Arafura Resources
Annual Report 2023

Plain-text annual report

ANNUAL REPORT 2023 On the frontpage: Kevin Anhamm, the Arla Innovation Farm in Central Europe, Kampt-Lintfort, Germany. In the heart of North Rhine-Westphalia, Germany, Kevin Anhamm operates the first Central European Arla Innovation Farm alongside his wife Rebecca, one full-time employee, one part-time employee and two trainees. This means that there is now an innovation farm in each of the four European Arla areas. These farms serve as testing grounds for new ideas and projects aimed at enhancing our carbon footprint on farm. At Kevin's farm, the key areas of focus include feed efficiency, biodiversity and, in particular, animal welfare. Kevin places great importance on the well-being of his 295 Holstein dairy cows with 180 female offspring, and is committed to ongoing investments in this aspect. Kevin strives to continually develop his farm and remain at the forefront of modern agriculture. The external opening of the Central European Innovation Farm is scheduled for April 2024. ABOUT THIS REPORT This is our detailed annual report of Arla's financial and sustainability performance, risks, strategy and governance. It includes our consolidated financial statements and our externally audited sustainability statements. In 2022, we integrated our financial and sustainability (ESG) reports into one comprehensive report to enhance transparency in our reporting and provide our stakeholders with a holistic view of our company's performance and long-term value creation. In 2023, we made further changes to the report to align with the European Sustainability Reporting Standards (ESRS) structure and requirements following the EU Corporate Sustainability Reporting Directive (CSRD), which Arla is obliged to implement in 2025. ESRS structure and requirements According to the ESRS, companies are required to disclose their Environmental, Social and Governance (ESG) information in a dedicated section called 'Sustainability Statements', placed within the management review section. To meet this requirement, the ESG data section, which was placed after the financial statements in last year's report, is now integrated into the Environmental, Social and Governance sections on pages 28-86. In the first chapter of the sustainability statements, we give a detailed account of our double materiality assessment and provide an overview of the ESRS topics that we determined as material. In the following sections, we report on our impacts, ambitions, policies, strategies, actions, resources and progress towards targets for each of these material topics. Use the little coloured page tags to navigate and understand the page structure. For a detailed overview of all the ESRS disclosure requirements addressed in this report, please refer to page 154. Consolidated financial statements In this condensed report, the consolidated financial statements on pages 87-144 do not include the parent company financial statements. These are included in the report submitted for the authorities in Denmark. The structure of the consolidated financial statements is unchanged compared to the structure in the annual report 2022. TABLE OF CONTENTS I. MANAGEMENT REVIEW INTRODUCTION 5 Chair letter 6 CEO letter 7 2023 performance at a glance 8 9 2023 highlights 10 Business model 11 Future26 – our strategy Five-year overview PERFORMANCE REVIEW 13 Executive summary 14 External market overview 15 Performance overview 24 2024 outlook RISKS AND OPPORTUNITIES 26 Risk governance 27 Arla's risk position II. FINANCIAL STATEMENTS III. REPORTS AND OTHER DISCLOSURES CONSOLIDATED FINANCIAL STATEMENTS MANAGEMENT'S AND AUDITOR'S REPORTS Primary statements 88 88 89 90 91 94 Income statement Comprehensive income Profit appropriation Balance sheet Equity Cash flow Notes 96 Introduction to notes 99 Note 1: Revenue and costs 105 Note 2: Net working capital 108 Note 3: Capital employed 116 Note 4: Funding 136 Note 5: Other areas 146 147 149 Board of Directors' and Executive Board's report Independent auditor's report on the consolidated and parent company financial statements Independent auditor's assurance report on the sustainability statements OTHER DISCLOSURES 152 153 154 155 157 UN Global Compact Progress towards UN Sustainable Development Goals ESRS disclosure requirements overview Glossary Corporate calendar SUSTAINABILITY STATEMENTS General information 29 Sustainability in Arla 30 Materiality assessment Environment 33 Climate change and animal welfare 45 Biodiversity and nature 52 Resource use and circularity Social 58 68 Employees and workers in our value chain Consumers – healthy and safe nutrition Governance 75 Governance framework 77 Management 81 Management remuneration 82 Fair and transparent tax practices 84 Responsible business conduct PAGE 3ARLA'S ANNUAL REPORT 2023 INTRODUCTION ARLA® SKYR Arla's wide range of nutritious and affordable products create value for consumers in 146 countries across the world. 5 6 7 8 9 10 11 Chair letter CEO letter 2023 performance at a glance Five-year overview 2023 highlights Business model Future 26 strategy STRENGTHENING THE FOUNDATION FOR A SUSTAINABLE FUTURE W ith changing market conditions and a rapid transition from the extraordinary circum- stances of 2022, 2023 marked a significant year for Arla and our 7,999 farmer owners. Thanks to the strong execution by our farmer owners, employees and management, Arla once again demonstrated our agility in navigating through these challenging market conditions. I am incredibly proud of our solid results, both financially and in terms of sustainability goals, in the ever-changing landscape of 2023. Our Sustainability Incentive model, launched in the summer of 2023, builds upon a long-standing data and science-based approach to how we in Arla can reduce our carbon footprint. In 2023, EUR 226 million was paid out related to the Climate Check payment and the incentive payment for the last six months of the year. The results for 2023 show that our overall strategy is working as intended and that we are able to accelerate our efforts. CO2e emissions for owner milk were reduced to an average of 1.08 per kg of milk compared to 1.12 the previous year, highlighting our effective approach and firm commitment to leading the future of dairy in value creation and sustainability. With the introduction of the Sustainability Incentive model and the new customer programme, the value- add happening on our owners' farms has been even further strengthened. We are pleased with the results of the year and will continue working towards our goals of creating long-term value for our farmers, our customers and our society. 2023 was a year of two halves. Production costs rose while milk prices experienced a substantial decline in the first half of 2023. Since then, the market adjusted, and milk prices stabilised and improved towards the end of the year, but some production costs remained at a high level. Adjusting the economy on the farms simultaneously with these shifting conditions in an uncertain market has been a challenge for many farmer owners. The average pre-paid milk price in 2023 was 44.1 EUR-cent/kg, which is 14.7% lower than the extraordinarily high price level of last year. Nevertheless, the solid financial results allowed for a competitive milk price and a supplementary payment of EUR 270 million, equivalent to 2.07 EUR-cent per kg of owner milk, above the level set in Arla's Retainment Policy, subject to the final approval of the Board of Representatives. Sustainability is a challenge we cannot ignore and is crucial to meet the mar- kets needs. With the steps taken this year, we are turning a challenge into an opportunity. As an owner, I am proud that we take responsibility for the environmental challenges by investing our time and capital in making the changes happen. We do not sit idle, but dare to be proactive and take on the task through innovation and action. JAN TOFT NØRGAARD Chair of the Board of Directors PAGE 5ARLA'S ANNUAL REPORT 2023I.II.III.SUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESChair letterFuture 26 strategyCEO letter2023 performance at a glanceFive-year overview2023 highlightsBusiness model COMPETITIVE RETURNS IN A DEFLATED DAIRY MARKET A rla demonstrated its robustness in a deflated dairy market by returning to strong branded growth after a slow first half of the year, reaffirming a positive outlook for the first half of 2024. This was not least demonstrated by supplementary payments to our farmer owners of 2.07 EUR-cent/kg of milk or a total EUR 270 million for the full year. which is well above the 1.5 EUR-cent/kg that we committed to in our retainment policy. As expected, the 2023 dairy market plummeted from an all-time high at the end of 2022, putting companies and farm economy under pressure. In the second half, the market slowly started to recover. While commodity prices remained at a lower level compared to the past couple of years, the level in second half was high compared to pre-Covid levels. In this volatile market, Arla’s robustness and ability to maximise price fluctua- tions and maintain growth in market shares in branded positions were once again reaffirmed. Our revenue of EUR 13,674 million was almost on par with the revenue for 2022, but increased costs of goods sold combined with general cost inflation led to a perfor- mance price decrease of 8.1 EUR-cent/ kg to 47.0 EUR-cent/kg of milk against the all-time high performance price in 2022. This result is 15% above the last 5-year average. While we maximised a difficult commer- cial landscape, our firmly embedded efficiency programme helped keeping our performance competitive, delivering EUR 114 million in net savings, which was above expectations. Unfortunately, negative currency effects cut into our profits, especially the historically low SEK, but also GBP, USD, Nigerian Naira, Bangladeshi Taka, and the heavily devalued Argentinian peso. Brands returned to volume growth after challenging first half For our brands, it was a year of two halves. In the first half, consumers continued to trade down to cheaper products due to inflation, impacting our strategic branded volume-driven growth negatively across Europe and International. However, we were able to maintain volume growth for brands like Starbucks™, Puck®, Arla® Protein and Arla® Pro. As inflation eased in the second half, all our brands regained volume growth momentum. Our strategic branded revenue growth for the full year ended at -0.7%, which was better than expected due to significant growth of 4.1% in the second half. Ground-breaking steps for sustainability Demand for sustainability actions continued to build, and Arla and its farmer owners responded by further reducing CO2e emissions by 4 percentage points in scope 1 and 2 and by 3 percentage points in scope 3 in 2023. We have made substantial investments in sustainability and will continue to do so through our strong financial position. We are proud of not only being able to systematically decarbonise dairy, but also to add a second and third building block for how we are accelerating the transition together with our farmer owners. While the first building block, the annual Climate Check on farm, was introduced in 2020, we activated the second block, the Sustainability Incentive model in 2023. Through this model, EUR 226 million was distrib- uted to farmer owners based on their sustainability activities. Nearly 97% of our farmer owners submitted their data and uploaded almost 44,000 files to document their on-farm activities. The third building block was introduced later in the year with the Customer Sustainability Programme, which commercialises our farmers' progress by giving key customers access to claimable CO2e reductions and specific on-farm projects. By measur- ing, incentivising and commercialising on-farm sustainability actions at scale, our clear operating model translates science-based targets into tangible actions and monetary value, providing each farmer with a clear path to improve sustainability and economy on farm, while offering new value for our customers. This ground-breaking approach is one of our best proof- points of how we are creating the future of dairy. Outlook for 2024 We anticipate continued volatility on multiple levels. While difficult to predict the full year, the first half of 2024 looks brighter than 2023. Uncertainty remains as growing unrest around the world and the related economic slowdown can potentially impact our business negatively. However, global demand for dairy remains strong, and we expect to regain branded growth and to improve our performance com- pared to 2023. We remain committed to delivering our Future 26 ambitions and continuing our efforts to be a leading role model for sustainable dairy. PEDER TUBORGH CEO of Arla PAGE 6ARLA'S ANNUAL REPORT 2023I.II.III.SUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESChair letterFuture 26 strategyCEO letter2023 performance at a glanceFive-year overview2023 highlightsBusiness model 2023 PERFORMANCE AT A GLANCE Competitiveness Value creation Sustainability Sustainability 47.0 PERFORMANCE PRICE EUR-CENT/KG 55.1 2.2 47.0 2.1 39.7 1.7 -0.7% STRATEGIC BRANDED VOLUME DRIVEN REVENUE GROWTH1 4.5% -3.2% -0.7% 4%p SCOPE 1+2 EMISSIONS REDUCTION IN 2023 3%p SCOPE 3 EMISSIONS2 REDUCTION IN 2023 29% 33% 9% 12% -63% GOAL -30% GOAL 2021 2022 2023 2015 2022 2023 2030 2015 2022 2023 2030 Supplementary payment 2022 2022 2023 13.7 REVENUE EUR BILLION 13.8 13.7 11.2 2.8% PROFIT SHARE3 OF REVENUE 3.0% 2.8% 2.8% 114 NET EFFICIENCIES4 EUR MILLION 155 114 101 13.9 MILK VOLUME5 BILLION KG 13.8 13.7 13.9 2021 2022 2023 2021 2022 2023 2021 2022 2023 2021 2022 2023 2021 2022 2023 Read more about our Future 26 strategy on page 11. 2.6 LEVERAGE 3.0 2.6 2.6 Within guidance Outside guidance 1 -0.3% excluding our Russian business which was divested in the first half of 2022. 2 Per kg of milk and whey. 3 Based on profit allocated to owners of Arla Foods amba. 4 Between 2021 and 2022, we altered the methods of creating efficiencies due to the start of our new strategy period. 2022 and 2023 numbers are therefore not fully comparable with historic numbers related to our previous efficiency programme, Calcium. 5 Standardised milk: 4.2% fat, 3.4% protein; 2021 and 2022 numbers are restated accordingly. PAGE 7ARLA'S ANNUAL REPORT 2023I.II.III.SUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESChair letterFuture 26 strategyCEO letter2023 performance at a glanceFive-year overview2023 highlightsBusiness modelFIVE-YEAR OVERVIEW Financial key figures EUR million Performance price EUR-cent/kg owner milk Income statement Revenue EBITDA EBIT Net financials Profit for the year Profit appropriation for the year Individual capital Common capital Supplementary payment Balance sheet Total assets Investments in property, plant and equipment Investments in right of use assets Non-current assets Current assets Equity Non-current liabilities Current liabilities Net interest-bearing debt including pension liabilities Net working capital Cash flows Cash flow from operating activities Cash flow from investing activities Free cash flow Cash flow from financing activities Acquisition of enterprises 2023 2022 2021 2020 2019 EUR million 2023 2022 2021 2020 2019 Financial key figures 47.0 55.1 39.7 36.5 36.3 Profit share Financial ratios 13,674 13,793 11,202 10,644 10,527 1,079 1,001 600 -145 399 41 69 270 529 -80 400 39 74 269 948 468 -61 346 42 83 207 909 458 -72 352 41 81 223 837 406 -59 323 61 123 127 8,299 8,746 7,813 7,331 7,106 445 88 4,788 3,511 3,052 2,650 2,597 2,850 1,104 1,151 -519 632 -592 -26 373 56 4,611 4,135 3,168 2,915 2,663 2,986 1,442 184 -443 -259 269 -11 452 69 4,668 3,145 2,910 2,446 2,457 2,466 810 780 -482 298 -330 - 478 102 4,413 2,918 2,639 2,296 2,396 2,427 679 731 -488 243 -293 - 425 81 4,243 2,863 2,494 2,304 2,308 2,362 823 773 -571 202 -136 -168 EBIT margin Leverage Interest cover Equity ratio Inflow of standard milk (mkg) Inflow from owners in Denmark Inflow from owners in the UK Inflow from owners in Sweden Inflow from owners in Germany Inflow from owners in the Netherlands, Belgium and Luxembourg Inflow from others Total inflow of raw milk Number of owners Owners in Sweden Owners in Denmark Owners in Germany Owners in the UK Owners in the Netherlands, Belgium and Luxembourg Total number of owners Environmental, social and governance Progress towards 2030 CO₂e reduction target (scope 1 and 2) market-based CO₂e scope 3 owner milk (kg) CO₂e scope 3 per kg of milk and whey (kg) Progress towards 2030 CO₂e reduction target (scope 3 per kg milk and whey) Average number of full-time employees Gender diversity, Board of Directors 2.8% 4.4% 2.6 11.1 36% 5,277 3,412 1,925 1,646 798 816 2.8% 3.8% 3.0 19.6 35% 5,185 3,360 1,876 1,637 757 858 3.0% 4.2% 2.6 23.7 37% 5,185 3,345 1,896 1,683 749 968 3.2% 4.3% 2.7 16.8 35% 5,224 3,320 1,905 1,732 742 1,043 3.0% 3.9% 2.8 12.0 34% 5,214 3,262 1,863 1,712 734 1,314 13,874 13,673 13,826 13,966 14,099 1,996 1,948 1,329 1,981 745 7,999 -33% 1.08 1.14 -12% 2,108 2,105 1,429 2,053 797 8,492 -29% 1.12 1.18 -9% 2,236 2,274 1,497 2,127 822 8,956 -25% 1.15 1.20 -7% 2,374 2,357 1,576 2,241 858 9,406 -24% 1.15 1.21 -7% 2,497 2,436 1,731 2,190 905 9,759 -12% 1.15 1.21 -7% 21,307 20,907 20,617 20,020 19,174 25% 25% 13% 13% 13% PAGE 8ARLA'S ANNUAL REPORT 2023I.II.III.SUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESChair letterFuture 26 strategyCEO letter2023 performance at a glanceFive-year overview2023 highlightsBusiness modelHIGHLIGHTS 2023 2023 WAS DOMINATED BY MARKET VOLATILITY AND SHIFTING CONSUMER BEHAVIOUR. NONETHELESS, WE MANAGED TO WEATHER THE STORM, WORKED HARD TO ADJUST, AND KEPT UP THE PACE OF OUR BUSINESS AND SUSTAINABLE TRANSFORMATION. SUSTAINABILITY INCENTIVE MODEL LAUNCH In July 2023, we launched the Sustainability Incentive model and issued the first payouts, and the initial results confirm the model's potential and versatility. The model is a point-based system, in which the farmers can collect points based on their emission-reducing activities on the model's 19 different levers and earn additional payouts correspond- ing to their actions. In 2023, we managed to lower scope 3 emissions per kilo milk and whey by 3 percentage points and 12% in total compared to our 2015 baseline. Read more on page 35. m 6 2 2 R U E Incentive pool redistributed in 2023 This sum covers incentive model pay- ments to farmers for the last six months of the year as well as 1 EUR-cent/kg of milk for submitting their Climate Check data. ARLA® PROTEIN GROWS VOLUMES SIGNIFICANTLY In 2023, Arla® Protein continued to shine as a remarkable success story. With its natural, high-protein, low-sugar and low-fat offerings, Arla® Protein captured the broad attention of consumers living an active life across all backgrounds and lifestyles. By emphasising the fuelling power of protein and offer- ing an array of delicious products like milk-based beverages and puddings, Arla® Protein struck a chord with consumers, resulting in volume growth of 60.6% in 2023. Read more on page 17. EFFICIENCY PROGRAMME DELIVERS ABOVE EXPECTATIONS Our efficiency programme, Fund our Future, exceeded our expectations in 2023, delivering net savings of EUR 114 million from significant efficiency initiatives within digitalisation, logistics and production optimisation, as well as insourcing activities. Read more on page 16. INVESTING IN THE FUTURE As set out in Arla’s Future 26 strategy, we contin- ued to invest in growing our strategic business in 2023. Investments in intangibles, property, plant and equipment, including right of use assets, amounted to an all-time high EUR 601 million (2022: EUR 521 million), and our strong leverage of 2.6 supports our capability to invest in the years to come. CUSTOMER SUSTAINABILITY PROGRAMME As part of our ambition to lead in a more climate-efficient dairy production, we launched a new customer programme in 2023 that simultaneously accelerates sustainability efforts on farm and helps customers achieve their reduction targets for scope 3. The Customer Sustainability Programme was first launched in October in the UK, where the first commercial agreements were signed, and we will roll out the programme to more retail and foodservice customers across our European core markets during 2024. Read more on page 36. PAGE 9ARLA'S ANNUAL REPORT 2023I.II.III.SUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESChair letterFuture 26 strategyCEO letter2023 performance at a glanceFive-year overview2023 highlightsBusiness model BUSINESS MODEL SECURING THE HIGHEST VALUE FOR OUR FARMERS' MILK WHILE CREATING VALUE FOR THEIR GROWTH Arla is the fourth-largest dairy producer in the world based on milk intake. As a cooperative, our focus is on maximising the value from our milk, and with our cooperative set-up this means that all the benefits from the sale of Arla prod- ucts lead back to our farmer owners, who actively contribute to sustainability efforts and invest in the business to enable development and the well-being of future generations. Farmers and cows We have 7,999 farmer owners who oversee a herd of over 1.5 million cows. Their primary business goal is to produce milk in a sustainable and profitable manner, ensuring the well-being of the cows and preserving the surrounding environment. Our farmers are rewarded for their sustainability actions through our incentive model. Read more on page 35. FARMERS & COWS MILK COLLECTION PRODUCTION & PACKAGING Protecting Nature Regenerative Agriculture Nutrients for Society CONSUMERS CUSTOMERS Renewable Energy Innovation Milk collection Every year, we collect approximately 13.9 billion kg of raw milk, primarily sourced from our owners across seven countries. Production and packaging We operate 59 production and pack- aging sites, producing 6.4 billion kg of nutritious dairy products annually. Our facilities create jobs worldwide, offering safe conditions and fair wages. Furthermore, we enhance the value of our owners' milk through innovation, branding and marketing. The profits are distributed among the owners through the milk payment system. Customers Our products are distributed in 146 countries, catering to a diverse range of customers, including supermarket chains, foodservice and business-to- business. The key to our success lies in fostering strong collaboration and working towards a shared objective of delivering exceptional service to consumers while minimising the environmental impact of shopping. Consumers Through our efforts, we nourish millions of individuals, prioritising their health and well-being. Our approach focuses on innovative solutions, promoting positive food habits and ensuring affordable access to nutrition for low-income consumers. Read more on pages 68-73. PAGE 10ARLA'S ANNUAL REPORT 2023I.II.III.SUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESChair letterFuture 26 strategyCEO letter2023 performance at a glanceFive-year overview2023 highlightsBusiness model FUTURE 26 – OUR STRATEGY BRINGING HEALTH AND INSPIRATION TO THE WORLD, NATURALLY Creating the future of dairy Arla aims to be a leader in driving sustainable change in our industry and in the food sector. While the global demand for dairy is rising, consumer preferences are evolving. Sustainability is becoming a key factor in food choices, and addressing poor diets and malnutrition is essential. To tackle these challenges, we are committed to re-thinking our food system through our Future 26 strategy and in close collaboration with our customers, positioning Arla as part of the solution, offering solutions for healthy and sustainable growth in our business. 1 2 0 2 103-107 Peer group index We aspire to have a competitive milk price compared to our peers. SCOPE 1+2: -63% SCOPE 3: -30% CO₂e reduction We commit to the 1.5°C ambition and to becoming the most ambitious global dairy cooperative. 1-4% Branded volume growth We aim to create brands and products that bring value to our consumers' life through health and nutrition. 70-100 mEUR ANNUALLY Efficiencies We fund our future by having an end-to-end focus on becoming both more efficient and more effective in the way we work. 600-800 mEUR ANNUALLY Investments Future26 steps up investments to support owners & value creation. i T B S 0 3 0 2 6 2 6F 2 0 2 O R E Z T E N 0 5 0 2 STRONGER PEOPLE STRONGER PLANET Despite continued market volatility, we maintained a competitive milk price to our farmer owners in 2023. We made progress on our major strategic objectives, and we demonstrated strong performance in several product categories as well as in our foodservice and ingredients businesses (AFI). See pages 15-23 for further details. We continued to lead the way in promoting sustainability and addressing climate change and global food accessi- bility. A major milestone in 2023 was the introduction of our Sustainability Incentive model to support and reward our farmer owners in reducing their climate footprint. See page 35 for further details. Our 2030 science-based targets guide us on our path towards carbon neutrality, and we progressed well on both scope 1 and 2 as well as scope 3 emission reductions in 2023. See pages 33-42 for further details. In addition, we made substantial progress on our digital and innovation activities, which are integral to our Future 26 strategy. To improve efficien- cy, we focused on end-to-end processes and digital optimisation. We also made significant investments in transforma- tional areas outlined in Future 26. See page 16 for further details. PAGE 11ARLA'S ANNUAL REPORT 2023I.II.III.SUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESChair letterFuture 26 strategyCEO letter2023 performance at a glanceFive-year overview2023 highlightsBusiness model LURPAK® Our premium butter brand Lurpak®, sold in 100 countries across the world, reached a milestone in Australia selling more than 5 million kg of products in 2023. PERFORMANCE REVIEW 13 Executive summary 14 External market overview 15 Performance overview 24 2024 outlook NAVIGATING VOLATILITY AND GETTING BACK TO GROWTH 2023 was in many ways a year of two halves. From the end of 2022 and into the beginning of 2023, we saw a rapid drop in commodity prices as both supply and demand reacted to the record high price level present in late 2022. Later in the year, there was a notable resurgence in demand due to the more affordable price levels and a stagnation in global milk supply. This led to a slight increase in commodity prices once again. branded positions, which returned to volume growth of 4.1% in the second half of the year after a challenging first half. We took ground-breaking steps on sustainability actions, and saw accelerated emission reductions both within the business and especially on farms. We also saw our efficiency programme delivering above ambition level, and a robust financial position with improved leverage. During this volatility, we saw firm underlying business performance and solid market share developments in our As a result of the significantly lower commodity prices, a higher cost base due to inflation as well as headwind from adverse foreign exchange rate developments, our average performance price decreased by 14.7% compared to 2022, from 55.1 EUR-cent/kg to 47.0 EUR-cent/kg. However, this level still surpassed the 5-year average by 15%. The supplementary payment of 2.07 EUR- cent/kg of milk was well above the guaranteed 1.5 EUR-cent/kg of milk as per our retainment policy. Revenue decreased slightly to EUR 13.7 billion, down from EUR 13.8 billion in 2022. In 2023, earnings were mainly driven by rising commercial margins, while commodities were under pressure. Looking into 2024, our main focus is to continue being competitive. We aim to achieve this by maintaining the growth momentum gained in the second half of 2023. Additionally, we will manage volatility in dairy prices and intake. Furthermore, we will navigate external factors such as foreign exchange rate developments, consumer purchasing power, and geopolitical tensions 47.0 PERFORMANCE PRICE EUR-CENT/KG 13.7 REVENUE BILLION EUR 55.1 2.2 47.0 2.1 36.3 1.0 36.5 1.8 39.7 1.7 13.8 13.7 10.5 10.6 11.2 -0.7% STRATEGIC BRANDED VOLUME-DRIVEN REVENUE GROWTH 4%p SCOPE 1+2 EMISSIONS REDUCTION IN 2023 3%p SCOPE 3 EMISSIONS REDUCTION IN 2023 2019 2020 2021 2022 2023 2019 2020 2021 2022 2023 2019 2020 2021 2023 2015 2022 2023 2030 2015 2022 2023 2030 Supplementary payment 2022 7.7% 5.1% 4.5% -3.2% -0.7% 29% 33% 9% 12% -63% GOAL -30% GOAL TORBEN DAHL NYHOLM CFO of Arla PAGE 13ARLA'S ANNUAL REPORT 2023I.II.III.External market overviewPerformance overview2024 outlook Executive summarySUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESEXTERNAL MARKET OVERVIEW AS A GLOBAL BUSINESS, WE ARE IMPACTED BY THE VOLATILITY OF THE EXTERNAL MARKET. IN 2023, THIS VOLATILITY WAS REFLECTED IN DECLINING COMMODITY PRICES, INFLATIONARY PRESSURE, SHIFTING CONSUMER BEHAVIOURS AS WELL AS CHALLENGING FOREIGN EXCHANGE RATE DEVELOPMENTS. Continued geopolitical turbulence 2023 unfortunately saw the high levels of geopolitical turbulence continue. The war in Ukraine continued, and the conflict in Israel and Palestine escalated. Besides dire humanitarian consequences, the turbulence also drove uncertainty and volatility in global markets in 2023. Rapid dairy commodity price decrease in the beginning of 2023 In the wake of the dairy commodity price hike in 2022, driven by high demand and constrained supply, we as forecasted saw a rapid price normalisation towards the end of 2022 and into the beginning of 2023. This happened as demand cooled off as a consequence of the cost of living and price levels, while global milk supply increased, driven by price levels as well as lower energy, feed and fertiliser costs. Notably, the price normalisation resulted in EU mozzarella prices decreasing by 38%, while skimmed milk powder (SMP) dropped by 29% from October 2022 to February 2023. The commodity price decrease was followed by a period of relative stability in the second and third quarter as supply and demand appeared in balance. However, towards the end of 2023, dairy commodity prices started to rise again. This happened primarily within the EU region where SMP increased by 24% from August to December. Inflationary pressure eased off during year The high inflationary pressure from 2022 continued into the initial months of 2023. However, the pressure eased off during the year, and the European average 2023 inflation is projected at 6.5%1, down from 9.3% in 2022 with relatively high inflation in the UK, Sweden and Germany and lower infla- tion in Denmark and the Netherlands. Global inflation also declined, however it remained at a higher level of 6.9% (2022: 8.7%). The inflation levels were high in Africa and the Middle East and lower in North America, South East Asia and China. Decreasing energy prices drove the declining inflation as energy shortage uncertainties were reduced, while mainly packaging, ingredients and salaries remained at a high level. Decrease in economic activity In an effort to mitigate inflationary pressure, central banks continued to raise interest rates in the first half of 2023, maintaining them at a high level throughout the year. This contributed to a further decrease in economic activity. Consequently, global GDP growth is projected at 3.0%1 in 2023 (2022: 3.5%). Within the euro area, the projected growth rate for 2023 is 0.7% (2022: 3.3%). Conversely, developing countries showed more robust growth projections, with an anticipated rate of 4.0% in 2023 (2022: 4.1%). Changing consumer behaviour Due to inflation and rising living expens- es, European consumers continued to adopt cost-saving measures affecting the dairy category in the first half of 2023. The decline in retail dairy con- sumption slowed down during the year as inflationary pressure started to ease off and wages increased, and towards year-end we saw dairy consumption increase again, resulting in a flat develop- ment in retail dairy consumption across the EU region for the full year 2023. In response to the cost pressure, European consumers also continued to trade down from branded products to private label offerings while actively seeking value through promotions, resulting in a decrease to branded consumption, mainly in the butter, spreads and marga- rine (BSM) retail category, as especially consumers in the UK, NL and DE reduced category consumption. Global dairy demand was on average marginally down compared to 2022. Challenging foreign exchange rate development In 2023, several key currencies for Arla weakened versus the euro. Especially the SEK experienced a substantial de- cline of 7.3% in the average rate for the year, while the USD and GBP saw minor declines of 2.8% and 2.0% respectively. We also experienced an adverse impact from devaluations in Argentina (356% devaluation in 2023), Bangladesh and Nigeria. Farmer costs remain at high level Following the unprecedented inflation in most on-farm costs in 2022, some costs decreased throughout 2023 as conditions began to normalise, mainly due to decreases in feed, fertiliser and fuel prices. However, this was to a large extent offset by increases in other costs, such as labour and interest rates. Lower farmgate milk prices Driven by the commodity price normal- isation, farmgate milk prices decreased significantly across all major dairy- producing regions during 2023. In the EU-27, average farmgate milk prices reduced by 20.8% compared to 2022. On-farm costs did not experience a similar decrease, which among other factors led to a stagnation of milk supply during the year. From an Arla point of view, total stand- ardised milk supply increased from 13.7 to 13.9 billion kg. The increase came from owner milk which increased by 1.9%, driven by the first half of the year, while contract milk decreased by 4.9%. The volume increase in owner milk was seen across all markets. 1 IMF, World Economic Outlook, October 2023 Development in foreign exchange rates Commodity prices EU-cent/kg, Milk Utilisation Equivalent 115 110 105 100 95 90 85 70 60 50 40 30 20 2020 GBP 2021 2022 2023 SEK USD Source: Nord Pool Group 2020 Gouda Source: GDT 2021 2022 2023 Mozzarella SMP PAGE 14ARLA'S ANNUAL REPORT 2023I.II.III.External market overviewPerformance overview2024 outlook Executive summarySUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIES PERFORMANCE OVERVIEW ARLA'S MISSION IS TO SECURE THE HIGHEST VALUE FOR OUR FARMERS' MILK WHILE CREAT- ING OPPORTUNITIES FOR THEIR CONTINUED GROWTH. OUR COMMITMENT TO MAXIMISE BOTH SHORT- AND LONG-TERM VALUE FOR OUR OWNERS REQUIRES STRONG EXECUTION ON ALL LEVELS OF THE BUSINESS. Milk price decrease driven by declining commodity prices Arla's average pre-paid milk price decreased by 15.0% to 44.1 EUR-cent/ kg in 2023 (2022: 52.0 EUR-cent/ kg). Our performance price, which measures the value Arla adds to each kg of our owners' milk, decreased by 14.7% to 47.0 EUR-cent/kg (2022: 55.1 EUR-cent/kg). The decrease in the performance price was primarily driven by declining commodity prices and adverse foreign exchange rate effects, mainly from SEK but also a negative impact from GBP, USD, and ARS (Argentine Peso). Average pre-paid milk price for our owners EUR-cent/kg of milk 60 55 50 45 40 35 30 59.1 41.3 2019 2020 2021 2022 2023 Additionally, an increase in opera- tional costs, excluding raw milk, to EUR 6,964 million (2022: EUR 6,175 million) further contributed to the decline in performance. The rise in operational costs, excluding raw milk, was primarily due to changes in inven- tory values resulting from decreasing milk prices. Furthermore, inflation, mainly affecting staff costs, packaging and ingredients, also contributed to higher operational costs. Revenue decrease driven by foreign exchange rate developments During 2023, revenue decreased by 0.9% to EUR 13.7 billion (2022: EUR 13.8 billion), with most of the decrease occurring in the second half of the year. Revenue was negatively impact- ed by adverse foreign exchange rate effects of EUR -344 million, primarily driven by lower SEK, GBP and USD. Prices contributed negatively to revenue by EUR -204 million, with a negative price impact in Global Industry Sales (GIS) and our ingredients business (AFI) being offset by higher commercial prices. Decreasing branded volumes were offset by higher volumes in GIS which combined with higher milk intake gave a volume impact on revenue of EUR 429 million. PAGE 15ARLA'S ANNUAL REPORT 2023I.II.III.External market overviewPerformance overview2024 outlook Executive summaryGlobal Industry Sales /EuropeInternationalArla Foods Ingredients/ Global brandsSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIES Strategic branded volume-driven revenue growth, indexed to 2018 % Financial leverage development Target range: 2.8-3.4 7.7% 4.5% -3.2% -0.7% 113 118 115 114 105 2.8 2.7 3.0 2.6 2.6 2019 2020 2021 2022 2023 2019 2020 2021 2022 2023 Restored retail and foodservice margins due to branded price retention In 2023, retail and foodservice margins were high due to strong branded price retention in a decreasing commodity price market, mainly due to the first half of the year with normalisation effects towards year-end. The high price environment in the first half of the year negatively impacted our branded volumes sold through retail. However, we saw growth return in the second half of the year as prices normalised and consumer purchasing power increased. Despite the market volatility in recent years, overall branded volumes in 2023 were still at a significantly higher level than before Covid-19 measured on a 2018 index. In total, strategic branded volumes decreased by 0.7% in 2023. Retail volumes decreased by 1.3% with volumes in retail, excluding discounters, decreasing by 2.0%, partly offset by discounters increasing by 7.7%. Our foodservice business delivered 2.3% branded volume growth in 2023 (2022: 9.2%). Fund our Future savings above expectations Our transformation and efficiency programme, Fund our Future, delivered above expectations and reached net savings of EUR 114 million despite volume headwind. This was driven by a significant number of efficiency initiatives, including shop floor digitalisation, logistic route efficiencies, recipe and pack optimisations as well as insourcing of specialist areas within marketing and IT. Accelerated on-farm emission reductions We continued the positive momentum from last year and reduced our scope 1 and 2 emissions by 4 percentage points in 2023, and in total by 33% compared to our 2015 baseline. The reduction was mainly a result of energy optimisations at sites and the impact from new green power purchase agreements (PPAs). We also accelerated our on-farm emission reductions and reduced scope 3 emissions per kg of milk and whey by 3 percentage points (2022: 2 percentage points), and in total by 12% compared to our 2015 baseline. The reductions were a direct outcome of ongoing climate initiatives implement- ed on farms and especially driven by fertiliser use and manure handling for the herds. We expect the introduction of the Sustainability Incentive model in 2023 to support our emissions focus in the coming years. Read more about how our farmers reduce their emissions on pages 35-36. Net profit within target range In 2023, we achieved a net profit of EUR 380 million1, or 2.8% of revenue, which is within our target range of 2.8- 3.2%. Profit was mainly driven by high retail and foodservice prices, however with a normalisation towards the end of the year. Other comprehensive income im- pacted by lower energy prices and foreign exchange rate fluctuations Other comprehensive income was EUR -199 million (2022: EUR 156 million). The net cost of EUR 199 million con- sisted of negative value adjustments of hedge instruments amounting to EUR -141 million and negative value adjustments of net assets measured in foreign currencies (translation effect) amounting to EUR -47 million. The lower value of our hedge instruments, which reduces our short-term foreign exchange rate profit exposure and secures our future interest and energy costs at a certain level, was due to gen- erally lower energy prices and foreign exchange rate fluctuations. Robust financial position We kept our robust financial position in the volatile market in 2023. Our leverage landed at 2.6, which is an improvement from 2022 (3.0) and below our target range of 2.8-3.4. This was due to a higher EBITDA and lower level of net interest-bearing debt, driven by decreased funds tied up in net working capital, explained by lower inventory and trade receivables. Operating cash flow improved significantly Cash flow from operating activities increased to EUR 1,151 million (2022: EUR 184 million). The trend towards a normalisation of milk prices in 2023, on the back of the unusually high level at the end of 2022, meant that the adverse effect on funds tied up in net working capital positions from last year was partly released during 2023. Net working capital contributed positively with EUR 320 million compared to EUR -707 million last year. In addition, cash flow from operating activities improved due to a higher EBITDA, partly offset by higher paid interest expenses. Increased level of investments We continued to invest in significant projects to support future growth within our strategic business areas. Investments in intangibles, property, plant and equipment, including right of use assets, amounted to EUR 601 million (2022: EUR 521 million). More specifically, we continued to invest in a capacity increase for milk-based beverages in Esbjerg, Denmark, and growth for Arla Foods Ingredients. Additionally, new projects, including the investment in butter capacity in Holstebro, Denmark, were undertaken. Lower net interest-bearing debt Net interest-bearing debt decreased to EUR 2,850 million (2022: EUR 2,986 million). The free operating cash flow of EUR 643 million (defined as cash flow net of operating and investing activities) was partly used to pay farmer owners in the form of a supplementary payment for 2022 and a half-year supplementary payment for 2023, and partly to repay maturing loans and to reduce utilisation of other short-term interest-bearing credit facilities. 1 Excluding non-controlling interests' share of profit PAGE 16ARLA'S ANNUAL REPORT 2023I.II.III.External market overviewPerformance overview2024 outlook Executive summaryGlobal Industry Sales /EuropeInternationalArla Foods Ingredients/ Global brandsSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESGLOBAL BRANDS OUR STRATEGIC GLOBAL BRANDS ARE AT THE HEART OF OUR BUSINESS AND THEY DRIVE THE MAJORITY OF ARLA'S VALUE CREATION. Our brands STRATEGIC BRANDED VOLUME-DRIVEN REVENUE GROWTH H2 2023 4.1% H1 2023 -6.0% 7.2% 2.6% -8.8% -6.6% -4.4% 0.5% 3.1% 15.2% 15.9% 9.9% 2023: -0.7% 2022: -3.2% 2023: -2.8% 2022: -4.3% 2023: 0.8% 2022: -7.6% 2023: -1.7% 2022: -6.9% 2023: 6.5% 2022: 4.7% 2023: 15.7% 2022: 12.4% STRATEGIC BRANDED NET REVENUE GROWTH 1.2% 2022: 14.2% 2023: -2.3% 2022: 10.2% 2023: 2.9% 2022: 16.0% 2023: 3.0% 2022: 24.6% 2023: 4.9% 2022: 31.8% In 2023, we saw branded revenue increase by 1.2% to a record high level of EUR 6,375 million (2022: EUR 6,300 million) due to higher prices with an underlying decrease in branded volume-driven revenue growth of -0.7% (-3.2% in 2022). This was mainly the result of the high price level of 2022 continuing into the beginning of 2023, resulting in consumers trading down to cheaper products and in general buying less dairy products. However, in the second half of the year, we saw significant improvement in volume growth of 4.1% attributed to the decrease in price levels, stronger purchasing power and increased marketing spend. Arla® brand Our Arla® brand with its various successful sub-brands covering multiple categories such as milk, yogurt, cream, powder and cheese, was generally challenged in 2023, with branded volumes declining by 2.8% compared to 2022, bringing volumes back to pre-Covid levels. The volume decrease was partly offset by higher prices, which resulted in a 2.3% revenue decrease to EUR 3,618 million in 2023 (2022: EUR 3,702 million). Some of our sub-brands experienced exceptional volume growth despite higher price points. Arla® Protein grew volumes by 60.6%, and our food- service brand Arla® Pro also experienced growth of 2.2% during the year. From a market perspective, the UK performed well with a branded volume growth of 5.9%. Arla® was recognised as Europe's most popular dairy brand by the 2023 Kantar Brand Footprint report. spearheaded by growth in South East Asia and partly due to new product launches. Lurpak® Our brand Lurpak® experienced revenue growth of 2.9% to EUR 772 million (2022: EUR 750 million). Volumes increased by 0.8% compared to 2022 with an underlying decrease in first half-year volumes due to high price levels, offset by a second half-year where we saw consumer demand increase as prices normalised. In the European market, volumes decreased by 0.6% mainly driven by the UK, however with a marked improvement in the second half due to a new pack and price strategy. International markets maintained strong growth of 3.5%, mainly driven by South East Asia and Rest of the world. Castello® Our speciality cheese brand, Castello®, decreased by 1.7% in volumes compared to 2022. However, due to higher prices, revenue improved by 3.0% to EUR 246 million (2022: EUR 238 million). The branded cheese category and in particular speciality cheese, where Castello® oper- ates, struggled in times of inflation and recession, which also affected Castello® in core European markets. In international markets, volumes increased by 1.4%, Puck® Puck®, our leading brand in MENA, over- all grew volumes by 6.5%, with revenue growing by 4.9% to EUR 526 million (2022: EUR 504 million). We saw strong growth in the mozzarella and shredded cheese, cooking and cream cheese cate- gories supported by increased efforts in communication, in-store activation and product sampling, which led to better market penetration. Starbucks™ Our Starbucks™ ready-to-drink (RTD) coffee assortment, available in more than 50 countries in Europe, the Middle East and Africa, delivered 15.7% volume growth in 2023, with a revenue increase of 13.7%. The volume growth was mainly driven by our European business, which grew by 21.8% based on strong brand performance, portfolio developments with strong growth in the chilled classics 750 ml platform and increased distribution across markets. Our International business grew a bit slower by 5.8% and was more adversely impacted by the inflationary environment and economic uncertainty. PAGE 17ARLA'S ANNUAL REPORT 2023I.II.III.External market overviewPerformance overviewExecutive summaryEuropeInternational/ Global brandsArla Foods Ingredients2024 outlook Global Industry Sales /SUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESEUROPE OUR EUROPEAN COMMERCIAL SEGMENT SPANS EIGHT COUNTRIES IN NORTHERN AND WESTERN EUROPE. WE CREATE VALUE FOR OUR FARMER OWNERS BY BRINGING BRANDS LIKE LURPAK®, ARLA® AND STARBUCKS™ TO CONSUMERS ACROSS THE CONTINENT. In 2023, revenue increased by 2.7% to EUR 7,984 million (2022: EUR 7,771 million), mainly driven by price increases executed in 2022 continuing into the start of 2023. Due to high inflation and elevated dairy prices, branded dairy volumes were under pressure in 2023, however consumers started returning to branded products in the second half of the year. In total, we saw a decrease in branded volumes of 1.3% against a decline in the general branded European retail category of approximately 2%. The butter and spreadable category declined by approximately 5%, but our Lurpak® brand only declined by 0.6%. Despite the challenging environment that in particular affected Sweden negatively, our Netherlands/Belgium/ France cluster achieved 6.9% branded growth and the UK 2.2%. Several of our European focus areas performed well in 2023. This included Arla® Protein growing by 60.5%, Starbucks™ by 21.8% and Arla® Pro by 7.2%. We also launched an ambitious bid to scale up Arla® Protein and Arla® Skyr in France through a new long- term partnership. As part of our ambition to be a leader in sustainability, we launched a new customer programme across Europe. A first for the industry, this will develop solutions to help customers achieve their reduction targets for scope 3 and accelerate sustainability efforts on farm. Several major customers joined the programme in 2023. STARBUCKS™ CHILLED COFFEE Despite shifting consumer behaviour in Europe, our Starbucks™ ready-to-go coffee drinks continued their growth journey and grew volumes by 21.8%. Strategic branded volume-driven revenue growth -1.3% 2022: -4.2% Revenue EUR million 7,984 2022: 7,771 Revenue growth 2.7% 2022: 17.4% Share of total Arla revenue 58.4% 2022: 56.3% PAGE 18ARLA'S ANNUAL REPORT 2023I.II.III.External market overviewPerformance overviewExecutive summaryEuropeInternational/ Global brandsArla Foods Ingredients2024 outlook Global Industry Sales /SUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESUK SWEDEN DENMARK GERMANY THE NETHERLANDS, BELGIUM AND FRANCE FINLAND 2.2% 2022: -7.3% 2.4% 2022: 18.3% Strategic branded volume-driven revenue growth -5.1% 2022: -3.9% Strategic branded volume-driven revenue growth -0.2% 2022: -1.1% Strategic branded volume-driven revenue growth -5.4% 2022: -7.7% Strategic branded volume-driven revenue growth 6.9% 2022: 1.3% Strategic branded volume-driven revenue growth -2.4% 2022: -1.8% Strategic branded volume-driven revenue growth Revenue growth Share of EU revenue 2023: 38.3% 2022: 38.5% -3.7% 2022: 11.4% Revenue growth 4.1% 2022: 20.3% Share of EU revenue 2023: 19.2% 2022: 20.5% Revenue growth Share of EU revenue 2023: 15.8% 2022: 15.5% 4.6% 2022: 20.9% Revenue growth Share of EU revenue 2023: 15.7% 2022: 15.4% 10.3% 2022: 23.1% Revenue growth 14.6% 2022: 9.7% Revenue growth Share of EU revenue 2023: 6.1% 2022: 5.7% Share of EU revenue 2023: 4.9% 2022: 4.4% In 2023, brands initially faced declining volumes due to high dairy commodity prices and inflation in the UK. However, cost reductions enabled a rebound in the second half, leading to growth in branded volume and market shares. In total, the business grew branded volumes by 2.2% and revenue by 2.4% to EUR 3,060 million (2022: EUR 2,989 million), with strong growth in Arla® Protein, Starbucks™ and Arla® Pro growing by 66.4%, 26.2% and 8.5%, respectively. In October, we launched the Customer Sustainability Programme to commercialise on-farm sustainability efforts. Strategic branded volumes decreased by 5.1% as increased inflation and inter- est rates, combined with a weakened SEK, impacted Swedish households' purchasing power and consumer shopping behaviour. This resulted in a category decline in dairy with an increased share of private label. Our performance in the market significantly improved in the second half of the year, mainly driven by yellow cheese, cottage cheese and quark. Arla Sweden's reve- nue decreased by 3.7% to EUR 1,536 million (2022: EUR 1,594 million), in large part due to the 7.3% decrease of the SEK versus the euro. Revenue increased by 4.1% to EUR 1,258 million (2022: EUR 1,208 million) despite pressure from consumer behaviour still adjusting to increasing focus on low prices, attractive promo- tions and discount channels. Impact from market trends resulted in price decreases as well as volume pressure. Overall, our brands remain in a strong position, and strategic branded volumes only declined by 0.2%. Arla® Organic was under pressure with a volume de- cline of 7.1% due to consumers trading down and shifting towards private label. However, Arla® Protein, Starbucks™ and Castello® grew volumes by 98.9%, 25.0% and 8.7%, respectively. Revenue increased by 4.6% to EUR 1,253 million (2022: EUR 1,198 million) mostly from pricing carry-overs on private label and brands. Continued high inflation led to discounter growth and a general reduction in consumer spending, and our branded volumes decreased by 5.4%, mainly driven by a decrease of 21.1% for our Kaergarden® brand. However, the foodservice business (Arla® Pro), Starbucks™ and Arla® Buko delivered strong growth of 69.6%, 25.0% and 7.5%. respectively. In 2023, our business in the Netherlands, Belgium and France achieved double-digit revenue growth of 10.3% to EUR 489 million (2022: EUR 443 million). This was driven by volumes and favourable prices in the first half of the year. Both the retail and foodservice business showed consist- ent volume and revenue growth across all three markets. Notably, our brands Starbucks™, Lurpak®, Arla® Pro and Arla® Skyr delivered growth rates of 19.1%, 16.7%, 16.6% and 16.4%, respectively, leading to overall branded volume-driv- en revenue growth of 6.9%. Strong revenue growth in both retail and foodservice resulted in total revenue growth of 14.6% to EUR 388 million (2022: EUR 339 million), driven by price increases. Branded volumes decreased by 2.4%, driven by the retail segment which declined by 3.4% due to the high price environment, while the foodservice channel only decreased branded volumes by 0.3%. Despite the overall volume decrease, we saw the Arla® Protein brand grow branded volumes by 24.3%. PAGE 19ARLA'S ANNUAL REPORT 2023I.II.III.External market overviewPerformance overviewExecutive summaryEuropeInternational/ Global brandsArla Foods Ingredients2024 outlook Global Industry Sales /SUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIES INTERNATIONAL OUR INTERNATIONAL SEGMENT ENCOMPASSES AROUND 140 COUNTRIES ON SIX CONTINENTS. OUR KEY BRANDS IN THE SEGMENT INCLUDE PUCK®, ARLA DANO®, LURPAK®, CASTELLO® AND STARBUCKS™. Revenue in the International segment reached EUR 2,471 million (2022: EUR 2,437 million1), equalling growth of 1.4%2. Despite higher price levels, branded volume growth remained positive with 1.9% growth3. We saw good progress in the majority of our International business, and were able to manage macroeconomic challenges in emerging markets such as devaluation of currencies, like we saw in Bangladesh and Nigeria, and high inflation impacting consumer behaviour and reducing demand. On a regional level, we saw strong branded growth in MENA, South East Asia and RoW, while we experienced a decline in China and West Africa. From a brand perspective, the volume growth was mainly driven by Puck® growing by 6.6%. ARLA® PRO 1 Excluding the divestment of our Russian business 2 0.3% including the divestment of our Russian business 3 0.4% including the divestment of Russia Our foodservice business delivered strong growth of 12.9% in our biggest international market, MENA. Strategic branded volume-driven revenue growth3 1.9% 2022: 1.0% Revenue EUR million 2,471 2022: 2,4371 Revenue growth2 1.4% 2022: 19.2% Share of total Arla revenue 18.1% 2022: 17.7% PAGE 20ARLA'S ANNUAL REPORT 2023I.II.III.External market overviewPerformance overviewExecutive summaryEuropeInternational/ Global brandsArla Foods Ingredients2024 outlook Global Industry Sales /SUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESMIDDLE EAST AND NORTH AFRICA REST OF THE WORLD NORTH AMERICA SOUTH EAST ASIA CHINA WEST AFRICA 4.2% 2022: 4.3% 3.2% 2022: 31.3% 3.2% 2022: 8.6% 5.4% 2022: 8.6% Strategic branded volume-driven revenue growth Revenue growth Share of International revenue 2023: 40.3% 2022: 39.6% Strategic branded volume-driven revenue growth1 0.3% 2022: -0.6% Strategic branded volume-driven revenue growth 3.9% 2022: 21.3% Strategic branded volume-driven revenue growth -20.7% 2022: -44.1% Strategic branded volume-driven revenue growth -8.8% 2022: -17.8% Strategic branded volume-driven revenue growth Revenue growth1 Share of International revenue 2023: 24.3% 2022: 23.4% -2.0% 2022: 20.1% Revenue growth -1.1% 2022: 49.4% Revenue growth 8.7% 2022: -44.3% Share of International revenue 2023: 13.8% 2022: 14.2% Share of International revenue 2023: 10.7% 2022: 11.0% Revenue growth Share of International revenue 2023: 5.8% 2022: 5.4% -18.8% Revenue growth 2022: 1.3% Share of International revenue 2023: 5.1% 2022: 6.4% MENA increased revenue by 3.2% to EUR 996 million in 2023 (2022: EUR 964 million), and continued the brand- ed growth journey with 4.2% branded volume growth in 2023. This was driven by strong performance in most markets and brands. Notably, we experienced 12.9% branded volume growth in the foodservice business, and our key brand in the region, Puck®, grew volumes by 6.9%, gaining market shares in both the cheese and cream categories. Revenue increased by 5.4% to EUR 601 million in 2023 (2022: EUR 570 million) due to a high price environment and branded volume growth of 3.2%. Branded growth was positive despite the negative impact from customers trading down from branded products to private label and discounters gaining market shares. The main driver was Starbucks™ which increased branded volumes by 10.6% in 2023. In 2023, our revenue experienced a de- cline of 2.0% to EUR 340 million (2022: EUR 347 million). We managed to achieve modest growth of 0.3% for our brands within a volatile market setting, mainly driven by the Tre Stelle® brand in Canada growing volumes by 2.0%. However, this was to a large extent offset by Puck® volumes decreasing by 12.0%. We saw positive branded growth of 0.8% in Canada, while USA decreased by 0.4%, mainly driven by cheese and cooking categories. Revenue decreased by 1.1% to EUR 266 million in 2023 (2022: EUR 269 million), mainly due to the challeng- ing macroeconomic situation in Bangladesh where, despite several price increases in the market, our revenue decreased due to significant negative currency devaluations. This was partly compensated by strong revenue growth in both the Philippines and Indonesia. Branded volumes increased by 3.9%, mainly driven by Lurpak® increasing by 47.4%. Foodservice remained an important growth driver in South East Asia, growing by 2.8%. With the European milk price levels declining, we regained competitiveness for our UHT products in the Chinese market, contributing to a revenue increase of 8.7% to EUR 142 million (2022: EUR 131 million). Branded growth decreased by 20.7% due to a decline in milk and butter sales, however this was more than offset by increased private label volumes. Our Early Life Nutrition (ELN) business grew revenue by 17.4% after we obtained registration for three ELN brands in the market. Our 2023 revenue in West Africa was significantly impacted by the currency devaluation in Nigeria. Revenue declined by 18.8% to EUR 127 million in 2023 (2022: EUR 157 million). The following inflation led to a decline in the milk powder category, impacting our branded volume growth. As a conse- quence, branded volumes decreased by 8.8% due to a volume decrease of 6.1% for the Arla Dano® brand. During 2023, we opened our Arla farm in Kaduna, which was well received by society and the authorities, boding well for further backwards integration in Nigeria. 1 Russia was divested in the first half of 2022, impacting year on year comparison in 2023. Branded revenue growth and revenue growth including Russia was -3.6% and 0.8% PAGE 21ARLA'S ANNUAL REPORT 2023I.II.III.External market overviewPerformance overviewExecutive summaryEuropeInternational/ Global brandsArla Foods Ingredients2024 outlook Global Industry Sales /SUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESARLA FOODS INGREDIENTS ARLA FOODS INGREDIENTS (AFI) IS A GLOBAL LEADER IN WHEY-BASED INGREDIENTS THAT ARE USED IN A WIDE RANGE OF CATEGORIES FROM INFANT, CLINICAL AND SPORTS NUTRITION TO DAIRY AND BAKERY. IN ADDITION, WE MANUFACTURE CHILD NUTRITION PRODUCTS FOR THIRD PARTIES. AFI IS A 100% OWNED SUBSIDIARY OF ARLA. AFI's 2023 performance was driven by a continuous effort to produce new innova- tions, and despite market price volatility, our ingredients business kept a strong momentum during 2023. permeate volumes and a new source of WPC raw material to enable further growth. The value-add share decreased slightly as sourced volumes saw an upward trend. However, AFI faced a very dynamic market environment and was especially subject to exceptionally volatile market prices for whey and lactose-based ingredients as well as foreign exchange rate volatility such as the devaluation in Argentina, where AFI has a production site. AFI saw a benefit from underlying market developments such as a strong demand for our specialised whey protein products, combined with raw material and energy prices normalising after record high levels. All in all, this resulted in higher growth in the value-add segment of 10.4% (2022: 6.8%) but a revenue decrease of 6.3% to EUR 963 million in 2023 (2022: EUR 1,028 million). In 2023, AFI acquired full ownership of MV Ingredients in the UK. The full ownership of MV Ingredients brought AFI additional Implementation of our Future 26 strategy continued at full force: AFI entered into a Joint Development Agreement with Novonesis to develop new generations of highly specialised proteins based on precision fermentation. Also, a major investment programme was initiated at Danmark Protein to increase capacities of our unique protein solutions. Finally, we began an investment in a new permeate dryer at our plant in Argentina. The Advanced Nutrition business, primarily producing early life nutrition products, was challenged during 2023 following rising production costs and strategic customers facing difficult market conditions in China. However, we introduced new customers in 2023, bringing the performance on a par with 2022 levels. ARLA® PROTEIN AFI's whey based ingredients are used in a wide range of categories, such as infant, clinical and sports nutrition. Growth of the value-add segment 10.4% 2022: 6.8% Value-add share 79.7% 2022: 80.4% Revenue EUR million 963 2022: 1,028 Share of total Arla revenue 7.0% 2022: 7.5% PAGE 22ARLA'S ANNUAL REPORT 2023I.II.III.External market overviewPerformance overviewExecutive summaryEuropeInternationalArla Foods Ingredients/ Global brands2024 outlook Global Industry Sales /SUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESGLOBAL INDUSTRY SALES IN ADDITION TO OUR RETAIL CHANNELS, WE CONDUCT BUSINESS-TO-BUSINESS SALES OF CHEESE, MILK POWDER AND BUTTER TO OTHER COMPANIES TO USE AS INGREDIENTS IN THEIR PRODUCTION, ALSO ALLOWING US TO BALANCE OUR MILK THROUGHOUT THE YEAR. European and global dairy commodity market prices decreased rapidly in the beginning of 2023 due to increased milk production, weak demand due to high prices and lower Chinese import volumes. In the second half of 2023, mainly driven by a decreasing milk production, we saw commodity prices starting to recover. In total, revenue from Global Industry Sales decreased by 10.9% in 2023, driven by the lower commodity prices. Despite higher volumes handled in Global Industry Sales, the overall share of milk solids sold through Global Industry Sales increased to 27.4% (2022: 23.6%). This increase was mainly driven by lower sales volumes in other parts of our business and a higher overall milk intake. ARLA® KO Our Global Industry Sales model allows us to balance our milk throughout the year. Share of milk solids sold through Global Industry Sales 27.4% 2022: 23.6% Revenue EUR million 2,256 2022: 2,531 Revenue growth -10.9% 2022: 50.1% Share of total Arla revenue 16.5% 2022: 17.6% PAGE 23ARLA'S ANNUAL REPORT 2023I.II.III.External market overviewPerformance overviewExecutive summaryEuropeInternational/ Global brandsArla Foods Ingredients2024 outlook Global Industry Sales /SUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIES2024 OUTLOOK WE FORESEE 2024 TO BE ANOTHER CHALLENGING YEAR WITH VOLATILE MARKET CONDITIONS. HOWEVER, WE EXPECT THE POSITIVE MOMENTUM OF OUR BRANDS, EFFICIENCIES AND SUSTAINABILITY EFFORTS TO CONTINUE. Looking ahead to 2024, we anticipate another challenging year with volatile market conditions, driven by external factors such as continued pressure on consumer spending, foreign exchange rate developments and geopolitical tension and uncertainty. In late 2023, lower prices and stronger purchasing power stimulated demand for dairy which, combined with global milk supply stagnation, moved com- modity and farm prices upward. This helped relieve economic pressure on farmers and created more stable milk supply and prices. For our brands, the momentum from late 2023 is expected to continue into the first half of 2024. We antici- pate branded volume growth for 2024 as a whole of 1.0-3.0%, despite a more uncertain market and a lower growth outlook for the second half of the year. For revenue, it takes expectations to a range of EUR 13.2-13.7 billion, as sales prices towards the end of 2023 are at a lower level than the record high levels present at the beginning of 2023. The profit share is expected to be between 2.8 and 3.2%, and leverage between 2.4 and 2.8, driven by an expected strong cash flow. We expect to keep a firm momentum through our efficiency programme and to deliver savings in the range of EUR 85-105 million. Through our climate strategy, including the Incentive model, we will keep the current pace in our efforts to reduce our climate impact. This is expected to enable us to reach our 2030 emission reduction targets – a 63% reduction in scope 1 and 2 emissions and a 30% reduction in scope 3 emissions per kg of milk and whey – by leveraging the strong momentum fuelled by the important milestones achieved in 2023. Outlook 20231 Results 2023 Outlook 2024 STRATEGIC BRANDED VOLUME-DRIVEN REVENUE GROWTH -2.0 ~ - 1.0% -0.7% 1.0-3.0% REVENUE EUR BILLION PROFIT SHARE EFFICIENCIES EUR MILLION LEVERAGE SCOPE 1+2 EMISSIONS PERCENTAGE POINTS SCOPE 3 EMISSIONS PERCENTAGE POINTS 1 As announced in the 2023 half-year report 13.2-13.7 2.8-3.0% 85-105 2.4-2.8 REDUCTION REDUCTION 13.7 2.8% 114 2.6 -4%P -3%P 13.2-13.7 2.8-3.2% 85-105 2.4-2.8 REDUCTION REDUCTION PAGE 24ARLA'S ANNUAL REPORT 2023I.II.III.External market overviewPerformance overview2024 outlook Executive summarySUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESRISKS AND As a global company, we closely monitor, evaluate and adjust to external risks and opportunities in the markets we operate in. STARBUCKS™ FRAPPUCCINO OPPORTUNITIES 26 27 Risk governance Arla's risk position RISK GOVERNANCE AS A GLOBAL COMPANY WITH THE AMBITION TO LEAD SUSTAINABLE DAIRY, ARLA ENCOUNTERS VARIOUS RISKS AND OPPORTUNITIES. EFFECTIVE RISK MANAGEMENT IS CRUCIAL FOR GENERATING AND PROTECTING VALUE, ENSURING THE CONTINUITY OF OUR OPERATIONS AND ACHIEVING OUR STRATEGIC GOALS. Risk identification, assessment and mitigation In 2023, we further strengthened our risk management process by enhancing the approach across business units, ensuring a shared understanding and clear roles for risk identification, assessment and mitigation. We continued to roll out our enterprise risk management framework, improving our risk infrastructure, communication and documentation. Arla's risk management focuses on identifying and minimising risks and uncertainties, mitigating internal and external impacts, and capitalising on business opportunities to maximise value. Our risk owners continuously monitor trends that may affect Arla in the future to identify key risks. These risks are evaluated using a two-dimen- sional heat map that measures their potential impact on operating profit and the likelihood of occurrence. The Executive Management Team (EMT) and the Board of Directors (BoD) regularly review and evaluate the most significant risks. The BoD is responsible for maintaining a strong risk and compliance management system as well as an internal control system. The EMT is accountable for the risks and is responsible for ensuring effective risk mitigation and identifying related opportunities. The EMT examines our risk map and the top risks are presented to the BoD. Both the EMT and BoD take measures to avoid un- necessary risks and mitigate others. The process is adaptable, allowing for prompt assessment of unforeseen risks, such as the war in Ukraine and the Israel-Gaza conflict. Risk description Peripheral risks: These risks are outside of our management's direct control. Market-specific risks: These risks are considered managed within the strategic and business planning process. Company-specific risks: These are risks Arla can directly manage and mitigate. They serve as a starting point for the development of global policies and internal control procedures. l a c i t i r C j r o a M t c a p m i t fi o r P e t a r e d o M Corporate risk management UNDERSTAND PLAN Identification Evaluation Reporting Planning · Risk map or catalogue · Classification of risk types. · Estimates of the probability of occurrence · Assessment of risk impact · Monthly risk reports · Early-warning indicators · Risk in value management · Risk in operative planning · Risk in strategic planning · Risk in investment valuation · Risk-return portfolio management ACT Risk response · Peripheral · Market-specific · Company-specific Crisis management · Contingency measures · Business continuity measures · Communication measures 2 8 1 6 5 4 3 7 Possible Likelihood Likely Very likely Peripheral risks 1. Climate-related regulatory changes 2. Geopolitical instability and economic turmoil Market-specific risks 3. Transformation of consumer behaviour 4. Loss of competitiveness in branded portfolio 5. Loss of international competitiveness due to increased production costs Company-specific risks 6. IT disruptions, including major cyber attacks 7. Major product quality and safety issues 8. Currency volatility PAGE 26ARLA'S ANNUAL REPORT 2023I.II.III.Arla's risk positionSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIES Risk description Risk development Category Potential impact Mitigating actions 1 2 3 4 5 6 7 8 Climate-related regulatory changes Read more about climate-related risks on page 43-44 Geopolitical instability and economic turmoil A number of climate-related regulations impacting the dairy industry are discussed both at EU level and in individual European countries. This includes an emission levy on industry operations and agriculture. As a global company, Arla is exposed to global political and economic instability or recession, including the continued war between Ukraine and Russia as well as the Israel-Gaza conflict. Transformation of consumer behaviour Constant transformation of consumer preferences is a given in the food industry, but the fastening pace and the volatility of these trends could significantly affect our business. Loss of competitiveness in branded portfolio In the current recessionary environment there is a risk that consumers choose more low-cost alternatives. Loss of international competitiveness due to increased production costs Relatively high production costs in Europe put pressure on the competitiveness of products exported to international markets. IT disruptions, including major cyber attacks High dependency on IT systems and operations, combined with a growing trend in crimeware targeting manufacturing companies, poses a significant operational risk. Major product quality and safety issues Currency volatility We have a complex and long value chain with a large variety of products. Ensuring that our products are safe to consume and are appropriately labelled, and keeping our employees safe and healthy, are key to the success of Arla. As a significant part of Arla's revenue is generated in curren- cies other than EUR or DKK, our key financial risk relates to the fluctuation of currencies in our global markets. Increased Increased Decreased Decreased Increased Increased · Higher production costs on farm · Lower milk volumes · Reduced flexibility of operations Peripheral risk · Continued implementation of on-farm activities to reduce CO2e emissions · Incentivising farmers to reduce their CO2e emissions (the first payment was paid out in 2023) · Actively reducing emissions in our own operations, and staying alert to potential reduction in milk intake · Economic instability and recession affect demand for dairy, exchange · Balancing our growth between higher and lower risk markets in our rates and commodity prices · Political unrest or wars can affect the global food value chain through for example a shortage of animal feed and disruption of logistics net- works These, in turn, could impact our milk volumes and profitability International segment · Increasing the agility of our supply chain · Loss of market share and sales volumes if Arla's sustainable transfor- mation does not match the speed of changing consumer trends · Understanding and closely tracking consumer needs · Providing a wide range of options to consumers seeking more sustaina- ble meal choices · Ensuring consumers understand the nutritional and health benefits of our products and brands Market- specific risks · Our brands are at the core of our value generation model. Slow · Keeping our branded portfolio relevant and affordable to our consumers development in branded revenue will impact profitability negatively · Price pressure on our branded products could make our brands less competitive on the market through innovation and strong sales execution · On our key growth markets in International, we are in many instances competing with dairy companies based outside of Europe. These companies have a competitive edge over Arla if the current level of input costs is maintained · Maintaining a cost-efficient supply chain by evolving to be less dependent on our European sites by exploring possibilities in production and sourc- ing on our international markets where we have strategic commercial interests · Disruption of operations, and potential damage to our ability to · Strengthening our processes around IT operations, and mitigating IT manufacture, deliver and sell our products security vulnerabilities · Security awareness building and support to Arla colleagues through newly established Chief Information Security Office (CISO) Stable Company- specific risks brand reputation and reduced trust in our products · Downgrade of products may lead to financial losses programmes · Food safety and compliance with health and safety regulations are a top priority across our supply chain · Major product quality and/or food safety issues may lead to a loss of · We are constantly improving our quality and food safety management · Currency deterioration increases sales prices in the individual markets, affects Arla's competitiveness and potentially impacts revenue and profit · Centralised currency exposure management · Reducing short-term exposure through hedging activities Stable · Arla has owners in several countries, including the UK and Sweden. Purchase of owner milk and operations in countries outside the euro zone means that our performance price measured in EUR is exposed to fluctuations in GBP and SEK, and also in currencies like NGN, ARS and BDT Read more in Note 4 to the financial statements on pages 118-119. PAGE 27ARLA'S ANNUAL REPORT 2023I.II.III.Arla's risk positionSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIES SUSTAINABILITY STATEMENTS General information 29 Sustainability in Arla 30 Materiality assessment Environment 33 Climate change and animal welfare 45 Biodiversity and nature 52 Resource use and circularity Social 58 Employees and workers in value chain Consumers – healthy and safe nutrition 68 Governance 75 Governance framework 77 Management 81 Management remuneration 82 Fair and transparent tax practices 84 Responsible business conduct CASTELLO® AGED HAVARTI In the autumn of 2023, we relaunched our popular and fast-growing Aged Havarti with a new recyclable foil packaging and a new design. SUSTAINABILITY IN ARLA c o p e 1 + 2 s 2 O % C 3 - 6 WE ARE COMMITTED TO BUILDING A SUSTAINABLE FUTURE. OUR SUSTAINABILITY STRATEGY DRIVES OUR ACTIONS TOWARDS STRONGER PEOPLE AND A STRONGER PLANET In Arla, our vision is to bring health and inspiration to the world naturally while being a leader in value creation and sustainability. Our Future 26 strategy focuses on sus- tainable growth, reducing our environ- mental impact and creating value for our farmer owners who, in turn, actively contribute to sustainability efforts and future development. Growing our business, pursuing sustainability-related opportunities and mitigating sustainability-related risks are only possible if we closely manage our material impact on the environ- ment and the people in our value chain. Stronger people Our products play a central role in millions of people's lives - throughout their lifetime and in the years to come more and more people will make our products part of their everyday diet. Our position in the global dairy market and our relationship with customers all over the world put us in a position where we can shape the future consumption of dairy products. We want to enable healthier and strong- er lives across the world by offering more nutritious, natural and affordable products and inspire good food habits. For us, sustainability is not just about reducing our climate impact, but also about all the people that we affect throughout the entire value chain. Stronger planet We believe that protecting the environ- ment is essential to producing products that support a nutritious and sustainable diet for a growing population – and we are taking action. By lowering our impact on climate change through sustainable dairy farming practices, we are committed to reducing our carbon footprint and continuously improving our environmental perfor- mance to leave the farms in an even healthier shape for the next generation. Safeguarding ecosystems and promoting biodiversity are integral to our efforts. We are committed to keeping our emission and resource impact from operations and packaging to a minimum through circularity and renewable energy sources. We prioritise efforts to minimise food waste, ensuring that valuable resources are used responsibly. g y farmin ble a ain t s u air S d i n 2 F o m o i l d l i o & n F k a i r d s m e p n r g o a g r g a e m d m e R Y FA R I A D F O O D H A B I T a n d -30% CO2 scope 3 per kilo milk and whey D eforestation a n d c onversion-free Fossil based virgin pla Desig recyclin n e g 1 d fo r 0 0 % s tic 0 N P R OTECTING PACKAGIN NATURE % 1 0 0 rene w able ele c tri c t y & LOGISTIC S MING PROD U C TIO STRONGER PLANET STRONGER PEOPLE % H a l f f o o d w a s t e 2025 2030 y t i s r e er div s t n e cid c d Zero a n e Increase g G F O O D W A S T E E L P N IT Y PEO S HEALTH & NUTRITION crease healthy choices ero product recalls In Z U C O M M s s t o e u triti o n c c e a b l e n s I n c r e a a ff o r d a PAGE 29ARLA'S ANNUAL REPORT 2023I.II.III.Materiality assessment /EnvironmentSocialGovernance/ Sustainability in ArlaGeneral informationSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIES MATERIALITY ASSESSMENT IN 2023, WE CONDUCTED A DOUBLE MATERIALITY ASSESSMENT TO MAP AND GAIN A DEEP UNDERSTANDING OF OUR MOST MATERIAL IMPACTS ON PEOPLE, THE ENVIRONMENT (IMPACT MATERIALITY) AS WELL AS BUSINESS RISKS AND OPPORTUNITIES ARISING FROM SUSTAINABILITY TOPICS (FINANCIAL MATERIALITY). A double materiality assessment is a strategic and comprehensive approach to evaluate the impacts, risks and opportunities related to sustainability. The double materiality assessment determined all topics stemming from the European Sustainability Reporting Standards (ESRS) to be material, except for three. The materiality threshold, as indicated in the matrix on a one to five scale, was set at an average score above three. The topic names listed are aligned with ESRS. Although water, pollution and affected communities fell under our threshold for material topics following the methodology for our assessment, we recognise our existing water and pollution footprint as well as our impact on communities. Therefore, we have included disclosures on our key impacts and, where applicable, metrics that are relevant to our stakeholders. Water withdrawal is reported in the biodiversi- ty and nature chapter as water is a vital element for sustaining biodiversity. Material issues (threshold 3+) F. Food safety AW. Animal welfare E1. Climate change E4. Biodiversity and nature E5. Resource use and circular economy S1. Own workforce S2. Workers in the value chain S4. Consumers and end-users G1. Business conduct Not material issues E2. Pollution E3. Water and marine resources S3. Affected communities Link to the topics included in the European Sustainability Reporting Standards (ESRS) AW E1 S4 E4 S1 E5 S2 E2 G1 S3 E3 F 5 4 3 2 1 F AW Food safety Arla-specific Animal welfare Arla-specific As a global food company, the safety of our products is our core foundation. Our key impact is that the products we deliver are safe to consume. The key opportunity is consumer trust and brand reputation based on the safety of our products. Animal welfare is a key priority of our farmers and our consumers. The farmers' management methods have a significant impact on the welfare of their herds, which, in turn, has an impact on the farms' environmental footprint. The most important risk is that major food safety or product issues may lead to a loss of brand reputation and reduced trust in our products, resulting in financial losses. Animal welfare is a risk with a poten- tially significant financial impact, as our customers and consumers expect the best treatment of our farmers' cows. 1 Financial materiality Outside in 2 3 4 5 Read more on pages 68-73. Read more on pages 39 and 42. y t i l a i r e t a m t c a p m I t u o e d i s n I PAGE 30ARLA'S ANNUAL REPORT 2023I.II.III.Materiality assessment /EnvironmentSocialGovernance/ Sustainability in ArlaGeneral informationSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIES E1 E4 E5 S1 S2 S4 G1 Climate change ESRS E1 Biodiversity and nature ESRS E4 Resource use and circular economy ESRS E5 Our own workers and workers in the value chain ESRS S1 and S2 Consumers and end-users ESRS S4 Business conduct ESRS G1 Climate change is one of the most material topics for Arla due to its impact on both our own operations and our value chain. Methane emissions from cows, other CO2e emissions and energy use emerged as Arla's key impacts related to this topic. Simultaneously, this presents us with the chance to drive the sustainability transformation within the dairy industry, leading to reduced climate impacts. Our key risks are climate-related regulatory changes as well as regulations to reduce emissions in production and agricultural activities. Being able to lead on decarbonisation actions also gives us a potential business opportunity. For a detailed description of climate-related risks and opportunities, see pages 43-44. Although separating dairy farming's impact from the impact of other agricultural activities in the countries we operate in is complex, our assess- ment revealed that Arla has a material impact on biodiversity loss, on the num- ber of species and on the conditions of ecosystems. Arla's impact on biodiversi- ty materialises through the land use of our farmers. At the same time, this gives us the opportunity to lead the transformation towards greater biodiversity and increase our brand value. The key risks related to biodiversity are potentially stricter regulations and taxation, such as on land use, and failing ecosystems causing problems with feed production or other aspects of dairy farming. As an agricultural company, we are depleting some crucial non-renewable resources, for example phosphorus through our land use, fossil fuels through our operations and logistics and plastic used in our packaging. Our other big impacts on this topic relate to generating solid waste and food waste. Sustainable packaging is of key importance for our customers and consumers, representing both a hygiene factor as well as an opportu- nity to be first movers on circularity in specific product packaging. Our most material risk related to this topic is dairy farming losing the competition for land with other contestants, who would use the land to grow human food, forests or fibre raw materials. Arla's policies and practices related to our own employees impact over 20,000 people. Even more people employed in our upstream and downstream value chains are covered by our human rights due diligence process, risk and impact assessments and human rights and modern slavery policies. Our impact ranges from providing a healthy and safe working environment, securing employment and appropriate grievance mechanisms, to ensuring that child labour and forced labour do not occur in our value chain. Mitigating any negative impact and ensuring that we positively impact both our own employees and workers in the value chain is a great opportunity for Arla. This encompasses creating a loyal, diverse and skilled workforce, positively impacting their health and safety and the employment practices of our suppliers. Failing to do so is an equally significant risk. Our key impacts related to consumers are ensuring the safety of our products (see food safety above), and contrib- uting to their diets with nutritious and healthy options. Apart from these, we also identified access to quality information regarding products and the protection of our most vulnerable consumers, for example children and low-income consumers, as important aspects of our impact. Our greatest opportunity lies in differentiating ourselves by reducing the carbon footprint of dairy products significantly. The main risks we face relate to food safety, transformation of consumer preferences, decreasing competitiveness of our branded portfolio, changes in dietary guidelines and loss of consumer attractiveness due to new labelling guidelines. Honest and transparent business conduct is expected from Arla, and we continuously seek to meet and exceed these expectations. Our key impacts related to business conduct are to pro- tect the data privacy of consumers, and responsible marketing and lobbying activities. Honest business conduct further gives us the opportunity to differentiate ourselves within the food and beverage industry. The most important risk is that Arla is not perceived as a company built on honest and transparent business conduct. Read more on pages 33-44. Read more on pages 45-51. Read more on pages 52-57. Read more on pages 58-67. Read more on pages 68-73. Read more on pages 74-86. PAGE 31 PAGE 31ARLA'S ANNUAL REPORT 2023I.II.III.Materiality assessment /EnvironmentSocialGovernance/ Sustainability in ArlaGeneral informationSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESProcess and metrics MATERIALITY ASSESSMENT The process of our double materiality assessment followed the requirements of the European Sustainability Reporting Standards (ESRS 1 and 2). Below, we detail how material impacts, risks and opportunities were identified and assessed. Stakeholder and proxy identification A key objective of the double materiality assessment was to understand how our most important stake- holders see Arla's sustainability-related impacts, risks and opportunities. To achieve this, we first identified stakeholders who are affected by Arla's business activities, and also stakeholders who use the information presented in the annual report. According to our stakeholder analysis, the following groups are our key stakeholders: our farmer owners, nature, customers, consumers, affected communities, workforce, NGOs, financial institutions, the media and governments. As certain stakeholder groups could not be directly reached or sampled in an unbiased way, proxies were selected to represent them. Proxies were selected based on several criteria, for example their role in Arla, their expertise in a certain field, their relation to a cer- tain stakeholder group and their role in society. Some stakeholder groups were also proxied by research papers to obtain an objective view of the matter. For example, consumer opinion was covered by desktop research by looking at representative opinion surveys, and also by talking to members of the Agriculture, Sustainability and Communications management team, who, in their daily work, make business decisions considering consumers' priorities and behaviour. related to the topics. When identifying impacts, proxies considered both Arla's own impact and impacts resulting from our business relationships. After identifying them, proxies scored the severity of impacts, taking their scope, scale and irremediability into consideration. Risks and opportunities were scored based on their likelihood of materialising and their potential financial impact on Arla. For assessing the size of the potential financial impact, proxies used qualitative thresholds due to the immaturity of quantifiable thresholds. The risk and opportunity assessment for the purposes of establishing double materiality is, for now, separate from Arla's overall Enterprise Risk Management process. Qualitative thresholds used for the double materiality risk and opportunity assessment are not necessarily the same thresholds used in the global risk assessment presented on pages 25-27. To determine the materiality of each sustainabili- ty-related topic, an average of all the impact scores, and separately an average for all the related risks and opportunities, were calculated. If a topic had both a risk and opportunity associated, only the higher scores were taken into consideration to give such topics more weight in the analyses. External validation of impact, risk and opportunity assessment Based on the impact, risk and opportunity assessment by internal proxies, a draft materiality matrix was creat- ed. The map was then presented to various external experts, representing or related to our stakeholder groups, for validation. External experts were chosen from NGOs, financial institutions and universities. STRATEGY DEVELOPMENT Assessing impacts, risks and opportunities related to sustainability matters Sustainability matters included in the double materiality assessment were mainly identified based on the list of topics presented in ESRS 1. Based on the topics suggested by ESRS 1, proxies representing different stakeholder groups identified positive and negative impacts, risks and opportunities Arla's unique democratic setup makes it possible to formulate and execute strategies in close collabora- tion with our owners and most important suppliers and stakeholders – the farmers. Future 26 and its sustainability pillar 'Stronger People, Stronger Planet' was built together with our farmer owners with a strong focus on pursuing material sustainability-related opportunities while mitigating sustainability risks (see a detailed description of such risks and opportunities on pages 43-44). During the process of developing our strategy, our Executive Management Team (EMT) and Board of Directors ensured that the opinions and concerns of key stakeholders were considered. Farmers are involved in reviewing our strategy through various meetings and forums. As part of the strategy development, relevant targets addressing material sustainability topics were set and approved by the EMT. Further, the materiality assessment is taken into consideration during the strategy update process. Read more in the environmental and social sections. GENERAL ACCOUNTING POLICIES The sustainability statements on pages 28-86 encompass Arla's reporting on Environmental, Social and Governance (ESG) matters. Starting from 2025 on, Arla will be obliged to adhere to the European Sustainability Reporting Standards (ESRS) as per the new EU Corporate Sustainability Reporting Directive (CSRD) that came into effect in early 2023. To proactively meet these requirements, we revised the report structure and content to ensure better align- ment with the ESRS requirements. For a detailed overview of all the ESRS disclosure requirements addressed in the report, please refer to page 154. Other reporting standards The sustainability statements include statutory reporting on Corporate Social Responsibility (CSR) in accordance with section 99a of the Danish Financial Statements Act. Read more on page 10 (business model), pages 43-44 (climate-related risks) and pag- es 28-86 (policies, actions, management systems, key ESG figures and expectations for the future). Our statutory statement on section 99b regarding diversity on the Board of Directors and management can be found in the statutory reporting for each enti- ty subject to this regulation. The target and progress for the gender diversity of the Board of Directors and management of the Arla Foods Group are disclosed in this report on pages 61, 66, 77 and 86. Our statutory statement on section 99d regarding data ethics can be found on page 85. In 2022, we disclosed our climate-related risks and opportunities according to the Task Force on Climate-Related Financial Disclosures' (TCFD) recom- mendations for the first time. Climate-related risks and opportunities are now described in the climate change and animal welfare chapter on pages 43-44. according to Arla's Restatement Policy. By default, Arla's baseline emissions are reviewed every five years from the target base year (2020, 2025, 2030), if no significant structural or methodological changes trigger a recalculation beforehand. Every five years, Arla assesses whether the structural changes (for example acquisitions or divestments) in the past years reach the significance threshold when accumulated. Each year, Arla assesses if the structural changes that year reach the significance threshold by themselves or when added together. An overview of progress towards the UN Sustainable Development Goals is included on page 158. A threshold is defined for each science-based target: · Scope 1 and 2: 5% change compared to the base year · Scope 3 per kg of raw milk: 3% change compared to the base year When the baseline emissions are recalculated due to significant structural changes in the company (as defined above), historic figures are also recalculated and reported alongside the non-recalculated (actual) historic emission figures. This provides the reader with more clarity to understand Arla's actual emissions each year. Other externally reported sustainability figures are only restated if material mistakes in the previous years' reporting are discov- ered. The materiality of mistakes is determined on a case-by-case basis. In 2023, we chose to restate the historical figures for solid waste to correct errors related to prior years. Further, in 2023 we chose to restate the historical figures for the renewable electricity share to adjust the methodology to better align with the chosen reporting frameworks. Basis for preparation Arla's sustainability statements are developed using regular monthly and annual reporting procedures. The consolidation principles primarily rely on operational control, unless otherwise specified in the accounting policies to each section. All reported data aligns with the reporting period of the consolidated financial statements. For our definitions of applied time horizons, please refer to page 43. We obtain reasonable assurance on the following key sustainability metrics: energy and climate-re- lated metrics, food safety, animal welfare, accidents and certain employee-related metrics. We obtained limited assurance for the remaining disclosure of the sustainability statements. Reporting scope Environmental KPIs included data from all production and logistical sites. This, together with purchased milk, externally purchased whey, external waste handling, external transport and packaging, covers all material activities in Arla's value chain. The environmental impact related to offices, business travel and other less material activities was not included in the total emission figure. This scope also applies to the accidents KPI, page 65, however accidents at head offices in Denmark, the UK, Sweden and Germany were also included. All of our revenue relates to the food and beverages sector. Some of our impacts also relate to the agriculture and farming sector. All our revenue stems from high climate impact sectors. Restatement principles Baselines and comparison figures are restated PAGE 32ARLA'S ANNUAL REPORT 2023I.II.III.Materiality assessment /EnvironmentSocialGovernance/ Sustainability in ArlaGeneral informationSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESCLIMATE CHANGE AND ANIMAL WELFARE Strategic ambition 2023 Progress towards target EMISSION REDUCTIONS SCOPE 1+2 SCOPE 3 per kg of milk and whey RENEWABLE ELECTRICITY IN EUROPE 2015 2015 4%P 3%P 17%P 33% 12% 69% Target 63% 30% 100% 2030 2030 2025 Read more on pages 37-38 Read more on pages 35-36 Read more on page 37 PAGE 33ARLA'S ANNUAL REPORT 2023I.II.III.General informationResource use and circularity /Biodiversity and natureEnvironmentSocialGovernance/ Climate change and animal welfareSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESPAGE 33Impacts ARLA'S EMISSION SOURCES 2023 2030 Ambitions ARLA'S EMISSIONS IN 2030 96% SCOPE 3 CH4 N2O CO2 81% 10% 3% 2% Farms Externally sourced whey Waste and other Packaging 4% 1% 3% SCOPE 1+2 CO2 Purchased energy Transport (own fleet) and production Strategy SCIENCE-BASED CLIMATE STRATEGY 30% Scope 3 emission reductions per kg of milk and whey Our scope 3 science-based target is mainly related to reducing the carbon footprint at farm level by 30% per kg of standardised milk and whey. 63% Scope 1+2 emission reductions and strategic long-term targets Arla has set science-based targets for 2030, using 2015 as a baseline. Direct greenhouse gas emissions (scope 1) and emissions related to purchased energy (scope 2) should be reduced by 63% in absolute terms. 100% Renewable electricity by 2025 Switching from fossil to renewable energy is an important lever to fulfil our scope 1 and 2 reduction ambition. Our key focus is to secure renewable electricity for all our sites in Europe. Policies Environmental and Energy Management Policy & Green Ambition 2050 Reducing our impact on climate change is at the top of the agenda in our cooperative. Together with our farmer owners, we have set ambitious climate targets that align with the goals of the Paris Agreement. By committing to limit global warming to 1.5°C, we are actively working towards mitigating the effects of climate change. As one of the world's largest dairy com- panies, Arla has the size, strength and influence to make a significant impact as a frontrunner when it comes to sustainability and protecting our planet. We acknowledge our responsibility, which is why our ambition is to become carbon net zero across our value chain by 2050, and why we are committed to setting a science-based net-zero target. Our 2030 targets guide us on our path to carbon neutrality. We are currently looking into updating our scope 3 target to be aligned with the newly published Forest, Land and Agriculture Guidelines issued by the Science Based Targets initiative. Once approved, it will be disclosed in our external reporting. In Arla, we believe that being da- ta-driven is key to reducing our carbon footprint. Science is developing rapidly, and we constantly strive to use the best available data, technology and methodology. The effects on updates in methodologies and data sources are included in the reported numbers. We obtain reasonable assurance on our scope 1, 2, and 3 greenhouse gas emissions. Our targets and strategy for climate change mitigation are approved by our Board of Directors and other relevant stakeholders. We have an opportunity for differentiating ourselves by reducing our carbon footprint. PAGE 34ARLA'S ANNUAL REPORT 2023I.II.III.General informationResource use and circularity /Biodiversity and natureEnvironmentSocialGovernance/ Climate change and animal welfareSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESActions and resources SUSTAINABLE DAIRY FARMING AS ONE OF THE WORLD'S LARGEST DAIRY PRODUCERS, WE HAVE A BIG RESPONSIBILITY TO REDUCE OUR IMPACT ON THE CLIMATE. IT IS CLEAR THAT THE CLIMATE CHANGE THREAT WE FACE TODAY REQUIRES US TO DO EVEN MORE, SETTING BOLDER TARGETS WITH A CLEAR PATHWAY FOR ACHIEVING THEM. In 2023, scope 3 emissions per kg milk and whey decreased by 3 percentage points compared to 2022, contributing to an overall reduction of 12% com- pared to 2015. Read more on page 40. Emissions from Arla's owners were 1.08 kg CO2e per kg of owner milk, a 3.6% decrease from last year. Reductions were seen across all countries, with the UK showing the largest improvements. The biggest reductions derive from bet- ter fertilizer use and manure handling. Our Sustainability Incentive model was launched in July 2023, and the first results confirm the reduction potential. The first payouts issued this summer marked, for the first time ever, that the milk price the individual Arla farmers receive is now directly tied to their activi- ties related to environmental actions. The model is based on a point-based system in which the farmers can collect points based on their emis- sion-reducing activities on the model's 19 different levers, such as feed and protein efficiency, manure handling, sustainable feed, renewable electricity and land use. For every activity, the farmers can collect points if they meet specific criteria. Each point that the farmers gain will trigger 0.03 EUR-cent/ kg of milk they deliver to us. Activities with the biggest CO₂e reduction potential trigger the most points. The average points achieved during 2023 were 50. For an average Arla farm with an annual milk production of 1.6 million kg, this amounts to close to EUR 40,000 a year in total. 3.6% Reduction in CO2e per kg owner milk in 2023 compared to 2022. This reduction represents the largest year on year reduction we have seen so far. Available points in the Sustainability Incentive model TOTAL 80 POINTS 5 THE BIG 5 49 POINTS SUSTAINABLE FEED 11 POINTS CARBON FARMING AND BIODIVERSITY 8 POINTS MANURE HANDLING 6 POINTS RENEWABLE ELECTRICITY 5 POINTS KNOWLEDGE BUILDING 1 POINT PAGE 35ARLA'S ANNUAL REPORT 2023I.II.III.General informationResource use and circularity /Biodiversity and natureEnvironmentSocialGovernance/ Climate change and animal welfareSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESTHE BIG 5 1. Feed efficiency If farmers manage to maximise the milk per feed ratio and minimise feed waste, the milk will be more climate efficient. 2. Protein efficiency Carefully measuring feed with the right protein levels means less nitrogen, leading to less nitrous oxide, a greenhouse gas, from the manure. 3. Animal robustness Cows that live a long and healthy life will produce more milk over their lifetime which improves climate efficiency. 4. Fertiliser use Matching precisely the amount of fertiliser with the plants' needs and using different methods to spread the muck can improve the yield per carbon emission ratio. 5. Land use Feed yield on farms can also be optimised to increase climate efficiency. 5 In 2023, a total of EUR 226 million was paid out. This covers Incentive model payments for the last six months of the year as well as 1 EUR-cent/kg of milk for submitting their Climate Check data. Years of groundwork The Incentive model currently enables farmers to earn up to 2.4 EUR-cent/ kg of milk for their actions contributing to our 2030 scope 3 CO₂e emission reduction target as well as other sus- tainability actions, such as enhancing biodiversity. Years of data collection and analysis using the Climate Check tool helped our farmer owners identify farm green- house gas emissions (CO₂e) before the model rollout. The data generated from the Climate Check conducted in seven Northern European countries forms one of the world's biggest pools of externally validated dairy farm data. Through the Climate Check, we have identified the five most impactful areas to reduce the carbon footprint on farm that account for 78% of the variance in carbon footprint between Arla farms, the Big 5. This extensive dataset gives us the opportunity to help each individual farmer pinpoint where their efforts are best prioritised to reduce their emis- sions as effectively as possible, and at the same time improve the profitability of their milk. Promising first findings The first collected data put in use indicates that the model has a strong engagement. 97% of farmers submitted Climate Check data, 79% uploaded additional data into the Incentive model and the weighted average score for 2023 was 50 out of a total of 80 maximum points. Across all farm types, areas and regions there are farmers who score above the Arla average point score. There is a strong link between CO₂e per kg of milk and incentive points, and data analysis shows that farmers are reaching their respective incentive points in different ways, as the model is able to accommodate the diversity of Arla farmers. Furthermore, the levers under the farmers' influence are driving the main differences between areas. The Big 5 have a significant reduction potential, which is underlined in the Sustainability Incentive model, making it the category with the most lever points and therefore the biggest financial impact. The preliminary data suggests that no structural factors prevent farmers in certain areas or with certain farm types from reaching or exceeding the Arla average, highlighting the potential and the scalability of the model. We continuously analyse and review the model to ensure that it is as relevant and impactful as possible. The more climate action, the greater the reward. This also sends a clear message to customers and consumers that a share of the price they pay for more sustainable Arla products and concepts is directed to the farmers who take the most action. We are looking into how we can offer our data-based innovations to other farmers or dairy companies to accelerate the transition across our global industry. New commercial partnerships Our science-based and data-driven approach to the on-farm transition is creating a growing interest amongst customers in partnering up with Arla to reduce their scope 3 emissions through our newly developed Customer Sustainability Programme. The programme was launched in 2023 and first introduced in UK. A number of our major customers already joined the program with plans to expand to more markets in 2024. The Customer Sustainability Programme will continue to be rolled out to retail and foodservice customers across European core markets during 2024. Where our emissions came from on a farm in 2023 CO2 CO2 8% PEAT SOIL 32% FEED PURCHASED AND HOME-GROWN N2O 5% ENERGY 10% MANURE STORAGE N2O CH4 43% COW'S DIGESTION Other emissions, 2%, include capital goods and destruction of animal remains. Reducing methane emissions Methane emissions are a major chal- lenge for the dairy industry, comprising 43% of the total emissions from Arla farms due to cows' digestion of feed. We continuously review and update our Sustainability Incentive model to drive change. Future initiatives, such as feed additives and biochar, show promising initial findings in reducing methane emissions. While the Big 5 initiative is essential for reducing methane emissions, we aim to further accelerate our efforts through the implementation of feed additives. In 2022, our farmer owners piloted the use of a new feed additive with 13,000 dairy cows across more than 25 farms in Denmark, Sweden and Germany. In 2023, we made significant progress on refining our approach and developing practical implementation strategies for the future. We closely follow the development of a wide range of feed additives that promise to reduce methane produc- tion. Other initiatives relate to further optimising feed compositions and feed efficiency and to reducing farming on peat soils. PAGE 36ARLA'S ANNUAL REPORT 2023I.II.III.General informationResource use and circularity /Biodiversity and natureEnvironmentSocialGovernance/ Climate change and animal welfareSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIES SUSTAINABLE PRODUCTION AND LOGISTICS ACHIEVING CARBON NET ZERO OPERATIONS BY 2050 IS THE LONG-TERM SUSTAINABILITY AMBITION FOR OUR DAIRY PRODUCTION SITES AND OUR LOGISTICS NETWORKS. OUR STRATEGY IS CENTRED AROUND RENEWABLE ELECTRICITY, ENERGY EFFICIENCY AND TRANSITIONING AWAY FROM FOSSIL FUELS IN PRODUCTION AND LOGISTICS. In 2023, our scope 1 and 2 emissions decreased by 4 percentage points compared to 2022 and reached a total reduction of 33% compared to our 2015 baseline. We continued our focus on delivering energy savings through awareness and changed behaviour while also investing heavily in technol- ogies and equipment to transition away from fossil fuels. Our long-term plans to accelerate our transition from fossil fuels to renewa- bles through initiatives such as energy optimisation, electrification, renewable electricity and alternative thermal energy are firmly on track. More renewable electricity Switching to renewable energy is vital for achieving our emission reduction goals. In 2023, 69% of our electricity consumption in Europe stemmed from renewable sources, by 2025 this should be 100%. For more information, please refer to page 41. Our focus is on secur- ing more renewable electricity through new solar and wind farms, adding more renewable energy to the grid. This year, we signed five power pur- chase agreements (PPAs) for new solar and wind parks in the UK, Germany, and Sweden. In Sweden, we secured a 10-year solar energy contract, covering approximately half of the current electricity need for all our Swedish dairy operations. In combination, the five contracts will generate 164 GWh of green electricity representing 15% of the electricity consumption at our European production and logistics sites. At our packaging, distribution and mix- ing site in Tychowo, Poland, we opened a large solar power plant covering 70% of the site's needs. Through the invest- ment we secure business continuity in an area with frequent power cuts and create a renewable energy source in an electricity grid with a high emission factor due to the dependency on coal. We also installed solar panels on the roof of our cheese packaging site in Oswestry, UK, which can cover 12% of the site's annual electricity need. Please 33% Scope 1+2 CO2e emission reduction Strategic ambition: We aim for a 63% reduction in scope 1+2 emissions by 2030 compared to 2015. see further information on page 121 in the financial statements. Energy efficiency At our largest fresh milk dairy, Aylesbury UK, we piloted a new AI digital tool to identify energy reduction opportunities. This advanced technology provided accurate energy consumption data and enabled us to quickly address energy spikes. With the AI-powered energy performance report, we achieved substantial energy savings equivalent to 15 extra production days, along with a reduction in CO₂e emissions. Our goal is to expand the use of this tool to more production sites for increased value and CO₂e emission reductions. We continued to assess quick-win areas for our production sites and logistics centres. We identified three areas for 2023 through a supplier-lead screening and assessment process: · Optimising the ventilation systems by looking at general automation, heat recovery, fans and reducing air flow to save energy. · Assessing, replacing and optimising air compressors and associated equipment to reduce energy use. · Optimising current frequency con- verters and identifying more motors that can be equipped with converters to minimise energy usage. PAGE 37ARLA'S ANNUAL REPORT 2023I.II.III.General informationResource use and circularity /Biodiversity and natureEnvironmentSocialGovernance/ Climate change and animal welfareSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESWhere our emissions came from (scope 1+2) in 2023 12% LOGISTICS 88% PRODUCTION Transition away from fossil fuels We believe that the energy supply of the future must be multi-pronged with different renewable energy sources in order to create resilience, cost compet- itiveness and match the availability of renewable energy sources. The energy crisis in 2022 has further motivated us to act swiftly and pursue rapid change. We have invested heavily in alternative solutions suited to the sustainability strategy. An example is the Taulov dairy in Denmark which, in late 2023, was connected to a large district heating system. This means that more than half the yearly natural gas consumption will be replaced by fossil-free district heating, saving up to 41% of the site's current CO2e emissions related to heating per year. Logistics and fuel efficiency We continued the work on transitioning to fossil-free fuels and on emission-re- ducing initiatives in our logistics fleet and production sites. Throughout the past years, Arla's own and leased truck fleet has been equipped with an Ecodriving system to optimise vehicle and driver performance, and we now have a setup which ensures that it is installed in all new trucks. The system displays the drivers' economic performance, helping them to improve. On average, the system is expected to reduce overall fuel consumption by 3-5%. Furthermore, we continued to expand our fleet of inbound electric and bio- gas-driven vehicles in the UK, Finland and Sweden. At the end of 2023, around 50 Arla biogas trucks were on the road in Sweden, and we continue to create opportunities for Arla farmers to utilise their cow manure for biogas. Route and delivery optimisation in Denmark, Sweden and the UK also contributed significant emission savings during the year. We proactively engaged our key customer and logistics suppliers to optimise the filling of our trucks and reduce the distances driven. In the UK, we collaborated with a key customer who agreed to get shipments every second day. This significantly decreased delivery frequency and mileage and reduced CO2e emissions. ARLA® B.O.B. Arla® B.O.B. milk is sold to consumers in the UK. In 2023, we continued our focus on optimising our logistics to reduce CO2e emissions in collaboration with a key customer. PAGE 38ARLA'S ANNUAL REPORT 2023I.II.III.General informationResource use and circularity /Biodiversity and natureEnvironmentSocialGovernance/ Climate change and animal welfareSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESANIMAL CARE MILK IS OUR KEY RAW MATERIAL, AND WE WANT IT TO BE PRODUCED RESPONSIBLY, WITH CARE FOR COWS AND NATURE. Animal welfare in Arla In Arla, the welfare of our cows is at the heart of our farming practices. Our farmers take great pride in ensuring the health and well-being of their herds, and commit considerable time and resources to delivering high animal welfare standards. 20 years of Arlagården® In 2003, we started the Arlagården® farm quality assurance programme to strengthen our animal welfare practic- es. Since then, we have continuously updated and adapted Arlagården® Share of farmers with no major animal welfare issues in 2023 We measure the general wellbeing of the cows using four indicators devel- oped on the basis of scientific research on the most common dairy cattle issues. The data shows the share of audited farmers without major issues within each welfare indicator in 2023. % 9 9 9 . Cows with good body condition Fit cows have the perfect amount of fat reserve on their bodies: not too little and not too much. % 8 9 9 . Mobile cows Cows walk without any problems, and have no pain in their legs and hooves. % 7 9 9 . Cows without injuries An injury on a cow can be a lump, bump, ulcer or sore. % 1 9 9 . Clean cows Clean cows have a lower risk of being infected by disease. 2 3 4 1 robustness, corresponding to an aver- age of 2 points in the Incentive model. Digital farms Today, many Arla cows are equipped with a collar which helps the farmers track activity levels and patterns that indicate the health of individual cows, enabling the farmer to react faster if something is wrong. Our pilot project at the UK innovation farm utilises 3D cameras and advanced algorithms to automate data collection on cows' mo- bility and body condition. This simplifies dairy herd management, enabling faster identification and resolution of health issues. Ultimately, this technology empowers farmers to prioritise the well-being of their cows. Driving industry-wide improvements Championing animal welfare extends beyond our farms. Engaging with NGOs, industry associations and participating in forums, round tables and conferences dedicated to farm animal welfare is one of our core focus points. By supporting the European Dairy Association through the EU Animal Welfare Platform, Arla is actively contributing to shaping the upcoming ambitious animal welfare legislation. to align with evolving customer and consumer expectations and changing conditions on farm. To ensure that animal welfare is a core focus area, Arlagården® requires owners to submit a comprehensive report on their herds' health status on a regular basis. In an audit process harmonised across all owner countries, farmers are visited by external experts trained in animal welfare at least once every three years to have their herds checked on. Our animal welfare experts receive regular training to ensure they remain up to date on the latest best practices. Read more about the audit on page 42. Animal robustness is one of the Big 5 levers in our Incentive model. To gain insight into how to improve this lever, we launched a pilot with 19 farms in 2022, in which the farmers, supported by veterinarians, focused on how to further prevent the most common cow diseases as well as animal accidents on farms. The project received highly positive feedback from the farmers involved, as it enabled them to get tailored advice on how to improve their herds' health and robustness. In 2023, to scale the insights gathered from the pilot, more than 90 workshops were conducted across our seven owner countries. In 2023, EUR 4 million were paid out to farmers for the last six months of the year related to animal PAGE 39ARLA'S ANNUAL REPORT 2023I.II.III.General informationResource use and circularity /Biodiversity and natureEnvironmentSocialGovernance/ Climate change and animal welfareSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESProgress towards targets GREENHOUSE GAS EMISSIONS (CO²e) To set our goals, we rely on the latest scientific methodology and understanding of our ecosystem to ensure the goals are robust, actionable and in line with the planet's needs. In 2023, our scope 1+2 CO₂e emissions decreased by 4 percentage points, leading to a total reduction of 33% compared to the 2015 value of 983 thousand tonnes. The reduction was a result of energy optimisations at sites, the impact from PPA contracts, solar panels in Bahrain, Poland and UK, and to a minor degree renewable electricity certificates. The reduction was partly offset by impacts from increased milk volumes and powder production. In 2023, scope 3 emissions per kg of milk and whey decreased by 3 percentage points compared to 2022, contributing to our overall reduction of 12% compared to the baseline value of 1.29 kg CO2e per kg of milk and whey in 2015. As a result, the current scope 3 emissions per kg of milk and whey now amount to 1.14 kg CO2e. Emissions specifically from Arla's owners amounted to 1.08 kg CO2e per kg of owner milk, corresponding to a 3.6% decrease compared to last year. Reductions were delivered across most countries, with UK showing the biggest improvements. The biggest reductions were observed within better fertiliser use and manure handling. Packaging emissions increased due to product mix changes, while scope 3 transport emissions de- creased as a result of reduced air freight, low carbon fuel usage and insourced transport activities which in turn lead to higher scope 1 transport emissions. In 2023, total CO₂e emissions decreased to 18,801 thousand tonnes (2022: 19,102). The development is primarily explained by emission reductions on farm, partly offset by higher milk volumes and increased purchases of external whey for the Arla Foods Ingredients business. To a smaller degree this reduction is also caused by a decrease in scope 2 emissions. ACCOUNTING POLICIES To follow up on the progress towards emission reduc- tion targets, greenhouse gas emissions (expressed as CO₂ equivalents, CO₂e) are reported annually. CO₂e is categorised into three scopes according to the methodology of the Greenhouse Gas Protocol Corporate Standard (GHG Protocol). In line with Arla's science-based targets, the group does not reduce its CO₂e emissions with carbon credits. Calculating CO₂ equivalents Greenhouse 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 green-house gases associated with dairy production: Methane (CH₄) and nitrous oxide (N₂O). In order to calculate Arla's total greenhouse gas emissions (carbon footprint), different greenhouse gas emissions are converted into carbon dioxide equivalents (CO₂e). The conversion of different gases reflects their global warming potential. The potency of the different gases is taken into con- sideration according to the following calculations (based on the IPCC Fifth Assessment Report, Climate Change 2013): 1 kg of carbon dioxide (CO₂) = 1 kg of CO₂e 1 kg of methane (CH₄) = 28 kg of CO₂e 1 kg of nitrous oxide (N₂O) = 265 kg of CO₂e The majority of Arla's emissions are methane from digestion and manure storage, and nitrous oxide from fertiliser and manure usage. Greenhouse gas emissions are categorised into three scopes accord- ing to where they appear across the value chain, and what control the company has over them. Emissions are calculated in accordance with the methodology set out in the GHG Protocol. Scope 1 – All direct emissions Scope 1 emissions relate to activities under the group's control. This includes transport using Arla's vehicles and direct emissions from Arla's production facilities. Scope 2 – Indirect emissions Scope 2 emissions relate to the indirect emissions caused by Arla's energy purchases, i.e. electricity or heat. In 2020, Arla switched from location-based scope 2 reporting to market-based reporting and updated the 2015 baseline. The market-based allo- cation approach reflects emissions from electricity purchased or produced by Arla, as well as emissions related to other contractual instruments such as PPAs and certificates purchased by Arla, which may differ from the average electricity and other energy sources generated in a specific country. This gives Arla the opportunity to purchase electricity and other contractual instruments which emit less greenhouse gases than the country average. In accordance with the GHG Protocol, Arla discloses scope 2 emissions according to both the market and location-based method (also known as dual reporting). Scope 3 – Other indirect emissions Scope 3 emissions relate to emissions from sources that Arla does not directly own or control. They cover emissions from purchased goods and services (e.g. raw milk purchased from owners and contract farmers, whey, packaging and transport purchased from suppliers), but also waste processing from production sites. Emissions from whey relate to externally purchased whey for Arla Foods Ingredients. Included whey is standardised and recalculated based on the milk solid content to consider the difference in quality and fractions purchased at Arla. The emission factor related to externally purchased whey was unchanged at 1.0 kg of CO₂e per kg of whey, a conservative estimate (Flysjö, 2012). Arla collects data from transport and packaging suppliers covering a minimum of 95% of the spend. Based on the collected data, results are scaled up to cover 100%. For transport, production and packaging, emission factors are based on Defra 2022 and Ecoivent 3.9.1. The emission factors are updated annually. Scope 3 – Emissions on farm Scope 3 emissions from raw milk are calculated in accordance with the International Dairy Federation's guideline for the carbon footprint of dairy products (IDF 2015). The tool used for calculating the carbon footprint of milk is based on an attribu- tional life-cycle assessment (LCA) that has been developed during the last decade in collaboration with 2.-0 LCA Consultants, a Danish consultancy firm formed by academics. For detailed descriptions of methodology, please refer to Schmidt and Dalgaard (2021), which can be found on the website of 2.-0. LCA Consultants. Farm-level emission factors are also obtained from 2.-0 LCA Consultants. For non-owner milk, emission factors were unchanged from 2015 levels. Non-owner milk emissions are Greenhouse gas emissions progress Thousand tonnes (mkg) CO₂e scope 1+2 market-based CO₂e reduction scope 1+2 (baseline: 2015) CO₂e scope 3 from owner per kg of owner milk (kg) CO₂e scope 3 per kg of milk and whey (kg) CO₂e reduction scope 3 per kg of milk and whey (baseline: 2015)¹ 2023 660 33% 1.08 1.14 2022 695 29% 1.12 1.18 2021 733 25% 1.15 1.20 2020 751 24% 1.15 1.21 2019 862 12% 1.15 1.21 12% 9% 7% 7% 7% ¹ The calculation of CO₂e emissions in 2015 was based on national statistical data, the best available source at the time. In 2016, we started to do climate measurements on Arla farms and gradually replaced the national statistical data with Arla-specific data in the CO₂e calculation model. Greenhouse gas emissions (scope 1, 2, 3) Thousand tonnes (mkg) Production Transport CO₂e scope 14 CO₂e scope 2 – market-based Milk Externally sourced whey Packaging Purchased goods and services (category 1) Fuel and energy-related activities (category 3) Upstream transport and distribution (category 4) Waste generated in operations (category 5) CO₂e scope 32 Total CO₂e CO₂e scope 2 – location-based Total CO₂e – location-based 20232,3 2022 2021 2020 2019 426 82 508 152 15,196 1,987 459 399 78 477 218 368 79 447 286 381 93 474 277 366 97 463 399 15,571 1,859 444 16,386 1,751 417 16,645 16,524 1,133 1,032 396 384 17,642 17,874 18,554 18,174 17,940 159 331 9 177 346 10 125 347 24 120 306 25 110 312 25 18,141 18,407 19,050 18,625 18,387 18,801 19,102 19,783 19,376 19,249 192 165 243 237 274 18,841 19,049 19,740 19,336 19,124 2 Scope 3 emissions from categories 2, 6, 7, 8, 9, 13 and 14 are individually less than 0.5% and not included in the emission figures. Categories 10, 11, and 12 have minor impacts above 0.5%. Arla did not report voluntarily in 2023, but is improving data quality for future reporting. Category 15 has around a 5% impact, and data quality efforts are underway for future reporting. 3 Biogenic emissions, which are not included in the emission table, amounted to 90 thousand tonnes of CO2e. 4 Refrigerants not included. GHG intensity per net revenue4 Thousand tonnes per million EUR Total GHG emissions (location-based) per net revenue (tCO2e/mEUR) Total GHG emissions (market-based) per net revenue (tCO2e/mEUR) 4 Net revenue figures taken from financial statements. 2023 1.38 1.37 2022 1.38 1.38 2021 1.76 1.77 2020 1.82 1.82 2019 1.82 1.83 PAGE 40ARLA'S ANNUAL REPORT 2023I.II.III.General informationResource use and circularity /Biodiversity and natureEnvironmentSocialGovernance/ Climate change and animal welfareSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIES GREENHOUSE GAS EMISSIONS (CO2e) CONTINUED calculated by multiplying milk volume by emission factors based on national inventory data and not Arla-specific data. The calculations are based on an earlier version of the farm tool following IDF 2010 (Dalgaard R, Schmidt J, Cenian K, 2016). Emissions related to raw milk include emissions both on and off farm. The emissions relate to the cow's digestion, feed production and purchase, manure storage, energy usage, capital goods and peat soils. Emissions related to feed include fertiliser for home-grown feed and purchased feed and transport of purchased feed. Manure storage can result in methane and nitrous oxide emissions. The amount of emissions varies depending on how manure is covered and whether it is used for biogas production. Peat soils are wetland with a high CO₂e content. When soils are drained and used in crop production, CO₂ and N₂O are released. The emission figure related to raw milk presented in this report is a weighted average emission per kg of milk, calculated based on validated climate data from farms where the data has been validated by external climate experts, multiplied by the fat and protein-adjusted milk intake. Farm data validated by external climate experts is statistically representative of all Arla farms. UNCERTAINTIES AND ESTIMATES In 2023, 97% of Arla's active farmer owners, covering 99% of Arla's owner milk volume, submitted a detailed Climate Check questionnaire (farmers receive an incentive of 1.0 EUR-cent/kg of milk to complete the survey). Their responses were validated by external climate experts. This report includes only externally validated data which in 2023 covered all farms who submitted a Climate Check. Farmer owners complete the Climate Check once a year based on data from their most recent financial year. This could vary from farm to farm, as some have financial years running from January to December, while others run from July to June. Therefore, the figures presented are not necessarily based on farm data covering the same period. The majority of data, 62%, relates to the period 1 January 2022 to 31 December 2022, while 10% relates to earlier periods. An uncertainty analysis has been carried out to understand the biggest areas of uncertainty related to self-reported farm emission data. The analysis was centred around four key levers: herd, feed, crops and manure handling, and addressed the parameters with the highest impact on emissions on farm. The analysis concluded that results on individual farms could be misstated by a maximum of 10-12%, but only if the farmer had a starting point of high emissions and claimed to change from no biogas treatment to full biogas treatment of slurry. Arla has a robust control process in place to reduce uncertainties and improve data quality. The control process is twofold, including the validation process of the external climate experts and an internal control performed by Arla on catching statistical outliers or abnormalities in data. Smaller farmers and farmers using extensive grazing systems do not always measure the amount of feed that the cows eat or the dry matter content of the grass on the fields. To enable these farmers to report, the system contains a model which calculates feed consumption based on herd size and milk yield. Reporting on peat soils is a developing field and still subject to higher uncertainty than other areas. Due to its relatively high climate impact, uncertainties related to peat soils could have a significant impact on the total reported greenhouse gas figure. The risk of errors is minimised by external climate experts val- idating the data supported by automated statistical outlier controls. All outliers are flagged and need to be checked by the climate expert before the result of the Climate Check is available. Numbers are only released for reporting after thorough investigation. The methodology used to calculate emissions on farm develops over time. Currently, factors that potentially could lower total net emissions, such as carbon sequestration on farm and direct land use change, are not included. IDF 2015 suggests that direct land use change should be included in the calculations. Our farmers are committed to measuring the impact from carbon sequestration. Carbon sequestration is the process of capturing and storing carbon dioxide from the atmosphere in for example plants and soil. The baseline year for our scope 3 science-based target is 2015. To calculate the baseline as well as follow-up on the reduction target, the same method and tool were used, but the type of data used differed. For the 2015 baseline, national statistical data for 2012 was used, which was the best available data at the time. From 2016, national statistics were gradually replaced by data from climate measurements at Arla farms. The change happened for Denmark, the UK and Sweden in 2016, Germany in 2019 and for the rest of the owner countries in 2020. The reporting year 2020 was the first time when most Arla farms were included. The farm-specific data is always one to two years behind, which is why the 2023 reporting was based on farm data from primarily 2022. Other uncertainty relates to data collection regard- ing packaging and transport from suppliers. Each quarter, Arla sends its suppliers detailed requests to provide the necessary data, accompanied by a man- ual on how to complete the related documentation. Manual data entries from different sources are clear risks to data quality. To minimise the risk of reporting errors, a rigorous two-step internal validation process is in place. ENERGY CONSUMPTION AND MIX The renewable electricity share increased to 69% in 2023 compared to 52% last year. The increase was a result of new PPAs and investments in on-site solar plants. To a smaller degree this was also caused by the purchase of renewable electricity certificates. Read more about the accounting treatment of PPAs on page 121. Concerns over the energy crisis following the Russian invasion of Ukraine in 2022 led to investments in backup plans to enable a switch to oil as an alternative fuel to ensure supply continuity. These are still ready for use should they become necessary in the future. In the beginning of 2023, the oil boilers were used at a number of production sites, meaning that 8% of the energy consumption in 2023 related to crude oil. ACCOUNTING POLICIES Energy used at Arla's production sites and ware- houses originates from different sources, including biogas, biomass, natural gas, district heating and grid electricity. Energy consumption (thousand MWH) Coal and coal products Crude oil and petroleum products Natural gas Other fossil sources Purchased or acquired electricity, heat, steam or cooling from fossil sources 2023 - 349 2022 2021 2020 2019 - 454 - 346 - 462 - 492 1,906 1,738 1,723 1,695 1,596 0 302 0 420 0 488 0 465 0 628 Total energy consumption from fossil sources 2,557 2,612 2,557 2,622 2,716 Total energy consumption from nuclear sources Renewable sources, including biomass, biofuels, biogas, hydrogen from renewable sources etc. Purchased or acquired electricity, heat, steam and cooling from renewable sources Self-generated non-fuel renewable energy Total energy consumption from renewable sources Total energy consumption Renewable sources' share of total energy consumption (%) Energy intensity based on net revenue (thousand MWH) Energy intensity (total energy consumption per net revenue)¹ 45 545 974 4 1,523 4,125 37% 97 554 796 2 1,352 4,061 33% 185 598 611 0 1,209 3,951 31% 185 614 531 0 1,145 3,952 29% 431 624 116 0 740 3,887 19% 2023 302 2022 294 2021 353 2020 371 2019 369 ¹ From activities in high climate impact sector. We operate in the high climate impact sector 'Manufacture of dairy products'. Electricity consumption in Europe¹ (thousand MWh) Non-renewable sources Renewable sources Total electricity consumed Renewable electricity share 2023 329 730 2022 500 551 2021 628 401 2020 621 412 1,059 1,051 1,029 1,033 69% 52% 39% 40% 2019 - - - ¹The historical figures for renewable electricity are restated to align with updated methodology. The renewable energy decreased from 638 Mwh in 2022, 416 Mwh in 2021 and 428 Mwh in 2020. This caused a restatement of the overall renewable electricity share. PAGE 41ARLA'S ANNUAL REPORT 2023I.II.III.General informationResource use and circularity /Biodiversity and natureEnvironmentSocialGovernance/ Climate change and animal welfareSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESOUR PROGRESS ON CLIMATE ACTIONS CONTINUED Electricity from renewable sources includes certificates related to self-produced electricity from biogas, solar, electricity certificates purchased from farmer owners and open market certificates. Arla follows market-based accounting and accounts for the purchase of green electricity by contractual agreement, i.e. certificates. Energy data is registered monthly and primarily based on invoice information and automated meter readings at each site, and therefore there is little uncertainty associated with these figures. Renewable energy share To calculate the share of renewables, renewable energy use is divided by the group's total energy use. Arla does not account for energy losses, therefore all energy purchased is included in the figures. The energy sold was not deducted in the calculation of the renewable energy share. Renewable electricity share The renewable electricity share is calculated as the share of consumed electricity, both purchased and self-produced, that originates from renewable energy sources or renewable electricity certificates. The renewable electricity share follows the RE100 guidelines. Some Arla sites produce and sell excess electricity. The electricity sold was deducted from the calculation of the renewable electricity share. In 2023, we chose to change the methodology for the renewable electricity share to better align with the RE100 guidelines and thus we excluded the renewable electricity in the grid mix not covered by contractual instruments. Historical figures have been restated to align with the updated methodology. ANIMAL WELFARE Animal welfare development Animal welfare is a key priority for Arla's farmer owners, and for Arla as a company. Arla is committed to reporting on the most important measures to describe and improve animal welfare. Animal welfare KPIs include somatic cell count, which is a good indicator of disease and stress in cows, and four indicators associated with the physical appearance and wellbeing of cows. Animal welfare on farm is externally audited at least once every three years by a world-leading quality assur- ance and audit firm, SGS, specialising in animal welfare. The percentage of audited farms was 35% in 2023, corresponding to 2,814 audited farmers. The results of the audit can trigger a follow-up audit or activity, depending on its outcome. In case of severe issues or repeated animal welfare breaches, Arla suspends milk collection from the non-compliant farm, and, in extreme cases, terminates its membership. During 2020, the audit process was upgraded and harmonised across all owner countries to ensure that auditors follow the same procedures and standards everywhere. Therefore, only 2021-2023 data is reported. The average somatic cell count across Arla geogra- phies remained at 184 thousand cells/ml. ACCOUNTING POLICIES Somatic cell count (average): Somatic cells in milk are primarily white blood cells. An elevated level of somatic cells can indicate inflammation (mastitis) of the cow's udder, which causes the animal pain and stress and also lowers milk quality. Arla monitors the somatic cell count (SCC) by analysing milk at bulk tank level each time milk is collected from the farms. Levels are continuously reported to safeguard milk quality. The figure reported is a weighted average of Arla's entire milk intake in a given year. The SCC count is received from several laboratories across owner countries. A SCC above 300 reduces the milk price to the farmer, while a supplement is given for a SCC below 300. Audit on farms and animal-based indicators Animal welfare conditions on all Arla farms are regu- larly audited. These on farm audits involve a thorough check-up covering herd health and well-being, feeding and housing which are principles derived from the criteria defined by the WelfareQuality® project. Four animal-based indicators are evaluated: body condition, mobility, cleanliness and injuries. These indicators were developed based on scientific research on the most common dairy cattle issues. Audits include rou- tine audits (performed at least every three years), spot checks, start-up visits, attention and special attention audits. Audited farmers are defined as the percentage of owners who received at least one audit in 2023. Animal-based indicators evaluated by auditors The KPIs reported in the animal welfare indicators table relate to the share of audited farmers with no major issues reported within each category. During a farm audit, the auditor assesses the cattle on the farm, and identifies whether there are any welfare concerns. If concerns are identified, the cattle are scored according to Arla's welfare indicators. The auditor scores the cows on the four core welfare indicators on a scale of 0-2, where 0 means no issues identified, 1 means minor issues and 2 means major issues. The results are reported to Arla. If the auditors find more than 5% of the sampled cows too thin, more than 25% too dirty, more than 15% lame or more than 10% injured, they report it to Arla as a major animal welfare incident. UNCERTAINTIES AND ESTIMATES Farms are audited every three years. A year-on-year comparison may therefore be affected due to the fact that it is not the same farms being audited every year. Policies and other Policies for sustainability strategy Our sustainability strategy is supported by our Environmental and Energy Management Policy and Arla's Green Ambition 2050, which together act as guiding policies to address key environmental issues and achieve our long-term sustainability goals on climate change, biodiversity, ecosystems and resource use. Environmental and Energy Management Policy & Green Ambition 2050 Our policies on climate change mitigation focus on GHG emission reductions, energy efficiency and transitioning to renewable energy. Climate change adaptation is not addressed yet. Our Green Ambition 2050 focuses on three key topics; better climate, clean air and water as well as improved biodiversity and ecosystems. Animal welfare indicators Somatic cell count (thousand cells/ml) Share of audited farmers with no major cleanliness issues Share of audited farmers with no major mobility issues Share of audited farmers with no major injury issues Share of audited farmers with no major issues related to body condition 2023 184 99.1% 99.8% 99.7% 99.9% 20222 184 98.6% 99.8% 100.0% 99.9% 2021 191 98.4% 99.5% 100.0% 99.8% 2020 194 2019 196 - - - - - - Better climate Our goal is to reduce global greenhouse gas emissions by increasing circularity and resource efficiency. We aim to achieve this through: · A significant reduction of our own greenhouse gas emissions and emissions from milk production, in line with the Science Based Targets initiative. · A transition to renewable energy sources both on-site and throughout the value chain and through resource efficiency for water, energy and materials. · Monitoring and optimising our operations and allocating capital to ongoing investments to improve energy efficiency. Arla is taking a big step in moving from fossil fuels to renewable energy sources. We aim to use only renew- able electricity at our production sites and offices in Europe by 2025. This requires a shift away from fossil coal, oil and gas to renewable energy sources such as wind, solar, biogas and other biofuels. This is relevant for electricity and heat on farms and sites, fuels for transport and materials for packaging. Together with the Arlagården® programme and the Code of Conduct, our Green Ambition 2050 underlines our care for animal welfare. Clean air and water Our goal is to keep nitrogen and phosphorus cycles in balance and secure high groundwater and air quality. We will reach this by protecting regional water sources, reducing the need for external water use and reducing emissions across the whole value chain. Circular economy principles are our guidelines, fo- cusing on reducing waste and unnecessary resource use as well as reusing and recycling in line with the waste hierarchy. This applies to milk as well as our packaging and water use and the carbon, nitrogen and phosphorus cycles. We especially seek to use more recycled materials in our packaging to increase the amount of packaging that can be recycled. Improve biodiversity and ecosystems The decline in biodiversity is a threat to our future wellbeing and can have irreversible consequences for our planet. We want to build and contribute to a more biodiverse, robust and accessible local agricultural landscape. To achieve our goals and targets, it is critical to form strong partnerships throughout the entire value chain as well as across value chains. We cannot achieve our Green Ambition alone. We need to rely on the cooperative spirit – working together with researchers and scientists as well as suppliers and customers to find new technologies and solutions to lead the future of sustainable dairy. Animal welfare The Arlagården® programme, the Code of Conduct and Green Ambition 2050 underline our commitment to animal welfare. We prioritise improving animal health on farms and responsibly producing high-quality milk to support the transition to a sustainable dairy industry. EU Taxonomy The EU Taxonomy Regulation (EU) 2020/852 aims to increase transparency and provide a scientific definition of 'sustainable'. It sets reporting obliga- tions for businesses, focusing on revenue, OpEx and CapEx. Eligibility and alignment assessments are required, with eligibility referring to inclusion in the EU Taxonomy Regulation. Currently, the food and beverage manufacturing industry is not covered, re- sulting in 0% revenue eligibility for Arla. The analysis of OpEx and CapEx has been initiated, however we do not plan to pre-implement the elements before 2025 when reporting will become mandatory as part of the EU's Corporate Sustainability Reporting Directive. Carbon pricing In Arla, we use a carbon pricing scheme to incorpo- rate the carbon impact into investment decisions for every investment above EUR 500,000. The goal is to make investments with a positive carbon impact attractive. Our current carbon price is EUR 90/tonne of CO2e. This carbon price is updated once a year as the weighted average of the one-year average EU ETS price and the one-year average weighted GoO certificate price. Our carbon pricing scheme adheres to our internal standards and is not aligned with the screening criteria in the EU Taxonomy. PAGE 42ARLA'S ANNUAL REPORT 2023I.II.III.General informationResource use and circularity /Biodiversity and natureEnvironmentSocialGovernance/ Climate change and animal welfareSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESRisk and opportunities CLIMATE-RELATED RISKS AND OPPORTUNITIES IDENTIFYING AND ASSESSING ARLA'S KEY CLIMATE-RELATED RISKS AND OPPORTUNITIES IS A PREREQUISITE FOR SUCCESS- FULLY EXECUTING OUR CLIMATE STRATEGY. We map and conduct climate-related risks and opportunities through our general double materiality assessment process (see pages 30-32) and conduct a scenario analysis involving both our Executive Management Team and our Board of Directors in the process. These management bodies review the climate-related risks once a year, independently of each other. We follow the recommendations of the Task Force on Climate-Related Financial Disclosures when conducting the yearly climate-related risk and opportunity review. When assessing transitional climate-related risks, in line with ESRS E1 requirements, Arla takes into consideration a strict regula- tory scenario adhering to the 1.5°C global warming target of the UN Paris Agreement. Under such a scenario, we assume the strictest possible regu- latory environment in Europe where our core business is. This means, for example, high taxation on CO2e emis- sions, stringent nature conservation laws that prohibit certain use of land or agricultural activities, and mandatory climate or nutrition labelling on food products. To align the climate-related risk assessment methodology with our general Enterprise Risk Management framework (see pages 25-27), the time horizon for transitional risks is defined until the end of our current strategy period (2026). As the national and EU level regulatory environment is expected to change dynamically, the assessment of the likelihood and po- tential financial impact of transitional risks and opportunities in the medium and long term is too uncertain to create value for Arla's climate planning. Therefore, such an assessment was not conducted. For physical climate-related risks, we considered multiple climate scenarios defined as Representative Concentration Pathways (RCP)1: RCP 2.6, RCP 4.5 and RCP 8.5. In alignment with ESRS E1, in this report we present the results of the worst case (RCP 8.5) scenario where the climate would warm by 2°C by 2050. The analysis, conducted based on the latest scientific evidence and methodologies (see Guzman-Luna et al 2021), focused on how a certain level of climate warming would impact the dairy sector in our seven milk-producing countries in Europe. Milk is our most important raw material, and within our value chain dairy farming is most vulnerable to negative impacts from climate change, whereas our production is more resilient to such changes. The time horizon for the physical risk assessment is 2050 (long term) in accordance with the TCFD methodology. Climate science in general focuses on climate change's impact on the environment by 2050 or beyond, therefore assessing the short- term (until 2026) and medium-term (until 2035) impacts on dairy produc- tion in Europe would lack the necessary scientific evidence. For this reason, Arla decided to focus on the long-term impacts of climate change. The latter identification and assessment of risks build, among other things, on the assessment of our dependencies on climate change. In Arla, we are working towards transitioning from fossil energy to renewables. However, at present we are still dependent on fossil-based energy related to our production and packaging materials to pack our products. We further depend on our farmers' milk production. Due to uncertainty following future legislation, Arla has not been able to conduct a quantitative assessment of the potential financial impacts of climate-related risks and opportunities, and uses a qualitative scale of moderate to critical to illustrate the expected profit impact. Qualitative thresholds used for climate-related risk and opportunity assessments are not the same thresholds as the ones used in the global risk assessment presented on pages 25-27. 1 RCPs are scenarios developed by the IPCC based on global climate models with different temperature outcomes. B C A D E F Likely Very likely l a c i t i r C j r o a M t c a p m i t fi o r P e t a r e d o M G Possible Likelihood Transitional risks A. Regulations to reduce emissions in production B. Regulations to reduce emissions from agricultural activities C. Land use regulation D. Animal welfare regulations E. Environmental footprint and origin product labelling F. Change in dietary guidelines and trends Physical risks G. Extreme weather events PAGE 43ARLA'S ANNUAL REPORT 2023I.II.III.General informationResource use and circularity /Biodiversity and natureEnvironmentSocialGovernance/ Climate change and animal welfareSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESPhysical risks Risk description Risk development Category Potential impact Mitigating actions A B C D E F G Regulations to reduce emissions in production Regulations to reduce emissions from agricultural activities Land use regulation Animal welfare regulations Denmark introduced an emission tax on industry operations. Arla's operations will be impacted by this. There is the potential for other countries to follow Denmark and introduce similar taxes, or employ other regulatory tools to reduce emissions in future. The Danish Government has committed to introducing a carbon tax on methane and nitrous oxide emissions from agricultural activities. The EU is also discussing an Emissions Trading System (ETS) related to farm emissions. EU level proposals to reduce the emissions impact from land use include peat soil restoration and increasing forestry. National initiatives to improve water and air quality may also reduce livestock numbers in our core markets. The welfare of animals is closely related to the emission intensity of products originating from them. Partly for this reason, some European countries such as Germany are planning on introducing stricter animal welfare regulations and a related fee, while the EU is also reviewing the current animal welfare legislation to reflect the newest scientific evidence. Environmental footprint and origin product labelling Governments and the EU are increasingly looking at introduc- ing mandatory sustainability-related labelling covering carbon footprint, country of origin and nutrition. Change in dietary guidelines and trends National dietary guidelines could reduce the amount of animal-based foods recommended based on concerns about their carbon footprint, ignoring their nutritional contribution. Extreme weather events Heat waves, draughts, floods and other extreme weather events are becoming more and more common due to climate change. New animal diseases and pests are also a consequence of climate change that the agricultural sector has to face. Decreased Increased Decreased Decreased Increased Stable Stable · Increased production costs in countries with CO2e regulations, such as a CO2e tax. · We are constantly lowering our CO2 emissions in our production. Our science-based target is to lower scope 1 and 2 emissions by 63% by 2030. · We are also aiming at running our European operations solely on green electricity by 2025. · Our farmer owners' production costs would increase significantly, which could have a negative impact on milk volumes, causing raw material sourcing issues. · Reducing emissions on farm is part of our business strategy. Farmers continuously work on reducing emissions and are rewarded for their climate actions through the Sustainability Incentive model. · These regulations would mean less land for producing feed for cows, which could lead to herd size and milk volumes dropping. · Reducing livestock numbers would also negatively affect milk Regulatory risk volumes. · To understand the potential impact of such regulation better, and to provide our farmers with solutions, we collect data in Climate Checks and analyse the results. Arla has also set a deforestation and conversion-free commitment. · Stricter EU-wide legislation would impact our farmers in terms of · Arla farmers in general are forerunners in good animal welfare through increased investment levels. their extensive work with Arlagården® over the past 20 years. · Mandatory origin labelling will increase the complexity of our · We are working on establishing methodologies, processes and systems operations and reduce our efficiency as we collect milk from seven European countries. · Carbon and nutrition labelling that oversimplifies the complex- ities of a sustainable and nutritious diet could mistakenly drive consumers away from dairy. to calculate the environmental footprint of products. · We are also exploring possibilities to scale our current capacities in separating different types of milk in order to comply with potential origin labelling legislations. Consumer risk · Schools and other institutions might change their offerings for kids and young adults, which can have long-term repercussions for heir dietary preferences. · We educate about the nutritional benefits of dairy in schools, and inspire hundreds of thousands of people through our recipe sites and social media accounts. · Extreme weather events could have an adverse effect on crop yield, and disrupt operations or the distribution infrastructure. Physical risk · Heat waves are especially detrimental for the cows' productivity, and could affect milk volumes. · Our core milk production countries are relatively resilient to extreme weather events, however we are, together with our farmer owners, working on better understanding and mitigating the impact of changing weather conditions. PAGE 44ARLA'S ANNUAL REPORT 2023I.II.III.General informationResource use and circularity /Biodiversity and natureEnvironmentSocialGovernance/ Climate change and animal welfareSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESBIODIVERSITY AND NATURE Deforestation and conversion-free commodities purchased SOY (FEED) PALM (FEED AND INGREDIENTS) FOREST FIBRE (PACKAGING AND ENERGY) 2023 27% 43% 96% Progress towards target Value chain target 27% 43% 2025 2028 96% 2025 100% 100% 100% Read more on page 47 Read more on page 47 Read more on page 47 PAGE 45ARLA'S ANNUAL REPORT 2023I.II.III.General informationResource use and circularity /Biodiversity and natureEnvironmentSocialGovernance/ Climate change and animal welfareSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESPAGE 45Impacts ARLA'S IMPACTS NOW 2023 Ambitions ARLA'S AMBITION FOR 2025 DEFORESTATION AND LAND USE 27% 43% 96% Volume share of soy Volume share of palm Volume share of forest fibre WATER QUALITY SOIL CONDITION 100% Deforestation and conversion-free1 Deforestation is defined as the loss of natural forest as a result of conversion to agriculture or other non- forest land use, conversion to a plantation or severe or sustained degradation. Conversion is defined as the change of a natural ecosystem to another land use or profound change in a natural ecosystem's species composition, structure or function. 1 Covers volumes directly sourced by Arla and indirect volumes embedded in feed sourced by farmer owners on farms globally. The target applies to forest fibre and soy and palm in feed and ingredients. For palm used in feed, we extend our conversion-free target to end of 2028. This solely refers to other types of non-forest ecosystem conversion. No biodiversity offsets are used in relation to the deforestation and conversion-free target. Policies Responsible Sourcing Policy for Palm Responsible Sourcing Policy for Soy Responsible Sourcing Policy for Forest Fibre Code of Conduct for Suppliers and Business Partners Environmental and Energy Management Policy & Green Ambition 2050 Strategy BIODIVERSITY AND NATURE STRATEGY In Arla, we believe that a symbiotic relationship with nature is essential to sustainable farming. Addressing climate change must go hand in hand with tackling biodiversity loss – both are crucial for our planet. We focus on activities that leave our farms in better and healthier shape for the next generation and have hands-on initiatives in place that protect the natural surroundings of not only our own farms, but across the globe. Our biodiversity approach places great importance on safeguarding regional water sources and minimising emissions throughout the entire value chain to preserve access to clean water. To achieve our targets, it is critical to ensure strong cooperation throughout the entire value chain as well as across industries. All Arla farmers are committed to maintaining and enhancing nature and biodiversity on their farms and to engage in farming practices that enhance carbon sequestration in the ground. We continuously explore ways to support natural ecosystems, such as grass or peatlands, and to build a more diverse, robust and accessible local ag- ricultural landscape. But we also seek to nurture the environment whenever sourcing ingredients from afar. Producing nutritious quality dairy products can put pressure on nature, if not managed carefully. In Arla, we recognise that we are innately dependent on nature in all stages of the value chain. This is most apparent on the farms, where the cycles and processes of the environment, including subtle inter- actions of a diverse range of species, provide essential natural capital such as water, feed, nutrients and air. PAGE 46ARLA'S ANNUAL REPORT 2023I.II.III.General informationResource use and circularity /Biodiversity and natureEnvironmentSocialGovernance/ Climate change and animal welfareSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESActions and resources DEFORESTATION AND CONVERSION-FREE Deforestation and conversion-free sourcing commitment The destruction of high-value natural environments due to the encroach- ment of agriculture is a global crisis that demands careful action and collabora- tion in all steps of the value chain. by the end of 2025. The commitment covers the palm, soy and fibre that Arla sources as well as soy and palm embed- ded in animal feed used on Arla farms. Read more on pages 50-51. The focus of Arla's efforts will be on these to ensure maximum environmental impact. Collaboration is key We have established sourcing policies for the relevant commodities to be compliant with the zero deforestation and conversion commitment. We will communicate the updated sourcing policies to our direct suppliers and Deforestation is a major contributor to climate change, as greenhouse gases that are otherwise stored in above and below-ground biomass are released into the atmosphere. Acting upon our value chains is one of our most important levers in halting biodiversity loss and creating a positive impact on nature, the climate and people. Arla is committed to ensuring that our direct and indirect use of primary risk commodities (palm, soy and forest fibre) is deforestation and conversion-free Both soy and palm are used as ingredients in our products as well as in cattle feed, while forest fibre is used in packaging and for energy production. Our conversion commitment includes not only forests but also other natural ecosystems such as grasslands, wet- lands, swamps and peatlands. Arla uses the definitions on deforest- ation and conversion provided by the Accountability Framework Initiative which is recommended by the Science Based Targets initiative. SUSTAINABLE FEED 11 POINTS 11 points in Arla's Incentive model equals 0.33 EUR-cent/kg of milk paid out to Arla farmers reducing the use of soy or using deforesta- tion-free soy make deforestation and conver- sion-free a requirement to supply Arla after 2025. We are in dialogues with our suppliers to identify gaps towards our target and take action where necessary. We seek to inspire change at the farm level by supporting farmers in their journey to eliminate risks of deforest- ation and conversion linked to feed consumed on farm. At the same time, Arla is collaborating with relevant industry partners and other stakeholders to achieve our goal and scale impact. Regarding feed used by our farmer owners, Arla is encouraging farmers to use deforestation-free soy or to reduce the use of soy via the Sustainability Incentive model. It plays a key role in the effort to achieve Arla's deforestation and conversion-free commitment by facilitating the documentation of soy used in feed to determine the risk of deforestation. In 2023, the average score achieved related to sustainable feed in the Incentive model was 10. As a result, farmers received a payout of EUR 20 million for the last six months of the year. PAGE 47 PAGE 47ARLA'S ANNUAL REPORT 2023I.II.III.General informationResource use and circularity /Biodiversity and natureEnvironmentSocialGovernance/ Climate change and animal welfareSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESTOWARDS MORE NATURE First globally aligned framework for regenerative agriculture Together with world-leading members from the food and beverage industry and farmer cooperatives, in 2023 Arla committed to a new global framework for transitioning to regenerative agriculture practices. For the first time, the industry-first 'Regenerating Together Programme' offers a globally aligned definition of regenerative agriculture. Regenerative agriculture focuses on im- proving soil health, mitigating climate change and supporting biodiversity while keeping farmers' business viability central in a just transition approach. how regenerative agriculture practices can be applied to dairy farms on our 24 pilot farms. The four-year programme launched in 2022 will run until the end of 2025. In recent years, regenerative agriculture has garnered a lot of attention from producers, retailers, researchers and consumers as one of the answers to the double crisis of climate change and loss of biodiversity. But until now, a universal definition of the approach has not yet been established. With over half the world's agricultural land already being degraded, and 70% more food needed by 2050, there is an urgent need to transform agricultural practices to ensure future food security. The framework is designed for practical use at farm level to drive farmers' transition to regenerative agriculture. It will allow farmers anywhere in the world to work with supply chain partners to achieve measurable regenerative agriculture outcomes, and enables the industry to translate the often ambiguous concepts of regenerative agriculture into tangible action at farm level. Regenerative farming pilots In Arla, we are excited to drive the future of regenerative agriculture forward in our cooperative. Therefore, we have begun testing and learning The pilot farmers receive training and guidance in using different regener- ative methods and help collect data to understand and document the effect these methods can have on soil health, biodiversity, ecosystem processes, agricultural profitability and farmer well-being. By including both conventional and organic farms across countries in the project and by developing the experience and dataset, our ambition is to ensure that results and learning points can be used as inspiration for all 7,999 Arla farmers in the cooperative and as a steering point for our sustainability strategy. Innovation Farm Network and Nature projects in Sweden Arla is collaborating with farms in different ways to accelerate agricul- tural progress and support our farmer owners to drive the future of dairy. We have therefore established a network of Innovation Farms to highlight our on-farm activities and demonstrate how Arla is leading the sustainable dairy agenda, today and in the future. We have Innovation Farms in the UK, Denmark, Sweden and Germany with 4 2 Number of pilot farms where we have begun testing and learning how regen- erative agriculture practices can be applied to dairy farms PAGE 48 PAGE 48ARLA'S ANNUAL REPORT 2023I.II.III.General informationResource use and circularity /Biodiversity and natureEnvironmentSocialGovernance/ Climate change and animal welfareSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIES the aim of demonstrating scientific evidence, testing new concepts and technology as well as inspiring and bringing the dairy industry partners together to find the solutions that we need in order to become more sustain- able and carbon net zero by 2050. Nature and biodiversity is a common subject among the Innovation Farms, and specifically at the Innovation Farm in Sweden we have kickstarted a project to restore natural grasslands and promote biodiversity on farm. At the same time, we are currently waiting for the final results of an eDNA project (en- vironmental DNA), which explores and assesses the use of eDNA technology to measure biodiversity at the farm level. MELKUNIE Farmers supplying milk for the Arla® Organic and Melkunie® brands will plant 125,000 native trees and shrubs in the coming year. ReNature project in the Netherlands This year, we joined forces in a new collaboration with two independent organisations in the Netherlands that are committed to nature. This means that starting from the winter of 2023, the farmers supplying milk to the brands Arla Organic and Melkunie will plant 125,000 native trees and shrubs in the coming years. The farmers will receive a tailor-made planting and management plan to maximise the impact of biodiversity on their plots and the land around their farm. Once the trees and shrubs have been planted, the farmers receive clear advice on long-term management and maintenance of the plantings for at least 10 years. This way, the develop- ment of the plantings is guaranteed because the trees and shrubs are planted to improve biodiversity and store CO2 now and in the future. Based on the insights obtained, the ambition is that other countries where Arla has dairy farmers may follow. Biodiversity and soil surveys In 2023, the Biodiversity and Soil Health Check was carried out for the second time among farmers in parallel with the Climate Check. As in the first round, farmers were asked what biodiversity and soil health measures they had already implemented on their farms. CARBON FARMING AND BIODIVERSITY 8 POINTS 8 points in Arla's Incentive model is equal to 10% of the total possible score in our Sustainability Incentive model In addition, this year we gave members the opportunity to measure six specific soil health indicators, such as the count of earthworms or the infiltration rate of the soil. As before, completion of the question- naire was mandatory for Arla's organic farms and voluntary for conventional farms. Partly because participation in self-monitoring is now rewarded with one point in the Sustainability Incentive model, around 72% of conventional farms also took part in this survey. Farmers' actions to conserve biodiver- sity and carbon farming resulted in an average of 5 points in the Sustainability Incentive model. A total of EUR 9 million were paid out to farmers for the last six months of 2023. PAGE 49 PAGE 49ARLA'S ANNUAL REPORT 2023I.II.III.General informationResource use and circularity /Biodiversity and natureEnvironmentSocialGovernance/ Climate change and animal welfareSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIES Progress towards targets DEFORESTATION AND CONVERSION-FREE SUPPLY CHAINS Arla set a commitment of ensuring that primary risk commodities (palm, soy and forest fibre) are deforestation and conversion-free (DCF) by the end of 2025. This includes direct palm and soy in Arla Ingredients, and indirect soy and palm embedded in feed used on Arla farms as well as forest fibre used as packaging and energy. For palm used in feed, Arla extends the target date to eliminate other types of conversion (excluding deforestation) to the end of 2028 due to high uncertainty in the availability of documented conversion-free palm in feed. In 2023, the first year we report this data, it is estimated that 27% of soy, 43% of palm and 96% of forest fibre across Arla's supply chains achieve DCF status. Soy in feed comprises 99.6% of the total volumes in Arla's supply chain, whereas for palm in feed this comprises 46%. ACCOUNTING POLICIES Deforestation is defined as the loss of natural forest as a result of conversion to agriculture or other non-forest land use; conversion to a plantation or severe or sustained degradation. Conversion is the change of a natural ecosystem to another land use or profound change in a natural ecosystem's species composition, structure or function. Natural ecosystems include, for example, grasslands, wetlands or peatlands. Arla uses the definitions of the Accountability Framework Initiative which is recommended by the Science Based Targets initiative (SBTi). Commitment scope Arla focuses on the most relevant risk commod- ities to make the greatest impact: palm, soy and forest fibre, as these have the highest priority for deforestation and conversion-free targets within the value chain. Soy in feed and ingredients includes all soy-based products and derivatives, including soy meal, cake, hulls and soy oil. Palm in feed and ingredients includes all palm-based products and derivatives, including palm oil, palm kernel and other derivatives. Soy and palm products used in milk replacers are not included. Forest fibre includes all wood and forest fibre-based materials that Arla purchases for packaging components, energy production and office material. All Arla's operations in all geographies, including subsidiaries such as Arla Foods Ingredients, as well as Arla's owner farms are included in the commitment scope. This includes contract manufacturers and partnerships where Arla has management control as well as non-owner milk. All companies/partners/traders (referred to as suppliers), both direct and indirect, are included in Arla's DCF commitment. Direct suppliers include those from where Arla sources ingredients and forest fibre for our operations, whereas indirect suppliers include upstream third-party suppliers as well as parties supplying feed products to farms from where Arla sources milk. The latest cut-off date at the group level is 31 December 2020 (after which deforestation or conversion renders a given area or production unit non-compliant with DCF commitments). This is in line with the European Union Deforestation Regulation. Some commodities may be subject to earlier cut-off dates depending on the sourcing region, national legislation or certifications. These are outlined in our Responsible Sourcing Policies for palm, soy and forest fibre. Definition of DCF Following guidance by the Accountability Framework Initiative, Arla considers soy, palm and forest fibre as deforestation and conversion-free when they are physically segregated and certified or verified as DCF, organically produced, or originate from areas that are not high-risk according to WWF (Deforestation Fronts 2021). This means that Arla reports only segregated chain of custody models as DCF. Chain of custody models where there is no physical segregation, such as book and claim (soy or palm credits) or mass balance, do not qualify. Arla only accepts certification bodies that have high enough standards that meet deforestation and conversion-free criteria from the SBTi and the Accountability Framework Initiative: RTRS, Pro Terra, Soy Europe and Donau Soya for soy, RSPO and ISCC Plus for palm products, and FSC, PEFC and SFI for forest fibre when controlled wood is sourced from low-risk areas. Organic soy ingredients or in feed on organic farms are considered as DCF due to the low-risk origins of organic soy supply chains. Although credits/book and claim models do not count towards DCF claims, Arla purchases RTRS and RSPO credits to cover volumes of soy and palm with an unknown risk of deforestation and conversion. Feed Volumes of soy and palm used in feed are collected in the Climate Checks and relate to the farmers' use of feed during their 2022 financial year. Arla's DCF commitment scope also includes contract milk (non-farmer owner milk), however associated feed volume data is not collected directly. Instead, volumes of soy and palm for non-owner milk are estimated by the volumes of fat and protein-cor- rected milk (FPCM) solids using a feed conversion factor based on average Climate Check data for each market, or industry averages for other markets supplying Arla milk. To determine the proportion of DCF soy and palm in feed in each market, Arla collects aggregated industry information for each market, as it is not currently possible to trace feed purchased on farms back to the supplier company and beyond. Therefore, for soy in feed, 2022 data is supplied by industry feed associations, as is the case for Denmark (including Dansk Korn og Foder (DAKOFO)) and for Sweden (Foder och Spannmål). Data for Germany is sourced from the Ministry of Agriculture (Bundesanstalt für Landwirtschaft und Ernährung), and data for the UK is from the UK Roundtable for Sustainable Soy. These industry factors are applied to the physical volumes of soy used in each market as well as estimated volumes associated with non-owner milk. No industry data for soy is included for Luxemburg, the Netherlands and Belgium. For palm in feed, all volumes are considered to have an 'unknown' risk of deforestation, as no such reliable data exists at present. Ingredients and forest fibre Volumes of soy, palm and forest fibre sourced directly by Arla reflect consumption during the 2023 financial year, and are collected during the year in Arla's internal procurement systems. Arla determines the level of DCF for these commodities through a combination of supplier surveys and direct requests for documentation of origin and/or certi- fication. For fibre used in packaging, the suppliers relevant for DCF reporting represent at least 95% of fibre-related packaging spend. Of 213 suppliers requested to supply DCF supporting documentation, 88% responded. Volumes from non-respondent suppliers are considered to have an 'unknown' risk of deforestation. Forest fibre volumes embedded in office material are only collected from Arla's main offices (Viby, Leeds, Stockholm). Cocoa Cocoa is outside the reporting scope of Arla's deforestation and conversion-free commitment, however our policy is to use 100% UTZ/Rainforest Alliance-certified cocoa for our branded products, and we continue to comply with this goal. Cocoa will be reconsidered during the coming year to potentially be included in Arla's DCF ambition. UNCERTAINTIES AND ESTIMATES Volumes collected in the Climate Checks during 2023 relate to the farmers' use of feed during their 2022 financial year, which varies from farm to farm. Volumes of soy and palm from the small number of farmer owners who do not submit data to Climate Checks are not considered in reporting towards this commitment. Reporting on the level of deforestation and conversion-free supply chains for commodities is a developing field for the dairy industry and is subject to a degree of uncertainty. Arla is making progress to improve the transparency of supply chains, however industry average data on the level of DCF soy and palm in feed is used to calculate against the physical volumes from Climate Checks in each market and calculated volumes from non-owner milk. This will likely generate conservative estimations of soy and palm proportions that achieve DCF, since industry data includes all streams of the commodities without differentiating between GM (genetically modified)/non-GM soy, which will have varying contributions to deforestation and conversion. There are several exclusions from the scope of Arla's deforestation and conversion-free commitment and reporting. These include embedded soy and palm associated with externally sourced whey or milk powder, since associated feed is several steps back in the supply chain (Tier 3 supplier) and there is currently little to no data available for the 2023 reporting. In addition, products from contract manufacturers or third-party manufacturing are not included due to the unavailability of data. Soy and palm products used in milk replacers are not included, as milk replacers are not considered within the context of feed. Deforestation and conversion-free supply chains Volumes (tonnes)1,2 Certified Verified Low-risk origin Organic3 Proportion that is DCF Proportion unknown Soy Palm Forest fibre 178,754 74,256 198,812 4% 4% 16% 3% 27% 73% 43% 0% 0% - 43% 57% 95% 0% 1% - 96% 4% ¹ Soy and palm volumes include both volumes sourced directly as ingredients and indirect volumes in cattle feed. 2 Data on volumes and DCF relating to ingredients and fibre covers the 2023 calendar year, while the data related to feed covers the 2022 calendar year. 3 Organic certification as a criteria of deforestation and conversion-free only applied to soy. To determine the level of DCF achievement for forest fibre, Arla relies on certification information submitted from suppliers of such materials. There is limited ability for Arla to verify such data. Forest fibre volumes from third-party manufacturing are not included. Arla will identify solutions to integrate this data in 2024. WATER WITHDRAWAL In 2023, water withdrawal increased by 0.5% compared to last year. The change can be explained by slightly higher production volumes and also a shift in production mix. ACCOUNTING POLICIES Water withdrawal covers all water withdrawn to be used at production sites, warehouses and logistics terminals. Water withdrawal encompasses two main sources: water purchased from external suppliers and water obtained from internal boreholes. The external water category includes water purchased from external suppliers before undergoing internal treatment. Internal borehole water refers to water sourced from on-site boreholes and is measured prior to undergoing any internal treatment processes. UNCERTAINTIES AND ESTIMATES Our water consumption data is collected through monthly manual input from our sites. For externally purchased water, we cross-reference the data with supplier records to ensure accuracy. As for internal borehole water, we retrieve the data from manual meter readings. To minimise the risk of manual errors, we have implemented a comprehensive internal validation process at both site level and centrally. This thorough validation process ensures the reliability and accuracy of the reported data. 1.4 Water withdrawal thousand m3 2023 2022 2021 2020 2019 Water purchased externally 11,107 10,935 11,057 10,918 10,589 Water from internal boreholes 7,754 7,829 7,803 7,745 7,470 Total 18,861 18,764 18,860 18,663 18,059 PAGE 50ARLA'S ANNUAL REPORT 2023I.II.III.General informationResource use and circularity /Biodiversity and natureEnvironmentSocialGovernance/ Climate change and animal welfareSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIES With regard to monitoring our procurement of soy ingredients and feed, we follow our Responsible Sourcing Guidelines. Responsible Sourcing Policy for Forest Fibre Forest fibre plays an important part in our production chain. We at Arla are therefore committed to sustainable, transparent and responsible sourcing of virgin forest fibre in our packaging materials, in energy production at sites and for other purposes. Specifically, we commit to no deforestation, conversion or degradation of natural forests, no development of high conservation value areas, no infringements of the rights of workers, indigenous people and vulnerable communities, and no conversion of natural forests into forest plantations or any other land use. This policy covers all forest fibre used in all entities, operations and geographies under our management control. With regard to monitoring of our procurement of fibre-based products, we follow our Responsible Sourcing Guidelines. Policies and other Our ambitions on biodiversity and the ecosystem are enforced by our Environmental and Energy Management Policy, our Green Ambition 2050 and especially our Responsible Sourcing Policies. These support us in reaching our DCF 2025 target and in addressing our impacts and risks related to nature. Responsible Sourcing Policy for Palm Irresponsible production of palm products can cause substantial harm to the environment and society. We at Arla are therefore committed to transparent, responsible and sustainable palm sourcing. Specifically, we do not source palm produced on deforested or converted land. We further commit to no burning of forests, and no infringements of the rights of workers, indigenous people and vulnerable communities. We expect our direct and indirect suppliers to respect our no deforestation and no conversion commitment on palm in the supply chain. With regard to monitoring of our procurement of palm, we follow our Responsible Sourcing Guidelines. Responsible Sourcing Policy for Soy Irresponsible production of soy can cause substantial harm to the environment and climate. Soy embedded in feed represents the majority of the total soy in our supply chain. We at Arla are therefore committed to transparent, responsible and high-quality soy sourcing. Specifically, we do not source soy produced on de- forested or converted land. We further commit to no infringements of the rights of workers, indigenous people and vulnerable communities. This policy covers all indirect soy embedded in feed used by farmers who supply Arla as well as ingredi- ents that contain soy that Arla purchases directly. We expect our direct and indirect suppliers to respect our no deforestation and no conversion commitment on soy in the supply chain. PAGE 51ARLA'S ANNUAL REPORT 2023I.II.III.General informationResource use and circularity /Biodiversity and natureEnvironmentSocialGovernance/ Climate change and animal welfareSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESRESOURCE USE AND CIRCULARITY Focus areas 2023 Progress towards target PACKAGING DESIGNED FOR RECYCLING – OWN BRANDS VIRGIN FOSSIL-BASED PLASTIC 95% 83% 95% 2025 83% 2030 Target 100% 0% Read more on page 54 Read more on page 54 PAGE 52ARLA'S ANNUAL REPORT 2023I.II.III.General informationResource use and circularity /Biodiversity and natureEnvironmentSocialGovernance/ Climate change and animal welfareSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESImpacts ARLA'S IMPACTS NOW 2023 Ambitions ARLA'S AMBITIONS 83% VIRGIN FOSSIL-BASED PLASTIC WASTE Food waste Solid waste PACKAGING RECYCLABILITY 95% 45% 50% Designed for recycling: · Recyclable in market where sold · Designed for recycling, but not in market where sold 5% Not recyclable 0% Virgin fossil-based plastic Our ambition is to not use virgin fossil-based plastic in packaging used for Arla's own brands by 2030. HALVING WASTE Food waste We support the UN SDG of halving food waste across the value chain by 2030 100% Recyclability of packaging Our ambition is that 100% of the packaging used for Arla's own brands is designed for recycling by 2025. Policies Environmental and Energy Management Policy & Green Ambition 2050 Responsible Sourcing Policy for Forest Fibre Strategy CIRCULARITY APPROACH Towards fully sustainable packaging Arla's packaging ambition, 'Towards fully circular packaging', is our commit- ment to use resources in the best possible way to reduce our climate and environmental impact. The ambition includes improving the recyclability of packaging and reducing the use of virgin fossil-based plastic. In Arla, we use over 300,000 tonnes of packaging each year. Packaging solutions must ensure the safety and quality of food products, with the lowest possible environmental footprint while minimising food waste. Strict legal requirements related to food safety and hygiene make packaging design complex. Additionally, packaging must safeguard our products during distribution in the store and in our home. Packaging is also essential to securing access to our nutritious products around the world. We sell our products in more than 146 different countries with very different collection and recycling infrastructures, and especially in our international markets some materials cannot be recycled yet. Food waste and waste It is Arla's ambition to support the UN SDG target of halving food waste by 2030. In our dairies, we are constantly optimising production while minimising food waste through intelligent technology and close collaboration with customers and suppliers. We strive to either sell surplus food as animal feed, use it in biogas plants for energy production or donate it to a good cause. The focus of our waste reduction initiatives extends beyond food waste to encompass solid waste such as pack- aging materials. We continuously strive for improved production efficiency and waste management practices to reduce waste throughout the production and transport process as well as working with waste management suppliers to improve handling. PAGE 53ARLA'S ANNUAL REPORT 2023I.II.III.General informationResource use and circularity /Biodiversity and natureEnvironmentSocialGovernance/ Climate change and animal welfareSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESWASTE Actions and resources SUSTAINABLE PACKAGING Towards 100% recyclability Arla's overall long-term ambition is to increase recyclability towards 100%. As a first step, our 2025 target is to ensure that 100% of the packaging used for Arla's own brands is designed for recycling. This target is aligned with our Green Ambition 2050 and our Environmental and Energy Management Policy. Given these conditions, especially related to our international markets, we measure our packaging recyclability progress towards two criteria: 1. Designed for recycling This means that a packaging or a spe- cific part of the material is recyclable in at least one of Arla Europe's markets. 2. Recyclable in market where sold This means that a packaging or a spe- cific part of the material is recyclable in the market where the product is sold. Read more on page 56. PACKAGING RECYCLABILITY – OWN BRANDS 45% Recyclable in market where sold 50% Designed for recycling, but not in the market where sold 95% Designed for recycling 5% Not recyclable By utilising Arla's data on packaging material we are able to measure recy- clability. Furthermore, we use this data transparency to prioritise initiatives that can increase recyclability against either of the criteria explained above. Less plastic, better plastic Virgin fossil-based plastic is plastic derived from fossilised material such as crude oil. In order to phase this out, we prioritise plastic reduction, less plastic and renewable materials (such as paper and cardboard). As with our recyclability ambition, we measure the use of non-virgin fossil-based plastic as a total of the plastic used in branded packaging over 2023. While progress has been made on key branded products since having set the target in 2020, the global challenges we face on the availability of alternative materials combined with the slower than expected emergence of new tech- nologies have meant that our progress is slower than anticipated. Looking towards the future, we expect our industry and its packaging suppliers to begin solving the issues surrounding the availability of alternatives to virgin fossil-based plastic, and we are confident that accelerated progress will be seen in the coming years. We are fully committed to a future with less virgin fossil-based plastic in our packaging and better plastic used in our packaging. Towards recyclable drinking bottles To be considered circular, a packaging has to be recyclable and not contain virgin fossil-based plastic. We have started this journey on many of our drinking bottles by implementing a removable sleeve to increase recyclability. The bottles already contain 50% recycled material and we work to increase this towards 100%. Fibre caps for milk cartons In 2023, we teamed up with Blue Ocean Closures in a formal partnership to create a fibre-based cap for our milk cartons. This could be a first in the dairy industry and would reduce Arla's plastic consumption by more than 500 tonnes annually if implemented. Putting tethered caps on products. Under EU legislation, all plastic caps and lids are to be attached to bottles or cartons sold in the EU by July 2024. Arla has taken the decision to begin this transition early to aid in the prevention of plastic littering and increase recyclability. In 2023, tethered caps can be found on 191 unique products. PAGE 54 Circularity in mozzarella maturing bags Specially designed plastic film, used in our mozzarella production to mature the cheeses, is finding new life in a large-scale test with our German supplier. With this trial, started in 2023, we expect to be able to recover 80 tonnes of plastic material that would not have been recycled previously. PAGE 54ARLA'S ANNUAL REPORT 2023I.II.III.General informationResource use and circularity /Biodiversity and natureEnvironmentSocialGovernance/ Climate change and animal welfareSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESREDUCING FOOD WASTE New food waste strategy is shaping up In 2015, we became one of the first dairy producers to publicly align with the UN SDG's target of halving food waste by 2030. However, the scope and underlying initiatives of our commitment were not clearly defined. Currently, we are working towards setting a specific target for reducing food waste in our own operations. This sets a new standard for the dairy industry where the focus in the past has been on reducing waste to landfill. This production-specific target is expected to exceed the proposed reduction target for food producers in the EU. Around 2-3% of milk is wasted during production at our sites which are using milk as raw material. In 2023, total food waste was approximately 600,000 tonnes calculated in milk equivalents. Reducing food waste by 2030 will be challenging due to growing product demand. To tackle this, we are developing a food waste strategy with three main initiatives: 1. Prevent food waste Our main objective is to discover solutions that efficiently prevent food waste. We will achieve this by implementing innovative solutions and optimisations. A specific example is the roll-out of real-time material loss sensors at our production sites. These sensors play a crucial role in promptly identifying and addressing waste in our operations. 2. Upcycling Where food waste cannot be prevented, we aim at redirecting it to animal feed, for example insect farms that can trans- form the waste into a sustainable source of protein for animals or humans. 3. No waste to landfill Our goal is to ensure that no food waste ends up in landfills by 2030. Instead, we will explore alternative solutions for managing and repurposing food waste. All initiatives will be supported by increased training, data transparency and knowledge sharing across our production sites. Additionally, it is vital to continue our efforts to reduce food waste throughout the value chain. This includes optimising packaging, imple- menting rebate sales strategies and extending the shelf life of our products. Waste management hierarchy Prevention Reuse human consumption Reuse animal feed n ptio ost preferable o M 3 2 0 2 Recycle Recover energy Disposal n ptio Least preferable o Food waste upcycling with help from larvae Arla Foods Ingredients has found an innovative solution to repurpose delac- tosed permeate, a by-product of lactose production. Through a partnership with a leading insect farm, we can now transform this residual dairy stream into nutritious feed material for black soldier fly larvae. This sustainable approach yields a growth factor of 4,000, as 25 kg of larvae eggs can develop into 100 tonnes of larvae within a week. The larvae contribute to the development of a more environmentally friendly The waste management hierarchy indicates an order of preference for actions to reduce and manage waste. Food waste is defined as anything not used for either human or animal consumption. agricultural and food industry, generat- ing approximately 100 tonnes of larvae per year for livestock, fish and pet feed. This initiative also reduces food waste by moving the raw material up the waste hierarchy from energy recovery to the animal feed stage. Arla Foods Ingredients estimates a significant 17% reduction in food waste on-site com- pared to 2023 volumes. Looking ahead, the long-term goal is to expand the market to include human consumption, adding even greater nutritional value to what was once classified as food waste. PAGE 55ARLA'S ANNUAL REPORT 2023I.II.III.General informationResource use and circularity /Biodiversity and natureEnvironmentSocialGovernance/ Climate change and animal welfareSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESto the total weight of plastic materials used. Due to materiality, product units that make up less than 1% of finished product sales volumes within the sub-cat- egory of that product are excluded. The categories are butter blends, yellow cheese, milk etc UNCERTAINTIES AND ESTIMATES In 2023, the recyclability assessment was performed based on the recyclability status in December. There is a risk that a certain material combination was not recyclable earlier in 2023 but became recyclable in December. In this case, the material combination was counted as recyclable for the full year. This is also the case for the assessment of virgin fossil-based plastic. During the past years, Arla improved the processes and tools used for measuring recyclability. Therefore, data related to periods before 2022 is not available and data for virgin fossil-based plastic cannot be compared to previous year numbers due to a new and more granular methodology. Designed for recycling Europe International Total Recyclable in market where sold Europe International Total Virgin fossil-based plastic Europe International Total 2023 96% 95% 95% 2023 83% 0% 45% 2023 78% 98% 83% 2022 2021 2020 2019 - - - - - - - - - - - - 2022 2021 2020 2019 - - - - - - - - - - - - 2022 2021 2020 2019 - - - - - - - - - - - - Progress towards targets OUR PROGRESS ON CIRCULAR PACKAGING Recyclability refers to the ability of a material or product to be collected, processed and transformed into new materials or products through recycling processes. In 2023, 95% of the packaging used for our branded products was designed for recycling compared to 93% last year. In Arla's markets outside Europe, some materials that are widely recyclable in Europe, like glass or metal, are not recyclable. For this reason, even though 95% of Arla's branded packaging sold in markets outside Europe was designed for recycling, in 2023 only a minor part was recyclable in the market where sold. As a consequence, Arla's total recyclability in market where sold was 45%. To be able to track Arla's target for virgin fossil-based plastic with reliable and comparable data, Arla worked on updating the reporting systems and data collection methods in 2023. The two packaging-re- lated targets are framed by Arla due to the lack of agreed global standards. ACCOUNTING POLICIES Recyclability These measures are applied to packaging used for Arla's own brands. A material is recyclable when there is a proper infrastructure for packaging waste collection and sorting and a market for the recycled material. Designed for recycling Packaging is designed for recycling if the packaging is recyclable in at least one of Arla's markets in Europe. The assessment and calculation of designed for recycling follows the same logic as stated below under recyclable in market where sold. Recyclable in market where sold Recyclable in market where sold means that the packaging of a branded product or a specific material share thereof is recyclable in the market where the product is sold. A comprehensive assessment is made for each material to determine whether it is recyclable in a given market based on commonly acknowledged references for recyclable packaging design and recycling systems in that market. The references used include the 'Minimumstandard' issued by Zentrale Stelle Verpackungsregister in Germany, the 'Plastic Packaging Recycling Manual' published by the Swedish Förpackningsinsamlingen (FTI), the 'Recycle Checks' developed by KIDV in the Netherlands and the UK OPRL scheme. Each assessed product packaging unit is converted into weights of different materials used and multi- plied by sales volumes. The consolidated number is calculated as the weight of recyclable packaging material sold compared to the total weight of packaging materials used. Due to materiality, product units that make up less than 1% of finished product sales volumes within the sub-category of that product are excluded. When we say category, we mean butter blends, yellow cheese, milk etc. The coverage in 2023 was 88.5%. Virgin fossil-based plastic Virgin fossil-based plastic is defined as plastic derived from fossilised material such as crude oil, coal and natural gas. It excludes recycled and bio-based plastic as well as plastic for which the use of bio-based raw materials is certified by a mass balance chain of custody model. All packaging components in Arla are classified in the following ways to determine if they are made from virgin fossil-based plastic: · Is the material plastic yes/no? · Is the material made from recycled material yes/no? · Is the material made from renewable material yes/no? Additionally, each packaging component has a weight recorded in grams. With the above criteria, Arla is able to determine the amount of plastic in each piece of packaging sold and, if applicable, how much of that plastic is either recycled, renewable or virgin fossil-based. These values are then multiplied by sales volumes to produce an overall weight of virgin fossil plastic and non-virgin fossil-based plastic used over an annual period. The consolidated number is calculated as the weight of non-virgin fossil-based plastic compared PAGE 56ARLA'S ANNUAL REPORT 2023I.II.III.General informationResource use and circularity /Biodiversity and natureEnvironmentSocialGovernance/ Climate change and animal welfareSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESSOLID WASTE DEVELOPMENT In 2023, the amount of solid waste decreased to 30,770 tonnes, which is a reduction compared to the previous year's figure of 31,469 tonnes. This decrease can be attributed to lower volumes of waste for recycling and incineration at our sites in Sweden, UK, and the Netherlands. At present, Arla only discloses waste figures related to solid waste, which represents a small portion of Arla's overall waste. However, it is important to note that the most material waste type relates to food waste at our dairies. During the past years, we have worked on enhancing the accuracy and efficiency of food waste and are currently working on a new food waste strategy. Read more on page 55. ACCOUNTING POLICIES Solid waste refers to materials generated during production that are no longer intended for their initial purpose and which must be recovered through methods such as recycling, reuse or composting. In Arla, we mainly recycle waste. Alternatively, if these materials are not recovered through such means, they may be disposed of on landfills. Solid waste encompasses various types of waste, including packaging waste, hazardous waste and other non-hazardous waste. UNCERTAINTIES AND ESTIMATES Solid waste data is collected on a monthly basis from external waste handlers. The waste data is provided by sites via monthly forms, partially centrally based on invoice, supplier system, supplier email, weighted on site or other. The sourced data is based on direct measurements. In Denmark and Sweden, this data collection process is automated, ensuring accuracy and efficiency. However, for other countries, the data is reliant on manual entries made by individual sites, which inherently increases the risk of errors. To mitigate this risk, appropriate controls have been implemented to ensure data accuracy and reliability. In 2023, we chose to restate the historical figures for solid waste to correct errors related to prior years. The impact of the restatements of the individual figures is less than 5%. Total solid waste ¹ (tonnes) Total hazardous waste Total non-hazardous waste Total solid waste Total recycled waste 2023 930 2022 2021 2020 2019 1,034 1,279 1,378 1,322 29,840 30,434 32,348 32,097 30,789 30,770 31,468 33,627 33,475 32,111 19,217 20,174 22,726 22,554 20,641 Total non-recycled waste 11,553 11,294 10,901 10,921 11,470 Non-recycled waste's share of total solid waste 38% 36% 32% 33% 36% Hazardous solid waste ¹ (tonnes) Waste for incineration Waste for landfill Total waste directed to disposal Recycling Total waste diverted from disposal Total hazardous Non-hazardous solid waste ¹ (tonnes) Waste for incineration Waste for landfill Total waste directed to disposal Recycled plastic materials Recycled paper and cardboard Recycled glass Recycled metals Other 2023 2022 2021 2020 2019 282 50 332 598 598 930 284 35 319 715 715 272 25 297 982 982 523 35 558 820 820 357 47 404 918 918 1,034 1,279 1,378 1,322 2023 8,460 2,761 2022 8,358 2,616 2021 8,683 1,921 2020 9,159 1,204 2019 10,078 987 11,221 10,974 10,604 10,363 11,065 2,388 2,485 2,863 2,787 2,727 11,836 12,276 13,323 13,816 10,973 281 1,749 2,365 284 1,584 2,830 318 1,704 3,536 328 2,042 2,761 394 1,667 3,963 Total recycled non-hazardous waste 18,619 19,460 21,744 21,734 19,724 Total waste diverted from disposal 18,619 19,460 21,744 21,734 19,724 Total non-hazardous waste 29,840 30,434 32,348 32,097 30,789 ¹ The historical figures for solid waste are restated to correct errors related to prior years. The total solid waste changed from 31,450 tonnes in 2022, 33,500 tonnes in 2021, 32,975 tonnes in 2020 and 33,713 tonnes in 2019. The corrections also caused changes in the breakdown of solid waste categories. PAGE 57ARLA'S ANNUAL REPORT 2023I.II.III.General informationResource use and circularity /Biodiversity and natureEnvironmentSocialGovernance/ Climate change and animal welfareSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESEMPLOYEES AND WORKERS IN THE VALUE CHAIN Focus areas 2023 Progress towards target GENDER DIVERSITY IN MANAGEMENT (DIRECTOR+) ACCIDENTS PER MILLION WORKING HOURS 29% 5.5 6.0 2019 5.2 2020 4.3 2021 4.4 2022 Target 40% 0 Read more on page 61 Read more on page 60 2030 5.5 2023 PAGE 58PAGE 58ARLA'S ANNUAL REPORT 2023I.II.III.General informationConsumers – healthy and safe nutrition/EnvironmentSocialGovernance/ Employees and workers in the value chainSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESImpacts WAYS OF WORKING HEALTHY AND SAFE WORKING ENVIRONMENT MEASURES AGAINST VIOLENCE AND HARASSMENT SECURE EMPLOYMENT ADEQUATE WAGES APPROPRIATE GRIEVANCE MECHANISM SOCIAL DIALOGUE/ EXISTENCE OF WORK COUNCILS FREEDOM OF ASSOCIATION/ COLLECTIVE BARGAINING Ambitions ARLA'S AMBITIONS FOR 2030 ZERO Accidents Our aim is to have zero lost-time accidents per million working hours every year. 40% Gender diversity We aim to have at least 40% of the underrepresented gender in the Executive Management Team and in management teams by 2030. Policies Code of Conduct – Our Responsibility Diversity Policy Human Rights Policy Anti-harassment Policy Code of Conduct for Suppliers and Business Partners Working Hour Policy Grievance Policy Strategy CARING FOR PEOPLE In Arla, we are dedicated to taking care of people – our employees, workers in our value chain and people in the communities we operate in. We aim to build positive relationships with people and organisations. Mutual respect and understanding are at the core of all our interactions, regardless of their nature. This aligns with our fundamental goals of respecting human rights, promoting diversity and inclusion and maintaining high health and safety standards. Our employees, along with the workers in our value chain, are essential in the production and delivery of our products to consumers. We depend on a skilled workforce, who enables us to meet the needs of our customers and sustain our business. It is our ambition to provide all em- ployees with safe and healthy working conditions. Our target is zero work accidents, underlining our dedication to maintaining a secure and supportive workplace environment. Respecting workers' rights and fostering collaborative relationships are key to creating a harmonious and mutually beneficial working environment. We firmly believe in fair and equitable remuneration as a fundamental aspect of our commitment to our employees' job satisfaction. Additionally, we fully support freedom of association and the right to engage in collective bargaining. Developing and supporting the communities we operate in is part of our mission. We create jobs, engage in transparent dialogues with local stakeholders and support vulnerable communities. A key aspect is support- ing local dairy companies to improve their efficiency by developing standards and practices. We recognise the importance of attract- ing talent and maintaining high levels of engagement and motivation. Through ongoing initiatives and programmes, we actively promote diversity, equality and inclusion throughout our organisation. By fostering a workplace that respects the uniqueness of each individual, we aim to attract and retain top talent, solidifying our position as a leader in the dairy industry. PAGE 59ARLA'S ANNUAL REPORT 2023I.II.III.General informationConsumers – healthy and safe nutrition/EnvironmentSocialGovernance/ Employees and workers in the value chainSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESActions and resources COLLEAGUES IN FOCUS WE PRIORITISE THE SAFETY, WELL-BEING AND PERSONAL DEVELOPMENT OF PEOPLE THROUGHOUT OUR VALUE CHAIN. WE LISTEN, WE ACT AND WE AIM TO LEAD BY EXAMPLE IN OUR INDUSTRY. Engaging with employees Our annual global engagement survey provides valuable feedback from colleagues and is one of our most important tools for ensuring that Arla is a good place to work. In 2023, more than 17,800 colleagues completed the survey, corresponding to a response rate of 88%. To measure employment engagement, we use the Employee Engagement Index. This index is based on employees' favourable answers to questions related to their satisfaction, engagement and sentiment towards Arla as a workplace. In 2023, the Employee Engagement Index was 86%, which is above the standard for companies of our size. Based on the employee engagement feedback, our Executive Management Team (EMT) identified three focus areas for 2024: Avoiding unacceptable behaviour, enhancing our ways of working and empowering female managers. All teams discuss these and go through their own survey reports for additional insights to create local action plans. People managers are responsible for initiating and following up. Keeping our employees safe across the value chain Arla has a comprehensive and long value chain, and we offer a large variety of jobs across geographies. Our employees are key to the success of Arla, and it is our ambition to provide safe and healthy working conditions for all employees. In 2023, we increased our efforts around our behavioural safety programme, Cornerstones. The pro- gramme, which is designed to assess our behavioural safety maturity level, includes relevant trainings, self-as- sessments, maturity validations and process confirmations. Through systematic reporting, we are able to see trends and share learnings and best practices across our network as well as identifying critical areas to be addressed. Despite an increased focus, the accident frequency rate increased in 2023 compared to last year. We have established a mitigation plan with additional support to some areas to ensure a swift turnaround. Developing colleagues In 2023, we focused on balancing virtual and physical learning sessions after years of online learning due to Covid-19. We successfully implemented a learning management system across our production and logistic sites, ensur- ing that employees complete mandato- ry training and development dialogues. Additionally, we prioritised revitalising our company culture through engage- ment activities that reached over 8,500 employees. Through Arla Futures, our graduate universe, we aim to enable young professionals to become leaders and specialists. In 2024, we will launch three new programmes encompassing Finance, IT and HR. We have a strong tradition of supporting apprentices and their education. We actively participate in the European Excellence in Dairy Learning project, which spans nine countries and benefits apprentices and students studying dairy technology. Engaging in work councils Our works councils are organised at the local, national and European level. They are strong forums for internal dialogue on key matters related to colleague well-being and safety and securing the necessary conditions for the company's ongoing development. Twice a year, members from our EMT meet with our European Works Council, which includes 17 employee representatives representing over 15,000 employees across our production sites in Europe, the highest forum for collaboration between employees and Arla. Minutes from these meetings are published on our intranet. Sustainability was a topic at several of these meetings, and one of the highlights during 2023. PAGE 60 PAGE 60ARLA'S ANNUAL REPORT 2023I.II.III.General informationConsumers – healthy and safe nutrition/EnvironmentSocialGovernance/ Employees and workers in the value chainSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESDIVERSITY AND INCLUSION OUR DIVERSITY AND INCLUSION STRATEGY IS DESIGNED TO FOSTER AN INCLUSIVE WORKING ENVIRON- MENT WHERE EACH INDIVIDUAL IS VALUED AND EXPERIENCES A SENSE OF BELONGING.  In Arla, we believe that a diverse team brings together a wealth of perspec- tives, ideas and experiences, which ultimately drives innovation, sustaina- ble growth and better performance. To ensure tangible progress, we measure diversity and inclusion using three key performance indicators: inclusion favourability, gender diversity and nationalities in the workforce. Inclusion favourability is measured us- ing an index based on answers from our yearly employee engagement survey. In 2023, the average score related to belonging increased compared to last year. % 9 2 Share of women in management in 2023 To enhance gender diversity, we have a 2023 target of at least 30% of the un- derrepresented gender in the Executive Management Team and management teams, with the aim of increasing the target to 40% by 2030. In 2023, the share of women in management was 29%. Read more on page 66. Management training to build an inclusive culture To onboard and align the managers first-hand, we continued to organise onboarding sessions and management trainings for managers across the organisation in 2023. More than 800 managers and colleagues across 80 teams have now discussed what diversity and inclusion means, how our subconscious biases influence our everyday decision-making and how to fight these biases. Our most recent initiative course, launched in late 2023, aims to create psychologically safe teams and guidelines to call out non-inclusive behaviour. To further support managers we continued to improve the tools and data availability in our Diversity and Inclusion Dashboard. All managers have data on their own team on data points such as employee lifecycle, perfor- mance, promotions and equal pay. Data transparency is important to reveal potential subconscious biases. #EmpowHER One of the key elements of our strategy is to create equality by empowering women across senior management and within our talent pools. Our initiative #EmpowHER relies on four pillars: Training, networking, buddy concepts and a focus on talent acquisition to reduce biases and create equal opportunities for everyone. PAGE 61 PAGE 61ARLA'S ANNUAL REPORT 2023I.II.III.General informationConsumers – healthy and safe nutrition/EnvironmentSocialGovernance/ Employees and workers in the value chainSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESRESPECTING HUMAN RIGHTS HUMAN RIGHTS DUE DILIGENCE PROCESS HIGH-LEVEL RISK ASSESSMENT HUMAN RIGHTS COUNTRY BRIEF ASSESSMENTS: · Strategic business partners · Arla-controlled sites · Allegations/ high-risk issues PREVENTION AND MITIGATION PLAN MONITORING AND TRACKING COMMUNICATION ON FINDINGS WE ARE COMMITTED TO RESPECTING AND SUPPORTING INTERNATIONAL- LY RECOGNISED HUMAN RIGHTS AND TO PROMOTING MUTUAL RESPECT AND UNDERSTANDING IN OUR RELA- TIONSHIPS AROUND THE WORLD. Human rights action Arla is committed to respecting human rights across our entire value chain, both in our own operations and in the operations of our suppliers and business partners (read more about our policies related to human rights on page 67). Human rights due diligence Based on our assessment, we have the highest risk of causing, contributing or being linked to negative human rights impacts when operating in our non-European growth markets due to national contexts and the complexity of business operations. Therefore, we pri- oritise to conduct human rights impact assessments in these markets and also to carry out a due diligence process whenever we enter a new strategic partnership or receive an allegation. We continue to improve and implement our systematic human rights due dili- gence process in compliance with the UNGP and OECD, as illustrated above. Human rights risk assessments In 2023, we continued to identify and address potential and actual human rights risks and impacts in our value chain, with a focus on our business operations in West Africa. Together with local teams, our global human rights team completed on-location human rights risk assessments in Ghana and Senegal. The purpose of the assessments was to identify and follow up on human rights risks for all colleagues at our sites, Arla employees as well as third-party employees. In our assessments we have further focused on risks in relation to key suppliers of raw materials, packaging, logistics and services, as they are often among the most vulnerable due to the nature of their work. Our salient human rights issues formed the basis for the assessments, with a focus on particular risks in the region, including working conditions, health and safety, and wages. In both markets, our own operations showed solid perfor- mance and did not reveal critical risks in relation to Arla's salient human rights issues. Findings indicated a need for us to continue the implementation of own policies and improve ways of working, and to work with local suppliers and ser- vice providers to support them in their 73 Number of physical and virtual supplier audits conducted in 2023 efforts to respect human rights. Arla has initiated dialogues with relevant external parties to address these risks, including but not limited to working conditions and access to health insurance, and we continue to follow up on action plans to resolve the identified issues. During 2023, we also continued our regular follow-up on action plans from assessments in 2022 with a focus on the Middle East. Every year, we carry out supplier audits based on risk evaluations. During 2023, we conducted 73 physical and virtual audits compared to 58 last year. PAGE 62 PAGE 62ARLA'S ANNUAL REPORT 2023I.II.III.General informationConsumers – healthy and safe nutrition/EnvironmentSocialGovernance/ Employees and workers in the value chainSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESSALIENT HUMAN RIGHTS ARLA'S SALIENT HUMAN RIGHTS ISSUES ARE IDENTIFIED BASED ON OUR DUE DILIGENCE PROCESSES, RISK ASSESSMENTS AND REGULAR STAKEHOLDER DIALOGUES. Salient human rights are defined as the rights at risk of the most severe negative impacts on people through business activities and relationships. The issues identified as most salient across our value chain, including our suppliers and business partners, are working conditions, living standards, modern slavery, health and access to a grievance mechanism. RIGHT TO ENJOY JUST AND FAVOURABLE CONDITIONS AT WORK Safe and healthy working conditions Our focus continues to be on increasing the maturity level in the health and safety work in production facilities glob- ally. We see very strong performance in both our European and non-European markets. Read more on page 60 for information about our health and safety efforts. Through third-party audits during 2023, we have become aware of potential risks of unfavourable working conditions, including long working hours, in our supply chain in both European and non-European countries. We have investigated the situations, and are in dialogue with suppliers to resolve the risks identified. Living wage Aligned with international frameworks, we understand and appreciate that paying living wages is one of the most important ways of supporting people to get out of poverty, realising human rights and achieving the sustainable development goals. We participate in the AIM Working Group on Living Wage to gain insights and share knowledge. In 2023, we continued our collaboration with the Fair Wage Network to map the wages for our own employees as well as for third-party employees working at our sites. We will continue this work in 2024 on all markets to get a more complete overview of Arla's living wage status, and to evaluate and decide next steps. RIGHT TO ADEQUATE STANDARD OF LIVING Employer provided housing We continuously work to ensure Arla- provided accommodation is adequate, and meets or exceeds the International Labour Organisation standard for em- ployer-provided housing as well as local standards. During 2023, we also worked with some of our key suppliers, and continued to support and follow up on improvements in their housing facilities. RIGHT TO HEALTH Nutrition All over the world, inflation and increasing prices, also for food, put access to nutrition at risk. We seek to improve the access to nutrition where we operate, including at our sites. As an example of our efforts in 2023, we ran a pilot project on workforce nutrition in the United Arab Emirates. This included a focus on healthy food at work and tracking of results, initiating health checks and nutrition training. Health insurance on our non-European markets Our colleagues should have access to health services on fair terms. Findings from employee interviews in West Africa show that health insurance is in place for all Arla and third-party employees. However, findings indicate that the insurance agreement varies for third-party employees. We will address this with suppliers. Right not to be subjected to slavery, servitude or forced labour The risk of modern slavery remains a challenge in our global value chain. We source commodities from all over the world, and we are aware of the increased risk of child labour in certain countries in Asia and Africa as well as of forced labour in some of the countries in the Middle East, where we have production facilities. We continue our efforts to mitigate the risks. Examples of this include the launch of our Working Hour Policy, our Purchasing Policy, training for new colleagues as well as ensuring that migrant worker colleagues keep their passports and identity documents, unless they require otherwise and sign a letter of consent. During 2023, we continued our collaboration with manpower agencies on these matters. Access to grievance mechanism In 2023, we continued to communicate our whistle-blower service, Ethics Line. During the year, we carried out a compliance self-assessment of 37 entities in Arla's International business, which showed a slight decrease in Ethics Line awareness of 4 percentage points compared to 2022. We also include Ethics Line awareness questions in our on-ground risk assessments, revealing general awareness among colleagues. In 2023, 96 reports were submitted to Ethics Line. 36 of them concerned unacceptable behaviour (including harassment and discrimination, among other grievances), 29 related to fraud and bribery allegations and 31 to other topics. After investigating all substan- tiated grievances, none resulted in material fines or compensation. In 2023, we have not received any re- ports of severe human rights incidents neither in our own operations nor in our value chain. PAGE 63 PAGE 63ARLA'S ANNUAL REPORT 2023I.II.III.General informationConsumers – healthy and safe nutrition/EnvironmentSocialGovernance/ Employees and workers in the value chainSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESRESILIENT DAIRY FARMER COMMUNITIES AS A GLOBAL FARMER-OWNED DAIRY COMPANY, WE ARE COMMITTED TO SHARING OUR EXPERTISE TO BUILD CLIMATE-RESILIENT FARMER COMMUNITIES AND TO SUSTAIN DAIRY VALUE CHAINS IN STRATEGIC GROWTH MARKETS. Produce more with less Dairy farmers are increasingly facing the impacts of climate change, which calls for efficient mitigation and adaptation strategies. Our International Dairy Development programmes support the urgent need for a green transition while improving livelihoods for dairy farmers. Our Big 5 levers (see page 36) are adapted to local contexts in Indonesia, Bangladesh and Nigeria to achieve CO2e reductions and improve efficiency. Activities in Nigeria During 2023, we continued to upscale activities: transition to more commercially viable and sustainable dairy farming for nomadic dairy farmers. · The first Arla farm opened, and heifers from Arla farmer owners arrived. With high standards of animal welfare, the cows are well adapted, and milk supply has commenced. · We concluded the Milky Way Partnership project aimed at helping local farmers increase their milk yields while producing more climate-efficiently. 2,000+ farmers were trained, the income from dairy increased by more than 200% and dialogues and collaboration across the Nigerian dairy sector improved. · We continued the public-private Damau Household Milk Farm project, through which we support the · We kicked off a new project; Partnership for Green and Productive Dairy, with the aim of reducing greenhouse gas emissions from dairy production while increasing income for small-holder dairy producers, primarily targeting 1,000 farmers who will sell their milk to Arla. · These projects are expected to show- case a model for the future of dairy in Nigeria, increasing climate-friendly production and improving livelihoods. First organic cheese launched in Indonesia Arla is the lead commercial partner in a project to support Indonesian cooperative farmers in East Java to convert to organic dairy farming. In 2023, the first high-end organic cheese in Indonesia was launched by Mazaraat Artisan Cheese made from milk sourced at Setia Kawan Nongkojajar Dairy Farm Cooperative. Supported by the Danish Ministry of Foreign Affairs, Arla, together with partners, built capacity in organic dairy farming, and a total of seven organic farms were certified by the end of 2023. Green dairy transition in Bangladesh At the end of 2023, Arla was pre-ap- proved by the Danish Ministry of Foreign Affairs to start a five-year project in Bangladesh. The purpose is to showcase a visionary operating model for a productive and green dairy value chain in Bangladesh. The project will deliver proof-points to guide the transformation of the dairy industry in Bangladesh. Arla and PRAN will work together to launch a special milk with lower CO2 emissions and higher quality. Women in dairy Women play a pivotal role in dairy farming, and the green transition requires an enhanced gender focus to succeed. During 2023, we joined the International Dairy Federation Task Force on Women in Dairy, and results from Nigeria were published in the first Annual Yearbook for Women in Dairy. Progress will be monitored across all of our International Dairy Development projects going forward. PAGE 64 PAGE 64ARLA'S ANNUAL REPORT 2023I.II.III.General informationConsumers – healthy and safe nutrition/EnvironmentSocialGovernance/ Employees and workers in the value chainSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESemployee working 50% of a full-time position. The headcount refers to the total number of employ- ees, regardless of whether they are on a full-time or part-time contract. Each individual employed by Arla is counted as 1.0 in the headcount numbers. The average FTE figure is calculated as the average value for each legal entity throughout the year. These averages are derived from quarterly measure- ments taken at the end of each quarter. The headcount and FTE figure includes all employ- ees, regardless of whether they are on permanent or temporary contracts. However, employees on long-term leave, such as maternity leave or long- term sick leave, are excluded from the calculation. This ensures that the figure accurately represents the active workforce. The majority of employees in production and logis- tics are classified as blue-collar employees, while employees in sales and administrative functions are classified as white-collar employees. The ratio of white-collar to blue-collar employees is calculated based on headcounts as at 31 December. Employee data is managed centrally in compliance with the General Data Protection Regulation (GDPR) guidelines. In Arla, employees have the option to choose a gender category that aligns with their identity. The available choices include man, woman or other. To comply with GDPR regulations, the 'other' category is merged with the 'men' category in disclosed gender diversity figures. The FTE figure is reported internally on a monthly basis. To enhance the accuracy and reliability of the data, each legal entity validates the information on a quarterly basis. Progress towards targets ACCIDENTS Accident frequency rate development Accidents resulting in injuries can be categorised as either lost-time accidents (LTAs) or non-lost-time accidents (minor incidents). The number of LTAs per 1 million working hours increased to 5.5 (2022: 4.4). The Danish and German logistic organisations have experienced the most significant increases. In terms of our goal of zero accidents, we recorded 177 accidents in 2023 (2022: 144). We are closely monitoring the trend of accidents and have imple- mented mandatory mitigation plans in specific areas to ensure a quick improvement. ACCOUNTING POLICIES A lost-time accident (LTA) refers to a workplace injury suffered by an employee during work activities that leads to the loss of one or more scheduled working days or shifts. An accident is categorised as an LTA when the employee is unable to perform regular job duties, requires time off for recovery or is assigned modified duties during the recovery period. All employees, including both Arla employees and external agency workers engaged in Arla-related work, are required to promptly report any workplace-related injuries or illnesses to their team leader or manager, regardless of the severity. It is important to note that accidents involving contractors, such as construction workers, are not included in this reporting. Most on-site employees have access to a mobile application that enables them to easily and swiftly report any accidents. It is essential to notify the incident before the injured party leaves the workplace. The working hours used to calculate the accident frequency ratio are derived partly from payroll information and partly from estimates using full-time equivalent (FTE) figures. Accidents EMPLOYEES Employee development The total number of employees, measured as headcounts, increased by 2.6% compared to last year. This growth can be attributed to the ongoing insourcing of IT activities and distribution activities in the UK, as well as the expansion of Arla Foods Ingredients. Full-time equivalents (FTEs) increased by 1.9% compared to the previous year. The share of blue-collar workers amounted to 62% of the total headcount as of 31 December 2023. We appreciate that our impacts on workers extend beyond our own workforce, and include workers in the value chain. The workers whom we may have a material impact on, include outsourced employees working on our sites and workers on our farmer owners' farms. Both groups include migrant workers. These workers are not reflected in the numbers of this report. ACCOUNTING POLICIES The number of employees per country, gender, contract type, and age distribution is based on headcounts as of 31 December for 2023 and all historical years. This is a change in methodology from previous years when the figures were reported as average FTE.. The total number of employees is still expressed in FTEs for comparison reasons. FTEs, or full-time equivalents, are a measure of an employee's contractual working hours in relation to a full-time contract for the same position and country. This figure is used to quantify the active workforce in terms of full-time positions. An FTE of 1.0 represents a full-time worker, while an FTE of 0.5 indicates a workload equivalent to a part-time Per 1 million working hours Accident frequency 2023 5.5 2022 4.4 2021 4.3 2020 5.2 2019 6.0 Number of employees (headcounts) per country and gender1 Denmark United Kingdom Sweden Germany Saudi Arabia Poland North America United Arab Emirates Netherlands Finland Bahrain Other countries2 Women 2,852 730 1,041 406 59 508 230 63 113 177 36 334 Men 5,870 3,080 2,513 1,186 882 297 332 378 309 197 294 2023 Total 8,722 3,810 3,554 1,592 941 805 562 441 422 374 330 2022 2021 2020 2019 8,427 3,705 3,563 1,606 979 646 546 441 395 374 335 8,262 3,689 3,559 1,662 978 622 528 429 374 386 294 8,027 3,762 3,582 1,684 968 561 492 388 370 343 164 7,904 3,469 3,588 1,772 962 520 477 222 352 329 94 807 1,042 1,376 1,321 1,272 1,075 Total headcounts 6,549 16,380 22,929 22,338 22,055 21,416 20,496 Full-time equivalents 21,307 20,907 20,617 20,020 19,174 1 The number of employees per country and gender are reported as headcount as of 31 December for 2023 and all historical years. This is a change in methodology from previous years when the figures were reported as average FTE. 2 Other countries include, among others, Bangladesh, Argentina, Kuwait, Iraq, Oman, China and Nigeria. Number of employees (headcounts) by contract type Number Number of employees Number of permanent employees Number of temporary employees Number of full-time employees Number of part-time employees Distribution of employees by age group  Age group Share of employees Women Men Total 6,549 5,889 660 5,397 1,152 16,380 15,354 1,026 22,929 21,243 1,686 14,691 20,088 1,689 2,841 <30 20% 30-50 51% >50 29% PAGE 65ARLA'S ANNUAL REPORT 2023I.II.III.General informationConsumers – healthy and safe nutrition/EnvironmentSocialGovernance/ Employees and workers in the value chainSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIES GENDER DIVERSITY Gender diversity for all employees1 ACCOUNTING POLICIES Gender diversity for all employees Gender diversity refers to the proportion of women in relation to the total number of headcounts. The measurement of gender diversity both for all em- ployees and in management is based on headcounts as of 31 December for 2023 and all historical years,. and encompasses both white-collar and blue-collar employees. Gender diversity in management This measurement provides insight into the representation of women in management positions within the organisation. Arla's gender diversity in management is determined by measuring the proportion of women in director positions or above. Gender diversity in the Executive Management Team Gender diversity in top management is quantified by the proportion of women in the EMT. This meas- urement provides insight into the representation of women in executive management positions within the organisation. Total share of women Gender diversity in management1 Number of men Number of women Share of women at level director and above 2023 29% 2023 260 108 2022 28% 2021 27% 2020 27% 2019 27% 2022 2021 2020 2019 256 104 257 96 258 89 257 86 29% 29% 27% 26% 25% 1 The share of women among employees and in management are calculated based on headcount 31 December for 2023 and all historical years. This is a change in methodology from previous years where the figures were reported as average FTE. Gender diversity in Executive Management Team Number of men Number of women Share of women in Executive Management Team (EMT) 2023 2022 2021 2020 2019 7 1 7 1 6 1 6 1 5 2 13% 13% 14% 14% 29% GENDER PAY RATIO Gender pay ratio development Ensuring equal pay for the same job, regardless of gender, is a fundamental expectation for an ethical and responsible company. In Arla, both men and women in equivalent positions receive equal pay. This is achieved through well-defined and fixed salary bands across all job categories. To maintain pay equality, regular monitoring occurs on a quarterly basis, comparing salary levels between men and women within comparable job bands. The gender pay ratio provides insights into the placement of women within the company hierarchy. Arla aims for completely equal treatment between genders, which would be represented by a gender pay ratio of 1.0. In 2023, the median salary for men at Arla was 1% higher than the median salary (2022: 3%). This means that the structural differences within the company hierarchy are decreasing. Gender pay ratio Gender pay ratio (hierarchy variances) 2023 2022 2021 2020 2019 1.01 1.03 1.03 1.05 1.05 workforce is included in this report. It is worth noting that if blue-collar employees were included, the gender pay gap would likely decrease, as males are overrepresented in the blue-collar workforce. The pay data used for the calculation pertains to contractual salary amounts as at the end of March 2023, following the salary adjustment for that year. ACCOUNTING POLICIES The gender pay ratio is calculated by dividing the median salary for men by the median salary for women. This calculation includes contractual base salaries, while pensions and other benefits are not taken into account. By focusing solely on base salaries, the gender pay ratio provides a specific measure of the disparity in remuneration between men and women within the organisation. UNCERTAINTIES AND ESTIMATES According to the ESG reporting guidelines provided by CFA Society Denmark and Nasdaq, it is recommended to include the total workforce, along with bonus and pension, in the calculation of the gender pay ratio. However, due to data limitations, the gender pay ratio for the white-collar EMPLOYEE TURNOVER Employee turnover development Employee turnover reflects the fluctuation within our workforce. Arla strives for a stable turnover rate, recognising that a certain level of turnover is necessary for maintaining competitiveness and fostering innovation. Employee turnover % Voluntary turnover Involuntary turnover Total 2023 9% 4% 13% 2022 2021 2020 2019 10% 4% 14% 10% 3% 13% 6% 4% 10% 8% 4% 12% In terms of employee turnover, there was a decrease compared to the previous year, with a total turnover rate of 13% (2022: 14%). This was the result of a lower voluntary turnover rate while the involuntary turnover rate was unchanged. ACCOUNTING POLICIES Differentiating between voluntary turnover (when an employee chooses to leave the company) and involuntary turnover (when an employee is dismissed), turnover serves as a measure of talent retention at Arla and also reflects the efficiency of our operations. To calculate employee turnover, we divide the total number of employees who leave during a specific period by the total number of employees in that same period. It is important to note that this calculation is based on the headcount of employees and not on full-time equivalents (FTE). Turnover is calculated for all employees on permanent contracts and encompasses various reasons for their departure, including retirement, dismissal and resignation. Departures are included in the calculation starting from the month when remuneration is no longer provided. For instance, some tenured employees may receive remuneration for a few months after their dismissal, and their departure would be considered in the turnover calculation after this period. HUMAN RIGHTS GOVERNANCE Arla is committed to respecting human rights across our entire value chain. We adhere to the United Nations Guiding Principles on Business and Human Rights (UNGP) and the OECD Guidelines for Multinational Enterprises. Our work is guided by our Code of Conduct 'Our Responsibility' and our Human Rights Policy, in which we elaborate on our commitment and expectations to stake- holders. Arla's human rights work is governed by our EMT and managed in various business functions. We engage with stakeholders, including experts, unions, right-hold- ers and NGOs, on our human rights management. PAGE 66ARLA'S ANNUAL REPORT 2023I.II.III.General informationConsumers – healthy and safe nutrition/EnvironmentSocialGovernance/ Employees and workers in the value chainSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESPolicies and other In Arla, we have a comprehensive set of policies, standards, processes and codes of practice covering our complete value chain, governing how issues related to our workforce are handled in a structured manner. Our policies related to our workforce regulate those actions where our key impacts and potential risks lie, and support us in reaching our social sustainability targets and ambitions. If publicly available, policies can be found on our website. Code of Conduct – Our Responsibility Policy objectives and scope Arla's Code of Conduct – Our Responsibility – covers all aspects of our business and lies within every de- cision made every day, at all levels and everywhere in our company. Our Responsibility is based on the 10 principles of the UN Global Compact, the UN initiative to promote ethical business practices. Further, we are committed to following the UN Guiding Principles on Business and Human Rights as well as the OECD Guidelines for Multinational Enterprises. All of our policies are founded on our Code of Conduct. Our Code of Conduct covers four themes which are Responsible company, Confidence in products, Care for the environment and animal welfare, and Responsible relations. Policy governance Our Code of Conduct is approved by Arla's Board of Directors. Arla's Executive Management Team (EMT) approves strategies, prioritises areas, ensures progress and annual follow-up and sets the direction for necessary improvements and further updates. All managers are responsible for embedding our Code of Conduct in Arla's culture and business, and each and every colleague plays an important role in its implementation. Human Rights Policy Policy objective and scope The Arla Foods Human Rights Policy is based on internationally recognised human rights principles, and applies to all Arla operations and all companies owned and/or controlled by Arla Foods, regardless of size or location. As a global dairy cooperative, we seek to strategically improve the fulfilment of the right to adequate food and its fair distribution, the right to health and the right to enjoy favourable conditions of work. Wherever we operate, we establish processes that enable us to identify, prevent and mitigate potential adverse human rights impacts that we may cause, contribute to or be directly linked to through our business activities. If we find that we have caused or contributed to adverse impacts, we seek to provide remediation. We do not accept any form of human trafficking and child labour, nor forced labour anywhere in our value chain. Policy governance The effectiveness of the policy is reviewed bi-annu- ally by the EMT to ensure the business' continuous compliance with the UN Guiding Principles. Code of Conduct for Suppliers and Business Partners Policy objective and scope It is essential for Arla to operate in a responsible manner, and we expect our suppliers and business partners to live up to the same standards. Our sup- pliers must sign the Code of Conduct for Suppliers and Business Partners (CoCs) if they want to become our strategic, preferred or locally accepted suppliers. Employees are strongly advised to only use suppliers who fall within these categories. The most important objective of our CoCs is to minimise risks to people and safeguard our business. It requires suppliers to provide a safe and healthy working environment, respect the rights of children and not engage in or tolerate the use of child labour, not use forced labour and as a minimum comply with applicable laws and industry standards related to working hours and minimum wages and respect international agreements on human rights. In case a supplier breaches these obligations, Arla is entitled to termi- nate the contract and reject any supplied material without remediation for the supplier in question. Our procurement department monitors compliance with our CoCs and internally reports on it monthly. Arla is a member of AIM Progress, which is a forum assembled to enable and promote responsible sourcing practices. The update is inspired by AIM Progress's work. Policy governance The Code of Conduct for Suppliers and Business Partners is owned by the Head of Procurement, and is prepared and implemented through a collabora- tion between Procurement, Legal, QEHS Supplier Assurance and Global Sustainability. Diversity Policy Policy objective and scope Arla runs a global business, and we believe that diverse teams combining inherent diversity – such as gender, age or nationality – are key for us in order to understand and meet the needs of our consumers and customers. Our overall ambition is to achieve a more diverse workforce and create an inclusive envi- ronment, where colleagues are included and treated with openness and mutual respect, recognising and harvesting the benefits of diversity. See our related targets and our progress towards them on pages 58 and 66. The policy applies to all people processes to ensure equal and inclusive selection, assessment and reward of people. Policy governance Our Global HR team, headed by the Chief Human Resources Officer, is responsible for monitoring com- pliance with the policy, updating it when necessary and reporting on progress. Anti-harassment Policy Policy objective and scope Arla is committed to ensuring a workplace which is characterised by mutual respect, free from any kind of harassment, bullying and discrimination. Our focus lies on preventive actions, early detection and actions to stop it. We encourage reporting of complaints (see grievance mechanism on page 63). All complaints are taken seriously, and if proven, harassment and discrimination are sanctioned, as are deliberately false or malicious allegations. The policy covers all locations, including the workplace and any other settings in which colleagues may find themselves in connection with their Arla employment. Policy governance Our HR organisation's management and the HR business partners across Arla have prime respon- sibility for rolling out this policy, initiating dialogue about it and assisting managers in handling cases. Updating the policy is the responsibility of our global HR organisation. We measure the effectiveness of our policy by closely tracking non-acceptable behaviour cases through our yearly employee satisfaction survey and our confidential grievance reporting system. Further policies that regulate our impacts on our own workforce: Recruitment Policy and Working Hour Policy. Working Hour Policy Policy objective and scope Arla Foods is committed to providing safe and healthy working conditions for all employees working at our sites, while at the same time providing maximum flexibility for managers and em- ployees and complying with legislation and relevant guidelines. We seek to ensure that employees do not exceed reasonable working hours, to respect their right to rest and leisure and thus ensure a satisfacto- ry balance between work and personal life. Working hours must comply with national laws, collective agreements and follow the standards of the Ethical Trading Initiative (ETI) Base Code, whichever affords the greater protection for employees. Policy governance All people leaders must ensure that the planning of working hours for all internal as well as external employees working at an Arla location is aligned with this policy. Vice Presidents in production and managers at similar levels in other functions are responsible for handling escalations of non-con- formances within the respective areas. Grievance Policy Policy objective and scope Arla is committed to acting with integrity, respect and in a transparent way, according to principles set out in our Code of Conduct. We recognise that our reputation and success depend on the behaviour of our employees and we take violations of the Code of Conduct and legislation seriously. Our whistleblower service, Ethics Line, is available for all employees and other stakeholders to raise any concerns they may have. We do not tolerate retaliatory action taken against anyone raising concerns in good faith. Our actions align with the EU Directive on the protection of whistleblowers. All reports are confidential and can be conducted anonymously. Each grievance is addressed seriously and respectfully. Policy governance The Ethics Line Committee is an internal team acting with integrity and balancing the interests of the reporter, the reported person(s)/organisation/activ- ities and interests of Arla when handling grievances. The Ethics Line Committee includes representatives from Finance (Risk, Controls & Compliance), Legal, HR, Global Sustainability and commercial segments. The Ethics Line Committee is independent from organisational structures and reports to the CEO. PAGE 67ARLA'S ANNUAL REPORT 2023I.II.III.General informationConsumers – healthy and safe nutrition/EnvironmentSocialGovernance/ Employees and workers in the value chainSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESCONSUMERS – HEALTHY AND SAFE NUTRITION Focus areas 2023 Progress towards target LOW-INCOME CONSUMERS REACHED WITH AFFORDABLE NUTRITION PRODUCT RECALLS 97m 1 4 2019 1 2020 0 2021 1 2022 Target 100m Read more on page 70 0 Read more on page 70 2030 1 2023 PAGE 68PAGE 68ARLA'S ANNUAL REPORT 2023I.II.III.General informationEnvironmentSocial/ Employees and workers in the value chainSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESConsumers – healthy and safe nutrition/GovernanceImpacts ARLA'S IMPACTS Ambitions ARLA'S AMBITION FOR 2030 LOW-INCOME CONSUMERS HEALTHY AND SAFE NUTRITION DATA PRIVACY AND CONSUMER RIGHTS 100,000,000 Low-income consumers reached Access to adequate, affordable and healthy food is a basic human right, and we want to meet consumers' nutritional needs around the world. Our ambition is to reach 100 million low-income consumers with our affordable dairy nutrition. Read more on page 73. ZERO Product recalls A core responsibility is to ensure that our products are safe for consumers to eat and drink. The target for recalls is by default zero. QUALITY INFORMATION ON PRODUCTS COMPLAINT MANAGEMENT Policies Quality and Product Safety Policy Labelling Policy QEHS Manual & Food Safety and Recalls Responsible Marketing Policy Finding a delicate balance between protecting the environment and providing nutritious food to a growing global population is a crucial challenge for Arla and the food industry as a whole. Turning this challenge into an opportunity is essential for our contin- ued relevance in a changing market. We are dedicated to helping combat global malnutrition by ensuring access to affordable nutrition for low-income consumers. Our strategic ambition is to reach 100 million low-income con- sumers, and we continuously develop products and strengthen our efforts to achieve this goal. Inspiring healthy food habits and pro- moting cooking with minimal waste is also a key aspect of our health strategy, with a particular focus on future genera- tions. Through various inspirational and educational programmes, we aim to instill positive habits and behaviours. Strategy HEALTH AND NUTRITION Ensuring the safety of our products is our top priority. By adhering to the prin- ciples outlined in our Global Quality and Product Safety Policy, we continuously strengthen our quality culture and food safety standards. Accurate labelling is of utmost importance, ensuring that our consumers can make informed choices. We recognise the significance of providing access to quality infor- mation on our products, especially for vulnerable groups such as children and low-income consumers. As part of our health strategy, we focus on developing new, sustainable and even healthier products. Guided by the publicly available Arla® Nutrition Criteria, which align with current scientific evidence and guidance from global health authorities, we strive to create innovative products. PAGE 69ARLA'S ANNUAL REPORT 2023I.II.III.General informationEnvironmentSocial/ Employees and workers in the value chainSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESConsumers – healthy and safe nutrition/GovernanceActions and resources PROVIDING GOOD FOOD TO THE WORLD Food safety first It is absolutely key for Arla that our products are safe to eat and drink for everyone. Products are not released to the market if there are any concerns related to food safety, and strict proce- dures and safety policies are in place to secure this. Products will be recalled, should we get any indication of a food safety risk. In 2023, we recalled one product, not due to a food safety risk but due to visible growth of mould. All our production sites are certified under the Global Food Safety Initiative, which is audited by third-party auditors. In 2023, we twice experienced a situa- tion where a site did not pass the audit, and the certificate was temporarily DANO COOL COW To address growing food insecurity in developing countries, we constantly pursue opportunities to create affordable and nutritious products for low-income consumers. suspended until the site could regain it. The non-conformities were not linked to any food safety risk. The learnings from these situations have been shared globally with all our sites to prevent similar situations from happening again. In 2023, we implemented the results of our first external benchmark survey for Quality and Food Safety Culture, for example through organising our annual Food Safety Days in June. Additionally, we conducted labelling checks on our branded products in European and international markets to ensure regulatory compliance. Shaping the future of nutrition through research partnerships In order to lead the way in dairy nutrition and continuously explore the health benefits of dairy, we actively participate in a research collaboration called Arla Foods for Health (AFH) with the two largest universities in Denmark. In 2023, three new research projects were selected to receive total funding of EUR 1.3 million. The outcomes of the research can be applied to food design and the develop- ment of innovative nutritional solutions, potentially making a positive impact on global nutrition and public health. AFH and its partners are equally committed to sharing their scientific insights with the wider community. Improving access to healthy nutrition Malnutrition remains a significant health challenge affecting popula- tions globally. We are committed to addressing the needs of groups at high risk of malnutrition by providing access to affordably priced dairy products, in Bangladesh with Dano Daily Pushti, and in Nigeria, Senegal and Ghana with Dano Cool Cow. To address growing food insecurity in developing countries, we constantly pursue opportunities to create affordable products that provide sufficient nutrients for low-income consumers. High inflation continued during 2023 and further decreased the purchasing power amongst low-income consum- ers. Due to strong distribution networks and our trusted brand, we reached 97 million low-income consumers in Nigeria and Bangladesh this year, which is above the 2023 target of 90 million. In 2023, we concluded the Pushti Ambassador Project in Bangladesh in partnership with NGO BopInc. The project included 200 female retail entrepreneurs in Arla's sub-distribution network, and improved their income through sales of Arla's dairy nutrition in rural areas. Remarkably, the project, which is supported by the Danish Ministry of Foreign Affairs, identified 4,000+ potential female entrepreneurs. PAGE 70 PAGE 70ARLA'S ANNUAL REPORT 2023I.II.III.General informationEnvironmentSocial/ Employees and workers in the value chainSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESConsumers – healthy and safe nutrition/Governance WHAT WE BRING TO THE TABLE WE BELIEVE THAT DAIRY PLAYS A POSITIVE ROLE IN A SUSTAINABLE DIET, BALANCING THE ENVIRONMENTAL IMPACT OF PRODUCTION WITH THE NUTRITIONAL VALUE OF FOOD. OUR STRATEGY COMES ALIVE THROUGH OUR BRANDS, PRODUCTS AND INNOVATIVE PROJECTS AIMED AT CREATING QUALITY NUTRITION. Turning a breakfast staple into a healthy option Arla is committed to enhancing consumers' access to nutritious food. In 2023, we improved the recipe of Puck® spreadable processed cheese. This modification involved reducing the levels of fat and salt while simultaneously increasing the protein content, resulting in a healthier choice for families. As a popular breakfast staple in the Middle East and North Africa region, Puck blue jar cheese® can now be enjoyed by the whole family with a greater sense of well-being. Improving the health profile of Puck® squares Puck® squares, a beloved snack among kids and a versatile ingredient in baking, are now compliant with the Arla® Nutrition Criteria as the fat content has been reduced by 25%, while the protein content has increased by 38%. This ensures that kids can enjoy their favourite snack during lunch breaks, while parents can confidently use Puck® squares in their baking endeav- ours, knowing that they make healthier choices for their families. Partnership brings fortified yogurt to Tanzanian children An affordable fortified yogurt is on its way to Tanzanian school children following a collaboration between the local company Galaxy Food and Beverages and the GAIN Nordic partnership. As lead business partner in the partnership, Arla Foods Ingredients worked with Galaxy to adapt the yogurt recipe to the local market and processing conditions. The recipe was originally developed as part of the GAIN Nordic project to build a sustainable dairy supply chain in Ethiopia. It is this business model that has now been transferred to Tanzania. Available at a price that low-income consumers are willing and able to pay, the nutrient-rich yogurt is designed to help overcome the widespread problem of childhood stunting. Turning dairy and fruit waste into healthy, affordable foods Pakistan is the fourth-biggest dairy producer in the world. Yet, a large part of the milk ends up as whey side-streams from cheese production – an environmental pollutant when discharged with wastewater. Arla Foods Ingredients and its GAIN Nordic partners have worked with local dairies to turn whey into a nutritious whey- based drink that targets malnourished children and young women. The Danish international development agency DANIDA recently awarded additional funding to support product commercialisation. In another GAIN Nordic project in Pakistan, the focus is to transform waste from date cultivation into affordable dried fruit bars. PAGE 71ARLA'S ANNUAL REPORT 2023I.II.III.General informationEnvironmentSocial/ Employees and workers in the value chainSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESConsumers – healthy and safe nutrition/GovernanceINSPIRING CONSUMERS OUR MISSION IS TO INSPIRE CONSUMERS BY PROVIDING PRODUCTS THAT CATER TO THEIR DIVERSE NEEDS AND INVITING THEM TO PARTICIPATE IN ACTIVITIES THAT OFFER INSIGHTS INTO THE ORIGINS OF OUR PRODUCTS WHILE SUPPORTING HEALTHY HABITS AND GENERATING LESS WASTE WHEN COOKING. Reaching millions through recipe inspiration We firmly believe that inspiration and knowledge about cooking is the best way to develop good food habits, and we provide cooking inspiration around the world on our national websites and in brochures. With an annual visit count of over 30 million Arla.dk has proven to be a prom- inent source of cooking inspiration in Danish households. We are among the leading recipe providers in Denmark regarding presence on Google. We also increasingly use social media platforms to more actively engage consumers and spread the word about sustainable and healthy eating. Inspiring future generations Our educational programme, Arla Food Movers, reached 63,000 students in Denmark. It focuses on sustainable food habits, with this year's topic being 'Flip a Habit.' The material focus lies on how to change habits around food to be more sustainable and healthy. Making sure kids do not skip breakfast As a school canteen supplier, we play a role in ensuring students have a nourishing diet for a productive school day. We collaborate with a number of schools in Sweden to provide free breakfast and share insights nationwide. In the UK, we partner with Magic Breakfast, a charity working to end hunger as a barrier to education. In 2023, we donated over 129,000 litres of milk to schools across the country. Inspiring children through food camps The Arla Foundation1 organises food camps to inspire healthy food habits among young people in Denmark. Every week throughout the school year, the foundation's two camps are filled up with new pupils, reaching 1,600 school kids in 2023. Engaging with consumers We closely track consumer opinions and preferences to make sure we keep our place as one of the leading global dairy companies. We also rolled out the Food Moovers programme in the Middle East, designed to guide young students towards making healthy choices when it comes to their diet and lifestyle. It was implemented in more than 300 schools in the United Arab Emirates. We conduct representative surveys of both European and global consumers through third parties. This includes weekly measurements of corporate rep- utation and brand image. Additionally, the team purchases syndicate studies on sustainability matters on an ad hoc basis. Survey results are shared with the Chief Marketing Officer. We also track consumer opinion on our products through various focus groups. These are organised as frequently as necessary. The effectiveness of these measures is reflected in positive consumer reactions and growing sales volumes. Consumer service We highly value consumer satisfaction and are also aware of the impact of negative consumer stories on our brand value, so we prioritise providing multiple channels for consumers to raise concerns and complaints about our products. Our branded packaging displays the physical address, phone number and email address of relevant Arla offices, ensuring that consumers know how to contact us. Consumer complaints are managed separately by markets and tracked through a centralised database. 1 The Arla Foundation is independent of Arla. Arla donates EUR 1.3 million to the Arla Foundation annually. PAGE 72 PAGE 72ARLA'S ANNUAL REPORT 2023I.II.III.General informationEnvironmentSocial/ Employees and workers in the value chainSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESConsumers – healthy and safe nutrition/GovernanceProgress towards targets Recalls Policies and other FOOD SAFETY – PRODUCT RECALLS Number of recalls 2023 1 2022 2021 2020 2019 1 0 1 4 In 2023, there was one public recall incident. The recall was initiated due to a defective sealing at the filling line, causing low initial mould contamination identified in a specific batch of oat drink. Although the issue was assessed to not pose any food safety risk, the batch was recalled. Due to a misunder- standing of the instruction given by the Danish food authorities to Arla, this incident resulted in a fine. ACCOUNTING POLICIES All product incidents are handled promptly to safeguard consumer safety as well as to ensure com- pliance with legal requirements and product quality. The management of public recall incidents follows a detailed and standardised process. Additionally, the handling of product incidents is subject to annual testing to maintain preparedness and effectiveness. A public recall is initiated when products pose a material food safety, legal or brand integrity risk. It is relevant only when the affected products are accessible to consumers in the marketplace. Public recalls are promptly reported as they occur, and an incident report must be completed within two weekdays from the initial notification of the issue. The total number of public recalls is disclosed externally on an annual basis in accordance with reporting requirements. ACCESS TO AFFORDABLE NUTRITION Arla is committed to improving access to affordable nutrition for low-income consumers in develop- ing countries. In 2023, we reached 97 million consumers (2023 target: 90 million; 2020 baseline: 76 million) with affordable nutrition products, an increase from 87 million in 2022. ACCOUNTING POLICIES The disclosed number on access to nutrition is defined as the number of low-income consumers reached with Arla's affordable products in key markets during the last 12 months. These products are Dano Daily Pushti (DDP) in Bangladesh and Dano Cool Cow (DCC) in Nigeria. Products are in compliance with the publicly available Arla Nutrition Criteria. By 'consumers reached' Arla refers to consumers that are in a household which has either purchased or consumed the product in the specific period. The KPI is calculated using market Low-income consumers reached with affordable nutrition million 2023 2022 2021 2020 2019 People reached in Bangladesh People reached in Nigeria Total number of people reached 58 39 97 48 39 87 36 49 85 28 48 76 penetration data related to the number of low-in- come consumers reached with Arla's affordable nutrition products and average household size relative to the number of low-income consumers based in the market according to the National Social Economic Class segmentation. Market penetration data is provided by an external agency every month. The agency collects sample data from around 9,500 households every month using various data collection methods, such as mobile apps or diaries, depending on the available technologies in the area. The sample data is then extrapolated to illustrate the market penetration of the whole population within that specific market. Data is available with one month's delay, and as a result data related to December is based on the November data collection. Every year, the data is based on the last available period. In 2023, the data was based on market penetration data from November, and from December for previous years. Our policies related to consumers regulate those actions where our key impacts and potential risks lie, and support us in reaching our social sustainability targets and ambitions. They ensure that we correctly and appropriately inform consumers about our products, that our products are safe to consume, that we can act swiftly in case they are not and that we market our products responsibly, especially to the most vulnerable consumers groups, such as children. If publicly available, policies can be found on our website. Quality and Product Safety Policy Policy objective and scope Arla's top priority is to supply safe products of high and consistent quality. We are committed to never compromising on the quality or safety of our prod- ucts. Our Quality and Product Safety Policy applies to Arla, and any entity directly or indirectly controlled by Arla and their respective employees. The scope of this policy includes all handling and services related to our products which can affect product quality and safety. Key elements of our policy are as follows: 1. All of our products are risk-assessed for their full declared shelf life and for the relevant target groups of consumers. 2. HACCP principles (Hazard Analysis and Critical Control Points) are applied, documented and validated for all productions. 3. All manufacturing sites must be certified according to internationally recognised food safety standards within GFSI (Global Food Safety Initiative). 4. All products must be 100% traceable in all steps of supply, production, storage and distribution. 5. All production must comply with relevant legisla- tion and regulatory requirements in the country of manufacture and with relevant regulatory requirements in markets exported to. The effectiveness of this policy is constantly moni- tored internally based on three KPIs: the number of food safety incidents, complaints from customers and consumers and cost of quality deficiencies. Policy governance Our Quality and Food Safety Policy is reviewed yearly by the management of the Quality, Environment, Health and Safety (QEHS) department and approved by the Chief Supply Chain Officer. Labelling Policy Policy objective and scope Our Labelling Policy aims to create a uniform ap- proach to labelling across all Arla branded products to avoid misleading the consumers with regard to nutrition and health information. We seek to provide simple and accurate information of our products to enable our consumers to make informed choices in their quest for healthier food choices. The policy regulates the responsibility for both mandatory and voluntary information on the front and the back of all branded food packaging. Mandatory labelling information on our products always follows local or EU laws and regulations. Voluntary information on packaging includes health and nutrition claims and any other type of claims governed by EU or local food regulations (such as the use of words like 'Natural', 'Pure', 'Original'). In markets where there is no such legislation or guideline, Arla follows the principles for mandatory and voluntary information on labels laid out in FAO's Codex Alimentarius. The efficiency of the policy is evidenced by the consistently low number of legal cases we have in relation to our labels. Policy governance Our Labelling Policy is owned jointly by the global management of the marketing and the QEHS organisation, who are responsible for updating and implementing it. The policy is approved by the Chief Marketing Officer and the Chief Supply Chain Officer. QEHS Manual & Food Safety and Recalls Process objective and scope Product incidents related to the safety, legality or quality of our products are dealt with through a highly standardised process detailed in our QEHS Manual. Timely and controlled handling of such incidents is of utmost importance to secure best possible control and the safety of our consumers. All incidents must be managed without any undue delays, and in accordance with the escalation process, local procedures and Arla Mandatory Standards. Product incident management is tested at least annually. The QEHS manual covers all Arla-owned and/or -operated manufacturing sites, warehouses, logistic departments and other func- tions managing products, services and processes. The number of product-related incidents is tracked through a global system and reported to relevant management bodies at least monthly. Read more about food safety on pages 69-70. Process governance Our global QEHS organisation is responsible for maintaining and reviewing the Arla QEHS Manual which happens at least once a year and more often if needed. The manual is approved by the Chief Supply Chain Officer. Responsible Marketing Policy Policy objective and scope Our Responsible Marketing Policy covers all marketing communications directed at consumers, with special provisions for marketing to children under 18 years and under 13 years. First and foremost, all of our marketing communications have to comply with local laws and regulations. However, our commitment goes above and beyond these laws and regulations. The backbone of the policy is based on a collaboration with the EU Pledge. To abide by the International Chamber of Commerce (ICC) Code of Advertising and Marketing Communication Practice; and the ICC Framework for Responsible Food and Beverage Marketing Communications in all marketing communications in alignment with the EU Pledge enhanced commitment 2021. Our key objective is to factually present our products and recipes in all advertisements in a way which does not attempt to mislead consumers. When it comes to children, we do not insert marketing communication to inappropriate editorial content, and we make sure not to mislead about the potential benefits of a product (such as status and popularity with peers). For the most vulnerable group (under 13 years), we only market products that fulfil the Arla® Nutrition Criteria. The efficiency of the policy is evidenced by the consistently low number of legal cases related to our marketing communications. Policy governance The Responsible Marketing Policy is owned by our global marketing organisation, and is approved by the Chief Marketing Officer. PAGE 73ARLA'S ANNUAL REPORT 2023I.II.III.General informationEnvironmentSocial/ Employees and workers in the value chainSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESConsumers – healthy and safe nutrition/GovernanceGOVERNANCE PAGE 74ARLA'S ANNUAL REPORT 2023I.II.III.General informationEnvironmentSocialGovernanceSUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESGOVERNANCE FRAMEWORK Arla is a cooperative owned by dairy farmers from seven countries. To establish a reliable and successful cooperative, it is essential to provide all owners with the chance to express their views and be represented. Thus, the decision-making author- ity is entrusted to the Board of Representatives and the Board of Directors. The Executive Management Team is, in close collaboration with the BoD, responsible for setting the overall strategic direction of Arla and for the daily operations. The detailed structure and guidelines of our governance system are outlined in our Articles of Association. 4 AREA FORUMS DK, SE, CE, UK MEMBERS DK 74 SE 47 CE 25 UK 29 COOPERATIVE GOVERNANCE BOARD OF DIRECTORS 14 elected owners 3 employee representatives 2 external members BOARD OF REPRESENTATIVES 175 owners 12 employee representatives REGION DISTRICT OWNER NATIONALITIES 7,999 dairy farmers DK 1,948 SE 1,996 CE 2,074 UK 1,981 CORPORATE GOVERNANCE EXECUTIVE BOARD CEO and COO EXECUTIVE MANAGEMENT TEAM Executive Board and 6 officers EMPLOYEES 21,307 FUNCTIONS · Europe · International · Supply Chain · Agriculture, Sustainability & Communication · Marketing & Innovation · HR · Finance, Legal, IT & Strategy COOPERATIVE GOVERNANCE Arla is owned by 7,999 milk-producing farmers from Denmark, Sweden, Germany, the UK, Belgium, the Netherlands and Luxembourg, and they all have the opportunity to influence significant decisions. The cooperative is structured into four geographical areas: Denmark, Sweden, the UK and Central Europe. These areas are further divided into regions and member districts. See next page for further details. Arla has two primary bodies responsible for farmer owner representation and decision-making: the Board of Directors, consisting of 19 members, and the Board of Representatives, comprising 187 members. Board of Representatives (BoR) The BoR serves as the highest deci- sion-making authority in our cooperative governance system. It consists of a total of 187 members, with 175 being farmer owners and 12 employee representatives. The owner represent- atives are elected every two years, and the allocation of seats per country is determined by their calculated share of equity in the previous financial year before the elections. In the current elec- tion period, the seats were distributed PAGE 75ARLA'S ANNUAL REPORT 2023I.II.III.General informationTransparent tax practicesEnvironmentSocialGovernance/ Governance frameworkOur managementResponsible business conduct /SUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIES as follows: Denmark 74, Sweden 47, Central Europe 25 and the UK 29. The next election is in May 2024, and based on the equity on 31 December 2023, the seats are distributed as follows: Denmark 72, Sweden 47, Central Europe 26 and the UK 30. The BoR is responsible for making key decisions, including the allocation of profits for the year, and also has the authority to elect the BoD. Regular meetings of the BoR are held at least twice a year. District meetings Every owner of Arla is affiliated with the member district where their farm is situated. In March of each year, owners gather for a local annual assembly in their respective districts to uphold their democratic influence on Arla's decision-making processes. During these assemblies, district members elect representatives to represent their district on the BoR. Additionally, the districts have their own individually elected district councils. Regional boards In the Danish and Swedish regions, the regional board comprises the members of the BoR who have been elected within the specific region. In the Central European and UK regions, the regional board is composed of all the Chairs and Vice Chairs of the district councils within that region. The regional boards convene promptly after the annual district meetings to address owner- related issues that are pertinent to their respective regions. Board of Directors (BoD) The BoD, elected by the BoR, is re- sponsible for managing Arla in the best interests of the farmer owners. This crucial role entails setting the strategic direction, overseeing Arla's operations and asset management, ensuring satisfactory accounting practices and appointing the Executive Board. Additionally, the BoD is entrusted with safeguarding the interests of various stakeholders in the company, which includes lenders, investors in bond instruments and employees, among others. The BoD comprises 14 farmer owners and two external members elected by the BoR as well as three employee representatives elected by Arla's employees. As for the BoR, the number of farmer owner seats per country on the BoD is distributed based on equity. In the current election period, the seats were distributed as follows: Denmark 6, Sweden 4, Central Europe 2 and the UK 2. These remain unchanged in the coming election period. Area forums and Joint Area Council Arla operates with four area forums, each corresponding to one of the member areas. These forums serve as a vital link between the BoD and Arla's management. Members of these forums act as ambassadors, represent- ing Arla's interests across all members. The forums convene twice a year. Moreover, the Joint Area Council con- sists of four BoR members from each respective area, elected to the council through a ballot process. The BoD appoints the Chair and additional mem- bers to the council. The council's main focus lies in addressing owner-related matters that transcend individual areas, such as general membership terms and the global milk supply agreement. Owners In 2023, there were 7,999 joint owners in the cooperative (2022: 8,492). The decrease in the number of owners can be attributed partly to farmers who ceased milk production or sold their businesses to other Arla members. Additionally, a small number of owners resigned in order to supply another dairy company. This decline is consist- ent with the overall trend observed in the dairy sector over the past few years. CORPORATE GOVERNANCE Arla's corporate governance is a collab- orative effort between the Executive Board and the BoD. Working together, they establish and uphold Arla's stra- tegic direction, oversee organisational operations, manage Arla effectively, supervise the management team and ensure compliance with relevant reg- ulations and guidelines. By combining their expertise and responsibilities, the Executive Board and BoD collectively contribute to the overall governance and success of Arla. Executive Board The Executive Board, appointed by the BoD, plays a crucial role in managing the company and driving its long-term growth. They are responsible for setting the strategic direction, monitoring progress towards targets and establish- ing group policies. The Executive Board is committed to achieving sustainable growth and increasing the overall value of Arla. Additionally, the Executive Board is responsible for effective risk manage- ment and control measures, ensuring compliance with legal regulations and internal guidelines. The Executive Board consists of the CEO and another member of the Executive Management Team, currently the Executive Vice President of the Europe segment. Executive Management Team (EMT) The EMT is appointed by the Executive Board and holds responsibility for overseeing Arla's day-to-day business operations. They are actively involved in formulating strategies and planning future operating structures. The EMT comprises the Executive Board, a man- ager from the International commercial segment and five functional heads. These functional heads cover key management areas, including Supply Chain (CSO), Agriculture, Sustainability and Communications (CASO), Marketing and Innovation (CMO), Human Resources (CHRO), and Finance, IT, Legal and Strategy (CFO). To ensure effective communication and collabo- ration, EMT members regularly update each other on significant developments within their respective areas and align on cross-functional measures. Governance of sustainability strategy Sustainability is anchored in Arla's EMT and led by the Chief Agriculture and Sustainability Officer (CASO). The CASO oversees and coordinates the implementation of Arla's sustainability strategy, Stronger People – Stronger Planet, a key pillar in the group strategy, Future 26. The functional heads are responsible for the implementation of sustainability targets relevant for each function as well as taking actions to deliver the strategy. All global policies are applicable to entities under the direct or indirect con- trol of Arla as well as their employees, including contractors and sub-contrac- tors, where relevant. Strategic sustainability issues are discussed and agreed with our BoD on a regular basis. The BoD receives recurring performance updates on key sustainability topics such as climate and food safety. Employees Arla has 21,307 full-time equivalents (FTEs) globally (2022: 20,907). Our employees are represented by three elected members on the BoD and 12 elected members on the BoR. In addi- tion to their representation in the key decision-making bodies, our employees also benefit from the presence of work councils comprising both employee and employer representatives. The European Works Council serves as a high-level forum for dialogue between management and employees, discuss- ing corporate matters. In 2023, Arla culture engagement and sustainability on site and on farm were key topics in the two annual European Works Council meetings. PAGE 76ARLA'S ANNUAL REPORT 2023I.II.III.General informationTransparent tax practicesEnvironmentSocialGovernance/ Governance frameworkOur managementResponsible business conduct /SUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESBOARD OF DIRECTORS ARLA'S BOARD OF DIRECTORS (BOD) IS A HIGHLY EXPERIENCED AND WELL-ROUNDED TEAM, CONSISTING OF 14 ELECTED FARMER OWNERS, THREE EMPLOYEE REPRESENTATIVES AND TWO EXTERNAL MEMBERS. Competencies of the BoD Arla's BoD members possess a diverse range of skills and expertise, enabling them to engage in exceptional global governance. To ensure continuous improvement, the competencies of the BoD are evaluated every other year through a transparent process approved by the BoR. Based on the evaluation results, board members have the opportunity to participate in various training programmes, further enhanc- ing their skillsets. 17. 19. 7. 4. 9. 11. 12. 6. 16. 5. 1. 15. 2. 3. 18. 13. 8. 14. Gender composition of the BoD1 Tenure of the BoD Nationalities of the BoD 75% Male 25% Female 26% 0-3 years 42% 4-7 years 32% 8+ years 8 DK 5 SE 3 UK 1 DE 1 BE 1 FR 1 According to section 99b of the Danish Companies Act, only members elected at the company's general meeting are included This commitment to ongoing devel- opment ensures that the BoD remains equipped to meet the evolving needs of our organisation. Diversity of the BoD Diversity and inclusion are imperative to our business. It is crucial that both genders are represented to bring a variety of perspectives to the business. In 2022, we reached our target of a share of 25% woman in our BoD. In 2023, we updated our target to a share of 30% women by 2026. Read more on page 86. Key topics and decisions in 2023 The BoD conducted a total of 12 ordi- nary and one extraordinary meetings. Among these, five meetings were held in-person, while the remaining meetings took place online. See page 86 for details on meeting attendance. Throughout the year, the BoD addressed several key topics, including: · The continuously uncertain and volatile external market conditions · The implementation of the Sustainability Incentive model and the first payments. Read more on pages 35-36. · Risk monitoring and mitigation actions · Target setting and approval of Arla's business plan for 2024 and follow-up on Arla's strategic ambitions PAGE 77ARLA'S ANNUAL REPORT 2023I.II.III.General informationTransparent tax practicesEnvironmentSocialGovernance/ Governance frameworkOur managementResponsible business conduct /SUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIES MEMBER BIOGRAPHIES Owner Employee External 1-19 Link to the group photo Ib Bjerglund Nielsen not present for the group photo. All roles in public administration or similar held currently or in the previous two years are listed in the biographies. 1. JAN TOFT NØRGAARD (DK) Born: 1960 Member since: 1998 Occupation: Dairy farmer Internal positions: Chair of the Board of Directors, the Learning and Development Committee and the Remuneration Committee External positions: Member of the Governing Board of the Danish Agriculture & Food Council (2009) 2. MANFRED GRAFF (DE) Born: 1959 Member since: 2012 Occupation: Dairy farmer Internal positions: Vice Chair of the Board of Directors, Area Chair of Central Europe, Chair of the Joint Area Council and the Member Relation Group, member of the Learning and Development Committee and the Remuneration Committee External positions: Member of the Board of German Milch NRW (2007) and the Board of the German Federation of Cooperatives (2015) 3. ANDERS OLSSON (SE) Born: 1966 Member since: 2022 Occupation: Technical Coordinator at Götene Dairy 4. ARTHUR FEARNALL (UK) Born: 1963 Member since: 2018 Occupation: Dairy farmer Internal positions: Area Chair of the UK, Chair of the Farmer Sustainability Working Group, member of the Joint Area Council, the Member Relation Group and the Global Appeals Committee 5. BJØRN JEPSEN (DK) Born: 1963 Member since: 2011 Occupation: Dairy farmer Internal positions: Chair of the Organic Committee. External positions: Vice Chair of Skjern Bank (2012) and the Danish Dairy Board (2019), member of the cattle section of the Danish Agriculture & Food Council (2009), the Board of Directors of the Danish Cattle Levy Fund (2009) and the Board of Directors of the Danish Milk Levy Fund (2019) 6. DANIEL HALMSJÖ (SE) Born: 1982 Member since: 2022 Occupation: Dairy farmer Internal positions: Member of the Global Appeals Committee 7. FLORENCE ROLLET (FR) Born: 1966 Member since: 2019 Occupation: Head of the MSc in Luxury Marketing and Management, EMLyon, France 8. GRANT CATHCART (UK) Born: 1970 Member since: 2022 Occupation: Quality Controller, QEHS, at Oswestry Packaging Plant External positions: Member of the National Cheese Forum, UK (1999), and the National Works Council, UK (2012) 9. GUSTAV KÄMPE (SE) Born: 1977 Member since: 2021 Occupation: Dairy farmer Internal positions: Member of the Remuneration Committee and the Farmer Sustainability Working Group External positions: Member of the Swedish Dairy Association (2021) 10. IB BJERGLUND NIELSEN (DK) Born: 1960 Member since: 2013 Occupation: Dairy production worker External positions: Member of the Dairy Workers' Union, DK (2005) 11. INGER-LISE SJÖSTRÖM (SE) Born: 1973 Member since: 2017 Occupation: Dairy farmer Internal positions: Area Chair of Sweden, member of the Joint Area Council, the Member Relation Group and the Learning and Development Committee External positions: Chair of the Board of Directors of the Swedish Dairy Association (2022), board mem- ber of Tillväxtbolaget (2022) and Dairy Ambassador for the UN High-Level Political Forum (2022) 12. JOHNNIE RUSSELL (UK) Born: 1950 Member since: 2012 Occupation: Dairy farmer, chartered accountant Internal positions: Member of the Learning and Development Committee, the Remuneration Committee and the Organic Committee External positions: Chair of the ING Bank UK Pension Fund (2010) and two other entities (2013 and 2015, respectively) 13. JØRN KJÆR MADSEN (DK) Born: 1967 Member since: 2019 Occupation: Dairy farmer Internal positions: Member of the Learning and Development Committee, member of the Board of Directors of Andelssmør a.m.b.a (2020) External positions: Vice Chair of the Board of Directors of GLS-A (2018) 14. MARCEL GOFFINET (BE) Born: 1988 Member since: 2019 Occupation: Dairy farmer Internal positions: Member of the Global Appeals Committee, the Learning and Development Committee, the Organic Committee and the Preparatory Working Group External positions: Chair of the Board of Directors of Agra Ost Agriculture Research (2016), member of the municipal government of St. Vith (2018) and the Bauernbund Farmer Association (2012) 15. MARITA WOLF (SE) Born: 1959 Member since: 2021 Occupation: Dairy farmer Internal positions: Chair of the Global Training Committee, member of the Organic Committee External positions: Member of the Board of Directors of the Swedish Dairy Association (2003) and of the Board of Directors of the Swedish Farmers Foundation for Agriculture (2022) 16. NANA BULE (DK) Born: 1978 Member since: 2019 Occupation: Operating Advisor, Goldman Sachs Asset Management External positions: Chair of the Board of Directors of Carbfix (2023), member of the Board of Directors of Energinet (2018) and the Novo Nordisk Foundation (2023), Chair of the Danish Government Digital Council (2022) 17. RENÉ LUND HANSEN (DK) Born: 1967 Member since: 2019 Occupation: Dairy farmer External positions: Member of the Governing Board and the Executive Committee of the Danish Agriculture & Food Council (2019), and the Board of Directors of Agri Nord (2012) 18. SIMON SIMONSEN (DK) Born: 1970 Member since: 2017 Occupation: Dairy farmer, Valuation Consultant DLR Kredit A/S Internal positions: Member of the Remuneration Committee External positions: Dairy Ambassador for the UN High-Level Political Forum (2017) 19. STEEN NØRGAARD MADSEN (DK) Born: 1956 Member since: 2005 Occupation: Dairy farmer Internal positions: Area Chair of Denmark, Chair of the Global Appeals Committee and the Preparatory Working Group, member of the Joint Area Council and the Member Relation Group External positions: Chair of the Danish Dairy Board (2012), Vice Chair of the Governing Board and the Executive Committee of the Danish Agriculture & Food Council (2014), Chair of the Agro Food Park Steering Committee (2016) and the Danish Milk Levy Fund (2012) PAGE 78ARLA'S ANNUAL REPORT 2023I.II.III.General informationTransparent tax practicesEnvironmentSocialGovernance/ Governance frameworkOur managementResponsible business conduct /SUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIES EXECUTIVE MANAGEMENT TEAM ARLA'S EXECUTIVE MANAGEMENT TEAM (EMT) CONSISTS OF THE CEO, ONE COM- MERCIAL MANAGER OF THE EUROPEAN AND INTERNATIONAL COMMERCIAL SEG- MENTS AND FIVE FUNCTIONAL EXPERTS. THE EMT IS RESPONSIBLE FOR ARLA'S DAY-TO-DAY BUSINESS OPERATIONS AND FOR DEVELOPING AND DELIVERING GROUP STRATEGIES. 8. 5. 3. 4. 6. 7. 1. 2. Gender composition of the EMT Tenure of the EMT Nationalities of the EMT 87% Male 13% Female 37% 0-3 years 25% 4-7 years 38% 8+ years 4 DK 2 SE 1 UK 1 FR PAGE 79ARLA'S ANNUAL REPORT 2023I.II.III.General informationTransparent tax practicesEnvironmentSocialGovernance/ Governance frameworkOur managementResponsible business conduct /SUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESMEMBER BIOGRAPHIES All roles in public administration or similar held currently or in the previous two years are listed in the biographies. 8. PATRIK HANSSON (SE) Born: 1967 Position: CMO, Executive Vice President Marketing and Innovation Experience: Patrik has many years of experience from working in international consumer goods companies within finance, marketing, sales and general management. Patrik worked for 13 years in Procter and Gamble, mainly in marketing, before he joined Arla in October 2011 as Vice President of Marketing and Sales in Sweden. In 2015, he moved to Malaysia to start up Arla's regional headquarters in South East Asia. In 2016, he returned to Europe where he held the roles of Group Vice President in Sweden, and later in Germany, before taking up the current role as CMO in 2022 Education: Master's degree in Engineering Physics from Chalmers and a Master's degree from Gothenburg University 1. PEDER TUBORGH (DK) Born: 1963 Position: CEO, member of the Executive Board, representing Global Industry Sales and Arla Foods Ingredients in the Executive Management Team Experience: Peder has been with Arla since 1987, formerly under MD Foods, and has held various senior management and executive positions, including Marketing Director, Divisional Director and Executive Group Director. Peder has worked in Germany, Saudi Arabia and Denmark as part of his longstanding career in Arla Education: Master's degree in Economics and Business Administration from the University of Southern Denmark, Odense External positions: Member of the Global Dairy Platform (2006), Chair of AgriFoodTure (2022) 2. PETER GIØRTZ-CARLSEN (DK) Born: 1973 Position: COO, Executive Vice President of Europe, member of the Executive Board Experience: Peter joined Arla in 2003 as Vice President of Corporate Strategy and has held various senior positions, including Executive Vice President of Consumer DK and UK, before he became Executive Vice President of Europe in 2016 Education: Master's degree in Business Administration, Organisation and Management from the Aarhus University School of Business and Social Sciences External positions: Board member of AIM, the European Brands Association (2018), member of the Policy and Issues Council (PIC) of the UK's Institute of Grocery Distribution (IGD) (2016), Vice Chair of the Board of the European Dairy Association (EDA) (2020), Vice Chair of the Board of Directors of the Toms Group (2022) 3. TORBEN DAHL NYHOLM (DK) Born: 1981 Position: CFO, Executive Vice President, Finance, Legal, IT and Strategy Experience: Torben joined Arla in 2012 after working several years in the M&A consultancy industry. Starting out in Arla as a Business Controller in Corporate Finance, he has subsequently held a number of significant project and leadership roles across the finance organisation focusing mainly on the interface between finance and strategy, most recently as Head of Performance Management Education: MSc in Finance and International Business from Aarhus University 4. SIMON STEVENS (UK) Born: 1965 Position: Executive Vice President, International Experience: Simon joined Arla in 2002 as UK Sales Director and then SVP Sales and Marketing, where he played a major role in the significant transfor- mation of the UK business. Simon joined the EMT in 2021 having previously been Head of the MENA region based in Dubai. Prior to Arla, Simon worked 14 years for Unilever in sales and marketing roles in the UK, Netherlands and Italy Education: 1st class BSc Hons degree in Management Sciences from Loughborough University External positions: Member of the Board of Directors of Mengniu (2021) 5. OLA ARVIDSSON (SE) Born: 1968 Position: CHRO, Executive Vice President, HR Experience: Ola joined Arla in 2006 as Corporate HR Director, and has been 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 of HR. Prior to Unilever, Ola served as an Officer in the Royal Combat Engineering Corps in the Swedish Army Education: Master's degree in HR Management from Lund University External positions: Member of the Board of Directors of AP Pension (2014), Central Board member of the Confederation of Danish Industry (2018) 6. DAVID BOULANGER (FR) Born: 1970 Position: CSO, Executive Vice President, Supply Chain Experience: David joined Arla in October 2020. He has 26 years of experience working in supply chain and operations and has held several senior leadership positions in the food industry within Mars, Mondelez and Danone in various geographies. Most recently, before joining Arla as Chief Supply Chain Officer, he was Senior Vice President of Operations of Danone's Specialized Nutrition Division, operating globally in the Early Life & Medical Nutrition fields Education: Engineering degree from the Ecole Civil des Mines de Paris in France and Master's degree in Mathematics External positions: Member of the Board of Directors of Global Baby SAS (2021) 7. HANNE SØNDERGAARD (DK) Born: 1965 Position: CASO, Executive Vice President, Agriculture, Sustainability and Communication Experience: Hanne has been with Arla since 1989, 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 Vice CEO of Arla UK before she in 2010 moved into a global marketing role as Senior Vice President of Brands and Categories. In 2016, she became CMO and Executive Vice President and joined Arla's Executive Management Team. In January 2021, Hanne became Executive Vice President of Agriculture, Sustainability and Communication Education: Business degrees from the Aarhus University School of Business and Social Sciences and Harvard Business School External positions: Member of the Board of Directors of Arla Fonden (2012), member of the Technical University of Denmark (2016), member of the Danish Climate Forest Foundation (Klimaskovfonden) established by the Ministry of Environment of Denmark (2021), Board member of the Danish Agriculture & Food Council (2022) PAGE 80ARLA'S ANNUAL REPORT 2023I.II.III.General informationTransparent tax practicesEnvironmentSocialGovernance/ Governance frameworkOur managementResponsible business conduct /SUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIES MANAGEMENT REMUNERATION ARLA'S EXECUTIVE REMUNERATION GUIDANCE IS DESIGNED TO ENCOURAGE HIGH PERFORMANCE AND SUPPORT VALUE CREATION. THE GUIDELINES ENSURE ALIGNMENT WITH THE GROUP'S STRATEGIC DIRECTION AND THE INTERESTS OF OUR FARMER OWNERS. We have a structured approach to remuneration, ensuring that salaries are unbiased towards gender, nationality and age. Remuneration governance Arla's remuneration practice is gov- erned by the remuneration guidance provided by the Board of Directors (BoD), which is reviewed regularly. The BoD takes into consideration the recommendations of the Remuneration Committee (RemCo), which consists of six board members, including the Chair and the Vice Chair. The RemCo acts as a preparatory committee for the BoD and the Board of Representatives (BoR), with a particular focus on the BoD, BoR and the Executive Board. One of the committee's responsibilities is to ensure that the remuneration guidance, practices and incentive programmes align with Arla's strategy and contribute value to the owners by attracting and retaining highly qualified elected representatives, executives, directors and key employees. The RemCo holds four meetings per year. Our remuneration practices The remuneration packages are designed to attract, engage and retain highly skilled senior managers while also promoting strong performance in both short and long-term business outcomes. Following Scandinavian practice, the majority of the remuner- ation is fixed. This ensures that the total remuneration is contingent upon achieving Arla's short and long-term financial targets. All executives and senior management members are em- ployed under terms that comply with international standards. These terms include appropriate non-compete restrictions as well as confidentiality and loyalty requirements. Our performance measures Board of Directors (BoD) The remuneration provided to the BoD consists of a fixed fee and does not include any incentives. Apart from a minimal travel per diem, no additional compensation is provided for attending meetings and committees. However, BoD members receive a fixed yearly fee if they are member of a cross-area BoR working group or committee. This approach aims to ensure that the BoD's main focus is on the long-term interests of the cooperative. The remuneration of the BoD is evaluated and adjusted every two years, and these adjustments are approved by the BoR. The most recent adjustment was made in 2022. For specific details regarding the amounts, please refer to page 139. Executive Board and Executive Management Team (EMT) The compensation framework and approach for both the Executive Board and the EMT (collectively referred to as executives) are the same. The remuneration for the Executive Board is evaluated annually by the BoD based on recommendations from the RemCo. For specific details regarding the amounts, please see page 139. The remuneration for the EMT is determined by the CEO. The remuneration package for the executives is established by considering external benchmarks against European and international FMCG (Fast-Moving Consumer Goods) companies. This ensures a competitive and sustainable combination of fixed and variable pay. Additionally, the package includes pen- sion contributions as well as non-mon- etary benefits such as a company car, telephone etc. Short- and long term incentive plans The levels of fixed remuneration for executives are determined based on their individual experience, contribution and function within the organisation, whereas variable pay is linked to the performance against annual business targets. The variable pay component consists of two parts: an annual short-term incentive (STI) plan and a long-term (three-year) incentive (LTI) plan. The STI plan includes the same elements for all executives. In 2023, a sustainability component expressed as scope 1 and 2 CO₂e reductions was added as a fifth component to the STI scheme. The main components of the LTI are branded volume growth, and the group's performance versus a peer group. See illustration below. Variable pay components Executive Management Team Short-term incentive (STI) Long-term incentive (LTI) Profit Efficiencies Leadership Sustainability (new) Branded volume growth Performance versus peer group PAGE 81ARLA'S ANNUAL REPORT 2023I.II.III.General informationTransparent tax practicesEnvironmentSocialGovernance/ Governance frameworkOur managementResponsible business conduct /SUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESFAIR AND TRANSPARENT TAX PRACTICES AS WE RECOGNISE THE IMPORTANCE OF TAX FOR BOTH ECONOMIC AND SOCIAL PROGRESS, WE ARE FULLY DEDICATED TO PAYING OUR FAIR SHARE OF TAXES AND PROMOTING TRANSPARENT REPORTING ON OUR TAX PRACTICES. Our responsible and transparent approach to tax matters is rooted in our corporate identity and strategy. This approach also aligns with our dedication to the UN Sustainable Development Goals (SDGs), with our tax payments directly and indirectly contributing to the majority of the SDGs. Notably, our tax practices have a significant impact on SDG number 16, which emphasises the importance of developing effective, accountable and transparent institutions. Open dialogue Ensuring tax compliance in the countries where we operate and create value, and reporting transparently on our tax matters are of utmost impor- tance to us. Therefore, we strive for an open dialogue with tax authorities and tax communities to foster transparency regarding our business operations and tax matters. To support this agenda, we have entered into voluntary enhanced relationships with the tax authorities in some of our core markets, and we provide public consultation responses and input to upcoming legislation in cooperation with industry-relevant business groups. Tax governance Our global tax function is structured to ensure robust tax governance. We implement appropriate policies, employ knowledgeable personnel and establish effective tax controls and procedures. Furthermore, the roles and respon- sibilities around our tax governance and tax management are stipulated in our internal Global Tax Policy, which is reviewed and approved by Arla's CFO. Cooperative and corporate tax Arla operates as a cooperative, where our farmer owners are also our suppli- ers. As a result, earnings are not retained within the company but distributed to our owners in the form of the highest possible price for the milk supplied. As a Danish-based cooperative, Arla Foods amba is subject to the tax regulations for Danish cooperatives, which are taxable based on the tax value of their equity. Arla operates multiple subsid- iaries worldwide. These subsidiaries are mainly limited liability and private limited companies that are subject to regular corporate taxation. Value generation and tax contribution In 2023, Arla generated a total value of EUR 6.5 billion from the milk supplied. Milk sourced from our farmer owners accounted for EUR 6.0 billion in milk payments, while other farmers received milk payments totalling EUR 402 million. Consequently, 98% of the value generated directly from the milk supplied is subject to tax at farm level, in accordance with local tax regulations. In addition to the value and taxes gener- ated directly from the milk supplied, our operations extend and generate value into societies through different types of tax payments, either borne or collected by Arla. carefully determined and document- ed in line with the OECD's Transfer Pricing Guidelines, ensuring that the transactions are conducted at market terms and in accordance with the value generated. As part of our fair tax practices, we continuously evaluate available tax incentives and reliefs to ensure that the use of such is always to be anchored in commercial substance. As an example, the Danish joint taxation group has, in line with the Danish Tax Depreciations Act, made use of the increased tax depreciation basis for newly purchased operating assets with a green profile. Fair tax practices To ensure that Arla pays a fair tax in the countries where we operate, transactions between Arla entities are Presence in non-cooperative jurisdictions Arla has no presence in the jurisdic- tions determined as non-cooperative OUR KEY TAX PRINCIPLES Our tax practices align with Arla's glob- al Code of Conduct, supported by a set of essential tax principles approved by the Board of Directors: · We aim to report the right and prop- er amount of tax according to where value is created · We are committed to paying taxes legally due and to ensure compli- ance with legislative requirements in all jurisdictions in which we operate · We will not use tax havens to reduce Arla's tax liabilities · We will not set up tax structures intended for tax avoidance which have no commercial substance and do not meet the spirit of the law · We are transparent about our ap- proach to tax and our tax position · Our disclosures are made in accord- ance with relevant regulations and applicable reporting standards such as (IFRS) · We build on good relations with tax authorities and trust that transpar- ency, collaboration and proactive- ness minimise the extent of disputes PAGE 82ARLA'S ANNUAL REPORT 2023I.II.III.General informationTransparent tax practicesEnvironmentSocialGovernance/ Governance frameworkOur managementResponsible business conduct /SUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIES jurisdictions for tax purposes (as per the update from 17 October 2023) by the Council of the European Union. additional tax payments under the Pillar Two rules will be to the country of Denmark. To assess potential future financial effects of the Pillar Two rules and other related local tax rules, we continuously follow the development and enactment of these rules in the countries where we operate. While it has been determined that our effective tax rate is well above 15% in most of the jurisdictions where we operate, we have identified a few jurisdictions, mainly in the Middle East, where the effective tax rate is below 15%. This is primarily due to national laws in these jurisdictions that either do not impose a corporate income tax or impose a tax rate below the minimum of 15%. Based on preliminary analyses, the group expects the impact of the Pillar Two rules to result in an immaterial financial impact for the financial year 2024. For further details about tax, refer to Note 5.1 on page 136. Global Minimum Tax (Pillar Two) On 15 December 2022, the Council of the European Union reached a unan- imous agreement to implement the EU Minimum Tax Directive (Pillar Two). The directive requires member states to transpose the rules into domestic law by 31 December 2023. Pillar Two seeks to ensure that large groups (i.e. groups with a turnover of EUR 750 million or more in at least two of the last four years) incur a minimum 15% effective tax rate on a jurisdiction by jurisdiction basis. In Arla, we welcome the initiative's underlying intention of setting a standard for a global minimum tax. Arla has taken an active part in supporting the national implemen- tation of the rules in Denmark (the tax jurisdiction of the group's parent company, Arla Foods amba). Expected Pillar Two effects for Arla Arla falls within the scope of the Pillar Two rules, according to which Arla Foods amba is the Ultimate Parent Entity ('UPE') of the group. As a result, in case Arla will be liable to top up taxes for the difference between its effective tax rate per jurisdiction and the global 15% minimum tax rate, Generating value through milk supply 98% of the value generated directly from the milk sup- plied by our farmer owners is subject to tax at farm level PAGE 83ARLA'S ANNUAL REPORT 2023I.II.III.General informationTransparent tax practicesEnvironmentSocialGovernance/ Governance frameworkOur managementResponsible business conduct /SUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESActions and resources RESPONSIBLE BUSINESS CONDUCT Responsible business conduct Arla has an ambitious plan to grow, and we care about how we do it. Honesty and transparency are key to our busi- ness and the value we create for our farmer owners, employees and other stakeholders. Responsible business conduct goes beyond compliance. It comes from living our Arla values, promoting openness and transparency, and is part of our commitment to do business in an ethical way. Responsible business conduct is de- tailed in our Code of Conduct. The Code of Conduct covers all aspects of our business and lies within every decision made every day, at all levels and every- where in Arla. Our Code of Conduct includes four key themes: Responsible company, Confidence in products, Care for the environment and animal welfare and Responsible relations. This includes outlining, among other things, how we act in relation to anti-corruption and bribery, human rights, fraud, taxation, accounting, confidentiality, relation- ships with our business partners and suppliers, food safety, product quality and environmental and social impacts through our value chain. The areas that are most at risk in respect of fraud, corruption and bribery are our operations in the Middle East, Nigeria, Central and Southern Africa, Bangladesh, Indonesia and South America. Additionally, we place strong emphasis on anti-corruption and anti-bribery measures in the UK in response to more stringent local regulation. Committed to growing responsibly Arla's Code of Conduct covers all aspects of our business and lies within every decision made every day, at all levels and everywhere in Arla. Fraud investigations We take violations of the Code of Conduct and regulation seriously. If employees or stakeholders believe that our Code of Conduct has been violated, we encourage them to report it. Our whistleblower service, Ethics Line, is available for all employees and other stakeholders to raise any concerns they may have It is available on the Arla website in30 different languages. We raise awareness of our corporate culture through our onboarding process which includes training and familiarising new employees with our Code of Conduct. We measure awareness of our Ethics Line by carrying out a compliance self-assessment of 37 entities in Arla's International business, and we further include Ethics Line awareness questions in our on-ground risk assessments (see page 63 for details). In 2023, 96 reports were submitted to the Ethics Line (see page 63 for details). All grievances are investigated by the Ethics Committee and reported to the CEO. In general, we maintain a coherent system of internal controls, which are regularly assessed for effectiveness and adequacy. PAGE 84ARLA'S ANNUAL REPORT 2023I.II.III.General informationTransparent tax practicesEnvironmentSocialGovernance/ Governance frameworkOur managementResponsible business conduct /SUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESThey are considered the most vulnerable due to their dependence on our pay- ments. On average, it took 15 days for us to make payments to farmers, while for other suppliers, it took 60 days. Data ethics Ensuring data is handled in a compliant and ethical manner is important to Arla, and we are aware of the increasing potential for impacts in relation to the use of data. During 2023, we continued the implementation of our Data Ethics Policy by setting up a data ethics committee to discuss relevant dilemmas and provide recommen- dations in relation to the use of data. Recommendations are based on the policy principles. We will evaluate our practice to define how we best continue to embed data ethics awareness in the business. Policies Responsible Political Engagement Policy Payment Policy Global Purchasing Policy Anti-bribery Directive Data Ethics Policy Code of Conduct – Our Responsibility Code of Conduct for Suppliers and Business Partners Grievance Policy Responsible Marketing Policy Environmental and Energy Management Policy & Green Ambition 2050 Responsible marketing In Arla, we market our products directly to consumers through various channels. It is our commitment and responsibility to ensure that all of our products and brands are responsibly marketed, presented in a way that is not misleading, convey nutrition and health claims in compliance with international standards and local legis- lation and ensure that our consumers are informed to make decisions as part of a balanced and sustainable diet. Moreover, we have chosen to make special provision for children, committing us not to market any of our products that do not meet our strict nutrition criteria to children under 12 years of age. Political engagement and lobbying It is important for a large dairy coop- erative like Arla to engage in lobbying activities as it provides representation, allows influence on new legislation, grants access to important information, mitigates risks and promotes collabo- ration. Through engagement we can support growth and address industry challenges, and with our expertise and experience we can provide valuable input in understanding of our sector. In accordance with our policies, we never offer or give contributions to political parties. In 2023, our political engagement prac- tices focused primarily on climate-re- lated regulatory changes pertaining to carbon taxation and sustainable farming practices. We also collaborated with industry peers to ensure that legislation concerning packaging and recycling is meaningful, while prioritising food safety and functionality. Our engage- ment activities align with key business risks and are anchored in our Future 26 strategy and our commitment to meet the 1.5-degree goal set by the Paris Agreement. Responsible supply chain management Our suppliers from all over the world have a major impact on our sustainabili- ty performance, and we expect them to sign our Code of Conduct for Suppliers and Business Partners, which governs environmental, social, business ethical and human rights aspects. In turn, our Global Purchasing Policy outlines clear and consistent procurement practices, which are fundamental for collaborating with our suppliers. By signing our purchase agreement, our suppliers become acquainted with our key sustainability targets and the corresponding actions they should undertake to minimise their climate and environmental footprint. We maintain a close collaboration with our suppliers to effectively address environmental and social impacts across the entire supply chain. For more details on our efforts to reduce our climate impact, please refer to pages 33-42. For details on how we mitigate risks associated with risk commodities, please refer to pages 45-51. For details on how we ensure human rights are upheld in the supply chain, please refer to pages 62-63. Fair payment terms Fair payment terms, such as reasonable payment periods and transparent agreements, foster trust, strengthen business relationships and encourage collaboration between Arla and our suppliers. Paying suppliers on time, particularly our farmer owners, is crucial as timely payments ensure sustainabili- ty and growth. We have set our payment terms in line with industry practice outlined in our Payment Policy. In 2023, the average time it took us to pay an invoice was 52 days (median 38 days). Our key suppliers are the farmers who supply raw milk. PAGE 85ARLA'S ANNUAL REPORT 2023I.II.III.General informationTransparent tax practicesEnvironmentSocialGovernance/ Governance frameworkOur managementResponsible business conduct /SUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESTargets and progress GENDER DIVERSITY BOARD OF DIRECTORS BoD diversity development Gender diversity on the Board of Directors is important, partly to ensure that both genders are represented at a high level, and partly to bring a Gender diversity on the Board of Directors Share of women on the Board of Directors variety of perspectives to the business. Ensuring gender diversity on the Board of Directors is also a legal requirement in Denmark. The current Board of Directors consists of 19 members, including 14 farmer owners, three employee representatives and two external members. In accordance with section 99b of the Danish Financial Statements Act, only members elected by the Board of Representatives at the general assembly count in the Board of Directors' gender diversity figure. The members elected by the Board of Representatives are the 14 owner represent- atives and two external members. Four of these 16 Board of Representatives-elected board members are women, reflecting a ratio in 2023 of 25% women and 75% men. A new target for the 2026 strategy was set in 2023. We are therefore targeting a share of 30% women on our Board of Directors by 2026, compared to a target of 25% in 2023. ACCOUNTING POLICIES The gender diversity ratio is calculated as the share of women on the Board of Directors as at 31 December. It includes only members of the Board of Directors elected by the general meeting and excludes employee representatives and advisors to the Board of Directors. 2023 25% 2022 25% 2021 13% 2020 13% 2019 13% BOARD MEETING ATTENDANCE Meeting attendance development Attendance at the board meetings by the members of the Board of Directors ensures that all Arla's owners and employees are represented when important strategic decisions are made. Arla's board members are very dedicated, and as a general rule all board members attend all meetings unless they are prevented from doing so due to health reasons. In 2023, there were 12 ordinary board meetings and one extra ordinary meeting. The board attendance remained at the same level as last year. Information on board members can be found on pages 77-78. ACCOUNTING POLICIES The board meeting attendance ratio is calculated as the sum of regular board meetings attended per board member and the total possible attendance. The current Board of Directors consists of 14 owners, three employee representatives and two external members. When calculating board meeting attendance, all 19 board members are included. Policies and other Our Code of Conduct serves as an umbrella for our policies. We outline some of our governance-related policies in the following. Our Code of Conduct and other governance-related policies such as our Code of Conduct for Suppliers and Business Partners, Responsible Marketing Policy, Environmental and Energy Management Policy & Green Ambition 2050 and our Grievance Policy are outlined in more detail in the chapters on environment and social. Responsible Political Engagement Policy Policy objective and scope The objective of our Responsible Political Engagement Policy is to ensure open and transparent engagement with political stakeholders, garner political support for the dairy sector and promote the development of innovative, sustainable dairy products, while adhering to ethical business practices and relevant regulatory frameworks. Arla's political engagement activities are governed by Arla's Code of Conduct, which is in synergy with the 10 guiding principles of the UN Global Compact as well as the EU Transparency Register's Code of Conduct. In order to be able to take part in political engagement in the EU, Arla registered in the EU Transparency Register, in August 2014, with the registration number 479299526321-12 and signed up to the Code of Conduct governing relations with the EU institutions and their members, officials and other staff. Policy governance The Chief Agriculture and Sustainability Officer (CASO) has ownership of the policy, and the operational responsibility lies with the Senior Vice President of Corporate Communications. A quarterly steering committee is responsible for overseeing implementation. performed. In other words, to guide the payment behaviour of all supplier payments in a common direction and ensure that they are performed in a consistent manner. Our Payment Policy applies to all supplier payments and defines our standard payment terms, invoicing requirements and procedures. Our standard payment terms are 60 days. In the absence of an agreement with the supplier, the standard payment terms are 30 days. Our Payment Policy separately defines the standard payment terms for our farmer owners who are paid twice a month. In addition, certain strategic suppliers participating in financing programmes could have longer payment terms – read more on page 85. We always pay public author- ities, utility companies and financial institutions on the due date stated on the invoice. Payments below 60 days for preferred or pending suppliers can take place with the approval of the Head of Procurement and below 30 days with the approval of the Vice President of Finance or Chief Financial Officer. Policy governance Our finance organisation's leadership and the local Finance Managers across Arla have prime respon- sibility for rolling out this policy, initiating dialogue about it and handling cases. Updating the policy is the responsibility of our global finance organisation. Global Purchasing Policy Policy objective and scope Clear and consistent procurement practices are fundamental to minimising risks to food safety, the environment and human rights in our supply chain. Our policy sets out 11 principles for purchasing in Arla to ensure a clear and uniform process when buying goods and services to reduce costs, risks and environmental and human rights impacts. Among other procedural requirements, the policy also requires compliance with Arla Foods' Code of Conduct for Suppliers and Business Partners. Policy governance This policy applies to all purchases from external suppliers of goods and/or services with one excep- tion: the purchase of raw milk registered on the milk balance. The policy applies to all employees in Arla. However, the global procurement department has overall responsibility for the implementation of this policy. Corporate Finance is responsible for setting and implementing approval limits and delegation rights and dealing with any queries about them. Anti-bribery Directive Policy objective and scope Our Anti-bribery Directive sets out the responsi- bilities in observing and upholding our position on bribery and corruption, and provides information and guidance on how to recognise and deal with bribery and corruption issues. Arla is committed to conducting all business in an honest and ethical manner. We take a zero-tolerance approach to bribery and corruption and are committed to acting professionally, fairly and with integrity in all our business dealings and relationships wherever we operate. Further, we are committed to implementing and enforcing effective systems to counter bribery and corruption. This directive applies to all persons working for Arla or on Arla's behalf in any capacity. Policy governance Arla's Executive Management Team (EMT) has overall responsibility for ensuring this directive complies with our ethical obligations, and that all those under our control comply with it. Arla's Global Legal Services department has overall responsibility for ensuring this directive complies with our legal obligations. Arla's management at all levels is responsible for ensuring those reporting to them understand and comply with this directive and are given adequate and regular training in it. Data Ethics Policy Policy objective and scope In Arla, we have high ethical standards for how we conduct our business. The purpose of the Data Ethics Policy is to establish the data ethics standards that we wish to adhere to, and to emphasise our commitment to a responsible use of data. When we decide to use data as part of our business, we apply the guiding principles for data ethics focusing on the five principles: Human dignity, Responsibility, Equality and fairness, Progressiveness and Diversity. Policy governance The policy is governed by the EMT, and a data ethics committee discusses and makes recommendations on decisions on data ethics issues. Board meeting attendance Number of meetings Attendance 2023 12 99% 2022 12 98% 2021 12 98% 2020 10 99% 2019 10 96% Payment Policy Policy objective and scope The objective of our Payment Policy is to create the basic principles by which payment to suppliers is PAGE 86ARLA'S ANNUAL REPORT 2023I.II.III.General informationTransparent tax practicesEnvironmentSocialGovernance/ Governance frameworkOur managementResponsible business conduct /SUSTAINABILITY STATEMENTSINTRODUCTIONPERFORMANCE REVIEWRISKS AND OPPORTUNITIESSales of our Puck® Mozzarella products contributed positively to our revenue growth of 3.2% in MENA. PUCK® MOZZARELLA CONSOLIDATED FINANCIAL STATEMENTS Primary statements 88 88 89 90 91 94 Income statement Comprehensive income Profit appropriation Balance sheet Equity Cash flow Notes 96 Introduction to notes 99 Note 1: Revenue and cost 105 Note 2: Net working capital 108 Note 3: Capital employed 116 Note 4: Funding 136 Note 5: Other areas I. II. CONSOLIDATED FINANCIAL STATEMENTS III. Primary statements / Income statement Comprehensive income Profit appropriation Balance sheet Equity Cash flow / Notes INCOME STATEMENT COMPREHENSIVE INCOME (EUR million) Revenue Production costs Gross profit Note 1.1 1.2 2023 2022 13,674 -10,894 13,793 -11,145 2,780 2,648 Sales and distribution costs Administration costs Other operating income Other operating costs 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 Allocated as follows: Arla Foods amba's share of profit for the year Non-controlling interests Total 1.2 1.2 1.3 1.3 3.3 1.2 4.2 4.2 5.1 -1,764 -459 113 -121 51 -1,771 -439 162 -131 60 600 529 1,079 -479 600 1,001 -472 529 135 -280 455 -56 399 380 19 399 120 -200 449 -49 400 382 18 400 Develop- ment -1% -2% 5% 0% 5% -30% -8% -15% 13% 8% 1% 13% 13% 40% 1% 14% 0% -1% 6% 0% (EUR million) Profit for the year Note 2023 399 2022 400 Other comprehensive income Items that will not be reclassified to the income statement: Remeasurements of defined benefit schemes Tax on remeasurements of defined benefit schemes Non-recyclable OCI from joint ventures and associates Items that may be reclassified subsequently to the income statement: Value adjustments of hedging instruments Fair value adjustment of certain financial assets Foreign currency translation Tax on items that may be reclassified to the income statement Other comprehensive income, net of tax 4.7 4.4 -19 4 -3 -141 -2 -47 9 -199 -1 2 - 225 -3 -48 -19 156 Total comprehensive income 200 556 Allocated as follows: Arla Foods amba's share Non-controlling interests Total 181 19 200 538 18 556 Financial comments Comprehensive income consists of real- ised profit for the year and other value adjustments that have yet to be realised and are accounted for directly in equity. Profit for the year amounted to EUR 399 million (2022: EUR 400 million) and other comprehensive income amounted to EUR -199 million (2022: EUR 156 million). Other comprehensive income was pri- marily unrealised value adjustments on hedging instruments of EUR -141 mil- lion and adjustments related to foreign currency translation of EUR -47 million. ARLA'S ANNUAL REPORT 2023 PAGE 88 I. II. CONSOLIDATED FINANCIAL STATEMENTS III. Primary statements / Income statement Comprehensive income Profit appropriation Balance sheet Equity Cash flow / Notes PROFIT APPROPRIATION (EUR million) Profit for the year Non-controlling interests Arla Foods amba's share of profit for the year Profit appropriation: Supplementary payment for milk Interest on contributed individual capital Total supplementary payment Transferred to equity: Common capital (reserve for special purposes) Individual capital (contributed individual capital) Total transferred to equity Appropriated profit 2023 399 -19 380 252 18 270 69 41 110 380 2022 400 -18 382 260 9 269 74 39 113 382 Financial comments The supplementary payment for 2023 was EUR 270 million, including interest (2022: EUR 269 million). This corre- sponded to 2.07 EUR-cent/kg of owner milk (2022: 2.15 EUR-cent/kg). Contrib- uted individual capital carried interest of 5.6% in 2023, corresponding to EUR 18 million. The Board of Directors approved an interim supplementary pay- ment of EUR 63 million based on the first six months of owner milk deliveries. The remaining amount, corresponding to EUR 207 million, will be paid out in March 2024 subject to approval of the annual report by the Board of Repre- sentatives. Arla's retainment policy prescribes a maximum of 1.00 EUR-cent/kg of owner milk minus interest on contributed indi- vidual capital to be retained. In 2023, this equalled a retainment of 0.84 EUR- cent/kg of owner milk (2022: 0.92 EUR- cent/kg), corresponding to EUR 110 million (2022: EUR 113 million). Accord- ing to the retainment policy the retained earnings must be split 1/3 on individual capital (contributed individual capital) and 2/3 on common capital (reserve ARLA'S ANNUAL REPORT 2023 for special purposes). The amount allo- cated to common capital is reduced by EUR 18 million corresponding to the interest paid out in connection with the supplementary payment. In addition, the contributed individual capital was adjusted for amounts paid out to mem- bers who reached a ceiling of 7.8 EUR- cent of individual capital per kg of owner milk. PROFIT FOR THE YEAR 2.9 EUR-cent/kg RETAINMENT 0.84 EUR-cent/kg 380 mEUR 110 mEUR STANDARD PRE-PAID MILK PRICE 44.1 EUR-cent/kg Individual capital Common capital 0.31 0.53 41 69 PERFORMANCE PRICE* SUPPLEMENTARY PAYMENT 2.07 EUR-cent/kg Supplementary payment Interest 270 mEUR 1.93 0.14 252 18 47.0 EUR-cent/kg Supplementary payment for 2023 (EUR-cent/kg) Supplementary payment Half-year supplemen- tary payment in 2023 Interest March 2024 Final settlement, March 2024 * Please refer to Note 1.4.1 for further information about the performance price. PAGE 89 I. II. CONSOLIDATED FINANCIAL STATEMENTS III. Primary statements / Income statement Comprehensive income Profit appropriation Balance sheet Equity Cash flow / Notes BALANCE SHEET (EUR million) 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 Note 2023 2022 Develop- ment 3.1 3.2 3.3 5.1 4.7 2.1 2.1 4.5 2.2 4.5 4.1 1,010 3,149 560 23 21 25 954 3,031 565 22 16 23 4,788 4,611 1,384 1,145 132 309 403 138 1,772 1,267 239 319 432 106 3,511 4,135 6% 4% -1% 5% 31% 9% 4% -22% -10% -45% -3% -7% 30% -15% Total assets 8,299 8,746 -5% (EUR million) Equity and liabilities Equity Common capital Individual capital Other equity accounts Supplementary payment to owners 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 payables and other payables Provisions Derivatives Other current liabilities Total current liabilities Total liabilities Total equity and liabilities Note 2023 2022 Develop- ment 2,211 557 13 207 2,988 64 3,052 2,150 540 203 208 3,101 67 3,168 167 31 83 2,369 161 28 86 2,640 2,650 2,915 803 1,425 20 43 306 709 1,597 20 36 301 2,597 2,663 5,247 5,578 8,299 8,746 3% 3% -94% 0% -4% -4% -4% 4% 11% -3% -10% -9% 13% -11% 0% 19% 2% -2% -6% -5% 4.7 5.2 5.1 4.3 4.3 2.1 5.2 4.5 2.2 ARLA'S ANNUAL REPORT 2023 PAGE 90 I. II. CONSOLIDATED FINANCIAL STATEMENTS Primary statements / Income statement Comprehensive income Profit appropriation Balance sheet Equity Cash flow / Notes EQUITY (EUR million) Equity at 1 January 2023 Profit for the year Other comprehensive income Total comprehensive income Transactions with owners Transactions with non-controlling interests Half-year supplementary payment Supplementary payment regarding 2022 Foreign currency translation adjustments Total transactions with owners Equity at 31 December 2023 Equity at 1 January 2022 Profit for the year Other comprehensive income Total comprehensive income Transactions with owners Transactions with non-controlling interests Half-year supplementary payment Supplementary payment regarding 2021 Foreign currency translation adjustments Total transactions with owners Equity at 31 December 2022 ARLA'S ANNUAL REPORT 2023 Common capital Individual capital Other equity accounts Capital account Reserve for special purposes 903 1,247 - -9 -9 1 -5 - - 5 1 69 - 69 - - - - - - 895 1,316 889 1,173 - -1 -1 2 - - - 13 15 74 - 74 - - - - - - 903 1,247 Contributed individual capital Delivery- based owner certificates Injected individual capital 348 55 137 41 - 41 -17 - - - - -17 372 - - - -4 - - - - -4 51 - - - -5 - - - 2 -3 134 334 61 147 39 - 39 -15 - - - -10 -25 348 - - - -5 - - - -1 -6 55 - - - -4 - - - -6 -10 137 Total 2,150 69 -9 60 1 -5 - - 5 1 2,211 2,062 74 -1 73 2 - - - 13 15 2,150 Total 540 41 - 41 -26 - - - 2 -24 557 542 39 - 39 -24 - - - -17 -41 540 Reserve for value adjustment of hedging instruments Reserve for fair value through OCI Reserve for foreign exchange adjustments Suppl. payment Total Total Total equity Equity attributable to the own- ers of Arla Foods amba Non- controlling interests 211 - -141 -141 - - - - - - 70 -14 - 225 225 - - - - - - 211 5 - -2 -2 - - - - - - 3 8 - -3 -3 - - - - - - 5 -13 - -47 -47 - - - - - - -60 52 - -65 -65 - - - - - - -13 203 - -190 -190 - - - - - - 13 46 - 157 157 - - - - - - 203 208 3,101 270 - 270 - - -63 -201 -7 -271 380 -199 181 -25 -5 -63 -201 - -294 207 2,988 207 2,857 269 - 269 - - -61 -211 4 -268 382 156 538 -22 - -61 -211 - -294 208 3,101 67 19 - 19 - -17 - - -5 -22 64 53 18 - 18 - -11 - - 7 -4 67 III. Total equity 3,168 399 -199 200 -25 -22 -63 -201 -5 -316 3,052 2,910 400 156 556 -22 -11 -61 -211 7 -298 3,168 PAGE 91 I. II. CONSOLIDATED FINANCIAL STATEMENTS III. Primary statements / Income statement Comprehensive income Profit appropriation Balance sheet Equity Cash flow / Notes Understanding equity Equity accounts regulated by the Arti- cles of Association can be divided into three main categories: common capital, individual capital and other equity accounts. The characteristics of each equity category are explained below. Common capital Common capital is by nature unallo- cated to individual members and con- sists of the capital account and the re- serve for special purposes. The capital account represents a strong foundation for the cooperative's equity, as the non- impairment clause, described in the accounting policies below, ensures that the account cannot be used for pay- ments to owners. The reserve for special purposes is an account that in extraordi- nary situations can be used to compen- sate owners for losses or impairment 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 equity instruments allocated to each owner based on their delivered milk volumes. Individual capi- tal consists of contributed individual capital, delivery-based owner certifi- cates and injected individual capital. Amounts registered to these accounts will, subject to approval by the Board of Representatives, be paid out if owners leave the cooperative. Interest is ARLA'S ANNUAL REPORT 2023 credited the contributed individual capi- tal and disbursed with the supplemen- tary payment. Other equity accounts Other equity accounts include accounts prescribed by IFRS. These include re- serves for value adjustments of hedging instruments, the reserve for fair value adjustments of certain financial assets and the reserve for foreign currency translation adjustments. Supplementary payment The account for proposed supplemen- tary payment represents the transac- tions of supplementary payments in the year, and the balance represents the amount to be paid out following the ap- proval of the annual report. Non-controlling interests Non-controlling interests represent the share of group equity attributable to holders of non-controlling interests in group companies. Financial comments Equity decreased by EUR 116 million in 2023 and totalled EUR 3,052 million at 31 December 2023 (2022: EUR 3,168 million). The equity share was 36%, cal- culated as equity excluding non-control- ling interests of EUR 2,988 million di- vided by total assets of EUR 8,299 mil- lion. Comprehensive income Profit for the year amounted to EUR 399 million (2022: EUR 400 million), and other comprehensive income amounted to EUR -199 million (2022: EUR 156 million) . Other comprehensive income included income and expenses as well as gains and losses that are ex- cluded from the income statement and not realised at the balance sheet date. Other comprehensive income of EUR - 199 million was due to negative value adjustments on hedging instruments, negative value adjustments on net as- sets measured in foreign currencies and remeasurement of pension assets and li- abilities. Transactions with farmer owners The Board of Directors decided to pay out an interim supplementary payment of EUR 63 million for milk deliveries in the first six months of the year. An addi- tional supplementary payment of EUR 207 million was proposed to be paid subject to the Board of Representatives' approval of the annual report. In total this is a supplementary payment of EUR 270 million for the year, which in- cludes interest on contributed individual capital. A supplementary payment related to 2022 totalling EUR 201 million was paid out in March 2023. Other transactions with farmer owners amounted to net EUR 25 million. This consisted of EUR 27 million paid out to owners resigning or Development in equity (EUR million) Total equity 1 January 2023 Profit for the year Other comprehensive income Supplementary payment related to 2022 Other transactions with owners Half-year supplementary payment Other equity adjustments Total equity 31 December 2023 retiring from the cooperative and an amount of EUR 2 million relating to pay- ments from new members. In 2024, it is expected that EUR 28 mil- lion will be paid to owners resigning or retiring, subject to approval by the Board of Representatives. Other equity adjustments Other equity adjustments amounted to EUR -27 million (2022: EUR -4 million), specified as transactions with non-con- trolling interests of EUR -22 million and foreign exchange rate adjustments of EUR -5 million. Accounting policies Below we describe how our Articles of Association and IFRS regulations are re- flected in our accounting policies. Common capital Recognised in the capital account are technical items such as remeasurement of defined benefit pension schemes, ef- fects from disposals and acquisitions of non-controlling interests in subsidiaries and exchange rate differences in equity instruments issued to owners. Further- more, the capital account is impacted by agreed contributions from new owners of the cooperative. PAGE 92 I. II. CONSOLIDATED FINANCIAL STATEMENTS III. Primary statements / Income statement Comprehensive income Profit appropriation Balance sheet Equity Cash flow / Notes Recognised in the reserve for special purposes is the annual profit appropria- tion to common capital. It may, upon the Board of Directors' proposal, be applied by the Board of Representatives for the full or partial offsetting of material extraordinary losses or impairment in accordance with article 20.1(iii) of the Articles of Association. Individual capital Individual capital instruments are regulated in article 20 of the Articles of Association and the general member- ship terms. Equity instruments issued as contrib- uted individual capital relate to amounts transferred as part of the annual profit appropriation. The individual balances carry interest at CIBOR 12 months + 1.5%, which is approved and paid to- gether with the supplementary payment in connection with the annual profit appropriation. Delivery-based owner certificates are eq- uity instruments issued to Danish and Swedish owners until 2010 when these instruments ceased. Injected individual capital is equity instruments issued in connection with cooperative mergers and when new owners join the cooperative. Balances on delivery-based owner certif- icates and injected individual capital in- struments carry no interest. Balances on contributed individual capi- tal, delivery-based owner certificates and injected individual capital can be paid out over three years upon termina- tion of the membership of 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 regis- tered. Foreign currency translation ad- justments are calculated annually and the effect is transferred to the capital account. Proposed supplementary payment to owners is recognised separately in eq- uity until approved by the Board of Rep- resentatives. Other equity accounts Reserve for value adjustments of hedg- ing instruments comprises the fair value adjustment of derivatives 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 comprises the fair value ad- justments of mortgage credit bonds classified as financial assets measured at fair value through other comprehensive income. Reserve for foreign currency translation adjustments comprises foreign currency translation differences arising during the translation of the financial statements of foreign companies, including value ad- justments relating to assets and liabili- ties that constitute part of the group's net investment and value adjustments relating to hedging transactions secur- ing the group's net investment. Non-impairment clause Under the Articles of Association, no payment may be made by Arla Foods amba to owners which impairs the sum of the capital account and equity ac- counts prescribed by law and IFRS. The non-impairment clause is assessed on the basis of the most recent annual re- port presented under IFRS. Individual capital and the reserve for special pur- poses are not covered by the non-im- pairment clause. No pay-out of individual capital can be made without retainment of a corre- sponding amount in either the coopera- tive's unallocated equity, the individual capital accounts or the reserve for spe- cial purposes as specified in article 20.1.(i), (ii) and (iii) of the Articles of Association. 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 is recognised as part of the consolidated results and equity, respec- tively, but is listed separately. On initial recognition, non-controlling interests are measured at either the fair value of the equity interest or the pro- portional share of the fair value of the acquired companies' identified assets, liabilities and contingent liabilities. The measurement of non-controlling inter- ests is selected on a transactional basis. Milk payment to owners The on-account settlement of owner milk is recognised as a production cost in the income statement. The supplementary payment is based on the results for the year as part of the profit appropriation. The supplementary payment is recognised as a reserve in the equity statement until approved by the Board of Representatives, based on a recommendation by the Board of Directors. The supplementary payment is settled as an interim supplementary payment based on the first six months of milk deliveries, and a final supplementary payment at year-end. The interim sup- plementary payment in the year was recognised in equity. ARLA'S ANNUAL REPORT 2023 PAGE 93 I. II. CONSOLIDATED FINANCIAL STATEMENTS III. Primary statements / Income statement Comprehensive income Profit appropriation Balance sheet Equity Cash flow / Notes CASH FLOW (EUR million) EBITDA Reversal of share of profit in joint ventures and associates Reversal of other operating items without cash impact Change in net working capital Change in other receivables and other current liabilities Dividends received, joint ventures and associates Interest paid Interest received Taxes paid Cash flow from operating activities Investment in intangible assets Investment in property, plant and equipment Sale of property, plant and equipment Operating investing activities Acquisition of financial assets Sale of financial assets Acquisition of enterprises Sale of enterprises Financial investing activities Note 3.3 2.1 3.1 3.2 3.2 3.4 2023 1,079 -51 -54 320 -23 18 -145 55 -48 1,151 -68 -445 6 -507 -18 29 -26 3 -12 2022 1,001 -60 21 -707 11 15 -67 23 -53 184 -81 -373 13 -441 -16 17 -11 8 -2 Cash flow from investing activities -519 -443 (EUR million) Half-year supplementary payment Supplementary payment regarding the previous financial year Transactions with owners Transactions with non-controlling interests New loans obtained Other changes in loans Payment of lease debt Payment to pension plans Cash flow from financing activities Net cash flow Cash and cash equivalents at 1 January Net cash flow for the year Exchange rate adjustment of cash funds Cash and cash equivalents at 31 December Note 4.3.c 4.3.c 4.3.c 4.3.c 2023 -63 -201 -25 -13 777 -967 -78 -22 -592 40 106 40 -8 138 2022 -61 -211 -22 -11 810 -143 -71 -22 269 10 97 10 -1 106 (EUR million) Note 2023 2022 Free operating cash flow Cash flow from operating activities Cash flow from operating investing activities Free operating cash flow Free cash flow Cash flow from operating activities Cash flow from investing activities Free cash flow 1,151 -507 644 1,151 -519 632 184 -441 -257 184 -443 -259 ARLA'S ANNUAL REPORT 2023 PAGE 94 I. II. CONSOLIDATED FINANCIAL STATEMENTS III. Primary statements / Income statement Comprehensive income Profit appropriation Balance sheet Equity Cash flow / Notes Financial comments Cash flow from operating activities increased to EUR 1,151 million (2022: EUR 184 million), primarily driven by changes in working capital positions. The trend towards a normalisation of milk prices in 2023 on the back of the very unusual high level at the end of 2022 meant that the adverse effect on funds tied up in net working capital posi- tions from last year was partly released during 2023. The release of net working capital values during 2023 contributed to a positive cash flow of EUR 320 mil- lion (2022: EUR -707 million). In addi- tion, cash flow from operating activities improved due to a higher EBITDA, partly offset by higher paid interest expenses. The net cash flow from investing activi- ties amounted to EUR -519 million (2022: EUR -443 million). CAPEX invest- ments amounted to EUR 445 million (2022: EUR 373 million), where the investments in milk-based beverages capacity in Esbjerg, Denmark, and the growth of Arla Foods Ingredients contin- ued. Other investments were primarily Illustration of cash flow (EUR million) production capacities, including the investment in butter capacity in Holstebro, Denmark. Investments in intangible assets amounted to EUR 68 million (2022: EUR 81 million), consisting primarily of good- will from the MV Ingredients Ltd. invest- ment, and the continued general up- grade of Arla's SAP platform. The effect of financial investing activi- ties was net EUR -12 million (2022: EUR -2 million) and related to proceeds paid and received from various activities, the most significant being the acquisition of the shares in MV Ingredients Ltd. The cash flow from financing activities was EUR -592 million (2022: EUR 269 million), comprising transactions with owners and the effect of funding activi- ties, including cash management. Transactions with owners constituted a negative cash flow of EUR 289 million, specified as an interim supplementary payment of EUR 63 million, a supple- mentary payment regarding 2022 of EUR 201 million and net payment of individual capital of EUR 25 million. Transactions with non-controlling inter- ests amounted to EUR -13 million (2022: EUR -11 million). The net cash flow from funding activities was EUR -290 million, consisting of net repayment of loans of EUR -190 million and other funding activities of net EUR - 100 million. Please refer to Note 4.3 for more details. Cash and cash equivalents at 31 Decem- ber 2023 amounted to EUR 138 million (2022: EUR 106 million). A D T B E I l a t i p a c g n k r o w i t e N d n a s t n e m y a p r e h t O w o l f h s a c g n i t a r e p o n o t c a p m i n a h t i w s t n e m t s u d a j m o r f w o l f h s a C s e i t i v i t c a g n i t a r e p o s e i t i v i t c a g n i t s e v n I w o l f h s a c e e r F o t s t n e m y a p d n a s r e b m e m g n v a e i l s t n e m y a p y r a t n e m e p p u S l h t i w s n o i t c a s n a r T s t s e r e t n i g n i l l o r t n o c - n o n -290 s e i t i v i t c a i g n c n a n i f r e h t O h s a c n i e s a e r c n I ARLA'S ANNUAL REPORT 2023 PAGE 95 I. II. CONSOLIDATED FINANCIAL STATEMENTS III. Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / NOTES INTRODUCTION Basis for preparation The consolidated financial statements are based on the group's monthly reporting procedures. Group entities are required to report using standard accounting principles in accordance with the IFRS Accounting Standards as adopted by the EU (IFRS). The consolidated financial statements are prepared on a going concern basis. The group's general accounting principles are disclosed in Note 5.7, while accounting policies for the respec- tive areas are explained in the relevant note sections. In response to the Guidelines on Alter- native Performance Measures (APMs) issued by the European Securities and Markets Authority (ESMA), we have pro- vided additional information on the APMs used by the group. These APMs, and in particular the performance price, are deemed critical to understanding the financial performance and financial position of the group. As they are not defined by IFRS, they may not be directly comparable with other companies that use similar measures. Definitions are provided in the Glossary and supported by calculations in Note 1.4. Applying materiality Our focus is to present information that is considered of material importance to our stakeholders in a simple and struc- tured way. Considering the potential future impact of strategic risks When preparing the consolidated finan- cial statements, identified strategic risks were considered. In addition to the go- ing concern assumption applied, market and regulatory risks, including sustaina- bility-related risks, were considered. On top of a potential direct impact on Arla's performance, these risks could poten- tially also negatively impact future milk volumes delivered by the owners of Arla Foods amba and thereby indirectly im- pact the future value in use of certain parts of the asset base. These risks are monitored closely and no material impairment losses were identified. The assessment of risk and potential impact on future performance is inherently judgemental, and different conclusions could materialise in the future. Please refer to page 25-27 and 43-44 for more details on strategic risks. sales in USD or USD-related currencies. The group's activities in Argentina re- lated to AFI are reported using USD as the functional currency. Items denomi- nated in ARS were negatively impacted by a devaluation in December 2023. Exchange rate losses related to the de- valuation of ARS, BDT and NGN totalled EUR 93 million for the group. Currency exposure The group's financial position is signifi- cantly exposed to currencies, both due to transactions conducted in currencies other than the EUR and due to the trans- lation of financial reporting from entities not part of the euro zone. The most sig- nificant exposure relates to financial re- porting from entities operating in GBP and SEK, and to transactions relating to Please refer to page 27 for more details on currencies as part of strategic risk and to Note 4.1.2 on currency risks. Special focus areas for 2023 Comparability The group's activity level is normally determined by the volume of milk deliv- ered by the owners and by the success NOTE 1 REVENUE AND COSTS NOTE 2 NET WORKING CAPITAL NOTE 3 CAPITAL EMPLOYED NOTE 4 FUNDING NOTE 5 ACCOUNTING POLICIES Details on the group's performance and profitability. Development and composition of the group's inventory and trade balances. Details on production capacity, intangible assets and financial investments. Details on funding of the group's activities. The group's general accounting princi- ples and accounting policies. Read more on page 99 Read more on page 105 Read more on page 108 Read more on page 116 Read more on page 136 PAGE 96 The following sections provide additional disclosures supplementing the primary financial statements. ARLA'S ANNUAL REPORT 2023 I. II. CONSOLIDATED FINANCIAL STATEMENTS III. Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / INTRODUCTION TO NOTES (CONTINUED) of moving milk volumes into branded positions and to international markets. 2023 was yet another very unusual year with general macroeconomic uncer- tainty. The record high commodity prices of milk, especially in the second half of 2022, dropped rapidly in the first half of 2023. Despite the volatile market con- ditions, revenue for 2023 amounting to EUR 13,674 million was only 1% lower than the record high level from last year. The high inflationary pressure from 2022 eased during the initial months of 2023 but remained on a high level com- pared to previous years, impacting the level of operational costs such as sala- ries, packaging, additives and consuma- bles. Lower milk costs paid to farmers were therefore partly offset by increased costs within production. In addition to this, the high prices paid to farmers, especially in the second half of 2022, for milk used in the production of products sold in the first half of 2023 had a significant negative impact on the cost of goods sold compared to last year. ARLA'S ANNUAL REPORT 2023 The performance price for 2023 totalled 47.0 EUR-cent/kg of owner milk, repre- senting a reduction of 14.7% compared to last year. The continued volatility in milk prices also impacted net working capital and therefore cash flow. Cash flow from op- erating activities increased to EUR 1,151 million (2022: EUR 184 million). The trend towards a normalisation of milk prices on the back of the very unu- sual high level at the end of 2022 meant that the adverse effect on funds tied up in net working capital positions from last year was partly released during 2023. This reduced net interest-bearing debt and leverage landed at 2.6, safely below our target range of 2.8 to 3.4. The volatility experienced in the second half of 2022 and continuing during 2023 makes comparison with previous years difficult. As uncertainty continues into 2024, predictability is still difficult and stakeholders should be careful about using reported results as projec- tions for the future. Valuation of inventory Due to the macroeconomic volatility and the related effect on commodity prices, the valuation of individual cost components (such as milk-based com- ponents, additives, packaging, energy etc.) in our standard cost models was frequently updated throughout 2023 and thoroughly reviewed at 31 Decem- ber 2023. The conversion from standard cost to actual cost at the time of production for the individual inventory categories was correspondingly carefully assessed. Furthermore, net realisable value was assessed based on the price develop- ment for especially milk commodity products at the end of the year. Please refer to Note 2.1 Inventory for more details. Valuation of certain assets and liabilities based on a projection of expected future cash flow Interest rates remained at the high level from last year. The valuation of goodwill, gross pension liabilities and interest hedge instruments was therefore also in 2023 carefully assessed. Headroom related to goodwill in- creased, primarily due to improvements in expected future cash flow. The value of interest hedge instruments decreased by EUR 52 million as a result of lower long-term interest levels and utilisation of interest hedges during the year, while pension liabilities remained at the same level as last year. Please refer to Note 3.1 Goodwill, Note 4.4 Hedge instruments and Note 4.7 Pension liabilities for more details. Sustainability Incentive model recognised as part of milk costs A new Incentive model for owners was introduced during the summer of 2023, allowing up to EUR 500 million to be re- distributed among farmers depending on sustainability initiatives on farms. This is one of the key levers to achieve the CO2e savings on farms and is ex- pected to have a positive effect on sales and the value of our brands. In 2023, a total of EUR 226 million of the cost of owner milk was paid out re- lated to Climate Checks and the new Sustainability Incentive model intro- duced in July. The amount was included in the cost of owner milk. Read more in Note 1.2 Operational costs. Classification of power purchase agreements To support the reduction of scope 1+2 CO2e emissions, Arla has entered into 11 power purchase agreements (PPAs) with a contractual annual energy vol- ume of 446 GWh. Solar energy accounts for 287 GWh and wind energy accounts for 159 GWh. The first two agreements went live in 2023. Through a structured process, the ac- counting classification of the individual contracts was rigorously assessed based on the latest available guidance and involvement of external expertise. All contracts are for the purpose of own use and classified as executory supplier contracts. System (ETS) related to farm emis- sions. A carbon tax would increase pro- duction costs and could potentially force farmers to reduce production or leave the business. Please refer to Note 4.1.4 Commodity price risk and Note 5.5 Contractual com- mitments, contingent assets and liabili- ties. · Extreme weather events like heat waves, draughts or floods which can have a negative impact on crop yields and cows' productivity. · Land use regulations to reach EU cli- mate targets of converting agriculture to forest land which would potentially reduce the production of feed for cows and shrink herd numbers on farms. Climate-related risks in the consolidated financial statements Climate-related risks are high on the agenda in Arla. The management has as- sessed the impact on the consolidated financial statements from such risks and initiatives taken or to be taken towards addressing them. There was no material impact on the consolidated financial statements 2023 from climate changes or the actions taken against climate- related risks. Potential future impacts were also evaluated. Read more on pages 43-44. Points of considerations are described below. Risk of decline in milk volumes Climate-related risks that can potentially reduce milk volumes in the future are: · The Danish Government’s commit- ment to introducing a carbon tax on methane and nitrous oxide emissions from agricultural activities. Also, the EU is discussing an Emissions Trading PAGE 97 I. II. CONSOLIDATED FINANCIAL STATEMENTS III. Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / other factors. By nature, these are asso- ciated with uncertainty and unpredicta- bility which can have a significant effect on the amounts recognised in the con- solidated financial statements. The most significant accounting estimates and judgements are listed below with refer- ence to further comments in the notes. INTRODUCTION TO NOTES (CONTINUED) Risk of increased production costs Climate-related risks that could poten- tially affect the future of dairy opera- tions are: · Regulations to reduce emissions in production. Denmark has proposed an emission tax on industry operations. Arla's operations will be impacted by this. Other countries will potentially follow Denmark and introduce similar taxes, or employ other regulatory tools to reduce emissions in the future. Dairy production would be more ex- pensive compared to countries where such initiatives are not implemented, which would harm Arla's competitive- ness. We are constantly lowering CO2 emissions from operations. This is enforced by the Future 26 strategy's science-based targets of lowering scope 1 and 2 CO2 emissions by 63% by 2030. · Changes in consumer behaviour driven by costumers pushing for more sustainable products increase the need for sustainable dairy production to stay competitive. Risk of impairment of production capacity As a consequence of the above climate- related risks, Arla could face impairment of its production capacity due to: · Equipment becoming outdated in the sustainability transformation. · Excess production capacity if milk vol- umes and operations decline. The potential consequences of the above were considered as part of our impairment test conducted during 2023 and our assessment of value in use for property, plant and equipment. Non-cur- rent assets in the balance sheet were not affected by such impairment in 2023. Sustainability is now an integral part of all investments in property, plant and equipment which ensures future investments to address the risks identi- fied. Significant accounting estimates and judgements Preparing the group's consolidated financial statements requires manage- ment to apply accounting estimates and judgements that affect the recognition and measurement of the group's assets, liabilities, income and expenses. The es- timates and judgements are based on historical experience and Significant accounting estimates and judgements Measurement of revenue and rebates Valuation of inventory Measurement of trade receivables Valuation of goodwill Classification of investments Note 1.1 2.1 2.1 3.1 3.3 4.1.4.a Classification of power purchase agreements 4.7 5.1 Valuation of pension plans Tax Estimate/ Judgement Estimate Estimate Estimate Estimate Judgement Judgement Estimate Estimate ARLA'S ANNUAL REPORT 2023 PAGE 98 I. II. CONSOLIDATED FINANCIAL STATEMENTS Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / NOTE 1. REVENUE AND COSTS 1.1 REVENUE Financial comments Revenue decreased by 0.9% to EUR 13,674 million (2022: EUR 13,793 mil- lion). Prices contributed negatively to revenue by EUR -206 million, mainly driven by Global Industry Sales and AFI, but partly offset by higher commercial pricing. Branded volumes were under pressure in 2023 due to high inflation and ele- vated dairy prices. However, consumers started returning to branded products in the second half of the year. The result was a slight decline in strategic branded sales volumes of 0.7% (2022: -3.2%). This was offset by higher volumes in Global Industry Sales, resulting in a posi- tive net volume impact of EUR 429 mil- lion. Europe is Arla's largest commercial seg- ment, comprising 58.4% of total reve- nue (2022: 56.3%). Revenue in Europe increased to EUR 7,984 million (2022: EUR 7,771 million). Development in revenue (EUR million) 2022 Sales prices Volume/mix Currency 2023 ARLA'S ANNUAL REPORT 2023 Table 1.1.a Revenue split by country* (EUR million) United Kingdom Germany Sweden Denmark Netherlands Saudi Arabia Finland USA UAE China Other** Total III. Share of revenue in 2023 25% 12% 12% 10% 6% 4% 3% 2% 2% 2% 22% 2023 3.441 1.661 1.645 1.319 873 499 388 302 277 270 2.999 2022 3.474 1.737 1.717 1.306 775 468 337 278 230 328 3.143 13.674 13.793 100% *The figures in this table represents total revenue by country and includes all sales in the countries, irrespective of organisational structure. Therefore, the figures cannot be compared to the commercial segment review in the management review. **Other countries include, among others, Belgium, Canada, Oman, Spain, France and Australia Table 1.1.b - Revenue split by brand (EUR million) Arla Lurpak Puck Castello Milk based beverage Other supported brands Strategic branded revenue Arla Foods Ingredients Global Industry Sales, private label and other Total 2023 3,618 772 529 246 376 834 6,375 963 6,336 13,674 2022 3,702 750 504 239 353 746 6,294 1,028 6,471 13,793 PAGE 99 I. II. CONSOLIDATED FINANCIAL STATEMENTS III. Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / in the European commercial segment (2022: 53.9%). up 85.7% of total sales in International (2022: 85.4%). The International segment accounted for 18.1% of total revenue (2022: 17.7%). The revenue in International in- creased to EUR 2,471 million (2022: EUR 2,437 million), driven by branded volume growth, despite high prices and macroeconomic challenges in emerging markets such as inflation and devalua- tion of currencies. Branded sales made Arla Foods Ingredients accounted for 7.0% of total revenue (2022: 7.5%), amounting to EUR 963 million (2022: EUR 1,028 million). AFI maintained a high value-add share of 79.7% (2022: 80.4%). Global Industry Sales and other seg- ments represented 16.5% of total 1.1 REVENUE (CONTINUED) The increase was driven by higher prices and stable volumes. In Europe, strategic branded revenue declined by 1.3%, pri- marily driven by butter and spreadable product categories. Branded sales in- creased from EUR 4,183 million in 2022 to EUR 4,228 million in 2023, and accounted for 53.0% of total revenue Revenue split by commercial segment (EUR million) 2023 2022 7,984 7,771 2,471 2,437* 2,256 2,531 963 1,028 Europe International Arla Foods Ingredients Global Industry Sales and other sales *Excluding sales in Russia of EUR 26 million. ARLA'S ANNUAL REPORT 2023 revenue and decreased by 10.8% to EUR 2,256 million (2022: EUR 2,531 million). The development was primarily com- modity price driven. Arla’s revenue was negatively impacted by currency effects of EUR 342 million, primarily driven by lower SEK, GBP and USD related exchange rates. Accounting policies Revenue is recognised when a contract exists with a customer for the produc- tion and transfer of dairy products across various product categories and geographical regions. Revenue by com- mercial segment or market is based on the group's internal financial reporting practices. Revenue is recognised in the income statement when a performance obliga- tion is satisfied, at the price allocated to that performance obligation. This is de- fined 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 cus- tomers 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 pay- ments such as sales rebates, cash dis- counts, listing fees, promotions, VAT and duties. Contracts with customers can contain various types of discounts. His- torical 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 control of the product is trans- ferred to the customer, also taking into consideration the level of rebates. The vast majority of all contracts have short payment terms. Therefore, an ad- justment of the transaction price with regard to a financing component in the contracts with customers is not re- quired. Uncertainties and estimates Revenue, net of rebates, is recognised when goods are transferred to custom- ers. Estimates are applied when measur- ing accruals for rebates and other sales incentives. The majority of rebates are calculated based on terms agreed with the customer. For some customer rela- tionships, the final settlement of the rebate depends on future sales volumes, prices and other incentives. Therefore, there is an element of estimation and judgement in determining whether per- formance obligations are achieved. Esti- mates are based on historical experi- ence and forecasted future sales. PAGE 100 I. II. CONSOLIDATED FINANCIAL STATEMENTS Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / 1.2 OPERATIONAL COSTS Financial comments Operational costs amounted to EUR 13,117 million, which was a de- crease of 2% compared to last year. Lower milk costs paid to farmers were partly offset by increased production costs. In addition, the higher level of milk prices paid to farmers, especially in the second half of 2022, had a signifi- cant negative impact on the develop- ment of the cost of goods sold in 2023 compared to last year. Production costs decreased by 2% to EUR 10,894 million (2022: EUR 11,145 million). Excluding costs of raw milk, pro- duction costs increased to EUR 4,741 million (2022: EUR 3,965 million), repre- senting an increase of 19.6%. The in- crease was driven by inflation effects on production materials such as packaging, additives and consumables and higher costs related to salaries, partly offset by lower energy prices. Besides, the level of cost of goods sold was impacted nega- tively by the phasing effect related to products produced last year at a higher milk cost and sold during 2023. Sales and distribution costs decreased by 1% to EUR 1,764 million (2022: EUR 1,771 million). Administration costs increased by 5% to EUR 459 million (2022: EUR 439 mil- lion), mainly driven by an increase in staff costs. The volatility of the external environ- ment, especially the swings in raw milk availability, put pressure on our transfor- mation and efficiency programme, Fund our Future. However, for 2023 we achieved net savings of EUR 114 million of which EUR 89 million related to Development in operational costs (EUR million) Table 1.2.a Operational costs split by function and type (EUR million) Production costs Sales and distribution costs Administration costs Total Specification: Weighed-in raw milk Other production materials* Staff costs Transport costs Marketing costs Depreciation, amortisation and impairment Other costs** Total III. 2022 11,145 1,771 439 13,355 7,180 2,181 1,427 820 240 472 1,035 2023 10,894 1,764 459 13,117 6,153 2,884 1,511 795 262 479 1,033 13,117 13,355 *Other production materials includes packaging, additives, consumables, variable energy and effects of cost of goods sold related to changes in inventory **Other costs mainly includes maintenance, utilities and IT Table 1.2.b Weighed-in raw milk 2023 2022 Owner milk Other milk Total Mkg EUR million Mkg EUR million 13,058 816 13,874 5,751 402 6,153 12,815 963 13,778 6,661 519 7,180 Milk volumes have been restated from raw milk to standardised milk. Standardised milk with a composition of 3.4% protein and 4.2% fat is the generally used measure for weighed-in milk in Arla. Comparison numbers have been restated as well. 2022 Milk costs COGS from inventory and others Inflation Efficiency cost impact Currency 2023 ARLA'S ANNUAL REPORT 2023 PAGE 101 I. II. CONSOLIDATED FINANCIAL STATEMENTS Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / cooperative owners is recognised at pre- paid prices for the accounting period and therefore does not include the sup- plementary payment, which is classified as distributions to owners and recog- nised directly in equity. Sales and distribution costs Costs relating to sales staff, write-down of receivables, sponsorships, research and development, depreciation and im- pairment losses are recognised as sales and distribution costs. Sales and distri- bution costs also include marketing ex- penses relating to investment in the group’s brands such as the development of marketing campaigns, advertise- ments, exhibits and others. Administration costs Administration costs relate to manage- ment and administration, including administrative staff, office premises and office costs as well as depreciation and impairment. 1.2 OPERATIONAL COSTS (CONTINUED) operational costs, reducing our future cost base. Cost of raw milk The cost of raw milk decreased by 14.3% to EUR 6,153 million (2022: EUR 7,180 million). Owner milk Costs related to owner milk decreased by EUR 910 million due to a lower aver- age prepaid milk price. Arla's average prepaid milk price decreased to 44.1 EUR-cent/kg in 2023 (2022: 52.0 EUR- cent/kg), which constitutes a 15.2% decrease. In 2023, a total of EUR 226 million were paid out related to Climate Checks and the new Sustainability Incentive model introduced in July. The amount was in- cluded in the cost of owner milk. Other milk The cost of other milk decreased by EUR 117 million due to lower prices, and lower volume intake in the UK. Other milk consists of speciality milk and other contract milk acquired to meet local market demands. Staff costs and number of FTEs Staff costs increased by 5.9% to EUR 1,511 million (2022: EUR 1,427 million). ARLA'S ANNUAL REPORT 2023 Staff costs increased due to regular salary increases, additional FTEs in Denmark and the UK and continued in- sourcing of IT activities. The total num- ber of FTEs increased to 21,307 (2022: 20,907). Please refer to the ESG section, Note 1.2, for further details. Marketing spend The marketing spend increased by EUR 22 million to EUR 262 million (2022: EUR 240 million), driven by higher marketing spend to encourage sales, especially in the UK and China. Depreciation, amortisation and impairment Depreciation, amortisation and impair- ment were consistent with last year and amounted to EUR 479 million (2022: EUR 472 million). Accounting policies Production costs Production costs cover direct and indi- rect costs related to production, includ- ing volume movements in inventory and related inventory revaluation. Direct costs comprise purchase of milk from owners, inbound transport costs, pack- aging, additives, consumables, energy and variable salaries directly related to production. Indirect costs comprise other costs related to the production of goods, including depreciation and im- pairment losses on production equip- ment and other supply chain-related costs. The purchase of milk from Table 1.2.c Staff costs (EUR million) Wages, salaries and remuneration Pensions – defined contribution plans Pensions – defined benefit plans Other social security costs Total Staff costs relate to: Production costs Sales and distribution costs Administration costs Total Average number of full-time employees Table 1.2.d Depreciation, amortisation and impairment (EUR million) Intangible assets, amortisation Property, plant and equipment and RoU, depreciation Total Depreciation, amortisation and impairment relate to: Production costs Sales and distribution costs Administration costs Total III. 2022 1,239 88 3 97 1,427 800 412 215 2023 1,324 85 1 101 1,511 842 434 235 1,511 1,427 21,307 20,907 2023 62 417 479 346 60 73 479 2022 61 411 472 336 67 69 472 PAGE 102 I. II. CONSOLIDATED FINANCIAL STATEMENTS III. Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / 1.3 OTHER OPERATING INCOME AND COSTS Financial comments Other operating income decreased by 30% to EUR 113 million (2022: EUR 162 million). Income from the sale of excess electric- ity volumes from power production plants was EUR 30 million (2022: EUR 58 million). The reduction was due to lower market prices for electricity com- pared to last year. Remeasurement of our existing 50% share in MV Ingredients Ltd. following the acquisition of the remaining 50% share in MV Ingredients Ltd. in the UK led to a gain of EUR 22 million in 2023. Please refer to Note 3.4 for further details. Income from currency hedging instru- ments reclassified from OCI was EUR 18 million (2022: EUR 8 million). Please re- fer to Note 4.4 for further details. Gains on the disposal of intangible as- sets and property, plant and equipment were EUR 6 million (2022: EUR 11 million) following disposals in the UK and Saudi Arabia. Other items amounted to EUR 37 mil- lion (2022: EUR 13 million), mainly driven by EUR 8 million insurance com- pensation following a fire accident, and EUR 8 million following the termination of a rental agreement. Other operating costs decreased by 8% to EUR 121 million (2022: 131 EUR mil- lion). Costs of commodity hedging instru- ments reclassified from OCI were EUR 61 million (2022: a gain of EUR 72 Table 1.3 Other operating income and costs (EUR million) Sale of electricity Remeasurement gain of existing shares of MV Ingredient Ltd. Income from currency hedging instruments reclassified from OCI Gains on the disposal of intangible assets and property, plant and equipment Income from commodity hedging instruments reclassified from OCI Other income items 2023 2022 30 22 18 6 - 37 58 - 8 11 72 13 Other operating income 113 162 Costs of commodity hedging instruments reclassified from OCI Costs related to the sale of electricity Costs of currency hedging instruments reclassified from OCI Other cost items 61 27 15 18 - 32 76 23 Other operating costs 121 131 million), exclusively driven by energy hedging instruments. Please refer to Note 4.4 for further details. Costs related to the sale of electricity were EUR 27 million (2022: EUR 32 mil- lion) in line with the previous year. Costs of currency hedging instruments reclassified from OCI were EUR 15 mil- lion (2022: EUR 76 million). Please refer to Note 4.4 for further details. Other items amounted to EUR 18 mil- lion (2022: EUR 23 million) and were mainly driven by write-downs on non- dairy assets in the amount of EUR 5 mil- lion. Accounting policies Other operating income and costs con- sist of items outside the regular course of dairy business activities, including items such as gains and losses relating to the settlement of disputes, remeas- urement gains from step acquisitions of entities, net results from financial hedg- ing activities and net results from the production and sale of energy from our biogas plants. Furthermore, this item in- cludes gains and losses from the dis- posal of non-current assets and divest- ment of entities. ARLA'S ANNUAL REPORT 2023 PAGE 103 I. II. CONSOLIDATED FINANCIAL STATEMENTS III. Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / For 2023, the profit attributable to our farmer owners amounted to EUR 380 million (2022: EUR 382 million). This corresponded to 2.8% of revenue, or 2.9 EUR-cent/kg of milk delivered, and was distributed to the supplementary pay- ment and retainment as disclosed in the statement of profit appropriation. Accounting policies Profit share is a measure of profit rela- tive to revenue calculated as Arla Foods amba’s share of profit for the year di- vided by total revenue. Profit share is calculated as EUR 380 million divided by EUR 13,674 million and equalled 2.8% in 2023. 1.4 KEY PERFORMANCE INDICATORS The alternative performance measures disclosed in Note 1.4 are key perfor- mance indicators for the group. They are not IFRS requirements. 1.4.1 PERFORMANCE PRICE Financial comments Arla’s performance price is a key meas- ure of the overall performance, express- ing the value added to each kg of milk supplied by our farmer owners. The per- formance price is calculated as the standardised prepaid milk price included in production costs, plus Arla Foods amba’s share of profit attributable to farmer owners, divided by the weighed- in milk volume in 2023. The perfor- mance price was 47.0 EUR-cent/kg of owner milk, (2022: 55.1 EUR-cent/kg). 1.4.2 STRATEGIC BRANDED VOLUME-DRIVEN REVENUE GROWTH Financial comments Volume-driven revenue growth (VDRG) is defined as revenue growth derived from growth in volumes keeping prices constant. VDRG of strategic brands is a perfor- mance measure applied to support and understand the non-price revenue growth and performance of our branded business. Strategic branded VDRG decreased by 0.7% (2022: -3.2%). Sales of branded products were also in 2023 under pres- sure from high dairy pricing and infla- tion, however demand started returning in the second half of the year. Accounting policies Strategic branded volume-driven reve- nue growth (strategic branded VDRG) is a measure of the share of revenue growth relative to volumes. Volume-driven revenue is calculated by keeping prices fixed year on year. Strategic branded VDRG is calculated as the volume growth of EUR -46 million divided by total strategic branded reve- nue of EUR 6,375 million and equalled - 0.7% in 2023. 1.4.3 PROFIT SHARE Financial comments The profit share of Arla is targeted at 2.8-3.2% of revenue, calculated on the basis of the profit attributable to our farmer owners. Table 1.4.1 Performance price 2023 2022 EUR million Mkg. EUR- cent/kg EUR million Mkg. EUR- cent/kg 5,751 13,058 44.1 6,661 12,494 52.0 Owner milk (Standard milk (4.2% fat, 3.4% protein)) Arla Foods amba's share of profit for the year 380 2.9 382 Total 6,131 13,058 47.0 7,043 12,494 Table 1.4.2 Strategic branded volume driven revenue growth (EUR million) Strategic branded revenue last year Strategic branded VDRG Price and exchange rate adjustments Strategic branded revenue 2023 6,294 -46 127 6,375 3.1 55.1 2022 5,472 -176 998 6,294 Strategic branded volume driven revenue growth, % -0.7% -3.2% Table 1.4.3 Profit share (EUR million) Revenue Profit for the year Profit relating to non-controlling interests Profit attributable to farmer owners Profit share 2023 13,674 399 -19 380 2022 13,793 400 -18 382 2.8% 2.8% ARLA'S ANNUAL REPORT 2023 PAGE 104 I. II. CONSOLIDATED FINANCIAL STATEMENTS III. Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / Table 2.1.a Net working capital (EUR million) 1 January Cash flow Included in operating cash flow Non-cash flow M&A Write- downs Currency 31 Decem- ber NOTE 2. NET WORKING CAPITAL 2.1 NET WORKING CAPITAL Financial comments Net working capital decreased by EUR 338 million to EUR 1,104 million, (2022: EUR 1,442 million), representing a de- crease of 23% compared to last year. The decrease was driven by lower inven- tory, trade receivables positions and lower trade payables and other payables, including owner milk positions. Inventory Inventory decreased by 22% to EUR 1,384 million (2022: EUR 1,772 million). The decrease was driven by lower milk Development in net working capital (EUR million) 2023 Inventory Trade receivables Trade payables and other payables Total net working capital 2022 Inventory Trade receivables Trade payables and other payables Total net working capital Table 2.1.b Inventory (EUR million) Inventory before write-downs Write-downs Total inventory Raw materials and consumables Work in progress Finished goods and goods for resale Total inventory 1,772 1,267 -1,597 1,442 1,248 1,007 -1,445 810 -375 -117 172 -320 569 318 -180 707 2 4 -3 3 - - - - 10 2 - 12 -11 -4 - -15 -25 -11 3 -33 -34 -54 28 -60 2023 1,403 -19 1,384 307 380 697 1,384 1,145 -1,425 1,104 1,772 1,267 -1,597 1,442 2022 1,801 -29 1,772 401 622 749 1,384 1,772 Trade receivables Trade receivables decreased by 10% to EUR 1,145 million (2022: EUR 1,267 mil- lion). The development was driven by lower selling prices and negative cur- rency effects, partly offset by higher PAGE 105 1 January 2023 Inventory Trade receivables Trade payables and other payables excluding owner milk ARLA'S ANNUAL REPORT 2023 Owner milk Currency 31 December 2023 prices paid to our farmer owners, a de- crease in the prices of energy and utili- ties, partly offset by inflation in staff costs, packaging and ingredients, and to a lesser extent lower volumes. In addi- tion, the effect from currencies reduced the inventory value. Excluding currency effects, the carrying amount of inven- tory decreased by EUR 363 million. I. II. CONSOLIDATED FINANCIAL STATEMENTS Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / 2.1 NET WORKING CAPITAL (CONTINUED) (2022: EUR 1,597 million). A lower pre- paid milk price and lower inflation were the main reasons for the development. payables, including owner milk, decreased by EUR 169 million. volumes. Accordingly, the utilisation of trade receivables finance programmes decreased to EUR 267 million (2022: EUR 335 million). The group utilises these programmes to manage liquidity and reduce credit risk on trade receiva- bles. Managing credit risk exposure on trade receivables is guided by group-wide poli- cies. Credit limits are set based on the customer's financial position and current market conditions. The customer portfo- lio is diversified in terms of geography, in- dustry sector and customer size. In 2023, the group was not extraordinarily exposed to credit risk related to significant individ- ual customers, but to the general credit risk in the retail sector. Read more about credit risk in Note 4.1.5. Overdue above 30 days amounted to 6.6% of the trade receivables position (2022: 8.8%). Provision for expected losses was EUR 17 million (2022: EUR 19 million). Excluding currency effects, the carrying amount of trade receivables decreased by EUR 111 million. Trade payables and other payables Trade payables and other payables de- creased by 11% to EUR 1,425 million ARLA'S ANNUAL REPORT 2023 A number of Arla's strategic suppliers participate in supply chain finance pro- grammes, where the supply chain fi- nance provider and related financial in- stitutions act as a funding partner. When suppliers participate in these pro- grammes, 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. This is conditioned by Arla's recognition and approval of received goods or ser- vices and an irrevocable acceptance to pay the invoice at the due date via the funding partner. The arrangement of early payment is an exclusive transac- tion between the supplier and the sup- ply chain finance provider. Extended payment terms are not em- bedded in the programmes themselves, but agreed with vendors directly. The liquidity risk for Arla on termination of the programmes is limited. The pay- ment terms for suppliers participating in the programmes are no more than 180 days. Utilisation of supply chain finance programmes at year-end decreased by 16% to EUR 176 million (2022: EUR 210 million). Excluding currency effects, the carrying amount of trade payables and other Accounting policies Inventory Inventories are measured at the lower of cost or net realisable value, calculated on a first-in, first-out basis. The net real- isable value is established taking into account inventory marketability and an estimate of the selling price, less com- pletion costs and costs incurred to exe- cute the sale. The cost of raw materials, consumables and commercial goods includes the pur- chase price plus delivery costs. The pre- paid milk price to Arla's owners is used as the purchase price for owner milk. The cost of work in progress and manu- factured goods also includes an appro- priate share of production overheads, including depreciation, based on the normal operating capacity of the pro- duction 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 flows. III. 2023 1,162 -17 1,145 2022 1,286 -19 1,267 Table 2.1.c Trade receivables (EUR million) Trade receivables before provision for expected losses Provision for expected losses Total trade receivables Table 2.1.d Trade receivables age profile (EUR million) Not overdue Overdue by less than 30 days Overdue by between 30 and 89 days Overdue by more than 90 days Total trade receivables 2023 2022 Gross carrying amount Expected loss rate Gross carrying amount Expected loss rate 912 173 32 45 1,162 0% 1% 0% 33% 1,013 160 72 41 1,286 0% 0% 1% 44% Historically, experienced loss rates on balances not overdue or overdue by less than 30 days are below 1%. Net working capital (EUR million) Net working capital excluding owner milk Net working capital 1,000 823 2019 867 679 2020 810 2021 1,740 1,022 1,442 1,339 1,104 2022 2023 PAGE 106 I. II. CONSOLIDATED FINANCIAL STATEMENTS III. Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / example the number of days overdue, adjusted for significant negative devel- opments in certain geographical areas. The financial uncertainty associated with the provision for expected losses is usually considered to be limited. How- ever, if a customer's ability to pay were to deteriorate in the future, further write-downs may be necessary. Based on the macroeconomic volatility in 2023, expected losses were carefully assessed. Customer-specific bonuses are calcu- lated based on actual agreements with retailers, however some uncertainty ex- ists when estimating the exact amounts to be settled and the timing of these settlements. Finance programmes The classification of trade receivables finance programmes and supply chain finance programmes is subject to judge- ment. The utilisation of these pro- grammes is recognised in net working capital. 2.1 NET WORKING CAPITAL (CONTINUED) Expected losses are assessed for major individual receivables or in groups at portfolio level based on the receivables' age and maturity profile as well as his- torical records of losses. Calculated expected losses are adjusted for specific significant negative developments in geographical areas. Trade receivables are derecognised once the criteria for derecognition have been met and all substantial risk and rewards transferred. Trade payables and other payables Trade payables are measured at amor- tised cost, which usually corresponds to the invoiced amounts. The amounts payable to suppliers in- cluded in supply chain finance pro- grammes are classified as trade paya- bles in the balance sheet and in the cash flow statement as cash flow from work- ing capital. Uncertainties and estimates Inventory The group uses monthly standard costs to calculate inventory and revises all in- direct 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 ARLA'S ANNUAL REPORT 2023 component in the standard cost calcula- tion is the cost of raw milk from farmers. This is determined using the average prepaid milk price that matches the pro- duction date of inventory. Due to the macroeconomic volatility and the related effect on commodity prices, the valuation of individual cost components such as milk-based compo- nents, energy, packaging, consumables and utilities etc. in our standard cost models was frequently updated throughout 2023 and thoroughly as- sessed at 31 December 2023. Conversion from standard cost to reflect cost at the time of production for the in- dividual inventory categories was corre- spondingly assessed. Indirect production costs are calculated based on relevant assumptions with re- spect 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 mar- kets. Receivables Expected losses are based on a calcula- tion including several parameters, for 2.2 OTHER RECEIVABLES AND OTHER CURRENT LIABILITIES Financial comments Other receivables Other receivables decreased by EUR 10 million to EUR 309 million (2022: EUR 319 million). They mainly consist of VAT receivables, prepayments, income tax receivables and other items. Other items amounted to EUR 83 mil- lion (2022: EUR 113 million), mainly driven by insurance recoveries, various subsidies, disposal proceeds and other taxes. Other current liabilities Other current liabilities increased by EUR 5 million to EUR 306 million (2022: EUR 301 million). They mainly consist of employee-related accruals, income tax and VAT payables, accrued interests and other items. Employee-related accruals amounted to EUR 174 million (2022: EUR 156 mil- lion), mainly driven by holiday pay, salary and bonuses and related salary cost accruals. Other items amounted to EUR 64 mil- lion (2022: EUR 68 million), mainly driven by invoice financing payables within the framework of our finance programme. Accounting policies Other receivables and other current liabilities Other receivables and other current lia- bilities are measured at amortised cost usually corresponding to the nominal amount. Table 2.2 Other receivables and current liabilities (EUR million) VAT Prepayments Income tax Amounts owed by associates and joint ventures Accrued interest Other Other receivables Employee related liabilities Income tax VAT Accrued interest Deferred income Amounts owed to associates and joint ventures Other Other current liabilities 2023 125 55 21 20 5 83 309 174 23 17 12 9 7 64 306 2022 159 33 7 5 2 113 319 156 14 6 10 24 23 68 301 PAGE 107 I. II. CONSOLIDATED FINANCIAL STATEMENTS Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / NOTE 3. CAPITAL EMPLOYED 3.1 INTANGIBLE ASSETS AND GOODWILL Financial comments Intangible assets and goodwill Intangible assets and goodwill amounted to EUR 1,010 million, on par with last year. Goodwill The carrying amount of goodwill amounted to EUR 752 million (2022: EUR 702 million). Acquisitions during the year amounted to EUR 45 million and related to the acquisition of the remaining 50% share in MV Ingredients Ltd. from our joint venture partner. Please refer to table 3.1.b for a specification of goodwill. Licences and trademarks The carrying amount of licences and trademarks amounted to EUR 60 million (2022: EUR 66 million). The carrying ARLA'S ANNUAL REPORT 2023 amount primarily relates to the recogni- tion of trademarks from business combi- nations and includes Yeo Valley® and Svensk Mjölk®. The decrease in value was due to amortisation. The strategic brands Arla®, Lurpak®, Castello® and Puck® are internally gen- erated trademarks and are consequently not recognised in the balance sheet. Arla has the licence to manufacture, dis- tribute and market Starbucks™ premium ready-to-drink coffee beverages under a long-term strategic licence agreement. Similarly, Arla holds a long-term licence agreement on the Kraft™ branded cheese products in the MENA region. No values are recognised for these licence agreements. additional EUR 68 million. One of the key projects in 2023 was a go-live of the SAP S/4 Hana platform. Accounting policies Goodwill Goodwill represents the premium paid by Arla above the fair value of the net as- sets of an acquired company. On initial recognition, goodwill is recognised at cost. Goodwill is not amortised, but is subsequently measured at cost less any accumulated impairment. The carrying amount of goodwill is allocated to the group's cash-generating units that fol- low the management structure and in- ternal financial reporting. Cash-generat- ing units are the smallest group of as- sets which can generate independent cash inflows. IT and other development projects The carrying amount of IT and other de- velopment projects was EUR 198 million (2022: EUR 186 million). The group con- tinued to invest in IT projects with an Licences and trademarks Licences and trademarks are initially recognised at cost. The cost is subse- quently amortised on a straight-line Table 3.1.a Intangible assets and goodwill (EUR million) 2023 Cost at 1 January Exchange rate adjustments Additions Mergers and acquisitions 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 2022 Cost at 1 January Exchange rate adjustments Additions Mergers and acquisitions Disposals Cost at 31 December Amortisation and impairment at 1 January Exchange rate adjustments Amortisation and impairment for the year Amortisation on disposals Amortisation and impairment at 31 December Carrying amount at 31 December Goodwill Licences and trademarks IT and other develop- ment projects 702 5 - 45 - 752 - - - - - 752 710 -24 - 16 - 702 - - - - - 702 160 1 - - - 161 -94 - -7 - -101 60 166 -6 - - - 160 -90 3 -7 - -94 66 631 -1 68 - -190 508 -445 - -55 190 -310 198 558 -1 76 - -2 631 -398 5 -54 2 -445 186 III. Total 1,493 5 68 45 -190 1,421 -539 - -62 190 -411 1,010 1,434 -31 76 16 -2 1,493 -488 8 -61 2 -539 954 PAGE 108 I. II. CONSOLIDATED FINANCIAL STATEMENTS Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / 3.1 INTANGIBLE ASSETS AND GOODWILL (CONTINUED) basis over their expected useful lives, with a maximum of 20 years. IT and other development projects Costs accrued during the research or ex- ploration phase of conducting general assessments of requirements and avail- able technologies are treated as ex- penses as incurred. On the other hand, costs directly related to the develop- ment stage of IT and other development projects, including design, program- ming, installation and testing, are recog- nised as intangible assets. However, this is only the case if the expenditure can be measured reliably, the project is techni- cally and commercially viable, there is a likelihood of future economic benefits and the group intends to and has the necessary resources to complete and utilise the asset. These IT and develop- ment projects are then amortised on a straight-line basis over a period of five to eight years. 3.1.1 IMPAIRMENT TEST OF GOODWILL Financial comments Goodwill is allocated to relevant cash- generating units, primarily in our UK activities within the commercial seg- ment Europe. ARLA'S ANNUAL REPORT 2023 Basis for impairment test and applied estimates Impairment tests are conducted using expected future cash flows derived from forecasts and long-term strategic tar- gets. Projections for future cash flows and earnings targets are made for each individual cash-generating unit, taking into account expected developments identified in the Future 26 strategy pro- cess and past experience. This includes costs related to sustainability initiatives initiated as a part of Arla's Future 26 am- bitions. The impairment tests do not include revenue growth in the terminal value. Procedure for impairment tests Impairment tests of goodwill are based on an assessment of the value in use. Milk costs in the forecast are recognised at a milk price that corresponds to the price at the time the test was performed and longer term. The key operational as- sumption is future profitability, which considers the impact of moving milk in- take into value-add products and more profitable markets as well as operational efficiency initiatives. Test results In 2023, high interest rates persisted, leading to continued high discount rates that exerted pressure on the headroom in the goodwill impairment tests. Throughout the year, close monitoring of all goodwill positions and assess- ments of supporting business cases were conducted. No impairment was identified. Table 3.1.b Goodwill split by commercial segment and country (EUR million) Stronger cash flows in many markets improved the expected future cash flow levels in the impairment models. Sensi- tivity calculations indicated that with the currently applied discount rate, a 1 per- centage point reduction in margins would not result in impairment on any markets. However, in Finland, break- even was reached when a similar calcu- lation of a 1 percentage point reduction in margins was performed. Furthermore, the inclusion of a goodwill position related to the MV Ingredients Ltd. acquisition did not alter the conclu- sions of the impairment test in AFI. UK Finland Sweden Other Europe MENA China International Argentina UK Arla Foods Ingredients Total III. 2022 473 40 20 60 593 83 16 99 10 - 10 2023 480 40 20 62 602 80 16 96 9 45 54 752 702 Table 3.1.1 Applied key assumptions 2023 2022 (EUR million) UK Finland Sweden Europe, other MENA China Arla Foods Ingredients Discount rate, net of tax Discount rate, before tax Discount rate, net of tax Discount rate, before tax 8.5% 7.5% 6.9% 7.4% 11.1% 7.8% 7.9% 9.5% 8.3% 7.7% 8.3% 12.4% 8.5% 8.7% 8.6% 7.6% 7.6% 7.4% 13.0% 11.5% 8.1% 9.5% 8.2% 8.4% 8.3% 14.4% 12.2% 9.1% PAGE 109 I. II. CONSOLIDATED FINANCIAL STATEMENTS III. Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / period, it has been set to the expected inflation rate in the terminal period, as- suming no nominal growth. Discount rates A discount rate, specifically the weighted average cost of capital (WACC), is applied for each individual cash-gen- erating unit. The rate is determined based on assumptions regarding inter- est rates and risk premiums. WACC is re- calculated to a before-tax rate. Changes in future cash flow or discount rate esti- mates can lead to significantly different values. 3.1 INTANGIBLE ASSETS AND GOODWILL (CONTINUED) Accounting policies Impairment occurs when the carrying amount of an asset exceeds its recover- able amount through use or sale. For im- pairment testing, assets are grouped into the smallest cash-generating unit that generates largely independent cash inflows. However, for goodwill, which does not generate independent cash in- flows, impairment tests are prepared at the level where cash flows are consid- ered to be largely independent. The grouping of cash-generating units is determined based on the management structure and internal financial report- ing, which is assessed annually. 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 assess- ment of the time value of money and risks specific to the asset or cash-gener- ating unit. ARLA'S ANNUAL REPORT 2023 The carrying amount of other non-cur- rent assets is assessed annually against their recoverable amount to identify any indications of impairment. Any impair- ment of goodwill is separately recog- nised in the income statement and can- not be reversed. The recoverable amount of other non- current assets is determined as the higher value of the asset's value in use (present value of estimated future net cash flows from its use or the group of cash-generating units) and its market value (fair value) less expected disposal costs. An impairment loss on other non-cur- rent assets is recognised in the income statement under production costs, sell- ing and distribution costs or administra- tion costs, respectively. Impairment rec- ognised can only be reversed to the ex- tent 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 carry- ing amount does not exceed the carry- ing amount that would have been deter- mined, net of depreciation or amortisa- tion, if no impairment loss had been recognised. Uncertainties and estimates Uncertainties and estimates play a sig- nificant role in the goodwill impairment tests. The group of cash-generating units to which goodwill is allocated is defined based on the management structure and assessed annually. Goodwill impairment tests are con- ducted at least once a year for each group of cash-generating units. The ex- pected cash flow approach is used to de- termine the value in use, with key pa- rameters including anticipated future free cash flows and assumptions on dis- count rates. Anticipated future free cash flows The anticipated future free cash flows are determined based on current fore- casts and long-term 2026 targets de- rived from the Future 26 process. These forecasts and targets are established at the cash-generating unit level during the forecast and target planning pro- cess. External sources of information and industry-relevant observations, such as macroeconomic and market condi- tions, are considered in this determina- tion. All applied assumptions undergo scru- tiny during the forecast and target plan- ning process, relying on management's best estimates and expectations, which inherently involve judgement. These as- sumptions encompass expectations re- lated to revenue growth, EBIT margins and capital expenditure. They also in- clude moving milk intake into value-add products and more profitable markets and operational efficiency initiatives. For the growth rate beyond the strategy PAGE 110 I. II. CONSOLIDATED FINANCIAL STATEMENTS Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / 3.2 PROPERTY, PLANT AND EQUIPMENT Financial comments Arla's main property, plant and equip- ment are located in Denmark, the UK, Germany and Sweden. The carrying amount was EUR 3,149 million (2022: EUR 3,031 million). Additions amounted to EUR 533 million 2022: EUR 429 million). Additions included major projects, such as investments in a capacity increase for milk-based beverages in Esbjerg, Denmark, and growth investments for Arla Foods Ingredients, Denmark. In 2023, new investments were initiated, including investments in butter capacity in Holstebro, Denmark. Depreciation amounted to EUR 417 mil- lion, on a par with last year. Accounting policies Property, plant and equipment are measured at cost less accumulated de- preciation and accumulated impairment losses. Assets under construction, land and decommissioned plants are not depreciated. Property, plant and equipment by country (EUR million) 2023 2022 1,467 1,395 558 577 320 308 433 456 347 336 Denmark Sweden UK Germany Other ARLA'S ANNUAL REPORT 2023 Table 3.2.a Property, plant and equipment (EUR million) 2023 Cost at 1 January Exchange rate adjustments Additions Mergers and acquisitions Transferred from assets in the course of construction Disposals Cost at 31 December Depreciation and impairment at 1 January Exchange rate adjustments Depreciation and impairment for the year Mergers and acquisitions Depreciation on disposals Depreciation and impairment at 31 December Carrying amount at 31 December Right-of-use assets carrying amount at 31 December 2022 Cost at 1 January Exchange rate adjustments Additions Transferred from assets in the course of construction Disposals Cost at 31 December Depreciation and impairment at 1 January Exchange rate adjustments Depreciation and impairment for the year Mergers and acquisitions Depreciation on disposals Depreciation and impairment at 31 December Carrying amount at 31 December Right-of-use assets carrying amount at 31 December Land and building Plant and machinery Fixture and fit- ting, tools and equipment Asset in the course of con- struction 2,047 -2 79 2 43 -11 2,158 -888 2 -94 -1 7 -974 1,184 120 1,987 -43 58 62 -17 2,047 -838 22 -86 - 14 -888 1,159 124 3,984 4 101 19 109 -24 4,193 -2,641 -4 -248 -12 22 -2,883 1,310 19 3,800 -73 114 189 -46 3,984 -2,489 57 -247 - 38 -2,641 1,343 11 805 1 68 - 17 -48 843 -609 -1 -75 - 47 -638 205 83 782 -19 58 21 -37 805 -583 17 -78 - 35 -609 196 74 III. Total 7,169 1 533 24 - -83 7,644 -4,138 -3 -417 -13 76 -4,495 333 -2 285 3 -169 - 450 - - - - - - 450 3,149 - 222 413 -3 199 -272 -4 333 - - - - - - 6,982 -138 429 - -104 7,169 -3,910 96 -411 - 87 -4,138 333 3,031 - 209 PAGE 111 I. II. CONSOLIDATED FINANCIAL STATEMENTS III. Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / 3.2 PROPERTY, PLANT AND EQUIPMENT (CONTINUED) Cost Cost comprises the acquisition price as well as costs directly associated with an asset until the asset is ready for its in- tended use. For self-constructed assets, cost comprises direct and indirect costs relating to materials, components, pay- roll and the borrowing costs from spe- cific and general borrowing that directly concerns the construction of assets. If significant parts of an item of property, plant and equipment have different use- ful lives, they are recognised as separate items (major components) and depreci- ated separately. When component parts are replaced, any remaining carrying amount of replaced parts is removed from the balance sheet and recognised as an accelerated depreciation charge in the income statement. Subsequent ex- penditure items of property, plant and equipment are only recognised as an ad- dition 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 as incurred. Depreciation Depreciation aims to allocate the cost of the asset, less any amounts estimated to be recoverable at the end of its ex- pected use, to the periods in which the group obtains benefits from its use. Property, plant and equipment are de- preciated on a straight-line basis from the time of acquisition, or when the as- set is available for use based on an as- sessment of the estimated useful life. Investments in and depreciation of property, plant and equipment and right-of-use assets (EUR million) Investments in property, plant and equipment Depreciation of property, plant and equipment Right-of-use assets 506 81 425 367 70 297 580 102 478 381 67 314 521 69 452 406 74 332 429 56 373 414 74 340 533 88 445 417 70 347 2019 2020 2021 2022 2023 ARLA'S ANNUAL REPORT 2023 The depreciation base is measured tak- ing 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 con- dition 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 reviewed annually. Depreciation ceases when the carrying amount of an item is lower than the residual value, or when an item is decommissioned. Changes during the depreciation period or in the residual value are treated as changes to ac- counting estimates, the effect of which is adjusted only in current and future pe- riods. Depreciation is recognised in the income statement in 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 pe- riod over which the depreciable amount of the asset is expensed in the income statement. The depreciable amount of an item of property, plant and equip- ment 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 performed to assess the appropriateness of the depreciation method and the useful life and residual values of items of property, plant and equipment. As a consequence of climate-related risks, Arla could face future impairment of production capacity due to equip- ment becoming outdated in the sustain- ability transformation or from excess production capacity if milk volumes and operations decline. Non-current assets in the balance sheet were not affected by such impairment in 2023. Sustainability is now an integral part of all CAPEX investments which en- sures future investments to address the risks identified. Table 3.2.b Estimated useful life in years (EUR million) Office buildings Production buildings Technical facilities Other fixtures and fittings, tools and equipment 2023 50 20-30 5-20 3-7 2022 50 20-30 5-20 3-7 PAGE 112 I. II. CONSOLIDATED FINANCIAL STATEMENTS Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / 3.2 PROPERTY, PLANT AND EQUIPMENT (CONTINUED) 3.2.1 RIGHT-OF-USE ASSETS Financial comments Arla leases various offices, warehouses, vehicles and other equipment. Leases are typically agreed for a fixed duration, but may include an extension option. Significant right-of-use assets include office buildings and warehouses in Denmark, Germany, Sweden and the UK with remaining useful lives between 10 and 20 years. Filling machinery and other technical plants represent another major right-of- use asset category. Filling machines typ- ically have useful lives of seven years, whereas other technical plants are de- preciated between one and seven years. Cars and trucks have on average useful lives of four and five years, respectively. In total, the group has approximately 4,000 leases. Additions to right-of-use assets during the year amounted to EUR 88 million (2022: EUR 56 million). The total carry- ing amount of right-of-use assets was EUR 222 million (2022: EUR 209 mil- lion), as specified in table 3.2.1.a. Lease liabilities are specified in Note 4.3. Accounting policies 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 li- ability is initially measured on a present value basis, which comprises the net present value of fixed lease payments less any lease incentives receivable, vari- able lease payments based on an index or a rate and a potential exercise price if a purchase option exists. The lease payments are discounted us- ing an incremental borrowing rate. The corresponding right-of-use asset is measured at cost comprising initial measurement of the lease liability, any lease payments made at or before the commencement date less any lease incentives received and any initial direct costs and restoration costs. The right-of-use asset is subsequently depreciated on a straight-line basis over the shorter of the asset's useful life and the lease term. Each lease payment comprises a reduc- tion of the lease liability and a finance cost. The finance cost is charged to profit or loss over the lease period as a constant periodic rate of interest on the remaining balance of the liability. ARLA'S ANNUAL REPORT 2023 Short-term leases and leases of low- value assets are recognised as an expense in the income statement. Uncertainties and estimates The group has applied estimates and judgements with an impact on the recognition and measurement of right- of-use assets and lease liabilities. This includes an assessment of the incre- mental borrowing rate, service compo- nents and facts and circumstances that could create an economic incentive to utilise the extension options of lease arrangements. Table 3.2.1.a Right-of-use assets (EUR million) 2023 Carrying amount at 1 January Additions Disposals Depreciations and impairments for the year Depreciation on disposals Exchange rate adjustments Carrying amount at 31 December 2022 Carrying amount at 1 January Additions Disposals Depreciations and impairments for the year Depreciation on disposals Exchange rate adjustments Carrying amount at 31 December RoU Land and buildings RoU Plant and machinery RoU Fixtures and fittings, tools and equipment 124 29 -10 -30 8 -1 120 141 17 -7 -30 7 -4 124 11 12 -8 -4 8 - 19 8 9 -12 -6 12 - 11 74 47 -26 -36 24 - 83 81 30 -32 -35 31 -1 74 III. Total 209 88 -44 -70 40 -1 222 230 56 -51 -71 50 -5 209 Table 3.2.1.b Amounts recognised in the income statement (EUR million) 2023 2022 Expenses related to short-term and low-value leases Interest expenses on lease liabilities Total amounts recognised in the income statement Payment of lease debt Total cash outflow from right of use assets 39 8 47 78 125 40 7 47 71 118 PAGE 113 I. II. CONSOLIDATED FINANCIAL STATEMENTS Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / 3.3 JOINT VENTURES AND ASSOCIATES Financial comments The share of the profit in joint ventures and associates decreased by 15% to EUR 51 million (2022: EUR 60 million), and related primarily to the profit from our investment in Mengniu. COFCO Dairy Holdings Limited (CDH) and China Mengniu Dairy Company Limited (Mengniu) The group's proportionate share of the net asset value of CDH including the in- vestment in Mengniu was EUR 445 mil- lion, unchanged from last year. The car- rying amount of the investment in CDH included goodwill amounting to EUR 152 million (2022: EUR 158 million) driven by currency adjustments. The fair value of the indirect share in Mengniu equalled EUR 507 million (2022: EUR 888 million) based on the official listed share price at 31 Decem- ber 2023. Impairment risks included substantial and long-term reductions in leading stock indexes in Asia or an adverse and permanent reduction in the expected performance of Mengniu. As the fair value exceeded the carrying amount of the investment, there was no indication of impairment. ARLA'S ANNUAL REPORT 2023 In 2022, Mengniu reported group reve- nue of EUR 12,481 million and a profit of EUR 699 million. Consolidated figures are not available for the CDH group. CDH holds no significant investments other than the investment in Mengniu, and re- ported revenue relates to received divi- dend payments from Mengniu. Through the investment in CDH, Arla holds a 5.3% indirect investment in Mengniu. See table 3.3.b for more details on CDH. The carrying amount of the investment related to the membership of Lant- brukarnas Riksförbund in Sweden amounted to EUR 91 million and was on a par with last year. Joint ventures The carrying amount of joint ventures equalled EUR 24 million, unchanged from last year. In 2023, Arla acquired the remaining 50% share in MV Ingredients Ltd. from a joint venture partner. See Note 3.4 for more details on the MV Ingredients Ltd. acquisition. Accounting policies Investments in which Arla has a signifi- cant but not controlling influence are classified as associates. Investments in which Arla has joint control are classified as joint ventures. The proportionate share of the net profit or loss in associates and joint ventures is recognised in the consolidated income statement, after elimination of the pro- portionate share of unrealised inter- company profits or losses. Investments in associates and joint ven- tures are recognised according to the equity method and measured at the pro- portionate share of the entities' net as- set values, calculated in accordance with Arla's accounting policies. The pro- portionate share of unrealised inter- company profits and the carrying amount of goodwill is added, whereas the proportionate share of unrealised inter-company losses is deducted. Divi- dends received from associates and joint ventures reduce the value of the investment. For investments held in listed compa- nies, computation of Arla's share of profit and equity is based on the latest published financial information of the company, other publicly available infor- mation on the company's financial de- velopment and the effect of revalued net assets. Investments in associates and joint ven- tures with negative net asset values are measured at zero. If Arla has a legal or constructive obligation to cover a loss in the associate or joint venture, the loss is recognised under provisions. Any amounts owed by associates and joint ventures are written down to the extent Table 3.3.a Associates and joint ventures (EUR million) Value of associates and joint ventures Share of equity in COFCO Dairy Holdings Ltd. (Mengniu) Goodwill in COFCO Dairy Holdings Ltd. (Mengniu) Share of equity in immaterial associates Recognised value of associates Share of equity in immaterial joint ventures Recognised value of associates and joint ventures III. 2023 2022 293 152 91 536 24 560 290 158 93 541 24 565 Table 3.3.b COFCO Dairy Holdings Ltd. Disclosures of financial information* (EUR million) 2023 2022 Revenue Net profit Non-current assets Dividends received Ownership share Group share of net profit Recognised value 36 36 708 11 30% 34 445 44 44 742 12 30% 44 448 COFCO Dairy Holdings Ltd. has no other significant assets or liabilities * Based on the latest available financial reporting Fair value based on listed share price 507 888 Table 3.3.c Transactions with associates and joint ventures (EUR million) 2023 2022 Sales of goods Purchase of goods Trade receivables* Trade payables* * Included in other receivables and other payables - 77 15 -6 31 48 3 -21 PAGE 114 I. II. CONSOLIDATED FINANCIAL STATEMENTS III. Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / 3.3 JOINT VENTURES AND ASSOCIATES (CONTINUED) that the amount owed is deemed irre- coverable. An impairment test is performed when there are indications of impairment, such as significant adverse changes in the environment in which the equity- accounted investee operates, or a signif- icant or prolonged decline in the fair value of the investment below its carry- ing amount. Where the equity-accounted investment is considered to be an integral part of a cash-generating unit (CGU), the impair- ment test is performed at the CGU level using expected future net cash flows of the CGU. An impairment loss is recog- nised 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 op- erating policy decisions of the investee, but does not constitute control or joint control over those policies. Judgement is necessary in determining when a sig- nificant influence exists. When ARLA'S ANNUAL REPORT 2023 determining significant influence, fac- tors such as representation on the Board of Directors, participation in policy-mak- ing, material transactions between the entities and interchange of managerial personnel are considered. CDH and Mengniu The group has a 30% investment in CDH, which is considered an associate based on a cooperation agreement ex- tending significant influence, including the right to representation on the Board of Directors. The cooperation agree- ment with CDH also entitles Arla to rep- resentation on the Board of Directors of Mengniu, a Hong Kong-listed dairy com- pany in which CDH is a significant share- holder. Based on these underlying agreements, it is our assessment that Arla exercises a significant influence in Mengniu. Lantbrukarnas Riksforbund, Sweden (LRF) Arla has an ownership interest of 24% 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 in- terest constitutes a significant influence in LRF. This includes, but is not limited to, owner representation on the Board of Directors. Furthermore, Arla's owners have represented the Swedish dairy in- dustry on the Board of Directors of LRF, and both Arla and our Swedish owners are individual members of LRF. Based on this, it is our assessment that Arla exercises a significant influence in LRF, and the investment is therefore classified as an associate. 3.4 PURCHASE AND SALE OF BUSINESS ACTIVITIES MV Ingredients Ltd. In August 2023, Arla acquired the re- maining 50% of the shares in the joint venture MV Ingredients Ltd. located in UK. Through the transaction, the group's share in MV Ingredients Ltd. increased from a 50% owned joint venture to a wholly owned subsidiary. With the reclassification from invest- ments in joint ventures and associates to investments in subsidiaries, the exist- ing investment was deemed disposed of and remeasured to fair value according to the new acquisition when recognised as a fully controlled entity. The fair value of the acquired activities amounted to EUR 62 million including recognised goodwill of EUR 45 million. The assets acquired were whey-based production facilities and working capital items. Goodwill represented the value of synergies, nearby capacity and access to a higher whey pool. The remeasurement of the existing share in MV Ingredients Ltd. to fair value generated a gain of EUR 22 million rec- ognised as other operating income in the income statement. Please refer to Note 1.3 for more details. Table 3.4 Mergers and acquisitions (EUR million) Property, plant and equipment Inventory Cash Other assets Liabilities Fair value of acquired net assets Goodwill Fair value of acquired activities Cash balance in acquired activities Fair value of previously held investments Cash flow from acquisition 2023 2022 11 2 5 4 -5 17 45 62 -5 -31 26 - 2 - - -7 -5 16 11 - - 11 PAGE 115 I. II. CONSOLIDATED FINANCIAL STATEMENTS Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / NOTE 4. FUNDING 4.1 FINANCIAL RISKS Financial comments 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 so it is critical for the group to have an appropriate financial risk manage- ment approach in place to mitigate short-term market volatility, while simul- taneously 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. The policy outlines risk limits ARLA'S ANNUAL REPORT 2023 for each type of financial risk, permitted financial instruments and counterpar- ties. 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 fi- nancial risk management, but is an in- herent component of the group's busi- ness model. 4.1.1 LIQUIDITY RESERVES Adequate liquidity reserves In 2023, liquidity reserves increased by EUR 359 million to EUR 1,349 million. Looking at the maturity profile of the group's debt and the forecasted cash flow, the liquidity reserves are consid- ered adequate and are expected to re- main at the same level during 2024. En- suring the availability of sufficient oper- ating liquidity and credit facilities for operations is the primary goal of manag- ing liquidity risk. Based on the liquidity models suggested by the rating agen- cies, Arla's liquidity reserves amounting to EUR 1,349 million are assessed as adequate for the coming 12 months. Supply chain finance programmes and trade receivables financing relating to customers form part of the group's liquidity management. Selected suppli- ers have access to the group's supply chain finance facilities, which allow those suppliers to benefit from the group's credit profile. More than 93% (2022: 95%) of the day- to-day liquidity flow of the group is man- aged and controlled centrally and to a wide extent via cash pooling arrange- ments. This secures a scalable and effi- cient operating model. As a result, the group is able to ensure cost-efficient uti- lisation of credit facilities. Table 4.1.1.a Liquidity reserves (EUR million) Free cash Restricted cash Not readily available cash Cash and cash equivalents Free securities Restricted securities Securities used in repurchase arrangements Securities Free cash Free securities Unutilised committed loan facilities > 1 year Other unutilised loan facilities Liquidity reserves III. 2022 55 18 33 106 13 49 370 432 55 13 475 447 990 2023 78 16 44 138 29 37 337 403 78 29 615 627 1,349 Interest-bearing debt maturing < 1 year 477 401 Liquidity reserves 2023 2022 46% 48% 46% 45% 10% 11% 2% 1% Cash and cash equivalents Securities (free cash flow) Unutilised committed loan facilities > 1 year Other unutilised loan facilities PAGE 116 I. II. CONSOLIDATED FINANCIAL STATEMENTS III. Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / 4.1 FINANCIAL RISKS (CONTINUED) Arla operates in several countries with restrictions and regulations on the transferability of cash and securities. At 31 December 2023, cash of EUR 16 mil- lion (2022: EUR 18 million) was located in countries with restrictions and regula- tions on the transferability of cash, while the amount related to restricted securi- ties was EUR 37 million (2022: EUR 49 million). Cash and securities in Argen- tina, China, Bangladesh and Senegal are reported as restricted. Cash is considered not readily available for upstreaming in the group if a transfer is not possible within five days. Arla has cash positions in a number of countries where a transfer is deemed to take more than five days due to various circum- stances such as local administrative pro- cesses or shareholder agreements. At 31 December 2023, EUR 44 million (2022: EUR 33 million) were considered as not readily available cash. ARLA'S ANNUAL REPORT 2023 Table 4.1.1.b Expected non-discounted contractual cash flow on gross financial liabilities Non-discounted contractual cash flow (EUR million) 2023 Issued bonds Mortgage credit institutions Credit institutions Schuldschein Lease liabilities Other non-current liabilities Interest expense - interest-bearing debt Trade payables and other payables Derivative instruments Total (EUR million) 2022 Issued bonds Mortgage credit institutions Credit institutions Schuldschein Lease liabilities Interest expense - interest-bearing debt Trade payables and other payables Derivative instruments Total Carrying amount 535 1,212 852 350 223 10 - 1,425 43 4,650 Carrying amount 490 1,221 1,424 - 214 - 1,597 36 5,000 Total 2024 2025 2026 2027 2028 2029 2030 2031-2033 After 2033 534 1,216 1,142 352 223 18 916 1,425 43 5,869 127 10 891 - 63 18 110 1,425 36 2,680 109 85 47 - 50 - 101 - 2 394 181 49 1 201 37 - 84 - 2 555 - 54 101 - 25 - 68 - 1 249 117 61 1 151 16 - 59 - 1 406 - 68 100 - 32 - 52 - 1 253 - 90 1 - - - 52 - - 143 - 295 - - - - 156 - - 451 - 504 - - - - 234 - - 738 Total 2023 2024 2025 2026 2027 2028 2029 2030-2032 After 2032 Non-discounted contractual cash flow 493 1,229 1,425 - 218 359 1,597 36 5,375 134 11 507 - 59 53 1,597 30 2,409 135 11 517 - 47 41 - 5 756 - 86 47 - 38 38 - 1 210 179 50 1 - 25 30 - - 285 - 54 251 - 17 22 - - 344 45 61 1 - 23 17 - - 147 - 68 101 - 1 17 - - 187 - 273 - - 4 51 - - 328 Assumptions The contractual cash flows are based on the following assumptions: · The cash flows are based on the earliest possible date at which the group can be required to settle the financial liability. · The forecasted interest expense cash flows are based on the contractual interest rate. Floating interest payments have been determined using the current floating rate for each item at the reporting date. - 615 - - 4 90 - - 709 PAGE 117 I. II. CONSOLIDATED FINANCIAL STATEMENTS III. Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / 4.1 FINANCIAL RISKS (CONTINUED) Risk mitigation Risk Liquidity and funding are vital for the group to be able to pay its financial lia- bilities as they become due. Risk man- agement 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 thresh- old 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. How we act and operate In addition to the treasury and funding policy, the Board of Directors has ap- proved a long-term financing strategy, which defines the direction for financing of the group. This includes counterparties, instruments and risk ap- petite and describes future funding op- portunities to be explored and imple- mented. The funding strategy is sup- ported by farmer owners' long-term commitment to investing in the busi- ness. It is the group's objective to main- tain its credit quality at a robust invest- ment grade level. 4.1.2 CURRENCY RISK Financial comments The group is exposed to both transac- tion and translation effects from foreign exchange rates. Transaction effects are due 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 decreased by EUR 24 million compared to last year due to negative transaction effects. Part of this exposure was hedged by costs in the same cur- rency. 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 instru- ments is recognised in financial income or financial costs. A net loss of EUR 62 million (2022: EUR -46 million) was rec- ognised in financial costs. Exchange rate losses related primarily to the devalua- tions of the Argentine, Bangladeshi and Nigerian currencies, amounting to EUR 93 million in total. The negative effect from the devaluation in Argentina was partly offset by interest income from se- curities of EUR 40 million. To manage short-term volatility from currency fluctuations, derivatives are used to hedge the currency exposure. When settling the hedging instrument, a positive or negative amount is recog- nised in other income or other costs, respectively. A net profit impact of EUR 3 million (2022: EUR 68 million) was rec- ognised. Please refer to table 1.3. A profit impact from hedging should be expected in years where export curren- cies weaken during the year and vice versa. The group is exposed to translation ef- fects from entities reporting in curren- cies other than EUR. The group is mainly exposed to translation of entities report- ing in GBP, SEK, USD and DKK. Due to translation effects, revenue decreased by EUR 317 million compared to the rev- enue reported last year. Simultaneously, costs increased by EUR 41 million compared to last year's re- ported costs. The group's financial posi- tion is similarly exposed, impacting the value of assets and liabilities reported in currencies other than EUR. The transla- tion effect on net assets is recognised in other comprehensive income as foreign currency translation adjustments. In 2023, a net loss of EUR 47 million (2022: EUR 48 million) was recognised in other comprehensive income. The prepaid milk price indirectly absorbs both transaction and translation effects, and therefore the net profit or loss has limited exposure to currency risks. The prepaid milk price is set based on achieving an annual profit of 2.8% to 3.2%. The prepaid milk price is initially measured and paid out based on an EUR amount and is consequently exposed to EUR fluctuations against GBP, SEK and DKK. Compared to last year, the average rate of the SEK weakened by 7.3%, USD weakened by 2.8% and GBP weakened by 2.0%. The group is increasingly involved in emerging markets where efficient hedg- ing is often not feasible due to currency regulations, illiquid financial markets or expensive hedging costs. Among the most important markets are Nigeria, the Dominican Republic, Bangladesh, Leba- non and Argentina. Countries with less efficient currency markets represented 4% (2022: 4%) of the group's revenue in 2023. Revenue split by currency (EUR million) 2023 2022 4,531 4,466 3,423 3,415 Table 4.1.1.c Average maturity Average maturity, gross debt Maturity < 1 year, net debt Maturity > 2 year, net debt ARLA'S ANNUAL REPORT 2023 Policy 2023 4.9 years 0% 96% 2022 Minimum Maximum 5.2 years 0% 78% 2 years - 50% - 25% - 1,552 1,616 1,392 1,388 1,428 1,492 941 1,005 406 411 EURs GBP SEK DKK USD SAR Other PAGE 118 I. II. CONSOLIDATED FINANCIAL STATEMENTS III. Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / 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 for- eign operations should be hedged (translation risks) with an obligation to inform the Board of Directors at the next meeting. 4.1 FINANCIAL RISKS (CONTINUED) Risk mitigation The group's external exposure is calcu- lated as external financial assets and lia- bilities denominated in currencies other than the functional currency of each le- gal entity, plus any external derivatives converted at 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 cur- rency exposure is the net exposure, which is outlined in table 4.1.2.b. Net foreign currency investments in subsidiaries, as well as instruments hedging those investments, are excluded. Risk According to the treasury and funding policy, the Treasury department can hedge: · Up to 15 months of the net forecasted cash receipts and payables. · Up to 100% of the net recognised trade receivables and trade payables. The currency exposure is continuously managed by the Treasury department. Individual currency exposures are hedged in accordance with the treasury and funding policy. ARLA'S ANNUAL REPORT 2023 Table 4.1.2.a Exchange rates EUR/GBP EUR/SEK EUR/DKK EUR/USD EUR/SAR Closing rate Average rate 2023 2022 Change 2023 2022 Change 0.869 11.048 7.454 1.106 4.164 0.884 11.156 7.436 1.066 3.982 1.8% 1.0% -0.2% -3.6% -4.4% 0.870 11.468 7.451 1.081 4.057 0.852 10.629 7.439 1.051 3.947 -2.0% -7.3% -0.2% -2.8% -2.7% Table 4.1.2.b Currency exposure (EUR million) 2023 EUR/DKK USD/DKK* GBP/DKK SEK/DKK SAR/DKK 2022 EUR/DKK USD/DKK* GBP/DKK SEK/DKK SAR/DKK * Including AED Balance sheet exposure Potential accounting impact Open positions Hedging of future cash flows External exposure Sensitivity Income statement Other com- prehensive income 107 -12 45 -30 3 270 -62 10 45 47 - -335 -311 -14 -84 11 -544 -345 -65 -103 107 -347 -266 -44 -81 281 -606 -335 -20 -56 1.0% 5.0% 5.0% 5.0% 5.0% 1.0% 5.0% 5.0% 5.0% 5.0% 1 -1 2 -2 - 3 -3 - 2 2 - -17 -16 -1 -4 - -27 -17 -3 -5 PAGE 119 I. II. CONSOLIDATED FINANCIAL STATEMENTS III. Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / 4.1 FINANCIAL RISKS (CONTINUED) 4.1.3 INTEREST RATE RISK Financial comments The average duration of the group's in- terest hedging of interest-bearing debt, including derivatives but excluding pen- sion liabilities, has decreased by 0.8 to 2.3. The duration decreased due to a reduc- tion in interest rate hedges and reduced time to maturity which was only partly offset by lower net interest-bearing debt. The value of hedged future interest cash flow amounts to EUR 80 million. Please refer to table 4.4.a. 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 other comprehensive income expo- sure. Profit exposure relates to net po- tential impairment of non-current as- sets. Other comprehensive income ex- posure relates to revaluation of net ARLA'S ANNUAL REPORT 2023 pension liabilities and interest hedging of future cash flows. Fair value sensitivity A change in interest rates will impact the fair value of the group's interest-bearing assets, interest rate derivative instru- ments and debt instruments measured on a 1% increase in interest rates. A decrease in the interest rate would have the opposite effect. Cash flow sensitivity A change in interest rates will impact in- terest rate payments on the group's un- hedged floating-rate debt. Table 4.1.3.a shows the one-year cash flow sensitivity, depicting a 1% increase in interest rates at 31 December 2023. 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. How we act and operate The purpose of interest rate hedging is to mitigate risk and secure relatively sta- ble 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 derivatives to reduce risks related to fluctuations in the interest rate, and to manage the interest profile of the interest-bearing debt. By having a portfolio approach and using derivatives, the group can inde- pendently manage and optimise interest rate risk, as the interest rate profile can be changed without having to change the funding itself. This allows the group to operate in a fast, flexible and cost-effi- cient manner without changing underly- ing loan agreements. The mandate from the Board of Direc- tors provides the group with the oppor- tunity to use derivatives, such as interest rate swaps and options, in addition to in- terest conditions embedded in the loan agreements. Table 4.1.3.a Interest rate risk (EUR million) 2023 Financial assets Derivatives Financial liabilities Net interest-bearing debt excluding pension liabilities 2022 Financial assets Derivatives Financial liabilities Net interest-bearing debt excluding pension liabilities Table 4.1.3.b Duration Duration Carrying amount Sensitivity Potential accounting impact Income statement Other comprehensive income 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% -499 - 3,182 2,683 -542 - 3,367 2,825 5 6 -17 -6 5 6 -19 -8 -1 36 - 35 -1 42 - 41 2023 2.3 2022 3.1 Minimum Maximum 1 7 Policy PAGE 120 I. II. CONSOLIDATED FINANCIAL STATEMENTS III. Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / 4.1 FINANCIAL RISKS (CONTINUED) 4.1.4 COMMODITY PRICE RISK Financial comments Energy commodity contracts are pre- dominately related to a floating official price index. The Treasury department uses financial derivatives to hedge en- ergy commodity price risk. This secures full flexibility to change suppliers with- out having to take future hedging into consideration. Hedging activities focus on the most significant risks, including electricity, natural gas and diesel. The total fore- casted energy commodity spend for 2024 excluding taxes and distribution costs, is EUR 167 million with the prices at 31 December 2023. The purpose of hedging is to reduce vol- atility in energy-related costs. In 2023, hedging activities resulted in a loss of EUR 61 million (2022: EUR +72 million), please refer to table 1.3. However, the loss in 2023 was more than offset by significantly lower physical energy costs. The result of hedging activities, classi- fied as hedge accounting, is recognised in other income and costs. At the end of 2023, 49% of the fore- casted energy spend for 2024 was ARLA'S ANNUAL REPORT 2023 hedged. A 50% increase in commodity prices would negatively impact the fore- casted unhedged energy spend by ap- proximately EUR 43 million. If the fore- casted energy prices were 50% higher at 31 December 2023, a gain of EUR 48 million would positively impact other comprehensive income. Other commodity contracts covering in- gredients and packaging primarily de- pend on a fluctuating official price index. Power purchase agreements Arla has signed power purchase agree- ments covering 446 GWh, of which 83 GWh went into operation in 2023. Accounting classification of the individ- ual contracts was assessed through a structured process based on the latest available guidance and involvement of external expertise. It was concluded that all contracts are for the purpose of own use and are therefore classified as exec- utory supplier contracts. For contractual obligations, please refer to Note 5.5. Risk mitigation Risk The group is exposed to commodity risks related to the production and distri- bution of dairy products. Increased com- modity prices negatively impact produc- tion and distribution costs. Fair value sensitivity A change in commodity prices will impact the fair value of the group's hedged commodity derivative instru- ments, measured through other com- prehensive income and the unhedged energy consumption through the income statement. Table 4.1.4.b shows the sensitivity of a 50% increase in commodity prices for both hedged and unhedged commodity purchases. A decrease in commodity prices would have the opposite effect. Policy According to the treasury and funding policy, the forecasted consumption of electricity, natural gas and diesel can be hedged for up to 48 months, of which 100% can be hedged for the first 18 months, with a declining proportion thereafter. How we act and operate Energy commodity price risks are man- aged by the Treasury department. Com- modity price risks are mainly hedged by entering into financial derivative con- tracts, which are 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 com- modities can be effectively hedged by Table 4.1.4.a Contracted power purchase agreements Country Denmark Sweden Germany UK Total Type of energy Solar Wind Total Annual MWh of energy contracted Price terms Average duration Operating Objective Classification 276,630 Fixed 10 years 2023 Own use 100,000 Fixed 10 years 2025 Own use 49,207 Fixed 12 years 2024 Own use 19,732 Fixed 15 years 2024 Own use Executory contracts Executory contracts Executory contracts Executory contracts 445,569 286,754 158,815 445,569 Table 4.1.4.b Hedged commodities Potential accounting impact Sensitivity Carrying amount Income statement Other comprehensive income 2023 Diesel / natural gas Electricity 2022 Diesel / natural gas Electricity 50% 50% 50% 50% -9 -9 -18 6 31 37 -26 -17 -43 -10 -14 -24 30 18 48 94 58 152 PAGE 121 I. II. CONSOLIDATED FINANCIAL STATEMENTS III. Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / 4.1 FINANCIAL RISKS (CONTINUED) matching the underlying costs, but Arla aims to minimise the basic risk. Dairy derivative markets in the EU, the USA and New Zealand remain small, but are evolving. The group has engaged in hedging activities for a small part of the group's dairy commodity trading vol- ume. As the dairy derivative market de- velops, we expect this to play an increas- ing role in managing fixed price con- tracts with customers in the coming years. 4.1.5 CREDIT RISK Financial comments In 2023, the group continued to experi- ence very limited losses from defaulting counterparties such as customers, sup- pliers and financial counterparties. All major financial counterparties had satisfactory credit ratings at year-end. The Arla requirement is a credit rating of at least A-/A-/A3 from either S&P, Fitch or Moody's either for the financial coun- terparty or its parent company. In a small number of geographical locations which are not serviced by our relation- ship banks and where financial counter- parties with a satisfactory credit rating do not operate, the group deviated from ARLA'S ANNUAL REPORT 2023 the rating requirement. Out of the EUR 59 million placed in weaker speculative grade EUR 37 million was restricted sur- plus cash in Argentina invested in secu- rities. Further information on trade receivables is provided in table 2.1.c. The maximum exposure to credit risk is approximately equal to the carrying amount. As in previous years, the group continu- ously worked with credit exposure and experienced a very low level of losses arising from customers. To manage the financial counterparty risk, the group uses master netting agreements when entering into deriva- tive contracts. Table 4.1.5 shows the counterparty exposure for those agree- ments covered by entering into netting agreements that qualify for netting in case of default. Risk mitigation Risk Credit risks arise from operating activi- ties and engagement with financial counterparties. Furthermore, a weak counterparty credit quality can reduce their ability to support the group going forward, thereby jeopardising the fulfil- ment of our group strategy. Policy Counterparties for financial contracts are selected based on a relationship bank strategy. Approval by the Executive Board and the CFO is required, following a recommendation from Treasury. A minimum long-term rating of A3 from Moody's, A- from S&P or A- from Fitch is needed for a counterparty (or its parent). If credit is solely obtained from the counterparty, no rating is necessary. If the counterparty has multiple credit rat- ings, the average rating is used, rounded up. However, in geographies without sufficient coverage from our relation- ship banks, Treasury may deviate from these requirements. How we act and operate The group has a comprehensive credit risk policy and utilises credit insurance and trade financing products extensively for exports. In some emerging markets, obtaining the required credit coverage may be challenging, but the group strives to secure the best available cov- erage. This is considered an acceptable risk due to the group's investments in emerging markets. If a customer pay- ment is delayed, internal procedures are followed to minimise losses. The group works with a select few financial coun- terparties and continuously monitors their credit ratings. External rating of financial counterparties 2022 2023 54% 49% 25% 21% 2% 0% 3% 4% 8% 1% 3% 0% 2% 3% 4% 4% 9% 7% AAA AA AA- A+ A A- BBB+ Stronger speculative grade* Weaker speculative grade* Table 4.1.5 External rating of financial counterparties and securities (EUR million) Counterparty rating 2023 Securities Cash Derivatives Total 2022 Securities Cash Derivatives Total AAA AA AA- A+ 366 - - 366 383 - - 383 - 15 - 15 - - - - - 5 15 20 - 15 13 28 - 30 114 144 - 5 189 194 A - 4 - 4 - 33 33 66 Stronger speculative grade* Weaker speculative grade* A- BBB+ - 22 1 23 - - - - - 11 1 12 - 20 4 24 - 29 1 30 - 28 - 28 37 22 - 59 49 5 - 54 * Definition based on S&P rating scale. Stronger speculative grade: BB+ to B- and weaker speculative grade: CCC+ to D. Total 403 138 132 673 432 106 239 777 PAGE 122 I. II. CONSOLIDATED FINANCIAL STATEMENTS III. Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / 4.2 FINANCIAL ITEMS Financial comments Financial items increased by EUR 65 mil- lion to EUR 145 million, mainly due to higher interest on financial instruments. Net interest expenses amounted to EUR 97 million, representing an increase of EUR 44 million compared to last year due to higher interest rates compared to last year. Average interest expenses, excluding in- terest related to pension assets and lia- bilities, were 3.9% (2022: 2.3%). For a definition of average interest expenses, excluding interest related to pension as- sets and liabilities, please refer to the glossary. Interest cover decreased to 11.1 (2022: 19.6). Exchange rate losses related to the de- valuation of the Argentine, Bangladeshi and Nigerian currencies amounted to EUR 93 million, of which EUR 40 million were offset by interest income on the restricted cash and securities. The nega- tive foreign currency effect in Argentina was partly offset by interest income from investments in money market funds. Accounting policies Financial income and financial costs as well as capital gains and losses are rec- ognised in the income statement at amounts that can be attributed to the year. Financial items comprise realised and unrealised value adjustments of se- curities and currency adjustments of financial assets and financial liabilities as well as the interest portion of financial lease payments. Additionally, realised and unrealised gains and losses on derivatives not classified as hedging contracts are included. Borrowing costs from general borrowing, or loans that directly relate to the acquisition, con- struction or development of qualified assets are attributed to the costs of such assets and are therefore not included in financial costs. Capitalisation of interest was performed by using an interest rate matching the group's average external interest rate in 2023. Financial income and financial costs relating to financial assets and financial liabilities were recognised using the effective interest method. Table 4.2 Financial income and financial costs (EUR million) Financial income: Interest securities, cash and cash equivalents Foreign exchange rate gains Fair value adjustments and other financial income Total financial income Financial costs: Interest on financial instruments measured at amortised cost Foreign exchange rate losses Interest on pension liabilities Interest transferred to property, plant and equipment Fair value adjustments and other financial costs Total financial costs Net financial costs ARLA'S ANNUAL REPORT 2023 2023 2022 57 74 4 135 -151 -136 -3 14 -4 -280 -145 22 83 15 120 -71 -129 -2 7 -5 -200 -80 PAGE 123 I. II. CONSOLIDATED FINANCIAL STATEMENTS III. Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / · Bond issue of SEK 1,200 million which will expire after two years while SEK 800 million will expire after five years. · Schuldschein issue of EUR 350 million, of which EUR 200 million will expire after three years and EUR 150 million will expire after five years. A Schuldschein is a form of private placement loan, primarily used by companies to raise funds directly from investors, typically institutional inves- tors or banks. The loan is unsecured. · Arla has a commercial paper pro- gramme in Sweden denominated in SEK and EUR. The average utilisation in 2023 was EUR 144 million. · During the year, Arla entered into sale and repurchase arrangements based on its holdings of listed AAA-rated Dan- ish mortgage bonds. Please refer to Note 4.6 for more details. In 2023, bonds were repaid at a value of EUR 137 million, of which EUR 128 million matured before the end of 2023. EUR 9 million will mature in April 2024. 4.3 NET INTEREST- BEARING DEBT Financial comments Net interest-bearing debt, excluding pension liabilities, decreased to EUR 2,683 million (2022: EUR 2,825 million). The decrease in net interest-bearing debt was mainly driven by the decrease in net working capital. Pension liabilities increased by EUR 6 million to EUR 167 million. Net interest- bearing debt, including pension liabili- ties, amounted to EUR 2,850 million (2022: EUR 2,986 million). The UK pen- sion scheme net assets were EUR 21 million (2022: EUR 16 million). These as- sets are excluded from the calculation of pension liabilities, net interest-bear- ing debt and leverage. Arla's leverage ratio was 2.6, a decrease of 0.4 compared to last year. This is according to expectations, however bet- ter than the long-term target range of 2.8-3.4. The average maturity of interest-bearing borrowings decreased by 0.3 years to 4.9 years. Average maturity is impacted by a lapse of time to maturity, the level of net interest-bearing debt and offset by new facilities. The equity ratio increased to 36% (2022: 35%). ARLA'S ANNUAL REPORT 2023 Funding The group applies a diversified funding strategy to balance the liquidity and refi- nancing risk with the aim of achieving low financing costs. Major acquisitions or investments are funded separately. A diverse funding strategy includes di- versification of markets, currencies, in- struments, banks, lenders and maturi- ties to secure broad access to funding and to ensure that the group is inde- pendent of one single funding partner or one single market. All funding oppor- tunities are benchmarked against the three-month EURIBOR rate, and deriva- tives are applied to match the currency of our funding needs. The interest pro- file is managed with interest rate swaps independently of the individual loans. At 31 December 2023, 24% (2022: 22%) of the total interest-bearing borrowings is covered by interest rate swaps. 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 2023. During 2023, the group's most signifi- cant funding activities were: · Extension of EUR 400 million ESG- linked revolving credit multi-bank facil- ity to 2029. 2.6 Leverage in 2023 (2022: 3.0) Net interest-bearing debt consists of current and non-current liabilities, less interest-bearing assets. The definition of leverage is the ratio between net interest-bearing debt, including pension liabilities and EBITDA, and expresses the group's capacity to service its debt. The group's long-term target range for leverage is between 2.8 and 3.4. Net interest-bearing debt (EUR million) Target range leverage 2.8 - 3.4 Pension liabilities Net interests-bearing debt excluding pension liabilities Leverage 3,500 3,000 2,500 2,000 1,500 1,000 500 0 249 247 245 161 167 2,113 2019 2,180 2020 2,221 2021 2,825 2022 2,683 2023 4 3 2 1 0 PAGE 124 I. II. CONSOLIDATED FINANCIAL STATEMENTS III. Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / 4.3 NET INTEREST-BEARING DEBT (CONTINUED) Table 4.3.a Net interest-bearing debt (EUR million) Long-term borrowings Short-term borrowings Securities, cash and cash equivalents (excluding restricted securities and cash) Other interest-bearing assets Net interest-bearing debt excluding pension liabilities Pension liabilities Net interest-bearing debt including pension liabilities Table 4.3.b Borrowings (EUR million) Long-term borrowings: Issued bonds Mortgage credit institutions Bank borrowings Schuldschein Lease liabilities Total long-term borrowings Short-term borrowings: Issued bonds Commercial papers Mortgage credit institutions Bank borrowings Repurchased liability Lease liabilities Other current liabilities Total short-term borrowings 2023 2022 2,369 813 -488 -11 2,683 167 2,850 2,640 727 -538 -4 2,825 161 2,986 2023 2022 407 1,201 251 350 160 2,369 128 103 11 161 337 63 10 813 357 1,210 918 - 155 2,640 133 88 11 48 370 59 18 727 Total interest-bearing borrowings 3,182 3,367 Table 4.3.c Cash flow, net interest-bearing debt Cash flow Non-cash changes (EUR million) 1 January Included in financing activities Additions Reclassifi- cations Foreign exchange movements Fair value changes Restricted cash and securities 31 Decem- ber 2023 Pension liabilities Long-term borrowings Short-term borrowings Total interest-bearing debt Securities and other in- terest-bearing assets Cash Net interest-bearing debt 161 2,640 727 -22 -27 -241 3,528 -290 -436 -106 17 -40 - 76 - 76 - - 2,986 -313 76 9 -335 335 9 - - 9 - 2 -8 -6 3 8 5 19 13 - 32 2 - - - - - 167 2,369 813 3,349 37 16 -377 -122 34 53 2,850 Long- and short-term borrowings payments of EUR -268 million (EUR -27 million and EUR -241 million, respectively) can be reconciled to the cash flow statement as new loans obtained (EUR 777 million), other changes in loans (EUR -967 million) and lease payments (EUR -78 million) 2022 Pension liabilities Long-term borrowings Short-term borrowings Total interest-bearing debt Securities and other in- terest-bearing assets Cash Net interest-bearing debt 245 2,113 644 -22 696 -100 3,002 574 -439 -97 1 -9 - 49 - 49 - - 2,466 566 49 -190 190 -14 -32 -7 -48 4 - 161 2,640 727 - - - - -53 -44 - 3,528 - - 2 - -436 -106 -53 -42 - 2,986 Long- and short-term borrowings payments of EUR 596 million (EUR 696 million and EUR -100 million, respectively) can be reconciled to the cash flow statement as new loans obtained (EUR 810 million), other changes in loans (EUR -143 million) and lease payments (EUR -71 million) ARLA'S ANNUAL REPORT 2023 PAGE 125 I. II. CONSOLIDATED FINANCIAL STATEMENTS III. Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / 4.3 NET INTEREST-BEARING DEBT (CONTINUED) Maturity of net interest-bearing debt excluding pension liabilities at 31 December 2023 (EUR million) Maturity of net interest-bearing debt excluding pension liabilities at 31 December 2022 (EUR million) Interest profile for net interest-bearing debt excluding pension liabilities at 31 December 2023 (EUR million) Interest profile for net interest-bearing debt excluding pension liabilities at 31 December 2022 (EUR million) Debt Unused committed facilities Debt Unused committed facilities Fixed debt Fixed via swap Floating Fixed debt Fixed via swap Floating 215 469 315 291 345 181 400 200 499 293 90 225 707 185 277 296 250 172 127 169 277 615 3,000 2,500 2,000 1,500 1,000 500 0 3,000 2,500 2,000 1,500 1,000 500 0 0-1Y 1-2Y 2-3Y 3-4Y 4-5Y 5-6Y 6-7Y 7-10Y >10Y 0-1Y 1-2Y 2-3Y 3-4Y 4-5Y 5-6Y 6-7Y 7-10Y >10Y 1Y 2Y 3Y 4Y 5Y 6Y 7Y 10Y 1Y 2Y 3Y 4Y 5Y 6Y 7Y 10Y Table 4.3.d Net interest-bearing debt excluding pension liabilities and the effect of hedging, maturity Table 4.3.e Currency profile of net interest-bearing debt excluding pension liabilities* (EUR million) Total 2024 2025 2026 2027 2028 2029 2030 2031- 2033 After 2033 (EUR million) Original principal Effect of swap After swap 2023 DKK SEK EUR GBP Other Total 2022 DKK SEK EUR GBP Other Total 982 671 930 34 66 2,683 -9 239 79 5 1 315 99 116 14 8 54 291 60 187 209 7 6 469 59 5 108 6 3 181 64 120 156 3 2 345 76 4 112 5 3 200 66 - 24 - - 90 215 - 78 - - 293 352 - 150 - -3 499 Total 2023 2024 2025 2026 2027 2028 2029 2030- 2032 After 2032 1,046 606 1,014 39 120 2,825 30 228 -10 8 -71 185 36 139 390 7 135 707 97 5 163 6 6 277 57 183 5 5 46 296 58 3 105 5 1 172 61 48 7 8 3 127 67 - 102 - - 169 201 - 76 - - 277 439 - 176 - - 615 2023 DKK SEK EUR GBP Other Total 2022 DKK SEK EUR GBP Other Total * Before and after derivative financial instruments. 982 671 930 34 66 2,683 1,046 606 1,014 39 120 2,825 - -570 46 524 - - - -538 183 355 - - 982 101 976 558 66 2,683 1,046 68 1,197 394 120 2,825 ARLA'S ANNUAL REPORT 2023 PAGE 126 I. II. CONSOLIDATED FINANCIAL STATEMENTS III. Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / 4.3 NET INTEREST-BEARING DEBT (CONTINUED) Table 4.3.f Interest rate risk excluding effect of hedging (EUR million) 2023 Issued bonds: Commercial papers 652 mSEK maturing 03.04.2024 750 mSEK maturing 03.04.2024 1,200 mSEK maturing 16.06.2025 500 mSEK maturing 14.04.2026 1,500 mSEK maturing 17.07.2026 500 mSEK maturing 14.01.2028 400 mSEK maturing 12.10.2028 400 mSEK maturing 12.10.2028 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 ARLA'S ANNUAL REPORT 2023 Interest rate Average interest rate Fixed for Carrying amount Interest rate risk Interest rate Average interest rate Fixed for Carrying amount Interest rate risk Fixed Floating Fixed Floating Floating Floating Floating Floating Fixed Fixed Floating Fixed Floating Fixed Floating 4.4% 5.3% 1.6% 5.2% 5.5% 4.8% 5.8% 5.9% 4.9% 4.7% 3.8% 4.7% 4.6% 3.8% 4.7% 4.4% 3.8% 3.0% 3.7% 0-1 year 0-1 year 0-1 year 1-2 years 2-3 years 2-3 years 4-5 years 4-5 years 4-5 years Fair value Cash flow Fair value Cash flow Cash flow Cash flow Cash flow Cash flow Fair value 103 59 68 109 45 137 45 36 36 638 1-2 years 0-1 year Fair value Cash flow 71 1,141 1,212 0-1 year 0-1 year 402 697 Fair value Cash flow 1,099 223 10 233 Cash flow Cash flow 0-20 years 0-1 year 2022 Issued bonds: Commercial papers 750 mSEK maturing 03.07.2023 750 mSEK maturing 03.07.2023 750 mSEK maturing 03.04.2024 750 mSEK maturing 03.04.2024 500 mSEK maturing 14.01.2026 1,500 mSEK maturing 17.07.2026 500 mSEK maturing 14.01.2028 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 Floating Fixed Fixed Floating Floating Floating Floating Fixed Floating Fixed Floating Fixed Floating 2.5% 3.7% 1.5% 1.6% 3.9% 4.0% 2.4% 4.2% 2.8% 1.9% 3.0% 2.9% 1.9% 2.9% 2.6% 3.1% 3.7% 3.2% 0-1 year 0-1 year 0-1 year 2-3 years 2-3 years 3-4 years 3-4 years 5-6 years Fair value Cash flow Fair value Fair value Cash flow Cash flow Cash flow Cash flow 88 67 66 66 67 45 134 45 578 1-2 years 0-1 year Fair value Cash flow 125 1,096 1,221 0-1 year 0-1 year 377 959 Fair value Cash flow 1,336 214 18 232 Cash flow Cash flow 0-20 years 0-1 year PAGE 127 I. II. CONSOLIDATED FINANCIAL STATEMENTS III. Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / costs. Subsequently, liabilities are meas- ured at amortised cost with the differ- ence between loan proceeds and the nominal value recognised in the income statement over the expected life of the loan. Capitalised residual lease obligations re- lated to leases are recognised under lia- bilities and measured at amortised cost. Other financial liabilities are measured at amortised cost. For details on pension liabilities, please refer to Note 4.7. 4.3 NET INTEREST-BEARING DEBT (CONTINUED) Financial assets where the group in- tends to collect the contractual cash flow are classified and measured at amortised cost. quently measured at fair value with adjustments made in other comprehen- sive income and accumulated in the fair value reserve in equity. Accounting policies Financial instruments Financial instruments are recognised at the date of trade. The group ceases to recognise financial assets when the con- tractual rights to the underlying cash flows either cease to exist or are trans- ferred to the purchaser of the financial asset, and substantially all risks and re- wards related to ownership are also transferred to the purchaser. Financial assets and liabilities are offset, and the net amount is presented in the balance sheet when, and only when, the group has a legal right of offsetting and either intends to offset or settle the financial asset and the liability simulta- neously. Financial assets Financial assets are classified on initial recognition and subsequently measured at amortised cost, fair value through other comprehensive income or fair value through the income statement. The classification of financial assets on initial recognition depends on the finan- cial asset's contractual cash flow charac- teristics and how these are managed. Financial assets that are part of liquidity management are classified and meas- ured at fair value through other compre- hensive income. All other financial as- sets are classified and measured at 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 con- verted 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. Financial assets are measured on initial recognition at fair value plus transaction costs. The financial assets are subse- Interest income, impairment and foreign currency translation adjustments of debt instruments are recognised in the income statement on a continuous ba- sis under financial income and financial costs. In connection with the sale of fi- nancial 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 finan- cial 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 Upon initial recognition, debt to mort- gage credit and credit institutions as well as issued bonds are measured at the trade date at fair value plus transac- tion ARLA'S ANNUAL REPORT 2023 PAGE 128 I. II. CONSOLIDATED FINANCIAL STATEMENTS III. Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / 4.4 DERIVATIVES Financial comments The group has entered into derivative contracts to secure a stable cash flow in future years. The value of cash flow hedges decreased by EUR 141 million to EUR 70 million. The decrease was due to lower values of currency, interest and commodity hedge contracts. Currency contracts The value of currency contracts de- creased by EUR 34 million compared to last year. The lower value was due to changed currency exchange rates com- bined with maturing of existing con- tracts and value adjustments of new contracts. Interest rate contracts The value of interest rate contracts used for hedging decreased by EUR 52 mil- lion compared to last year. The lower value is a result of lower long-term inter- est levels and utilisation of interest hedges during the year. Commodity contracts The value of commodity contracts used for hedging decreased by EUR 55 mil- lion compared to last year. The lower value is a result of market prices de- creasing to levels below the hedged prices combined with maturing of exist- ing contracts and value adjustments of new contracts. ARLA'S ANNUAL REPORT 2023 Hedging of future cash flows The group uses currency forwards 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. 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 the fair value adjustment is therefore recognised directly in the income statement. Currency swaps are used as part of the daily liquidity management. The objec- tive of the currency swaps is to match the timing of the in- and outflow of for- eign currency cash flows. Accounting policies Derivatives are recognised from the trade date and measured in the financial statements at fair value. Positive and negative fair values of derivatives are recognised as separate items in the bal- ance sheet. Fair value hedging Changes in the fair value of derivatives which meet the criteria for hedging the fair value of recognised assets and liabil- ities 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 derivatives that are classified as hedges of future cash flows and effectively hedge changes in future cash flows are recog- nised in other comprehensive income as a reserve for hedging transactions under equity until the hedged cash flows im- pact the income statement. The reserve for hedging instruments under equity is presented net of tax. The cumulative gains or losses from hedging transac- tions that are retained in equity are reclassified and recognised under the same item as the basic adjustment for the hedged item. The accumulated change in value rec- ognised 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 derivatives that do not meet the criteria for classification as hedging instruments, changes in fair value are recognised as they occur in the income statement under financial income and costs. Table 4.4.a Hedging of future cash flow from highly probable forecast transactions (EUR million) 2023 Currency contracts Interest rate contracts Commodity contracts Hedging of future cash flow (EUR million) 2022 Currency contracts Interest rate contracts Commodity contracts Hedging of future cash flow Expected recognition Carrying amount Fair value recognised in OCI 2024 2025 2026 2027 After 2027 8 80 -18 70 8 80 -18 70 8 22 -18 12 - 21 - 21 - 12 - 12 - 11 - 11 - 14 - 14 Expected recognition Carrying amount Fair value recognised in OCI 2023 2024 2025 2026 After 2026 42 132 37 211 42 132 37 211 42 30 28 100 - 27 8 35 - 25 1 26 - 15 - 15 - 35 - 35 Table 4.4.b Value adjustment of hedging instruments (EUR million) Deferred gains and losses on cash flow hedges arising during the year Value adjustments of currency hedging instruments reclassified to other operating income and costs Value adjustments of commodity hedging instruments reclassified to other operating income and costs Value adjustments of currency hedging instruments reclassified to financial items Value adjustments of interest hedging instruments reclassified to financial items Total value adjustment of hedging instruments recognised in other comprehensive income during the year 2023 -112 2022 265 3 -61 20 9 -69 72 -34 -9 -141 225 PAGE 129 I. II. CONSOLIDATED FINANCIAL STATEMENTS III. Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / 4.5 FINANCIAL INSTRUMENTS Table 4.5.a Categories of financial instruments (EUR million) 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 receivables Cash 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 ARLA'S ANNUAL REPORT 2023 2023 2022 Table 4.5.b Fair value hierarchy - carrying amount (EUR million) Level 1 Level 2 Level 3 Total 45 8 53 403 403 9 66 12 87 1,145 309 138 1,592 2 2 1 10 30 41 2,369 813 1,425 4,607 47 7 54 432 432 43 96 53 192 1,267 319 106 1,692 19 19 1 - 16 17 2,640 727 1,597 4,964 2023 Financial assets: Bonds Shares Derivatives Total financial assets Financial liabilities: Issued bonds Mortgage credit institutions Derivatives Total financial liabilities 2022 Financial assets: Bonds Shares Derivatives Total financial assets Financial liabilities: Issued bonds Mortgage credit institutions Derivatives Total financial liabilities 403 8 - 411 - 1,212 - 1,212 432 7 - 439 - 1,221 - 1,221 - - 132 132 535 - 43 578 - - 239 239 490 - 36 526 - - - - - - - - - - - - - - - - 403 8 132 543 535 1,212 43 1,790 432 7 239 678 490 1,221 36 1,747 PAGE 130 I. II. CONSOLIDATED FINANCIAL STATEMENTS III. Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / 4.5 FINANCIAL INSTRUMENTS (CONTINUED) Risk mitigation Methods and assumptions applied when measuring the fair values of financial in- struments: 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 dis- counted cash flow models and observa- ble market data. The fair value is deter- mined as a termination price and, conse- quently, 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 ad- justed 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 valu- ation techniques and observable market data. Level 3: Fair values measured using valu- ation techniques and observable as well as significant non-observable market data. 4.6 SALE AND REPURCHASE ARRANGEMENTS Financial comments The group has invested in listed Danish mortgage bonds underlying its mort- gage debt. By entering into a sale and repurchase arrangement on the mort- gage bonds, the group is able to achieve a lower interest rate compared to cur- rent market interest rates on mortgage debt. The mortgage bonds are meas- ured at fair value through other compre- hensive income. Table 4.6 Transfer of financial assets (EUR million) 2023 Mortgage bonds Repurchased liability Net position 2022 Mortgage bonds Repurchased liability Net position The proceeds from these bonds create a repurchase obligation which is recog- nised in short-term borrowings and measured at fair value. In addition to mortgage bonds, the group holds other securities with a car- rying amount of EUR 40 million. Carrying amount Notional amount Fair value 363 -337 26 379 -370 9 363 -335 28 377 -369 8 363 -337 26 379 -370 9 ARLA'S ANNUAL REPORT 2023 PAGE 131 I. II. CONSOLIDATED FINANCIAL STATEMENTS III. Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / 4.7 PENSION LIABILITIES Pension liabilities The group's pension assets and liabilities consist primarily of defined benefit plans in Sweden and the UK. The group also operates defined contri- bution plans for employees. For these defined contribution plans, the group is not subject to the same investment, interest rate, inflation or longevity risks as it is for the defined benefit plans. The benefits that employees receive are dependent on the contribution paid, investment returns and the form of ben- efit chosen at retirement. Pension plans in Sweden The recognised net pension liability in Sweden was EUR 152 million at 31 December 2023, an increase of EUR 8 million compared to the previous year. The increase is predominantly driven by an increase in the funded liabilities resulting from a fall in the discount rate assumption used in the previous year. In addition, the inflation rate assumption used in the previous year has decreased, which has partially offset the discount rate effect. Mortality assumptions remained consistent with last year. See Note 4.7.f for a summary of assumptions used. These pension plans are contribution- based plans, guaranteeing a defined ARLA'S ANNUAL REPORT 2023 benefit pension at retirement. The plan assets are legally structured as a trust, and the group has control over the oper- ation of the plan and the associated in- vestments. 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 21 million at 31 December 2023, an increase of EUR 5 million com- pared to the previous year. UK assumptions changed in a similar way to Sweden, with a fall in both the discount rate assumption and the infla- tion rate assumption. In addition, an update in mortality assumptions at 31 December 2023 resulted in lower life expectancy in the UK. This all resulted in lower pension liabilities in the UK, which stood at EUR 932 million at 31 Decem- ber 2023, a decrease of EUR 11 million from the previous year. 2023 resulted in a negative return on plan assets of EUR 28 million. In addition to this EUR 54 million was paid out of the plan in the UK. These decreases were partially offset by interest income, contributions to the plan and favourable exchange rate adjustments, leading to an overall net decrease in the fair value of plan assets in the UK of EUR 6 million. Arla managed to increase its net pen- sion asset position in the UK. This was helped by the investment strategy adopted by the trustees, which aims to mitigate any major fluctuations in asset values due to external factors by incor- porating matching assets into the asset portfolio. This minimises movements in the net pension asset position and in- creases the stability of the ongoing pen- sion position. More details of the invest- ment strategy can be found in the 'Plan asset investments in the UK' section. The defined benefit plan in the UK is a defined benefit final salary scheme. The plan is closed to both new entrants and future accruals, but retains a salary link. The plan is a registered pension scheme, and the assets are held in legally sepa- rate, trustee-administered funds. The trustees of the plan are required by law to act in the best interests of the plan participants while at the same time ad- ministering the plan in accordance with the purpose for which the trust was cre- ated, and are responsible for drawing up the investment, funding and govern- ance policies. A representative of the group attends trustee meetings to pro- vide the group's view on the investment strategy, but the ultimate control lies with the trustees. Table 4.7.a Pension liabilities recognised in the balance sheet (EUR million) Sweden UK Other Total 2023 Present value of funded liabilities Fair value of plan assets Deficit of funded plans Present value of unfunded liabilities Net pension liabilities recognised in 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 2022 Present value of funded liabilities Fair value of plan assets Deficit of funded plans Present value of unfunded liabilities Net pension liabilities recognised in 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 162 -12 150 2 152 162 2 164 - 152 152 153 -11 142 2 144 153 2 155 - 144 144 932 -953 -21 - -21 932 - 932 -21 - -21 943 -959 -16 - -16 943 - 943 -16 - -16 31 -17 1,125 -982 14 1 15 31 1 32 - 15 15 143 3 146 1,125 3 1,128 -21 167 146 35 -20 1,131 -990 15 2 17 35 2 37 - 17 17 141 4 145 1,131 4 1,135 -16 161 145 PAGE 132 I. II. CONSOLIDATED FINANCIAL STATEMENTS III. Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / 4.7 PENSION LIABILITIES (CONTINUED) made both by Arla and the employee at a rate determined by Arla. (comprising a liability hedge portfolio and a buy-in annuity policy), with a weighting towards matching assets. Employer contributions are determined based on the advice of an independent qualified actuary on the basis of triennial valuation negotiations between the plan and Arla, and ultimately approved by HRM Pensions Regulator. The most re- cent triennial valuation of the plan was carried out at 31 December 2022, and on the agreed funding basis, the plan was in a surplus position. Defined contribution plans are in place for other employees. Contributions are Plan asset investments in the UK Plan assets generate returns that are used to satisfy the plan liabilities. They are not necessarily intended to be real- ised in the short term. The trustees in- vest in different categories of assets and with different allocations among those categories according to the plan invest- ment principles. Currently, the plan investment strategy is to maintain a balance of growth assets (property and infrastructure), income as- sets (comprising credit investments and corporate bonds) and matching assets Part of the investment objective is to minimise fluctuations in the plan's fund- ing levels due to changes in the value of the liabilities. This is primarily achieved using a Liability Driven Investment (LDI) portfolio, the main goal of which is to align movements in the value of the assets with movements in the liabilities caused by changes in market conditions. The plan has hedging in place that co- vers Maturity of pension liabilities at 31 December 2023 (EUR million) Maturity of pension liabilities at 31 December 2022 (EUR million) UK 936 Sweden 162 Other 30 UK 943 Sweden 155 Other 37 600 500 400 300 200 100 0 600 500 400 300 200 100 0 Table 4.7.b Development in pension liabilities (EUR million) 2023 2022 Present value of liabilities at 1 January Current service costs Interest costs 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 liabilities at 31 December Table 4.7.c Development in fair value of plan assets (EUR million) Fair value of plan assets at 1 January Interest income Return on plan assets excluding amounts included in net interest on the net de- fined benefit liability (OCI) Contributions to plans Benefits paid Exchange rate adjustments Fair value of plan assets at 31 December Actual return on plan assets: Calculated interest income Return excluding calculated interest Actual return 1,135 1 50 22 -33 -65 18 1,128 2023 990 47 -30 12 -55 18 982 47 -30 17 1,757 3 31 -505 -6 -64 -81 1,135 2022 1,581 29 -512 12 -54 -66 990 29 -512 -483 The group expects to contribute EUR 24 million to the plan assets in 2024 and EUR 83 million in 2025-2028. 0-1Y 1-5Y 5-10Y 10-20Y 20-30Y 30-40Y >40Y 6-7Y 0-1Y 1-5Y 5-10Y 10-20Y 20-30Y 30-40Y >40Y 6-7Y ARLA'S ANNUAL REPORT 2023 PAGE 133 I. II. CONSOLIDATED FINANCIAL STATEMENTS Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / 4.7 PENSION LIABILITIES (CONTINUED) governments (debt vehicles and bonds), commercial property investments (prop- erties) as well as insurance-linked secu- rities and cash (other assets). the assets will meet the pension liabili- ties, which are affected by assumptions concerning mortality and inflation. the majority of interest rate and inflation movements, as measured based on the trustees' funding assumptions which use a discount rate derived from gilt yields. LDI primarily involves the use of govern- ment bonds. Derivatives such as interest rate and inflation swaps are also used. There are no annuities or longevity swaps in the LDI portfolios. The value of the LDI assets is determined based on the latest market bid price for the under- lying investments, which are traded daily on liquid markets. Annuity policies consist of a bulk annuity contract with an insurance company. This allows the trustees to reduce their scheme's risk by acquiring an asset (annuity contract) whose cashflows are designed to exactly meet a specified set of benefit payments under the pension scheme. Infrastructure investments are in large- scale public systems, services and facili- ties such as power, road and water sys- tems. These investments aim to gener- ate stable long-term inflation-linked cash flows. The remainder of the plan assets con- sists of loans to companies or ARLA'S ANNUAL REPORT 2023 Accounting policies Pension liabilities and similar non- current liabilities The group has post-employment pen- sion plan arrangements with a signifi- cant number of current and former employees. The post-employment pen- sion plan agreements take the form of defined contribution plans and defined benefit plans. Defined contribution plans For defined contribution plans, the group pays fixed contributions to inde- pendent pension companies. The group has no obligation to make supplemen- tary payments beyond those fixed pay- ments, and the risk and reward of the value of the pension plan therefore rests with plan members, and not the group. Contributions to defined contribution plans are expensed in the income state- ment as incurred. Defined benefit plans Defined benefit plans are characterised by the group's obligation to make spe- cific payments from the date the plan member is retired, depending on, for ex- ample, the member's seniority and final salary. The group is subject to the risks and rewards associated with the uncer- tainty whether the return generated by The group's net liability is the amount presented as a pension liability in the balance sheet. The net liability is calculated separately for each defined benefit plan. The net li- ability 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) dis- counted to a present value (the defined benefit liability), less the fair value of as- sets held separately from the group in a plan fund. The group uses qualified actuaries to an- nually calculate the defined benefit lia- bility using the projected unit credit method. The balance sheet amount of the net lia- bility is impacted by remeasurements, which include the effect of changes in assumptions used to calculate the future liability (actuarial gains and losses) and the return generated on plan assets (excluding interest). Remeasure- ments are recognised in other compre- hensive income. Interest costs for the period are calcu- lated using the discounted rate used to III. % 27 22 22 12 8 1 8 100 Table 4.7.d Specification of plan assets (EUR million) Liability hedge portfolio Debt vehicles Annuity policies Properties Infrastructure Bonds Other assets Fair value of plan assets at 31 December 2023 295 295 211 82 64 9 26 982 % 30 30 21 8 7 1 3 100 2022 269 216 221 117 81 9 77 990 Table 4.7.e Assumptions for the actuarial calculations % 2023 2022 Discount rate assumptions Discount rate, Sweden Discount rate, UK Inflation assumptions Inflation (CPI), Sweden Inflation (CPI), UK Mortality assumptions (life expectancy in years at age 65) Male in the UK Female in the UK Male in Sweden Female in Sweden 3.5 4.6 1.5 2.4 20.3 22.5 22.0 24.0 4.0 4.9 2.0 2.6 21.0 23.0 22.0 24.0 Table 4.7.f Sensitivity of pension liabilities to key assumptions 2023 (EUR million) 2023 2022 2022 Impact on pension liabilities at 31 December Discount rate +/- 10bps Life expectancy +/- 1 year Inflation +/- 10 bps + -13 41 8 - 13 -41 -8 + -14 36 8 - 14 -36 -8 PAGE 134 I. II. CONSOLIDATED FINANCIAL STATEMENTS III. Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / 4.7 PENSION LIABILITIES (CONTINUED) measure the defined benefit liability at the start of the reporting period applied to the carrying amount of the net liabil- ity, taking into account changes arising from contributions and benefit pay- ments. The net interest costs and other costs relating to defined benefit plans are recognised in the income statement. The net liability primarily covers defined benefit plans in the UK and Sweden. Uncertainties and estimates The defined benefit liability is assessed based on a number of assumptions, in- cluding discount rates, inflation rates, salary growth and mortality rates. Any changes in assumptions can have a sig- nificant impact on the net position. The group is aware of a case in the UK involv- ing Virgin Media and NTL Pension Trustee, which could potentially lead to additional liabilities for some pension schemes and sponsors, including (if ap- plicable) the group. This case is subject to appeal and the impact (if any) is not known and will be assessed as relevant in the future. Table 4.7.g Recognised in the income statement (EUR million) Current service costs Recognised as staff costs Interest costs on pension liabilities Interest income on plan assets Recognised as financial costs 2023 2022 1 1 50 -47 3 3 3 31 -29 2 Total amount recognised in the income statement 4 5 Table 4.7.h Recognised in other comprehensive income (EUR million) 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 de- fined benefit liability Total amount recognised in other comprehensive income 2023 -22 33 -30 -19 2022 505 6 -512 -1 ARLA'S ANNUAL REPORT 2023 PAGE 135 I. II. CONSOLIDATED FINANCIAL STATEMENTS Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / Table 5.1.a Tax recognised in the income statement (EUR million) Current income tax Current income tax on profit for the year relating to: Cooperative tax Corporate income tax Adjustments to current taxes of previous years Total current income tax costs Deferred tax Change in deferred tax for the year Adjustment to deferred taxes of previous years Total deferred tax costs Total tax costs in the income statement NOTE 5. OTHER AREAS 5.1 TAX Current and deferred tax Tax in the income statement Tax costs increased to EUR 56 million (2022: EUR 49 million), primarily due to an increase in total deferred tax costs. The effective tax rate increased to 12.3% compared to 10.9% last year, pri- marily due to changes in recognised tax losses. Current income tax Cost related to current income taxes de- creased to EUR 31 million (2022: EUR 42 million), mainly due to adjustments to current taxes relating to previous years. Deferred tax Costs incurred in the income statement relating to adjustments of deferred taxes amounted to EUR 25 million, rep- resenting an increase of EUR 18 million compared to last year. The increase was ARLA'S ANNUAL REPORT 2023 driven by higher deferred tax costs in the current year as well as additional de- ferred tax costs from prior-year effects. Net deferred tax liabilities amounted to EUR 60 million, representing a net decrease of EUR 4 million compared to last year. See table 5.1.c. The primary changes in gross temporary differences were driven by enhanced capital allow- ances on property, plant and equipment, the effect of which was offset by a de- crease in deferred tax liabilities relating to provisions, pension liabilities and other liabilities. Deferred tax liabilities equalled EUR 83 million which mainly relate to provisions, pension liabilities and other liabilities, fi- nancial assets and other items. These were in part offset by deferred tax assets amounting to EUR 23 million relating to property, plant and equipment and tax losses carried forward. The group recognises deferred tax as- sets, including the value of tax losses carried forward, where management assesses that the tax assets may be uti- lised in the foreseeable future by offset- ting against taxable income. The assess- ment is performed on an ongoing basis and is based on the budgets and busi- ness plans for future years. The group recognised deferred tax as- sets in respect of tax losses carried for- ward in the amount of EUR 7 million. Deferred tax assets relating to tax losses carried forward not recognised totalled EUR 31 million and related to activities in the UK, Denmark, Sweden, the USA and Brazil. Expected effects from Pillar II taxes Based on preliminary analyses, the group expects the impact of the Pillar II rules to result in an immaterial financial impact for the financial year 2024. Table 5.1.b Calculation of effective tax rate (EUR million) 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 Non-deductible expenses, less tax-exempt income Impact of changes in tax rates and laws Adjustment for tax costs of previous years Recognition and adjustments of previously unrecognised tax losses Current year losses for which no deferred tax asset is recognised Other adjustments Total 2023 2022 22.0% -3.1% -8.1% 0.2% 0.0% -1.3% 0.6% 0.0% 2.0% 12.3% 455 100 -14 -37 1 - -6 3 - 9 56 22.0% -2.8% -7.7% -0.6% 0.0% -0.8% -1.0% 0.3% 1.5% 10.9% III. 2023 2022 8 31 -8 31 23 2 25 56 10 31 1 42 16 -9 7 49 449 99 -13 -34 -3 - -4 -4 1 7 49 PAGE 136 I. II. CONSOLIDATED FINANCIAL STATEMENTS Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / 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 taxa- ble profits. Actual future taxes may deviate from these estimates due to changes in expectations relating to future taxable income, future statutory changes in income taxation or the out- come 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. Table 5.1.c. Deferred tax assets and liabilities (EUR million) Net deferred tax liability at 1 January Deferred tax recognised in the income statement Deferred tax recognised in other comprehensive income Acquisitions in connection with business combinations Exchange rate adjustments Balance sheet reclassification of deferred tax assets/liabilities Net deferred tax liability at 31 December Deferred tax, by gross temporary difference Intangible assets Property, plant and equipment Provisions, pension liabilities and other liabilities 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 deferred tax is not recognised in tempo- rary differences on initial recognition of goodwill or arising at the acquisition date of an asset or liability without af- fecting either the profit or loss for the year or taxable income, except for those arising from M&A activities. Deferred tax is determined by applying tax rates (and laws) that have been en- acted or substantially enacted by the end of the reporting period and that are expected to apply when the related de- ferred tax asset is realised or the de- ferred tax liability is settled. Changes in deferred tax assets and liabilities due to changes in the tax rate are recognised in the income statement, except for items recognised in other comprehensive in- come. Deferred tax assets, including the value of tax losses carried forward, are recog- nised under other non-current assets at the value at which they are expected to be used, either by elimination in the tax on future earnings or by offsetting against deferred tax payable in compa- nies within the same legal tax entity or jurisdiction. The mandatory exception in IAS 12 from recognising and disclosing deferred tax assets and liabilities related to Pillar II in- come taxes has been applied. 5.1 TAX (CONTINUED) 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 di- rectly in other comprehensive income. Current tax Current tax is assessed based on tax leg- islation for entities in the group subject to cooperative or corporate income tax- ation. Cooperative taxation is based on the capital of the cooperative, while cor- porate income tax is assessed based on the company's taxable income for the year. Current tax liabilities comprise the expected tax payable/receivable on the taxable income or loss for the year, any adjustments to the tax payable or receiv- able in respect of previous years and tax paid on account. Current tax liabilities are disclosed as part of other current liabilities. 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 consoli- dated financial statements. However, ARLA'S ANNUAL REPORT 2023 III. 2023 2022 -64 -25 13 -2 -0 18 -60 -4 4 -31 7 -36 -60 23 -83 -60 -43 -7 -17 - 3 - -64 -6 22 -51 9 -38 -64 22 -86 -64 PAGE 137 I. II. CONSOLIDATED FINANCIAL STATEMENTS III. Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / 5.2 PROVISIONS Provisions Provisions amounted to EUR 51 million (2022: EUR 48 million). Provisions pri- marily relate to provisions for insurance incidents that have occurred, but have not yet been settled. Uncertainties and estimates Provisions are particularly associated with estimates of insurance provisions. Insurance provisions are assessed based on historical records of, among other things, the number of insurance events and related costs considered. The scope and extent of onerous contracts were also estimated. 5.3 FEES TO AUDITORS Fees paid to EY EY is appointed as auditors of Arla by the Board of Representatives. Table 5.2 Provisions (EUR million) Provisions at 1 January New provisions during the year Reversals Used during the year Provisions at 31 December Non-current provisions Current provisions Provisions at 31 December Insurance provisions Restructuring provisions Other provisions Total 2023 Total 2022 21 3 - - 24 10 14 24 4 1 - -1 4 1 3 4 23 3 -3 - 23 20 3 23 48 7 -3 -1 51 31 20 51 42 8 -1 -1 48 28 20 48 Table 5.3 Fees to auditors appointed by the Board of Representatives (EUR million) Statutory audit Other assurance engagements Tax assistance Other services Total fees to auditors 2023 2022 1.8 0.3 0.3 0.3 2.7 1.7 0.4 0.3 0.3 2.7 ARLA'S ANNUAL REPORT 2023 PAGE 138 I. II. CONSOLIDATED FINANCIAL STATEMENTS III. Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / The Executive Board consists of Chief Executive Officer Peder Tuborgh and Chief Operations Officer, Europe, Peter Giørtz-Carlsen. The principles applied to the remuneration of the Executive Board are described on page 81. Table 5.4.a includes accrued amounts related to the respective reporting period. The amount was based on reported key figures together with esti- mates of performance compared to peers and, consequently, the final future payout may differ. 5.4 MANAGEMENT REMUNERATION AND TRANSACTIONS WITH RELATED PARTIES Remuneration paid to management The remuneration to the 19 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 remunera- tion was most recently adjusted in 2022. The principles applied to the remunera- tion of the BoD are described on page 81. Members of the BoD are paid for milk supplies to Arla Foods amba in ac- cordance with the same terms as apply to other owners. Similarly, individual capital instruments are issued to the BoD on the same terms as apply to other owners. Table 5.4.a Management remuneration (EUR million) Board of Directors Wages, salaries and remuneration Total Executive Board Fixed compensation Pension and other benefits Short-term variable incentives Long-term variable incentives Total Table 5.4.b Transactions with the Board of Directors (EUR million) Purchase of raw milk Half-year supplementary payment Supplementary payment regarding previous years Total Unsettled milk deliveries in trade payables and other payables Individual capital instruments Total 2023 2022 1.7 1.7 2.5 0.5 0.7 1.0 4.7 2023 30.3 0.4 1.1 31.8 1.2 2.8 4.0 1.6 1.6 2.5 0.4 0.5 0.8 4.2 2022 36.2 0.3 1.1 37.6 1.4 2.6 4.0 ARLA'S ANNUAL REPORT 2023 PAGE 139 I. II. CONSOLIDATED FINANCIAL STATEMENTS III. Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / position beyond what has already been recognised in the financial statements. 5.6 EVENTS AFTER THE BALANCE SHEET DATE 5.5 CONTRACTUAL COMMITMENTS, CONTINGENT ASSETS AND LIABILITIES Financial comments Contractual obligations and commit- ments amounted to EUR 614 million (2022: EUR 420 million). Arla signed power purchase agreements in Den- mark, Germany, the UK and Sweden dur- ing the year, counting an increase in contractual commitments of EUR 143 million. Commitments to investments in property, plant and equipment in- creased by EUR 44 million. Other contractual obligations and commit- ments consisted of IT licences, short- term and low-value leases and others and increased by net EUR 7 million. Arla provided security in property for mortgage debt based on the Danish Mortgage Act with a nominal value of EUR 1,216 million (2022: EUR 1,229 mil- lion). Financial surety and guarantee ob- ligations amounted to EUR 18 million (2022: EUR 28 million). Arla is party to a small number of law- suits, disputes and other claims. It is management's assessment that the out- come of these will most likely not have a material impact on the group's financial Table 5.5 Contractual commitments* (EUR million) 2023 IT contracts Short-term and low value leases Power purchase agreements Property, plant and equipment investment commitments Total 2022 IT contracts Short-term and low value leases Power purchase agreements Property, plant and equipment investment commitments Total 0-1 years 1-5 years 5+ years Total 34 39 11 187 259 27 29 - 149 205 31 - 120 27 178 29 - 23 21 73 - - 177 - 177 - - 142 - 142 65 27 308 214 614 56 29 165 170 420 * Other contractual commitments not disclosed in the table include mortgaged property provided as security for mortgage loans and financial surety and guarantee obligations. ARLA'S ANNUAL REPORT 2023 Subsequent events No subsequent events with a material impact on the financial statements have occurred after the balance sheet date. 5.7 GENERAL ACCOUNTING POLICIES Basis for preparation The consolidated financial statements included in this annual report are pre- pared in accordance with IFRS Account- ing Standards as adopted by the EU, and additional disclosure requirements in the Danish Financial Statements Act for large class C companies. Arla is not an EU public interest entity as the group has no debt instruments traded in a reg- ulated EU marketplace. The consoli- dated financial statements were author- ised for issue by the company's Board of Directors on 19 February 2024 and pre- sented for approval by the Board of Rep- resentatives on 28 February 2024. The functional currency of the parent company is DKK. The presentation cur- rency of the parent company and of the group is EUR. These financial statements are prepared in million EUR with rounding. Consolidated financial statements The consolidated financial statements are prepared as a compilation of the par- ent company's and the individual subsid- iaries' financial statements in line with the group's accounting policies. Reve- nue, costs, assets and liabilities, along with items included in the equity of sub- sidiaries, are aggregated and presented on a line-by-line basis. Inter-company shareholdings, balances and transac- tions as well as unrealised income and expenses arising from inter-company transactions are eliminated. The consolidated financial statements comprise Arla Foods amba (parent com- pany) and the subsidiaries in which the parent company directly or indirectly holds more than 50% of the voting rights or otherwise maintains control to obtain benefits from its activities. Enti- ties in which the group exercises joint control through a contractual arrange- ment are considered joint ventures. Entities in which the group exercises a significant but not a controlling influ- ence are considered associates. A signif- icant influence is typically obtained by holding or having at the group's dis- posal, directly or indirectly, more than 20%, but less than 50% of the voting rights in an entity. Unrealised gains arising from transac- tions 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 carry- ing amount of the investment in propor- tion to the group's interest in the com- pany. 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 identi- fied in these accounting policies. Translation of transactions and monetary items in foreign currencies For each reporting entity in the group, a functional currency is determined, being the currency used in the primary eco- nomic environment where the entity op- erates. Where a reporting entity has transactions in a foreign currency, it will record the transaction in its functional currency using the transaction date rate. Monetary assets and liabilities denomi- nated in foreign currencies are trans- lated into the functional currency using the exchange rate applicable at the re- porting date. Exchange rate 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 cur- rency upon initial recognition. PAGE 140 I. II. CONSOLIDATED FINANCIAL STATEMENTS III. Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / Adoption of new or amended IFRS The group has implemented all new standards and interpretations effective in the EU from 1 January 2023. The new standards and interpretations did not have any material impact on the consoli- dated financial statements. Future implementations The IASB has issued a number of new or amended and revised accounting stand- ards and interpretations which are not yet applicable. Arla will adopt these new standards when they become manda- tory. It is expected that the future imple- mentation of the new or amended standards will not have a material impact on the consolidated financial statements. 5.7 GENERAL ACCOUNTING POLICIES (CONTINUED) 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 net profit or loss for the year are translated into EUR using the average monthly exchange rate if this does not differ materially from the transaction date rate. Exchange rate differences are rec- ognised in other comprehensive income and accumulated in the translation reserve. On partial divestment of associates and joint ventures, the relevant proportional amount of the cumulative foreign cur- rency translation adjustment reserve is transferred to the net profit or loss for the year, along with any gains or losses related to the divestment. Any repay- ment of outstanding balances consid- ered part of the net investment is not in itself considered to be a partial divest- ment of the subsidiary. ARLA'S ANNUAL REPORT 2023 PAGE 141 I. II. CONSOLIDATED FINANCIAL STATEMENTS III. Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / 5.8 GROUP CHART Arla Foods amba Arla Foods Ingredients Group P/S Arla Foods Ingredients Energy A/S Arla Foods Ingredients Japan K.K. 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 Unipessoal LTDA Arla Foods Ingredients Singapore Pte. Ltd. Arla Foods Ingredients S.A. de C.V. Arla Foods Holding A/S Arla Foods W.L.L. Arla Oy Massby Facility & Services Ltd. Oy Osuuskunta MS tuottajapalvelu ** Arla Foods Distribution A/S Cocio Chokolademælk A/S Arla Foods International A/S Arla Foods UK Holding Limited Country Denmark Denmark Denmark Japan USA Korea China Argentina Brazil Singapore Mexico Denmark Bahrain Finland Finland Finland Denmark Denmark Denmark UK Arla Foods UK Farmers Joint Venture Co. Limited UK Arla Foods UK plc Arla Foods GP Limited Arla Foods Limited Partnership UK UK UK Currency Group equity interest DKK DKK DKK JPY USD KRW CNY USD BRL SGD MXN DKK BHD EUR EUR EUR DKK DKK DKK GBP GBP GBP GBP GBP % 100 100 100 100 100 100 100 100 100 100 100 100 100 100 35 100 50 100 100 100 100 100 100 Currency Group equity interest Arla Foods amba Arla Foods Finance Limited Arla Foods Limited Arla Foods Hatfield Limited Yeo Valley Dairies Limited Arla Foods Cheese Company Limited Arla Foods Ingredients UK Limited MV Ingredients Limited Arla Foods UK Property Co. Limited Country Denmark UK UK UK UK UK UK UK UK Arla Foods B.V. Netherlands Arla Foods Comércio, Importacâo e Exportacão de Productos Alimenticios Ltda. Brazil DKK GBP GBP GBP GBP GBP GBP GBP GBP EUR BRL Arla Foods Ltd. AF A/S Arla Foods Finance A/S Kingdom Food Products ApS Ejendomsanpartsselskabet St. Ravnsbjerg Arla Insurance Company (Guernsey) Limited 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 Arla Foods Belgien AG Kingdom of Saudi Arabia SAR Denmark Denmark Denmark Denmark Guernsey Denmark Denmark Denmark Denmark Senegal Denmark Belgium DKK DKK DKK DKK EUR DKK DKK DKK DKK XOF DKK EUR % 100 100 100 100 100 100 100 100 100 100 75 100 100 100 100 100 100 100 100 100 100 100 100 ARLA'S ANNUAL REPORT 2023 PAGE 142 I. II. CONSOLIDATED FINANCIAL STATEMENTS III. Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / 5.8 GROUP CHART (CONTINUED) Arla Foods amba Arla Foods Ingredients (Deutschland) GmbH Arla CoAr Holding GmbH ArNoCo GmbH & Co. KG* Arla Biolac Holding GmbH Arla Foods Kuwait Company WLL Arla Kallassi Foods Lebanon S.A.L. Arla Foods Qatar WLL Arla Foods Trading and Procurement Limited Arla Foods Sdn. Bhd. Arla Foods Corporation Arla Foods Limited Arla Global Dairy Products Ltd. Arla Global Dairy Products Limited TG Arla Dairy Products LFTZ Enterprise TG Arla Dairy Products Ltd. Arl For General Trading Ltd. Arla Foods AB Arla Gelfeortens AB Årets Kock Aktiebolag Arla Foods Russia Holding AB Country Denmark Germany Germany Germany Germany Kuwait Lebanon Qatar Hong Kong Malaysia Philippines Ghana Nigeria Nigeria Nigeria Nigeria Iraq Sweden Sweden Sweden Sweden Currency Group equity interest DKK EUR EUR EUR EUR KWD LBP QAR HKD MYR PHP GHS NGN NGN NGN NGN USD SEK SEK SEK SEK % 100 100 50 100 49 50 40 100 100 100 100 100 99 50 100 51 100 100 67 100 Arla Foods amba Arla Foods Inc. Arla Foods Production LLC Arla Foods Transport LLC Arla Foods Deutschland GmbH Dofo Cheese Eksport K/S ° Dofo Inc. Aktieselskabet J. Hansen J.P. Hansen USA Incorporated AFI Partner ApS Andelssmør A.m.b.a. Arla Foods AS Arla Foods Bangladesh Ltd. Arla Foods Dairy Products Technical Service (Beijing) Co. Ltd. Arla Foods FZE Arla Foods Hellas S.A. Arla Foods Inc. Arla Foods Logistics GmbH Arla Foods Mayer Australia Pty, Ltd. Arla Foods Mexico S.A. de C.V. Arla Foods S.A. Country Denmark USA USA USA Germany Denmark USA Denmark USA Denmark Denmark Norway Bangladesh China UAE Greece Canada Germany Australia Mexico Spain Currency Group equity interest DKK USD USD USD EUR DKK USD DKK USD DKK DKK NOK BDT CNY AED EUR CAD EUR AUD MXN EUR % 100 100 100 100 100 100 100 100 100 98 100 51 100 100 100 100 100 51 100 100 ARLA'S ANNUAL REPORT 2023 PAGE 143 I. II. CONSOLIDATED FINANCIAL STATEMENTS III. Primary statements Notes / Introduction to notes Note 1: Revenue and costs Note 2: Net working capital Note 3: Capital employed Note 4: Funding Note 5: Other areas / 5.8 GROUP CHART (CONTINUED) Arla Foods amba Arla Foods France S.a.r.l. Arla Foods S.R.L. Arla Foods SA Arla Global Shared Services Sp. Z.o.o. Arla Foods LLC Arla National Food Products Company LLC Cocio Chokolademælk A/S Marygold Trading K/S ° Mejeriforeningen COFCO Dairy Holdings Limited** Svensk Mjölk Ekonomisk förening Svensk Mjölk AB Lantbrukarnas Riksförbund upa** Jörd International A/S Ejendomsselskabet Gjellerupvej 105 P/S Svenska Ostklassiker AB Komplementarselskabet Gjellerupvej 105 ApS PT Arla Foods Indonesia Arla Foods Arinco A/S Green Fertilizer Denmark ApS** Country Denmark France Dominican Republic Poland Poland UAE Oman Denmark Denmark Denmark British Virgin Islands Sweden Sweden Sweden Denmark Denmark Sweden Denmark Indonesia Denmark Denmark Currency Group equity interest DKK EUR DOP PLN PLN AED OMR DKK DKK DKK HKD SEK SEK SEK DKK DKK SEK DKK IDR DKK DKK % 100 100 100 100 49 67 50 100 89 30 75 100 24 100 100 68 100 100 80 25 * Joint ventures ** Associates ° According to section 5 of the Danish Financial Statements Act, the company does not prepare a statutory report. In addition, the group owns a number of entities without material commercial activities. Financial statements of the parent company Under section 149 of the Danish Finan- cial 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 pub- lish consolidated financial statements that do not include financial statements of the parent company, Arla Foods amba. The annual report of the parent company is an integral part of the full annual report and is available at www.arlafoods.com. Profit sharing and supplementary payments from the par- ent company are set out in the equity section of the consolidated financial statements. The full annual report con- tains the statement by the Board of Di- rectors and the Executive Board as well as the independent auditor's report. ARLA'S ANNUAL REPORT 2023 PAGE 144 Our popular heritage cheese, Castello® Creamy Blue, contributed to 13% of Castello’s total revenue in 2023. CASTELLO® CREAMY BLUE 146 147 149 Board of Directors' and Executive Board's report Independent auditor's report Independent auditor's assurance report MANAGEMENT'S AND AUDITOR'S REPORTS BOARD OF DIRECTORS’ AND EXECUTIVE BOARD’S REPORT Today, the Board of Directors and the Executive Board have discussed and approved the annual report of Arla Foods amba for the financial year 2023. The annual report has been prepared in accordance with IFRS Accounting Standards as adopted by the EU and additional disclosure requirements of the Danish Financial Statements Act. It is our opinion that the consolidated financial statements and the parent company financial statements give a true and fair view of the group's and the parent company's financial position at 31 December 2023 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 2023. In our opinion, the management's review of the annual report (pages 4-86) includes a true and fair view of the development in the group's and the parent company's financial position, activities, financial matters, results for the year and cash flows as well as a description of the most significant risks and uncertainties which may affect the group and the parent company. Arla's consolidated environmental, social and governance statements have been prepared in accordance with Arla's ESG accounting principles. In our opinion, they give a true and fair view and a balanced and reasonable presen- tation of the group's environmental, social and governance performance in accordance with these principles. We hereby recommend the annual report for adoption by the Board of Representatives. Aarhus, 19 February 2024 Peder Tuborgh CEO Peter Giørtz-Carlsen COO Jan Toft Nørgaard Chairman Manfred Graff Vice Chairman Anders Olsson Arthur Fearnall Bjørn Jepsen Daniel Halmsjö Florence Rollet Grant Cathcart Gustav Kämpe Ib Bjerglund Nielsen Inger-Lise Sjöström Johnnie Russell Jørn Kjær Madsen Marcel Goffinet Marita Wolf Nana Bule René Lund Hansen Simon Simonsen Steen Nørgaard Madsen PAGE 146ARLA'S ANNUAL REPORT 2023I.II.III.MANAGEMENT'S AND AUDITOR'S REPORTSOTHER DISCLOSURESBoard of Directors' and Executive Board's report Independent auditor's assurance reportIndependent auditor's report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 2023, which comprise income statement, statement of comprehensive income, balance sheet, statement of changes in equity, cash flow statement and notes, including material accounting policy in- formation, for the Group and the Parent Company. The consolidated financial statements and the parent company financial statements are prepared in accordance with IFRS Accounting 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 2023 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 2023 in accordance with IFRS Accounting Standards as adopted by the EU and additional requirements of the Danish Financial Statements Act. Basis for opinion We conducted our audit in accor- dance 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 state- ments" (hereinafter collectively referred to as "the financial statements") section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accordance with the International Ethics Standards Board for Accountants' International Code of Ethics for Professional Accountants (IESBA Code) and the additional ethical requirements applicable in Denmark, and we have ful- filled our other ethical responsibilities in accordance with these requirements and the IESBA Code. 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 mate- rially 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 ac- cordance 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 IFRS Accounting 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. 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, mat- ters 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 ma- terial 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 con- cern basis of accounting in preparing the financial statements and, based PAGE 147ARLA'S ANNUAL REPORT 2023I.II.III.Board of Directors' and Executive Board's reportIndependent auditor's reportMANAGEMENT'S AND AUDITOR'S REPORTSOTHER DISCLOSURES Independent auditor's assurance report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, 19 February 2024 EY Godkendt Revisionspartnerselskab CVR no. 33 94 61 71 Henrik Kronborg Iversen State Authorised Public Accountant MNE no. 24687 Jan K. Mortensen State Authorised Public Accountant MNE no. 40030 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 con- cern. 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 disclo- sures 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 finan- cial 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 in- formation of the entities or business activities within the Group to express an opinion on the consolidated finan- cial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. PAGE 148ARLA'S ANNUAL REPORT 2023I.II.III.Board of Directors' and Executive Board's reportIndependent auditor's reportMANAGEMENT'S AND AUDITOR'S REPORTSOTHER DISCLOSURES Independent auditor's assurance reportINDEPENDENT AUDITOR’S ASSURANCE REPORT ON THE SUSTAINABILITY STATEMENTS TO THE STAKEHOLDERS OF ARLA FOODS AMBA As agreed, we have performed an examination with a combined reason- able and limited assurance, as defined by the International Standards on Assurance Engagements, on Arla Foods amba’s Sustainability Statements in the Annual Report on pages 28-86 for the period from 1 January 2023 to 31 December 2023. Specifically, we are to conclude on: 1. Reasonable assurance over the follow- ing KPI’s identified in the Sustainability Statements (In the following referred to as ‘Selected sustainability KPI’s under reasonable assurance’): · KPI’s in the table on Accidents on page 65 · KPI’s in the tables on Numbers of employees (headcounts), Number of employees (headcounts) by contract type and Distribution of employees by age group on page 65 · KPI’s in the table on Number of recalls on page 73 · KPI’s in the tables on Greenhouse gas emissions progress, Greenhouse gas emissions scope 1-3 and GHG intensity per net revenue on page 40 · KPI’s in the tables on Total energy consumption, Energy intensity based on net revenue and Electricity consumption in Europe on page 41 · KPI’s in the table on Animal welfare indicators on page 42 2. "Limited assurance over the remain- ing information in the Sustainability Statements, which can be found on pages 28-86 of the Annual Report. In preparing the Sustainability Statements, Arla Foods Amba applied the Accounting policies described on pages 28-86. The Sustainability Statements needs to be read and un- derstood together with the Accounting policies, which management is solely responsible for selecting and applying. The absence of an established practice on which to derive, evaluate, and measure the Sustainability Statements allows for different, but acceptable, measurement techniques and can affect comparability between entities and over time. Management's responsibilities Arla Foods amba's Management is re- sponsible for selecting the Accounting policies and for presenting the Sustainability statements in accordance with the Accounting policies, in all material respects. This responsibility includes establishing and maintaining internal controls, maintaining adequate records, and making estimates that are relevant to the preparation of the Sustainability statements, such that it is free from material misstatement, whether due to fraud or error. Auditor's responsibilities Our responsibility is to express a con- clusion based on our examinations on the presentation of the Sustainability statements in accordance with the scope defined above. We conducted our examinations in accordance with ISAE 3000 Assurance Engagements Other than Audits or Reviews of Historical Financial Information and additional require- ments under Danish audit regulation to obtain assurance for the purposes of our conclusion. EY Godkendt Revisionspartnerselskab applies International Standard on Quality Management 1, ISQM1, which requires the firm to design, implement and operate a system of quality management including policies or procedures regarding compliance with ethical requirements, professional standards and applicable legal and regulatory requirements. We have complied with the indepen- dence and other ethical requirements of the International Ethics Standards Board for Accountants' International Code of Ethics for Professional (IESBA Code), which is founded on fundamen- tal principles of integrity, objectivity, professional competence and due care, confidentiality and professional be- haviour as well as ethical requirements applicable in Denmark. Description of procedures performed In obtaining reasonable assurance over the Selected sustainability KPI’s under reasonable assurance our objective was to perform such procedures and to obtain such evidences which we consider necessary in order to provide us with sufficient appropriate evidence to express an opinion with reasonable assurance. In obtaining limited assurance over the remaining information in the Sustainability Statements our objective was to perform such procedures as to obtain information and explanations which we consider necessary in order to provide us with sufficient appropriate evidence to express a conclusion with limited assurance. The procedures performed in connection with our limited assurance engagement 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. As part of our examination, we performed the below procedures: · Interviewed those in charge of Sustainability Statements to develop an understanding of the process for the preparation of the Sustainability statements and for carrying out internal control procedures. · Performed analytical review of the data and trends to identify areas of the Sustainability Statements with a significant risk of misleading or unbalanced information or material misstatements and obtained an understanding of any explanations provided for significant variances. · Based on inquiries we evaluated the appropriateness of A ccounting policies used, their consistent application and related disclosures in the Sustainability statements. This includes the reasonableness of estimates made by management. · Designed and performed further procedures responsive to those risks and obtained evidence that is sufficient and appropriate to provide a basis for our conclusion. In addition to the above we performed the following procedures for the Selected sustainability KPI’s under reasonable assurance: · Agreed key items and representative samples based on generally accepted sampling methodology to source information to check accuracy and completeness of the data · Site visits to conduct walkthroughs of data gathering, calculation and consolidation processes related to the reasonable assurance of metrics. PAGE 149ARLA'S ANNUAL REPORT 2023I.II.III.Board of Directors' and Executive Board's reportIndependent auditor's reportMANAGEMENT'S AND AUDITOR'S REPORTSOTHER DISCLOSURES Independent auditor's assurance reportIn our opinion, the examinations performed provide a sufficient basis for our conclusion. Copenhagen 19 February 2024 EY Godkendt Revisionspartnerselskab CVR no. 30 70 02 28 Henrik Kronborg Iversen State Authorised Public Accountant MNE no. 24687 Monica Mai Bak Larsen Partner, Climate Change and Sustainability Services Conclusion In our opinion the Selected sustainability KPI’s under reasonable assurance for the period from 1 January 2023 to 31 December 2023, which has been subject to our reasonable assurance procedures have, in all material respects, been pre- pared in accordance with the Accounting policies on pages 40, 41, 42, 65, 73. Based on the limited assurance examina- tions and the evidence obtained, nothing has come to our attention that causes us to believe that the remaining information in Arla Foods amba’s Sustainability Statements in the Annual Report on pages 28-86 for the period from 1 January 2023 to 31 December 2023, have not been prepared, in all material respects, in accordance with the Accounting policies described on pages 28-86. PAGE 150ARLA'S ANNUAL REPORT 2023I.II.III.Board of Directors' and Executive Board's reportIndependent auditor's reportMANAGEMENT'S AND AUDITOR'S REPORTSOTHER DISCLOSURES Independent auditor's assurance reportOTHER DISCLOSURES 152 153 154 155 157 UN Global Compact Progress towards UN Sustainable Development Goals ESRS disclosure requirements overview Glossary Corporate calendar LURPAK® SPREADABLE The packaging of all our Lurpak® Spreadable products are designed for recyclability. Since 2008, Arla has been a partici- pant of the Global Compact’s Nordic Network. In May 2009, Arla signed up to Caring for Climate, a voluntary and complementary action platform seeking to demonstrate leader- ship around the issue of climate change. In 2010, Arla’s CEO signed a CEO Statement of Support for the Women’s Empowerment Principles, an initiative from the Global Compact and UNIFEM (the UN Development Fund for Women). Read more about the Global Compact and its principles at www.unglobalcompact.org and more about Arla’s Code of Conduct at arla.com. UN GLOBAL COMPACT IN EARLY 2008, ARLA SIGNED UP TO THE GLOBAL COMPACT, THE UN INITIATIVE TO PROMOTE ETHICAL BUSINESS PRACTICES. AS A PAR- TICIPANT, WE ARE COMMITTED TO OBSERVING THE GLOBAL COMPACT’S 10 FUNDAMENTAL PRINCIPLES. Human rights 1. Support and respect the protection of internationally proclaimed human rights 2. Make sure that they are not complicit in human rights abuses 4. The elimination of all forms of forced and compulsory labour 5. The effective abolition of child labour 6. The elimination of discrimination in respect of employment and occupation Environment 7. Support a precautionary approach to environmental challenges 8. Undertake initiatives to promote greater environmental responsibility 9. Encourage the development and diffusion of environmentally friendly technologies Labour 3. Uphold the freedom of association and the effective recognition of the right to collective bargaining Anti-corruption 10. Work against corruption in all its forms, including extortion and bribery PAGE 152ARLA'S ANNUAL REPORT 2023I.II.III.ESRS disclosure requirements overviewProgress towards UN SDGsUN Global CompactCorporate calendarGlossaryMANAGEMENT'S AND AUDITOR'S REPORTSOTHER DISCLOSURESOUR PROGRESS TOWARDS THE UN SUSTAINABLE DEVELOPMENT GOALS Standard Environmental data CO₂e emissions CO₂e reduction scope 1 and 2 (baseline: 2015) CO₂e reduction scope 3 per kg of milk and whey (baseline: 2015) Total CO₂e (mkg) Energy mix Renewable electricity share EU (%) Waste and water Solid waste (tonnes) Water consumption (thousand m3) Animal welfare Somatic cell count (thousand cells/ml) Share of audited farmers with no major cleanliness issues Share of audited farmers with no major mobility issues Share of audited farmers with no major injury issues Share of audited farmers with no major issues related to body condition Social data Total share of women (%) Share of women at level director and above (%) Share of women in Executive Management Team (%) Gender pay ratio, white-collar (man to woman) Employee turnover (%) Food safety – number of recalls Accident frequency (per 1 million working hours) Governance data Share of women, Board of Directors (%) Non-audited targets and ambitions Nutrition and affordability Resilient dairy farmer communities Responsible sourcing Anti-corruption and bribery UN SDGs Page 2.3, 2.4, 12.2, 12.3, 12.5, 13.1 7.2, 7.3 6.3, 6.4 15.1 5.1, 5.5 5.1, 5.5 5.1, 5.5 5.1, 5.5, 8.5, 8.7 8.5, 8.7 2.1 8.8 5.1, 5.5 40 40 40 40 41-42 57 50 42 42 42 42 42 66 66 66 66 66 73 65 86 2.1, 3.4 69-70, 73 1, 2.3, 2.A, 5A, 8.2, 8.3, 12.2, 17.B 2.3, 2.4, 6.3, 6.4, 8.7, 8.8, 12.2, 12.4, 13.1, 15.1, 15.2 16.5 64 46-47, 50 84-86 PAGE 153ARLA'S ANNUAL REPORT 2023I.II.III.Progress towards UN SDGsUN Global CompactCorporate calendarGlossaryESRS disclosure requirements overviewMANAGEMENT'S AND AUDITOR'S REPORTSOTHER DISCLOSURESDISCLOSURE REQUIREMENTS EUROPEAN SUSTAINABILITY REPORTING STANDARDS (ESRS) COVERED BY ARLA’S SUSTAINABILITY STATEMENTS Progress towards compliance with CSRD requirements: Under materiality threshold Internal work initiated Moderate progress Advanced progress Status Standard Page Status Standard Page Status Standard Page Status Standard Page 32 ESRS E1-9 ESRS S1 SBM-3 26-27, 30-32 ESRS S2-5 53-54, 56-57 ESRS S3 SBM-3 ESRS S3-1 ESRS S3-2 ESRS S3-3 ESRS S3-4 ESRS S3-5 60-63, 67 60, 66 63, 67 ESRS 2 BP-1 ESRS 2 BP-2 ESRS 2 GOV-1 30-32, 40, 41, 43, 50 26, 32, 43, 75-80, 86 ESRS 2 GOV-2 26, 32, 43, 76 ESRS 2 GOV-3 ESRS 2 GOV-4 81 62 ESRS 2 GOV-5 26-27, 43-44 ESRS 2 SBM-1 10, 26-27, 29, 32, 75 ESRS 2 SBM-2 26-27, 32 ESRS 2 SBM-3 ESRS 2 IRO-1 ESRS 2 IRO-2 26-27, 30-32, 43 26-27, 30-32, 43-44 26-27, 30-32, 154 ESRS E1 GOV-3 81 ESRS E1-1 29, 32-38, 45, 52, 58, 68 ESRS E1 SBM-3 26-27, 43 ESRS E1 IRO-1 ESRS E1-2 ESRS E1-3 ESRS E1-4 ESRS E1-5 ESRS E1-6 ESRS E1-7 ESRS E1-8 30-32, 34, 43-44 34, 42, 76, 33-42 33-36, 40-42, 76 41-42 40-41 34, 40, 41, 46 42 ESRS E2 IRO-1 ESRS E2-1 ESRS E2-2 ESRS E2-3 ESRS E2-4 ESRS E2-5 ESRS E2-6 ESRS E3 IRO-1 ESRS E3-1 ESRS E3-2 ESRS E3-3 ESRS E3-4 ESRS E3-5 ESRS E4 SBM-3 26-27 ESRS E4 IRO-1 ESRS E4-1 ESRS E4-2 ESRS E4-3 ESRS E4-4 ESRS E4-5 ESRS E4-6 ESRS E5 IRO-1 ESRS E5-1 ESRS E5-2 ESRS E5-3 46-47, 51, 76 45-47, 50 32 42, 51, 53 53-55, 57 34, 53-56 ESRS E5-4 ESRS E5-5 ESRS E5-6 ESRS S1-1 ESRS S1-2 ESRS S1-3 ESRS S1-4 ESRS S1-5 ESRS S1-6 ESRS S1-7 ESRS S1-8 ESRS S1-9 ESRS S1-10 ESRS S1-11 ESRS S1-12 ESRS S1-13 ESRS S1-14 ESRS S1-15 ESRS S1-16 ESRS S1-17 ESRS S2 SBM-3 26-27, 30-32 ESRS S2-1 ESRS S2-2 ESRS S2-3 ESRS S2-4 62-64, 66-67 63, 67, 84 62-64, 66-67 60-63, 85 ESRS S4 SBM-3 26-27, 30-32 ESRS S4-1 ESRS S4-2 ESRS S4-3 ESRS S4-4 ESRS S4-5 72-73 72 70, 72-73 70-73 ESRS G1 GOV-1 30-31, 67, 76 ESRS G1-1 ESRS G1-2 ESRS G1-3 ESRS G1-4 ESRS G1-5 ESRS G1-6 42, 67, 84-86 85-86 67, 84-86 78, 80, 85-86 85-86 65-66 65-66 63 65 66 63 PAGE 154ARLA'S ANNUAL REPORT 2023I.II.III.UN Global CompactProgress towards UN SDGsCorporate calendarGlossaryESRS disclosure requirements overviewMANAGEMENT'S AND AUDITOR'S REPORTSOTHER DISCLOSURES GLOSSARY A Arlagården® is the name of our quality assurance programme. Arla® Nutrition Criteria are our guidelines to ensure nutritional quality of our products. Average interest expenses excluding interest related to pension assets and liabilities is calculated as a total of external interest expenses excluding cash discounts and mora interest, plus interest on finance leases and reduced by interest income on securities divided by net interest-bearing debt excluding pension assets and liabilities. B Carbon pricing describes a mechanism that places a financial cost on carbon dioxide and other greenhouse gas emissions, thereby financially incentivising low-carbon investments and more sustainable solutions. 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. CSRD is an abbreviation for Corporate Sustainability Reporting Directive and is a regulatory framework proposed by the European Commission. It aims at improving the transparency, comparability, and reliability of companies' sustainability disclosures on environmental, social, and governance. BEPS is an abbreviation referring to base erosion and profit shifting. These are tax avoidance strate- gies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations. Biogas is the mixture of gases produced by the break-down of organic matter in the absence of oxygen. primarily consisting of methane and carbon dioxide. In Arla, biogas is primarily produced from cow manure. D 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. 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. Digital reach is defined as engagement with Arla's digitil content, i.e. spending more than two minutes on our website, watching our videos to the end on YouTube and liking or commenting on content on our social media platforms. Equity ratio is the ratio of equity, excluding minority interests, to total assets, and is a measure of the financial strength of Arla. ESRS is an abbreviation of European Sustainability Reporting Standards and refers to a proposed set of reporting standard for sustainability-related disclosures by companies operating in the European Union. This standard is developed by the European Financial Reporting Advisory Group and aims to provide a common framework for companies to dis- close their environmental, social, and governance performance. F FMCG is an abbreviation of 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 abbreviation of full-time equivalents. FTEs are defined as the contractual working hours of 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 FTE of 0.5 equals half of the full workload. G Brand share measures revenue from strategic brands as a proportion of total revenue and is defined as the ratio of revenue from strategic branded products to total revenue. C CapEx is an abbreviation of capital expenditure. Capacity cost is defined as the cost of running the general business, and includes staff costs, mainte- nance, energy, cleaning, IT, travel, consultancy, etc. E EBIT is an abbreviation of earnings before interest and tax. and is 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 abbreviation of Europe, the Middle East and Africa. GDPR is an abbreviation of the General Data Pro- tection 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 in- dividuals over their personal data and to simplify the regulatory environment for international business by unifying the regulation within the EU. Global industry share is a measure of 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. M Greenhouse Gas Protocol (GHGP) provides accounting and reporting standards, sector guidance, calculation tools to account for greenhouse gas emissions. It establishes a comprehensive, global, standardised framework for measuring and managing emissions from private and public sector operations, value chains, products, cities and policies. I IFRS is an abbreviation of International FInancial Reporting Standards which are a globally recognised set of accounting standards developed and main- tained by the International Accounting Standards Board (IASB). lncoterms 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 com- mercial 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 incremen- tal revenue generated from innovation projects up to 36 months from their launch. Interest cover is the ratio of EBITDA to net interest costs. L Lactalbumin, also known as ‘whey protein’, is the albu-min contained in milk and obtained from whey. Leverage is the ratio of net interest-bearing debt, inclusive of pension liabilities, to 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 abbreviation of the Middle East and North Africa. Meal kits are a subscription service-food business model where a company sends customers pre-por- tioned 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. N 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. Securities, cash and cash equivalents defined as restricted are not included when deducting liabilities with securities, cash and cash equivalents. 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. Securities, cash and cash equivalents defined as restricted are not included when deducting liabilities with securities, cash and cash equivalents. Net working capital is the capital tied up in inventories, receivables and payables including payables for owner milk. Net working capital, excluding owner milk is defined as capital that is tied up in inventories, receivables and payables excluding payables for owner milk. Non-GMO means non-genetically modified organisms, for example non-genetically modified feed crops for cows. PAGE 155ARLA'S ANNUAL REPORT 2023I.II.III.UN Global CompactGlossaryProgress towards UN SDGsCorporate calendarESRS disclosure requirements overviewMANAGEMENT'S AND AUDITOR'S REPORTSOTHER DISCLOSURES O Q OCI is an abbreviation of other comprehensive income. OCI includes revenue, expenses, gains and losses that have yet to be realised. QEHS stands for Quality, Environmental. Health. and Safety. It is a department within Arla's supply chain safeguarding the quality and safety of production. USD-related currencies are currencies which move in the same direction as the USD (i.e. when the USD depreciates against the EUR, it also depreciate against the EUR). Currencies in the MENA region are typical examples. OECD refers to the Organisation for Economic Cooperation and Development. R V Value-added protein segment contains products with special functionality and compounds, compared to standard protein concentrates with a protein content of approximately 80%. Volume-driven revenue growth is defined as revenue growth associated with growth in volumes while keeping prices constant. W Whey protein hydrolysate is a concentrate or iso- late in which some of the amino bonds have been broken by exposure of the proteins to heat, acids or enzymes. This pre-digestion means that hydrolysed proteins are more rapidly absorbed in the gut than either whey concentrates or isolates. WMP is an abbreviation of whole milk powder. On-the-go refers to food consumed while on the go, and also to packaging solutions supporting this food consumption trend. Risk commodities refer to commodities that are associated with environmental, social, and governance risks throughout their supply chains. 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. P Performance price for Arla Foods is defined as the pre-paid milk price plus net profit divided by total member milk volume intake. It measures the value creation per kg of owner milk including retained earnings and supplementary payments. PPA is an abbreviation for power purchase agree- ments which are contractual agreements between two parties, typically a power producer and a buyer, for the pourchase and sale of electricity. Pre-paid milk price describes the cash payment farmers receive per kg of milk delivered during the settlement period. Private label refers to retail brands which are owned by retailers, but produced by Arla based on contract manufacturing agreements. Profit 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 of profit for the period allocated to owners of Arla Foods. to total revenue. S SEA is an abbreviation of South-East Asia. SMP is an abbreviation of skimmed milk powder. Strategic brands are defined as products sold under branded products such as Arla®, Lurpak®, Castello®, Puck® and Starbucks™. 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. U UNGP is an abbreviation for United Nations Guiding Principles on Business and Human RIghts. These principles provide a global standard for preventing and addressing the adverse human rights impacts of business activities. UN SDGs is an abbreviation for United Nations Sustainability Development Goals. The United Nations established these 17 goals in 2015 with the aim of providing a comprehensive framework to address various social, economic, and environmen- tal challenges and to guide global efforts towards sustainable development by 2030. PAGE 156ARLA'S ANNUAL REPORT 2023I.II.III.UN Global CompactGlossaryProgress towards UN SDGsCorporate calendarESRS disclosure requirements overviewMANAGEMENT'S AND AUDITOR'S REPORTSOTHER DISCLOSURES CORPORATE CALENDAR FEB 28-29 FEB 29 MAY 29 AUG 28 OCT 1-2 Board of Representatives meeting Publication of the consolidated annual report for 2023 Elections for the Board of Representatives Publication of the consolidated half-year results for 2024 Board of Representatives meeting PAGE 157ARLA'S ANNUAL REPORT 2023I.II.III.UN Global CompactProgress towards UN SDGsGlossaryCorporate calendarESRS disclosure requirements overviewMANAGEMENT'S AND AUDITOR'S REPORTSOTHER DISCLOSURESArla Foods amba Sønderhøj 14 DK-8260 Viby J. Denmark CVR no.: 25 31 37 63 Phone +45 89 38 10 00 E-mail arla@arlafoods.com www.arla.com Arla Foods UK plc 4 Savannah Way Leeds Valley Park Leeds, LS10 1 AB England Phone +44 113 382 7000 E-mail arla@arlafoods.com www.arlafoods.co.uk 

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