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Contents Management review 2 2016 in short 4 Arla’s milk wheel 6 Moving forward after a volatile year by Chairman of the Board of Directors, Åke Hantoft 8Branded growth in a volatile market by CEO, Peder Tuborgh 10 Significant events in 2016 14 Strategy 30 Governance 42 Performance 58 Risk and opportunity 68Values and considerations Consolidated financial statements 80 Consolidated financial statements 82 Primary statements 90 Notes 136 Independent auditor’s report 138Statement by the Board of Directors and the Executive Board Project management: Corporate Finance and Corporate Communication, Arla Copy, design and production: We Love People Translation: TextMinded Photos: Jens Bangsbo, Hans-Henrik Hoeg and Arla The consolidated annual report is published in Danish, Swedish, German, French and English. Only the original Danish text is legally binding. The translation has been prepared for practical reasons. Financial statement of the parent company Under section 149 of the Danish Financial Statements Act, this consolidated annual report represents an extract of Arla’s complete annual report. In order to make this report more manageable and user-friendly, we have decided to publish a consolidated annual report without the financial statements of the parent company, Arla Foods amba. The annual report of the parent company is an integrated part of the full annual report and is available on www.arlafoods.com. Profit sharing and supplementary payment from the parent company are set out in the equity section of the consolidated annual report. The full annual report contains the statement from the Board of Directors and the Executive Board as well as the independent auditor’s report.
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Glossary Brand share is the ratio of revenue from strategic branded products of Arla’s total revenue. Strategic branded products are defined as products sold under one of the three global brands Arla®, Lurpak® and Castello® and strategic brands. Capacity cost includes costs such as staff, maintenance, energy, IT, travelling and consultants. Conversion cost is the total cost of production per kg raw milk excluding the cost for milk and materials within the production site which are related to the production of goods. EBIT is an abbreviation of earnings before interest and tax. EBITDA is an abbreviation of earnings before interest, tax, depreciation and amortization. EBIT margin is EBIT as a percentage of total revenue. Equity ratio is the ratio between equity excluding minority interests and total assets. Interest cover is the ratio between EBITDA and net interest costs. Leverage is the ratio between net interest-bearing debt inclusive of pension liabilities and EBITDA. Net interest-bearing debt inclusive pensions is defined as current interest-bearing liabilities less securities, cash and cash equivalents and other interest-bearing assets plus non-current liabilities. Organic revenue growth is revenue adjusted for the effect of mergers, acquisitions, divestments of businesses and currency effects. Peer group index evaluates the relative performance of Arla compared to competitors without considering the retainment policy calculated as the performance price for Arla divided by the weighted average performance price of the peer group. Performance price for Arla is defined as the prepaid milk price plus net profit per kilo member milk weighed in within the period. Prepaid milk price equals the on-account payment owners receive per kg milk delivered during the settlement period. The price is primarily based on the milk’s constituents, i.e. fat and protein, and quality. Net working capital is the capital that Arla has tied up in inventories, receivables and payables including payables for owner milk. Net working capital excluding owner milk is defined as capital that Arla has tied up in inventories, receivables and payables excluding payables for owner milk. Retail and foodservice volume driven revenue growth is defined as revenue growth associated with growth in retail and foodservice volumes while keeping prices constant. Scalability is defined as the ratio between retail and foodservice volume driven revenue growth and growth in total capacity cost adjusted for special items. Strategic branded volume driven revenue growth is defined as revenue growth associated with growth in volumes from strategic branded products while keeping prices constant. Strategic branded products are defined as products sold under one of the three global brands - Arla®, Lurpak® and Castello® and strategic brands. Trading share measures the total milk volume used to produce commodity products compared to the total milk consumption in Arla. A commodity product is sold with a lower amount of value added or no value added at all. Volume driven revenue growth is defined as revenue growth associated with growth in volumes while keeping prices constant.
