CONSOLIDATED HALF-YEAR REPORT 2017 Creating the future of dairy
Arla Foods amba Arla Foods UK plc Sønderhøj 14 4 Savannah Way DK-8260 Viby J. Leeds Valley Park Denmark Leeds, LS10 1 AB CVR no.: 25 31 37 63 England
Phone +45 89 38 10 00 Phone +44 113 382 7000 E-mail [email protected] E-mail [email protected] www.arla.com www.arlafoods.co.uk Content “The global dairy industry has never been more Management review competitive than it is today, and the best 04 Half-year 2017 performance at a glance innovator wins. We are investing heavily in 06 Message from the Chairman of the Board of Directors, Åke Hantoft 07 Message from the Chief Executive Officer, Peder Tuborgh innovation to respond to the global demand for 08 Enabling Good Growth 2020 natural dairy products and to create better 09 Essential business priorities for 2017 10 Highlights returns for our farmer owners. The work that will 12 Opening the door to our future take place at our new Innovation Centre 14 Market overview 15 Financial review is crucial to our success.” 19 Financial outlook
Peder Tuborgh, CEO Consolidated financial statements 21 Income statement 22 Balance sheet 23 Cash flow statement 24 Revenue 25 Costs 26 Non-current assets 27 Net working capital 27 Cash flow 28 Equity 28 Net interest-bearing debt 30 Glossary 31 Corporate calendar
The half-year report has not been audited or reviewed by the Group’s auditors.
Project management: Corporate Finance, Arla. Copy, design and production: We Love People. Translation: Textminded. Photos: Jens Bangsbo and Arla. Arla’s new global Innovation Centre which opened in May 2017. Refer to page 12. 4 ARLA FOODS HALF-YEAR REPORT 2017 MANAGEMENT REVIEW 5
Revenue Profit share*** Strategic branded volume Half-year 2017 driven revenue growth performance at a glance 5.0 2.1% 1.0% BILLION EUR OF REVENUE 2.5%** 2.3% 5.1 4.9 5.0 2.1%
3.1% 6.1% 1.0%
HY HY HY HY HY HY HY HY HY 2015 2016 2017 2015 2016 2017 2015 2016 2017 Milk volume Target 2017 EUR 10 - 10.5 billion Target 2017 2.8 - 3.2% Target 2017 1 - 3% BILLION KG • • •
Brand share International share* Trading share* 7.1 HALF-YEAR 2015 44.1% 20.1% 20.6% Performance price EUR-CENT/KG 44.5% 44.1% 22.9% 22.5% 41.5% 20.6% 19.7% 20.1% 7.2 35.8 18.1% HALF-YEAR 2017 HALF-YEAR 2016
HY HY HY HY HY HY HY HY HY 2015 2016 2017 2015 2016 2017 2015 2016 2017
• Target 2017 >45% • Target 2017 >20% • Target 2017 <20%
35.8 33.8 30.0** Conversion cost Scalability Leverage 102.2 >2.0 3.4 7.0HALF-YEAR 2017 4.0 HY HY HY 2015 2016 2017 101.1 99.0 102.2 3.4 3.0**
All targets are based on full-year results. Performance on track Trend on track Target challenged • • • HY HY HY HY HY HY HY HY HY 2015 2016 2017 2015 2016 2017 2015 2016 2017 * International share is based on retail and foodservice revenue, excluding revenue from third party manufacturing (TPM), Arla Foods Ingredients and trading activities. Trading share is >2.0 >2.0 >2.0 based on milk consumption. ** Excluding gain from sale of Rynkeby. Target 2017 <100 Target 2017 >2.0 Target 2017 2.8 - 3.4 *** Based on profit allocated to owners of Arla Foods amba. • • • 6 ARLA FOODS HALF-YEAR REPORT 2017 MANAGEMENT REVIEW 7
MESSAGE FROM THE CHAIRMAN OF THE BOARD OF DIRECTORS MESSAGE FROM THE CHIEF EXECUTIVE OFFICER
Moving in Changing market dynamics the right direction present new opportunities
The improvement in the milk price was much needed and, six months into the year, Arla continues to develop according to our strategy, Good Growth 2020, as the we have a reasonable and competitive milk price. However, more Executive Management Team emphasises key activities to drive improved performance. must come and the good times have to last longer than in recent years. Higher sales prices, continued brand growth and innovation have driven Arla’s business in the first half of 2017.
Since 12 months ago, Arla has improved its from sales, and this continues to be the foundation companies outside Scandinavia. Looking ahead to Arla entered into 2017 with an improving prepaid are promoting Arla’s core values, including health are key to our business, as is ensuring a sustainable prepaid milk price to its farmer owners by 33.7 per of our business today. the second half of the year, there are clear milk price to our farmer owners. While the global and naturalness. These messages are resonating future for the British dairy industry and farmers. cent and delivered a performance price at 35.8 expectations that Arla will continue to embrace markets lost some momentum in March, which we with American consumers EUR-cent/kg in the first half of 2017. This was an Documenting our high standards the market opportunities that are opening up and, had to reflect in our milk price, they stabilised Expectations for the full year anticipated and much needed relief, coming from Consumers and customers are increasingly as farmer owners, we are looking forward to during May and June, enabling a significant Innovation is in our DNA The improving market conditions, driven by a very low level in 2016. However, pressure interested in the origin of our products, specifically following these developments in the coming increase in the milk price to owners. Consequently, Another business milestone achieved during the increasing fat values, particularly in Europe over remains on the business to further improve returns what we feed our cows and how we treat them. In months. we concluded the first half of 2017 with a milk first half of 2017 was the opening of our global the recent months, are indeed good news. The through the milk price. Recently we have seen fat response to this, we are developing the certification price on a strong level. Innovation Centre in May. This is a clear signal to second half of 2017 should be even stronger and prices increasing and they are outperforming of our milk, Arlagården® Plus. It is a database our consumers, customers and business partners we anticipate that both sales and consumer prices, protein prices for the first time. This development capturing farm data that enables us to provide ÅKE HANTOFT Positive turn in the market that we are leading the way in terms of taking as well as milk volumes will increase in the months is being driven by a significant change in market fact-based insights about the dedication of our Chairman of the Board of Directors The key driver of positive developments in dairy into the next era. The great work already to come. demand. farmers and our high on-farm standards. the global market is that prices for fat are rising. coming out of the Innovation Centre supports For the first time ever, fat is more valuable our vision of creating the future of dairy, as well Investing in adding value An evolving cooperative than protein. The change is driven by low or as our ability to generate good returns for our PEDER TUBORGH In 2013 the Board of Directors made a major This spring we have seen the first concrete non-existing butter stocks and an increasing owners. CEO decision to invest in a state-of-the-art Innovation outcome of our Owner Strategy work. The Board Performance price consumer trend and demand for richer dairy Centre which opened in May this year. of Representatives adopted the Articles of EUR-CENT/KG products. If this continues, it will prompt a Market developments Association to reflect an aligned democratic fundamental change in the dairy market and in In line with our strategy, Good Growth 2020, our However, great innovation is not achieved by simply structure across owner countries. Following this, turn our production and product management. International business continues to develop building an Innovation Centre. Innovation comes the first elections in our new democratic structure 35.8 As a result of the market development at the end positively. In particular, I am pleased to report that from being open-minded and prepared to take risks. took place. I am proud that more than 3,000 of of 2016 and the beginning of 2017, we have the potential of South East Asia and Africa is It is about doing things differently, stepping out of our 11,281 owners participated in the local 35.8 reacted by trading more industry products in the starting to unfold. In Europe, the UK continues to 33.8 our comfort zone and having the confidence to try meetings and elections, and in doing so, exercised 30.0 first half of 2017 than was initially anticipated. be Arla’s biggest market. It is a strong underlying new things. Arla farmers do this and innovating for their opportunity to influence and support our Arla business and we continue to develop our product success is part of our history. Back in the 1880s, an cooperative. Growing our brands portfolio and increase brand awareness. However, open mindset led farmers to unite in local dairy While we have consciously focused on driving as a result of the Brexit referendum, the Group is cooperatives. Our ancestors trusted the cooperative’s Outlook towards year-end value rather than volume, we are continuing to being negatively affected by exchange rates. ability to innovate and sell products. At the same The next big step is to pave the way for direct grow our brands. We remain fully committed to Brexit negotiations have now begun and we are time, they studied and educated themselves in how membership for our owners in Central Europe and developing our branded product portfolio in order engaging in dialogues with key stakeholders to to improve milk quality and yield. All of this the UK. This will finalise the journey we embarked to strengthen our market positions. An example is ensure that our position as a European business is HY HY HY increased the value of products and the returns on several years ago, when we merged with 2015 2016 2017 the launch of our campaign in the US, in which we made clear. Free movement of people and goods Z
8 ARLA FOODS HALF-YEAR REPORT 2017 MANAGEMENT REVIEW 9
Enabling Essential business priorities Good Growth 2020 for 2017
Arla wants to develop our role as a global food company that adds value to peoples’ lives through natural To achieve our long-term strategy, we need a short-term action plan. The essential business priorities are an nutrition and responsible operations. The Good Growth 2020 strategy is our response to the changing enabler for our strategy, Good Growth 2020, as they consist of critical areas that we should prioritise in the world around us where supply and demand for milk are increasingly geographically detached, combined with short-term on our journey to success. In order to continuously deliver strong results for our owners, the occurrence of new demographic realities and fast developing consumer trends. By excelling in eight the Executive Management Team determines our Essentials each year, subject to approval categories, focusing on six regions and winning as ONE Arla, we strive to achieve global growth and create by the Board of Directors. The Essentials are a set of clear and aligned business priorities, aiming to support value for our farmer owners towards 2020. the growth agenda and direction for the business set out in our strategy.
Our vision Create the future of dairy to bring health and inspiration to the world, naturally. Deliver price increases and Make leadership matter Drive bold brand growth Partner for growth with drive margin focus in the milk, yogurt and powder and bold innovation leading customers EXCEL FOCUS WIN category in eight categories on six regions as ONE Arla During the first half of 2017, we We maintained focus on growing In the first half of 2017, we proactively managed prices across The first half of 2017 showed brands to improve the overall worked hard to deliver on the all European and International positive development for Arla in profitability of the business. With ambition to strengthen the markets and categories, driving market leadership in our 44.1 per cent of sales coming customer-centricity of our supported by improved price biggest product category MYPC, from Arla®, Lurpak®, Castello® and business and win with leading management analytics and with satisfactory growth and Puck® in the first half of 2017, we customers. This required a special processes. This was achieved successful product launches of are on track towards our goal of a focus on growth, profitability, Our identity through solid commercial and specialty offerings such as brand share greater than 45 per customer category collaboration, Healthy, natural, responsible and cooperative growth. financial discipline, and ensured a organic, lactose-free, skyr, and cent by 2020. Our new global and delivery service, amongst competitive milk price for our protein. We also continued to Innovation Centre will allow us to others. Within foodservice we owners. improve our position with other boost our innovation pipeline to successfully launched a new Our mission innovations and non-genetically support further branded growth. organisation in Europe. To secure the highest value for our farmers’ milk while creating opportunities for their growth. modified feed.
EXCEL FOCUS WIN • • • • in eight categories on six regions as ONE Arla The global dairy industry is developing at high The six regions represent the markets in which we Arla has grown significantly in Europe with Control costs, drive Build leading market Strengthen the important Accelerating the value speed and is characterised by a constant evolution believe Arla has the biggest potential to grow a mergers and acquisitions in Central Europe, the UK operational efficiencies and positions in International German market position journey in Arla Foods of consumer habits and preferences. Analysing long-term profitable business. Arla has a strong and Sweden. The past few years have been spent release cash Ingredients consumer needs and trends and matching these position in Northern Europe as the preferred dairy aligning the different companies into ONE, thereby Our global categories and brands The UHT business remained to our own strengths, we identified eight product company for consumers, and in Middle East and harvesting the synergies that the mergers created. While lower milk volumes and continued to grow in markets under significant pressure, hence In 2017, the Ingredients business categories that are the core focus for our efforts to North Africa where our brands are among the With Good Growth 2020, we will take this unity to increasing mix complexity of our outside of Europe, and we the profitability was challenged. continues to deliver growth in shape the dairy market. By offering innovative strongest in the food industry. Arla is continually the next level. Arla’s ambition is that all our 18,751 branded portfolio challenged expanded market shares across Our commercial bets in Germany high-value added products. Focus products with natural ingredients, great taste and expanding market positions in growth markets employees work from ONE strong common conversion cost in supply chain, our focus regions. Across the focused on managing prices, is on continued transformation of good nutrition, we are making it easier for such as China, South East Asia and Sub-Saharan platform. We want to create ONE global Arla we delivered on scalability Middle East and North Africa, strengthening our branded existing products to higher-value consumers to live healthy lives. Our key categories Africa, whilst further engaging in opportunities in where we actively use each other’s different above 2.0. Financial leverage was Sub-Saharan Africa, the Americas, positions as well as improving specialties, through new are milk and powder; milk-based beverages; the US and Nigeria. The six regions are Europe, competencies and, in so doing, contribute to our delivered within the long-term China and South-East Asia, and our operational basics. investments and focused research spreadable cheese; yogurt; butter and spreads; Middle East and North Africa, Sub-Saharan Africa, success. target range of 2.8 to 3.4. As a Russia and Others, this was driven and development efforts. specialty cheeses; mozzarella and ingredients. China and South East Asia, USA, and Russia. consequence of the significantly by strengthened relevance with Furthermore, Arla Foods increasing milk price, working consumers, increased market Ingredients is working with capital was impacted by higher investments, as well as local potential partners to increase the inventory and receivable partnerships. supply of raw materials. positions. • • • •
• Performance on track • Trend on track • Target challenged 10 ARLA FOODS HALF-YEAR REPORT 2017 MANAGEMENT REVIEW 11
Staying strong with Proudly farmer-owned Arla® Protein Our farmer-owned campaign raises Supporting consumers to live consumer awareness, differentiates us from an active and healthy lifestyle, Arla® competitors and instills higher consumer Protein drinks launched into six new trust in our products. To date we have markets including Middle East and integrated the marque on 90 per cent of all North Africa and Germany and are now Arla® branded packaging, displayed on more available in 14 markets worldwide. than 900 different products. In the first half of 2017 it delivered a strong volume driven revenue Highlights growth of 31.6 per cent.
Grand opening of the Arla Innovation Centre Arla improved the shape of our business in the first half of 2017 Arla’s new state-of-the-art Innovation Centre officially opened and will play Farmer owned by growing our brands, pursuing innovation and making key investments. a pivotal role in the pursuit of our strategy campaign is going by adding more value-added products to Strong efforts across all segments of our business contributed to the market. Chefs, scientists, consumers strong and customers collaborate at the centre new product launches, solid branded growth and exciting initiatives as we to redefine trends and technologies that shape worldwide dairy. continue to fulfil our Good Growth 2020 strategy. Read more on page 12.
Two new members Starbucks continues ONE quality model Live unprocessed appointed to the double digit growth streak introduced After identifying a huge growth Board of Directors The Starbucks brand is off to a strong A common set of milk quality opportunity in the US dairy aisle and in Two new members joined the start in 2017, delivering 21.2 per cent standards for all Arla farmers our pursuit of Good Growth 2020, Board for the period 2017 to 2019, branded volume driven revenue was introduced, ensuring all owners Arla in 2017 launched the Live Inger-Lise Sjöström and Simon growth year to date. This was fueled TM work to the same quality parameters Unprocessed campaign across the US. Simonsen, replacing two members by a lot of activities across all which ensures milk quality and milk The campaign advocates making not seeking re-election. Following markets, including the successful production of the highest caliber. cheese the simple way. It is about the election, the Board reappointed launch of Skinny Latte lactose free starting a conversation about what Åke Hantoft as Chairman and Jan with no added sugar, targeting good food is. Toft Nørgaard as Vice Chairman. millennial consumers.
Puck launches Cheddar Boosting profitability Cream Cheese Spread with new investment plan The new winning recipe You are not a cook Arla aims to invest EUR 335 launched in March in Middle East until you cook YOU’RE NOT A COOKUNTIL YOU million in production sites compared The global Lurpak campaign and North Africa is supported by a to EUR 263 million last year, thereby Game on Cooks reminds ‘sofa chefs’ in popular campaign honouring ‘the continuing the relentless pursuit of the UK, Sweden, Greece and Australia everyday chef.’ Puck consulted our strategy in producing branded of the thrills to be had in the kitchen. with more than 400 consumers to high-quality product ranges for This is Lurpak’s most digital campaign develop the best tasting cheddar Europe and emerging markets. MILLION EUR ever and 350 million food lovers have C OK spread in the region, and 12 O Invested in an upgrade seen our buttery digital content this succeeded! of AKAFA site. half-year.
GOOD FOOD DESERVES LURPAK®
Arla enters new The big skyr adventure and FReSH initiative Skyr sales have grown more than 200 Investing in high-quality Arla teamed up with partners to per cent since 2014. Following the child nutrition launch the ‘Food Reform for introduction of skyr in the UK, Arla aims to be among the Sustainability and Health’ (FReSH) Germany and the Netherlands, sales world’s leading dairy companies programme, which aims to define outside Denmark are now making up within the high-growth child nutrition guidelines on sustainable diets, half of the skyr business. category, investing EUR 12 million in an redefine food production, reshape upgrade of our AKAFA production site in food consumption and evaluate Denmark, which is essential in a a sustainable footprint. category where quality is the key differentiator. 12 ARLA FOODS HALF-YEAR REPORT 2017 MANAGEMENT REVIEW 13
Opening the door “Our systematic approach to health is an to our future integral part of our collaborations and in our product innovation. Everyone is focused on Arla proudly opened the doors to its new Innovation Centre in May this year. how we can help people live healthier lives The trends, technologies and products that will shape the global dairy category in the and give as many people as possible access future will be created hand-in-hand with chefs, scientists, consumers and customers at Arla’s new state-of-the-art global centre, built in the heart of one of the world’s to natural, nourishing dairy products.” fastest growing food clusters. Sven Thormahlen, Senior Vice President of Research and Development in Arla
Innovation at Arla’s core such as dairy farming, prevention of lifestyle a direct look into their aisles. This allows us to Consumer House saving fixtures are installed throughout, and it has Situated in a world-leading food cluster Arla has put innovation at the core of its growth diseases, innovative packaging and technologies simulate what the future in the stores should look A section of the building is dedicated to sensorial a total of 525 m2 solar cells on the roof for the The new Innovation Centre is situated in a cluster plans for the next decade, aiming to be a that can make it easier to transport milk and fresh like. In this area we play a role as category evaluation for continuous improvement of our production of renewable energy. of food industry companies and research centres collaborative innovator and kick-starting this dairy products across continents. champions. products. Trained panels frequently visit to taste in Aarhus, Denmark, which has set out to become ambition with our new global Innovation Centre and evaluate products, to more objectively Flexible work space the ‘Silicon Valley’ of food development and in Aarhus, which was officially opened on the 16th More than a building Pilot facility describe the properties of our products and The work environment is designed to support innovation in Europe. May by Her Royal Highness Crown Princess Mary The Innovation Centre is much more than a Modern, state-of-the art laboratories allow us to determine what drives consumer preference and creativity and cross-functional projects, inspiring of Denmark. building; it is a new way of looking at innovation. make all product prototypes that we can make in a satisfaction, for example taste, texture and colour. collaboration and new ways of working. No By securing a location in the midst of one of the The centre allows us to elevate innovation to a dairy, for example cheese, fermented yogurt, Thereby, Arla can evaluate how our products are designated desks or office space in the building world’s strongest and most ambitious food Arla’s Innovation Centre will play a pivotal role in new level, exciting and serving our consumers. mozzarella etc. The facility enables innovation perceived by consumers and experts in the field. enhances flexibility. It houses 150 people, and has clusters, Arla will gain much better opportunities building strong brands with our consumers whilst A number of state-of-the-art features include: processes to take place at a vastly accelerated also attracted many other functions of the to expand an open innovation network. The new also winning consumer preferences. It is a central pace, which can quickly incubate new ideas and Sustainable build business for use of collaborative meetings and global innovation centre will accelerate and drive part to our strategy, Good Growth 2020, by adding Customer Collaboration Lab flavours. A quicker road from idea to finished The Arla Innovation Centre is designed as a carbon conferences. the environment and become the beacon that will more value-added products to our markets around The Customer Collaboration Lab’s technology product is of high strategic value to many of Arla’s neutral building. It also meets the requirements of attract even more international companies and the world. Arla will also work with scientists and allows us to simulate shelf space and design store customers, where innovative edge is a key the Low Energy Building Class 2020 stipulated in research institutes. universities on research within a number of areas environments specific to key customers, providing differentiator. Danish building regulations. Furthermore, water 14 ARLA FOODS HALF-YEAR REPORT 2017 MANAGEMENT REVIEW 15
Market overview Financial review
During the first half of 2017, macroeconomic trends were mostly positive Strong commercial efforts to deliver higher sales prices and solid branded despite ongoing discussions about global political and economic instability. growth were the focus points this half-year, translating into a 19.3 per cent Worldwide milk production remained largely unchanged versus the prior year increase in milk prices delivered to farmer owners and a performance price of and a healthy demand for dairy products continued, especially in emerging 35.8 EUR-cent/kg. Revenue grew to EUR 5.0 billion from EUR 4.9 billion last markets. Following a significant increase in fat prices, milk prices continued to half-year, despite reduced volumes. There was a continued positive development increase during most of the first half of 2017. of all key performance indicators, except conversion cost and profit share, which were negatively impacted by scale challenges in supply chain.
Healthy macroeconomic environment Substantial increases in fat prices Global Dairy Trade development Milk price to farmer owners increase Revenue increases due to higher market Prepaid milk price, Macroeconomic development was positive by Driven by the trend of a growing demand for due to major commercial focus and sales prices nearly all measures during the first half of 2017. richer dairy products, in conjunction with lower June 2015 to 2017, During the first half of 2017, Arla’s choice to In the first half of 2017, revenue grew 3.0 per cent 30 June 2015 to 2017 Gross Domestic Product (GDP) increased in all than expected milk production, the price of fat in Whole Milk Powder increase sales prices to customers to support to EUR 5.016 million, compared to EUR 4.853 EUR-CENT/KG major regions, with both Europe and the US Europe increased significantly in the first half of USD/TONNE increases in milk prices to farmers came to life million in the first half of last year. The underlying increasing 2.1 per cent and China up 6.9 per cent. 2017. This contributed to an imbalance and through hard work and commitment on all levels revenue development, excluding foreign exchange Stock markets also developed positively and volatile prices, exemplified by a historical shift in of our business. This was evidenced by the effects and prior year divestments, was 6.6 per interest rates remained negative to low, despite value from protein to fat. This development significant increases in both the performance and cent. The overall increase in revenue was the first increases in US interest rates. Employment sparked a reaction from the market, presenting a prepaid prices during the period. negatively impacted by exchange rate develop- growth also continued at modest rates in most particular opportunity for fat, which is at its highest ments, primarily as a result of the weakened GBP Western markets. In emerging markets, where price level ever, having increased 93.7 per cent Performance price is the most relevant KPI for Arla, in the UK, as well as by EUR 23 million due to the indicators are less comprehensive, GDP also from last half-year. measuring the value Arla creates per kg of owner sale of the Rynkeby juice business in 2016, which increased in Bangladesh, Ivory Coast, Senegal and milk, for example through proactive price was Arla’s last remaining non-dairy business unit. China. The one negative macroeconomic trend Milk production flat, market prices 3,083 management, innovation, brands, cost pro- For more detail on the development of revenue, during the first half of 2017 was oil prices which increasing grammes, international growth and economies of refer to page 24. continued to fall, down 3.5 per cent at half-year In addition to the increase in fat prices, the first half scale. In the first half of 2017, the performance 2017 compared to half-year 2016. This had a of the year displayed a much needed recovery in price increased by 19.3 per cent over the period to Retail and foodservice products represent 81.7 per 33.3 30.2 direct negative impact on GDP development in the the milk price after nearly three years of low prices 35.8 EUR-cent/kg, compared to 30.0* EUR-cent/kg cent of Arla’s revenue. Volume-driven revenue in major economies of the Middle East and for farmers. Global market milk prices increased 2,318 during the first half of last year. The drivers of this the first half of the year declined 0.9 per cent for Sub-Saharan Africa, which grew more slowly than approximately 43 per cent versus last half-year. 2,162 increase were higher achieved sales prices, as well this portion of our business, as a result of our 24.9 in recent years. The Global Dairy Trade (GDT) price for whole milk as improving geographical and product mix. strategic focus on branded product sales. powder was an average of USD 3,083 per tonne in GBP under pressure June this half-year, compared to 2,162 in June The prepaid milk price represents the on-account In a largely branded business such as ours, when Despite positive macroeconomic indicators, 2016. The recovery of the milk price was a direct payment owners receive per kilogram of milk raw material prices rise, considerable effort is exchange rates for the GBP suffered, declining 5.1 result of lower to unchanged milk production HY HY HY delivered during the settlement period. The required to translate these into timely sales price HY HY HY 2015 2016 2017 2015 2016 2017 per cent compared to the first half of last year as versus the prior year in most dairy-producing prepaid price increased to 33.3 EUR-cent/kg at increases, without loss of revenue due to adverse discussion about increased protectionism and markets. Milk production decreased in Europe, the end of June this half-year, versus 24.9 sales volume impacts. This is in contrast to our potential negative impacts on international trade New Zealand and the US in response to the EUR-cent/kg at the end of the same period last commodity-based competitors in Europe. Our from political events of the last 12 months, in extended period of low prices, as well as a drop in year, and represents a 33.7 per cent increase for strategic decision to focus on increasing sales particular the Brexit vote and the US elections, milk supply in main export regions. That said, there our farmer owners. This increase was higher than prices to allow us to maximise owner milk prices continued in the first half of 2017. was improved domestic demand in Europe, the US our performance price increase, highlighting on a timely basis led to over EUR 1.1 billion in sales and China, and demand for dairy products in acceleration of the prepaid milk price towards the price increases over the last 12 months. emerging markets such as Nigeria and China close of the period. continued to grow at modest rates. 16 ARLA FOODS HALF-YEAR REPORT 2017 MANAGEMENT REVIEW 17
Revenue split by commercial segment intake. Trading sales increased 8.8 per cent in the Lower volumes challenge supply chain Inflow of raw milk from owners* first half of 2017 to EUR 677 million, versus EUR scale opportunities MKG MILLION EUR 622 million in the first half of last year, as a result To support our Good Growth 2020 strategy, Arla of higher sales prices. However, the trading share has embarked on an ambitious multi-year cost of overall milk intake declined to 20.6 percent, improvement program targeting EUR 400 million compared to 22.5 per cent in the first half of last over four years. The vision is that over time, all United Kingdom year. zones and functions will contribute to these savings, with the primary focus being on cost 1,637 Scalability on target improvements within supply chain. The efficiency 1,672 Costs for Arla include three major areas: produc- programme commenced in 2016 and has tion, sales and distribution, and administration. delivered EUR 13 million savings during the first International Operating expenses were EUR 4.881 million in the half of 2017 and EUR 111 million in total. Netherlands 792 first half of 2017, compared to EUR 4.715 million 28 Sweden 719 16% the first half of 2016. Excluding the cost of milk As mentioned earlier, Arla took the strategic decision 29 961 Europe from our owners, these operating expenses remained in 2017 to focus on substantially increasing sales 999 3,177 virtually unchanged. Read more on page 25. prices to maximise milk prices for our owners. As a Denmark 3,179 result, sales volumes declined. This negatively 2,406 63% 5,016 We believe it is important to measure costs in impacted supply chain costs, where improvements 2,413 terms of scalability. Scalability measures the are largely driven by scale efficiencies, which are only 15% relationship between volume growth and capacity possible with increasing volumes. Belgium 6% cost, and this efficiency is essential to our financial 265 Germany performance and a core value-driver for our farmer In addition, increasing production complexity 269 owners. In the first half of 2017, we delivered due to a growing range of milk types, e.g. organic and 880 Luxembourg 913 scalability of greater than 2.0, which means Arla lactose-free etc, as well as a broader and more was able to reduce our capacity costs with a complex portfolio of branded products, led to 76 percentage higher than our reduction in retail and increased supply chain production costs. As a result, 75 • HY 2017 foodservice volumes. This is on target and our conversion cost index, which measures the total • HY 2016 Ingredients exemplifies effective control of capacity costs and cost of supply chain per kg of milk processed, grew at Trading * Total owner milk was 6,253 million kg for the first half of 2017 313 the positive rollout of the organisational restructure, an index of 102.2. This development highlights a and other milk was 771 million kg. Total weighed-in milk for 734 252 Organise to Win, which took place last year. higher absolute expenditure for supply chain costs half-year 2017 amounted to 7,024 million kg. 703
• HY 2017 • HY 2016
Driving bold brand growth and innovation Sales grow in all commercial segments Volume-driven revenue grew 3.3 per cent versus Brand share* relative to a decline in milk intake and is below our Brands drive the majority of Arla’s profitability, which the first half of last year. Strategic-branded target of delivering a conversion cost index below 100. makes increasing branded sales critical for us to Europe volume-driven revenue grew 3.7 per cent. achieve stronger relative profitability on a Europe is our largest business segment, account- International sales now represent 16 per cent of Net profit below prior year level medium- and long-term basis. We also know that ing for 63.3 per cent of total revenue during the overall revenue, compared to 15 per cent in the first At Arla we have a mandated annual net profit share branded revenue is less volatile and drives a first half of 2017 when excluding the European half of last year**. in the range of 2.8 to 3.2 per cent of revenue, as we fundamentally strong connection with consumers. revenue from Ingredients and Trading below. Sales continue to focus on paying out the largest possible For this reason, Arla continually focuses on growing in the region amounted EUR 3.2 billion, in line with Ingredients 41.5% 44.5% 44.1% share of our profit to our farmer owners via the our branded share of volume. Strategic-branded EUR 3.2 billion during the first half of last year, Arla Foods Ingredients is our most profitable prepaid milk price. As in previous years, seasonality in volume-driven revenue grew 1.0 per cent, led by driven by higher sales prices and an improved segment due to the high investment in innovation our operations impacts the half-year results while our Nigeria in Sub-Saharan Africa, as well as South East product mix despite volume declines and adverse and the technology involved in producing net profit target range is a full-year target. Therefore, Asia for International, and the Netherlands and currency effects. Volume-driven revenue whey-related products. We aim to be among the similarly to the first half of last year, the results for the Belgium for Europe. Brand share for the first half of decreased 2.1 per cent versus the first half of last world’s leading dairy companies within the child first half of 2017 were below the annual target range. 2017 was 44.1 per cent. This is slightly below first year. Strategic-branded volume-driven revenue nutrition category, investing EUR 12 million in an In addition, given the rapidly increasing milk price in half of 2016 with a brand share of 44.5 per cent. was stable overall for this region, with the upgrade of our production site in Denmark. Sales 2017, we prioritized further payouts to farmers, and The reduction in brand share is, despite the positive Netherlands and Belgium growing significantly, in this segment increased 24.2 per cent in the first consequently lowered the profit share to 2.1 per cent growth in brands of 1 per cent , due to the and Sweden and Finland declining slightly. half of 2017 to EUR 313 million, compared to for the first half of 2017, compared to the 2.5* per significant raw material price increases. The relative EUR 252 million in the first half of last year. This cent in the first half of last year. raw material price impact of the non-branded International development was driven by the sale of higher revenue is significantly higher than the impact on More than half of Arla’s topline growth ambition in volumes in our third party manufacturing Financial position and cash flow impacted the branded revenue. At constant prices the brand Good Growth 2020 comes from growing sales in business, as well as strong price and volume by positive price development share has improved to 45.8 per cent and hence a our high-margin international commercial growth in the value-added protein segment. Arla is considered and strives to be a robust satisfactory development. segment, where milk supply shortages, high investment grade credit company and this requires a population growth and an emerging middle class Trading strong balance sheet. Financial leverage is our most Our brands are at the heart of our business, and are expected to drive increased demand for Trading encompasses our business-to-business important balance sheet performance indicator, and we are committed to further strengthen and grow high-quality dairy products. In the first half of sales to other companies for use in their production, we have therefore defined a long-term target range them. In May, we opened the doors to our new 2017, international sales grew 10.2 per cent to as well as industry sales of cheese, butter or milk HY HY HY of 2.8 to 3.4 for this key ratio. Financial leverage is 2015 2016 2017 Arla Innovation Centre which will serve as the EUR 792 million, compared to EUR 719 million for powder. Although this is not a core business calculated as the ratio of net interest-bearing debt to home to many product and brand de-velopments the first half of last year. This development was a segment, it is critical to our success by managing profitability, i.e. EBITDA. The ratio measures Arla’s going forward. For more detail refer to page 12. result of higher sales prices and volumes. seasonal and geographical availability in milk * Logos used for visual purposes only. ability to generate profit compared to our net 18 ARLA FOODS HALF-YEAR REPORT 2017 MANAGEMENT REVIEW 19
Number of owners*
Denmark Sweden 2,690 2,718 Financial outlook 2,876 2,970
Germany UK The future of dairy will be based on bold choices. We will continue to commit 2,325 2,442 our attention to the things that add the most value for our business, guided 2,456 2,594 by our strategy Good Growth 2020. For the full-year 2017, we expect further improvement in our performance compared to the first half of the Belgium year. External factors are expected to develop largely in line with the first half, 836 however, there continues to be some uncertainty regarding milk volumes and 865 prices in the remaining part of the year.
Luxembourg 215 219 Total Netherlands Steady economic growth prices to continue to modestly improve. This will 10.5 billion for 2017. Net profit is expected to be We enter the second half of 2017 with the be the result of ongoing strategic emphasis within within our Board of Representatives-approved expectation of steady GDP growth in most markets Arla, as well as improvements in the broader range of 2.8 to 3.2 per cent of revenue. Volumes of 55 11,281 • HY 2017 compared to prior year, which should present European marketplace due to lower milk volumes our strategic branded products will grow 1 to 3 per 57 12,037 • HY 2016 continued opportunities and demand for our over the last 12 months. Whilst the continual cent, and financial leverage will be within the products. Despite overall strong macro signals, there increase in sales prices is a positive development, long-term targeted range of 2.8 to 3.4. The shape is some uncertainty across the Western markets it will pressure our brands and retail and foodser- of our business will continue to improve as * The consolidation within dairy farming continues and we have seen a reduction in the number of owners of 6 per cent, where recent and pending elections, particularly in vice volumes. Furthermore, higher milk intake evidenced in growing brand and international compared to first half of last year. In the same period, milk volumes from owners decreased by 2 per cent. We believe the the UK and Germany, have the potential to impact volumes are expected in the second half of 2017 sales as a percent of total sales, and a lower share reduction of weighed-in milk volumes is a result of the previous periods’ low milk prices and expect future volumes to trade, fiscal and monetary policies in European and across the industry and the short-term impact of of trading sales as a percent of total milk intake. increase following the current improved market situation. global markets. We do not currently foresee these increases remains uncertain. Cost areas will remain challenged from a full-year significant changes in global consumption trends or perspective. Scalability and conversion costs are big shifts in global trade patterns during the Improved delivery of targets expected expected to come in below the respective financial debt. In the first half of 2017, financial remaining part of 2017. Continuous monitoring and for full-year targeted ranges as a result of lower milk volumes leverage increased to 3.4 compared to 3.0* at the ensuring that we quickly react to change are We expect to achieve our full-year financial targets and therefore the absence of scale opportunities. end of the first half of last year as a direct result of essential in the second half of 2017, and beyond. across most key performance indicators. Nevertheless, we continue to prioritise a clear cost higher prices, which lowered overall profitability. It is Important to mention are further gains in both the focus in the second half of the year. important to note, however, that leverage during the Continued focus on increasing sales performance and prepaid milk prices, which will As the majority of our revenue is generated in the EU, it is period remained within our long-term target range. Brexit and milk price to our owners increase versus full-year 2016. Group revenue is important for Arla’s product offering to customers and We expect the positive price trends to continue expected to grow by nearly EUR 1 billion to a level consumers that our products can move freely across the The increase in milk prices also had a negative into the second half of 2017, with prepaid milk in the upper end of the range of EUR 10 to markets in which we operate to optimise the utilisation of effect on working capital. The increased value our ONE milk pool. With 2,442 farmer owners based in the UK, the country associated with our stock and receivables is Arla’s biggest single market, accounting for approximately 20 per cent of positions significantly reduced our cash position. the total revenue. Cash flow from operating activities decreased to Expectations for full year 2017 EUR -60 million compared to EUR 340 million in As a company, we are in favour of the free movement of goods and people. the first half year of last year. We want the final trade deal between the UK and EU to be free from tariff Revenue Profit share Strategic branded volume driven and non-tariff barriers in milk and dairy. Over the past six months, we have revenue growth Consequently, free operating cash flow for the first stepped up our engagement with the UK government and the EU to ensure 10 - 10.5 2.8 - 3.2% half of 2017 was EUR -200 million, compared to our views are heard at the highest level. We have also collaborated with BILLION EUR OF REVENUE 1 - 3% EUR 195 million for the first half of last year. • • • partners in the dairy industry and the wider food and farming community to build support for our position across Europe. Cash flow from financing activities was EUR 193 million, compared to EUR -293 million in the first Brand share International share Trading share As the negotiations progress, we will continue to deliver strong, evidence- half of last year, funded by the use of credit based arguments to politicians and policy makers hand-in-hand with our >45% >20% <20% facilities. A supplementary payment of EUR 120 farmer owners and peers in the dairy industry. And as the UK government • • • million was made in line with the Board of begins developing its post BREXIT agricultural policy, we will work closely Representative’s decision to pay out 1 EUR-cent/kg with them to protect the competitiveness of the UK dairy industry within of member milk to our farmer owners. the EU and the global dairy market. Conversion cost Scalability Leverage
* Excluding gain from sale of Rynkeby. >100 <2.0 2.8 - 3.4 ** International sales exclude Arla Foods Ingredients • • • and trading activities. • Target expected to be achieved • Target expected to be challenged CONSOLIDATED FINANCIAL STATEMENTS 21 Consolidated Income statement financial Half-year Half-year Development Full-year (EURm) 2017 2016 2016
Revenue 5,016 4,853 3% 9,567 Production costs -3,879 -3,700 5% -7,177 statements Gross profit 1,137 1,153 -1% 2,390
Sales and distribution costs -798 -804 -1% -1,642 Administration costs -204 -211 -3% -435 Other operating income 20 52 -62% 91 Other operating costs -23 -16 44% -29 Gain from sale of enterprise - 120 -100% 120 Share of results after tax in joint ventures and associates 25 14 79% 10 Earnings before interest and tax (EBIT) 157 308 -49% 505
Specification: EBITDA excluding gain from sale of enterprise 332 363 -9% 719 Gain from sale of enterprise - 120 -100% 120 Depreciation, amortisation and impairment losses -175 -175 0% -334 Earnings before interest and tax (EBIT) 157 308 -49% 505
Financial income 9 2 600% 7 Financial costs -36 -49 -16% -114 Profit before tax 130 261 -50% 398
Tax -18 -17 6% -42 Profit for the period 112 244 -54% 356
Minority interests -8 -5 60% -9 Arla Foods amba's share of profit for the period 104 239 -56% 347
We deliver the natural power of milk in exciting ways that make it easier for you to live a healthy life.
Arla’s consolidated annual report is prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted by the EU and additional disclosure requirements in the Danish Financial Statement Act. The consolidated half-year report is prepared according to the same principles. 22 ARLA FOODS HALF-YEAR REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 23
Balance sheet Cash flow statement
Half-year Half-year Development Full-year Half-year Half-year Full-year (EURm) 2017 2016 2016 (EURm) 2017 2016 2016
Assets Non-current assets: EBITDA 332 483 839 Intangible assets 815 824 -1% 825 Gain from sale of enterprise - -120 -120 Property, plant and equipment 2,243 2,338 -4% 2,310 EBITDA excluding gain from sale of enterprise 332 363 719 Investments in associates 428 439 -3% 434 Share of results in joint ventures and associates -25 -14 -10 Investments in joint ventures 52 48 8% 51 Change in working capital -268 -88 138 Deferred tax 71 61 16% 74 Change in other working capital -22 86 -3 Other non-current assets 23 23 0% 20 Other operating items without cash impact -37 23 22 Total non-current assets 3,632 3,733 -3% 3,714 Dividends received, joint ventures and associates 1 4 12 Interest paid -25 -34 -59 Current assets: Interest received 3 4 5 Inventories 1,099 977 12% 950 Tax paid -19 -4 -18 Trade receivables 924 882 5% 876 Cash flow from operating activities -60 340 806 Derivatives 58 90 -36% 31 Current tax 2 1 100% 1 Investment in intangible fixed assets -25 -21 -58 Other receivables 202 192 5% 222 Investment in property, plant and equipment -118 -136 -263 Securities 507 505 0% 504 Sale of property, plant and equipment 3 12 16 Cash and cash equivalents 74 110 -33% 84 Operating investing activities -140 -145 -305 Total current assets 2,866 2,757 4% 2,668 Free operating cash flow -200 195 501
Total assets 6,498 6,490 0% 6,382 Sale of enterprises - 138 138 Equity and liabilites Financial investing activities - 138 138 Equity Equity excluding proposed supplementary payment to owners 2,117 2,090 1% 2,033 Cash flow from investing activities -140 -7 -167 Proposed supplementary payment to owners - - - 124 Equity attributable to the parent company's owners 2,117 2,090 1% 2,157 Free cash flow -200 333 639 Minority interests 34 41 -17% 35 Supplementary payment regarding the previous financial year -120 -108 -108 Total equity 2,151 2,131 1% 2,192 Paid out from equity regarding terminated membership contracts -26 -19 -22 Liabilities Loans obtained, net 346 -166 -449 Non-current liabilities: Payment to pension liabilities -7 - -45 Pension liabilities 357 346 3% 369 Cash flow from financing activities 193 -293 -624 Provisions 11 14 -21% 12 Deferred tax 80 51 57% 80 Net cash flow -8 40 15 Loans 1,271 1,666 -24% 1,281 Total non-current liabilities 1,719 2,077 -17% 1,742 Cash and cash equivalents at 1 January 84 70 70 Exchange rate adjustment of cash funds -3 -7 -8 Current liabilities: Transferred to asset held for sale - 7 7 Loans 1,266 911 39% 947 Cash and cash equivalents at 30 June 74 110 84 Trade payables 962 807 19% 995 Provisions 10 20 -50% 13 Derivatives 94 171 -45% 168 Current tax 14 14 0% 18 Other current liabilities 282 359 -21% 307 Total current liabilities 2,628 2,282 15% 2,448
Total liabilities 4,347 4,359 0% 4,190
Total equity and liabilities 6,498 6,490 0% 6,382 24 ARLA FOODS HALF-YEAR REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 25
Revenue Costs
Strong increases in sales prices Improved cost base
Revenue increased 3.4 per cent to EUR sold, reduced revenue by EUR 62 million. Operational costs amounted to EUR was impacted by increasing production related to other production materials 5,016 million, compared to EUR 4,853 Furthermore, adverse currency 4,881 million compared to EUR 4,715 complexity as well as lower than decreased by EUR 143 million, primarily million in the first half of last year. The developments, primarily in the GBP, million in the first half of last year, planned milk volumes, growing at an due to price-driven changes in the value improvement was primarily driven by reduced revenue by EUR 135 million. representing an increase of 3.5 per cent. index of 102.2. of inventory and currency effects. higher sales prices, as well as improved Excluding weighed-in raw milk, total geographical and product mix, despite The one-off divestment of Rynkeby in costs decreased by 6.7 per cent, Weighed-in raw milk increased by EUR Staff costs decreased by 3.6 per cent to lower sales volume and negative May 2016 accounted for a EUR 23 primarily due to currency effects. 342 million. The increase was driven by EUR 608 million, compared to EUR 631 currency effects. million reduction in revenue as Scalability exceeded 2.0, which means higher milk prices to our owners, million in the first half of last year, as a compared to the first half of last year. Arla was able to reduce capacity costs amounting to EUR 396 million, partially result of reduced capacity costs and The positive sales price development with a percentage higher than our offset by lower volumes of EUR 40 currency effects, partially offset by increased revenue by EUR 383 million, reduction in retail and foodservice million, as well as currency effects and increased variable staff costs. corresponding to 7.9 per cent. Lower volumes. The conversion cost index changes in costs for Other milk. Costs sales volumes, partially offset by a positive change in the mix of products
Revenue split by commercial Revenue split by commercial Revenue by category Cost split by type, Cost split by type, Operational costs split by function segment, half-year 2017 segment, half-year 2016 half-year 2017 half-year 2016 (EURm) Half-year Half-year 2017 2016 Half-year Half-year 2017 2016 15% 14% 12% 13%
4% 4% Production costs 3,879 3,700 6% 5% Milk, yogurt, 10% Sales and distribution costs 798 804 powder 11% 49% 44% Administration costs 204 211 63% 66% and cooking 5,016 15% 4,853 4,881 4,715 Total 4,881 4,715 16% million EUR million EUR (MYPC) 44% 46% million EUR million EUR
13% 13% Specification: Weighed-in raw milk 2,436 2,094 12% 15% Other production materials* 558 701 Staff costs 608 631 (EURm) Half-year Half-year Cheese (EURm) Transportation costs 500 511 2017 2016 26% 25% Cost of raw milk Depreciation, amortisation and impairment 175 175 Other production materials* Other costs** 604 603 Europe 3,177 3,179 Staff costs Total 4,881 4,715 International 792 719 Transportation costs Butter, Average number of full-time employees 18,751 18,941 Arla Foods Ingredients 313 252 spreads and Depreciation, amortisation and impairment Milk trade and other 734 703 margarine Other costs** *Other production materials include packaging, additives, consumables and change Total 5,016 4,853 (BSM) 14% 13% in inventory. **Other costs mainly includes maintenance, utilities, marketing and IT.
D D Weighed-in raw milk EURm (EURm) 396 -14 -43 Other 16% 16% -113 Half-year 2017 Half-year 2016 5,200 383 -135 5,000 Weighed in mkg EURm Weighed in mkg EURm 5,100 4,900 4,881 5,016 5,000 4,800 Owner milk 6,253 2,167 6,370 1,811 4,715 -20 -40 Other milk 771 269 844 283 4,700 4,900 4,853 -23 -62 Total 7,024 2,436 7,214 2,094 4,800 4,600
0 0
H 2016 M and Currency H 2017 H 2016 Currency H 2017 olume/mix Sales prices Other milk divestments
Milk price effect excluding milk Milk volume effect Change in cost base M&A and divestments 26 ARLA FOODS HALF-YEAR REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 27
Non-current assets Net working capital
Investing for the future Net working capital affected by higher milk price
The carrying value of non-current assets We expect to see increased investments Denmark, officially opened in May 2017. Mengniu Dairy Company Limited was Net working capital increased by Trade receivables and inventory inventory position and payment terms, Trade payables related to owner milk decreased by EUR 101 million to EUR in the second half of 2017 and in 2018 Intangible assets decreased primarily EUR 295 million. The fair value of the EUR 9 million compared to the first half increased due to the higher milk price. and expanding our supply chain increased by EUR 36 million due to the 3,632 million, mainly driven by currency as a result of the approximately 50 per due to currency effects. No impairment shares, based on the listed stock price as of last year. The change was due to Furthermore, inventory increased as a financing programme. higher milk price. impacts and depreciation. cent increase in the supply chain was made in 2017. at 30 June 2017, amounted to EUR 357 increases in trade receivables and result of higher volumes on hand, investment budget, announced in million. inventory, partly offset by trade payables coupled with a change in product mix. Currency effects reduced net working Net working capital excluding owner Investment in property, plant and January 2017. In addition to investment Non-current assets also include and currency effects. We continuously aim to reduce net capital by EUR 34 million compared to milk increased by EUR 45 million and equipment was EUR 116 million, in production capacity, the new global investments in joint ventures and working capital by optimising our the first half of last year, mainly caused amounts to EUR 1,220 million. compared to EUR 136 million in the first Arla Innovation Centre, which is based in associates. The book value of China by movements in the GBP and the SEK. half of last year.
Net working capital EURm (EURm) Half-year Half-year 1,456 2017 2016 1,500 1,342 1,258 1,220 1,175 Inventories 1,099 977 Trade receivables 924 882 1,000 1,155 1,061 1,024 1,053 1,052 Trade payables -962 -807 Intangible assets Net working capital 1,061 1,052 EURm (EURm) Half-year Half-year 500 2017 2016 H 2013 H 2014 H 2015 H 2016 H 2017 4,000 Net working capital excluding owner milk Goodwill 602 628 Net working capital
3,500 Licenses and trademarks 29 34 IT and development projects 184 162 3,000 Total intangible assets 815 824
2,500 Property, plant and equipment 2,000 (EURm) Half-year Half-year 1,500 2017 2016 1,000 Land and buildings 857 850 Cash flow Plant and machinery 1,111 1,136 500 Other non-current assets Fixtures and fittings, tools and equipment 116 129
Property, plant and equipment Assets in the course of construction 159 223 Higher milk price reduces cash flow Intangible assets Total property, plant and equipment 2,243 2,338 0 H 2017 H 2016 Cash flow from operating activities A supplementary payment of EUR 120 decreased by EUR 400 million, closing at million was made in relation to the 2016 Development in cash flow EUR -60 million compared to EUR 340 profit allocation. Further payments, (EURm) million in the first half of last year. The representing EUR 26 million in individual 332 -268 change is due to higher working capital, capital, were paid out to owners who 400 primary on account of the higher milk resigned or retired. 300 prices, and lower EBITDA. 200 -127 Cash flow in the period was funded by 84 100 339 74 Free operating cash flow was EUR -200 the use of credit facilities, resulting in a -140 million, compared to EUR 195 million in NIBD at the same level as last half-year. 0 the first half of last year, due to the Total cash and cash equivalents -100 -146 above mentioned increase in working amounted to EUR 74 million, compared capital, nonetheless, investment to EUR 84 million at end of last year. -200 activities, driven by property, plant and -300 equipment, remained largely unchanged. NWC Other EBITD
Loans obtained, Investing activities Cash 30 June 2017 Cash 1 January 2017 including pensions and leaving members Supplementary payment 28 ARLA FOODS HALF-YEAR REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 29
Equity
Solid equity position
Equity amounted to EUR 2,151 million, Equity ratio, which corresponds to a decrease of EUR Equity half-year 2017 41 million compared to end of last year. (EURm) Half-year Half-year Full-year Profit for the period, before minority 2017 2016 2016 EURm EURm interest, was EUR 112 million. A 600 600 supplementary payment of EUR 120 33% Common capital 1,701 1,640 1,595 million was made in relation to the 2016 Individual capital 471 499 503 500 500 profit allocation. Further payments, Other equity accounts -55 -49 -65 representing EUR 26 million in individual 400 400 capital, were paid out to owners who Proposed supplementary payments resigned or retired. Other adjustments, to owners - - 124 300 300 including value adjustments due to Equity before minority interests 2,117 2,090 2,157 changes in interest and foreign Minority interests 34 41 35 Equity ratio, 200 200 exchange rates, negatively impacted Total equity 2,151 2,131 2,192 equity by EUR 7 million. half-year 2016 100 100 The equity ratio, excluding the value of minority interest, amounted to 33 per 0 0 0-1 1-2 2-3 3-4 4-5 5-6 6-7 7-10 10 > 0-1 1-2 2-3 3-4 4-5 5-6 6-7 7-10 10 > cent compared to 32 per cent at the 32% end of first half last year, and 34 per cent at the end of last year. Unused committed facilities Debt
Liquidity reserves (EURm) Half-year Half-year 2017 2016
Cash and cash equivalents 74 110 Securities (free cash flow) 15 10 Unutilised committed loans facilities 453 494 Unutilised other loan facilities 157 172 Net interest-bearing debt Total 699 786
Pension liabilities Leverage within target range (EURm)
Half-year 2017 Half-year 2016 The Group’s financial leverage at half-year was 3.4, representing an Leverage, Sweden UK Others Total Sweden UK Others Total increase of 0.4 compared to first half of half-year 2017 EURm last year, adjusted for the gain on the Present value of funded liabilities 208 1,395 43 1,793 211 1,349 35 1,595 3,500 5 divestment of Rynkeby in 2016. Net Fair value of plan assets -11 -1,267 -24 -1,449 -11 -1,237 -17 -1,265 interest-bearing debt increased due to 3,000 Deficit of funded plans 197 128 19 344 200 112 18 330 3.4 4 an increase in net working capital, as Present value of unfunded liabilities - - 13 13 - - 16 16 well as due to the supplementary 2,500 Net pension liabilities payment. The net pension liability 3 increased by EUR 11 million compared 2,000 recognised in the balance sheet 197 128 32 357 200 112 34 346 to the first half of last year, as a result of 1,500 actuarial losses, offset by payments to 2 the pension schemes and currency 1,000 effects. Average interest costs, excluding Leverage, 1 Assumptions - pension liabilities pensions, was 2.6 per cent compared to half-year 2016 500 2.8 per cent in the first half of last year. 0 0 Half-year Half-year H 2013 H 2014 H 2015 H 2016 H 2017 2017 2016 Net financial cost improved by EUR 20 million compared to the same period 3.0 Leverage Net interest-bearing debt excluding pension liabilities last year. Interest cost is lower than in Pension liabilities Target range leverage 2.8 - 3.4 Discounting rate, Sweden 2.5% 2.8% first half of last year and furthermore, Discounting rate, UK 2.6% 2.6% both currency and value adjustments Expected payroll increase, Sweden 2.2% 2.4% positively impacted the net financial Expected payroll increase, UK 4.0% 4.1% cost. Inflation (CPI), Sweden 1.8% 1.6% Inflation (CPI), UK 2.2% 1.8% 30 ARLA FOODS HALF-YEAR REPORT 2017 CONSOLIDATED FINANCIAL STATEMENTS 31
Glossary Corporate calendar
Brand share measures the revenue from Leverage is the ratio between net interest-bearing Retail and foodservice volume driven strategic brands as a proportion of total revenue, debt inclusive of pension liabilities and EBITDA. It revenue growth is defined as revenue growth and is defined as the ratio of revenue from enables evaluation of the ability to support future associated with growth in retail and foodservice strategic branded products and total revenue. debt and obligations; the long-term target range volumes while keeping prices constant. for leverage is between 2.8 and 3.4. BSM is an abbreviation of the product category Scalability measures the relative cost efficiency containing butter, spreads, and margarine. Milk volume is defined as total intake of raw milk of the business and is defined as the ratio between in kg from owners and contractors. retail and foodservice volume driven revenue CAPEX is an abbreviation of capital expenditure. growth and growth in total capacity cost adjusted M&A is an abbreviation of mergers and for special items. The strategic ambition for Capacity cost is defined as the cost for running acquisitions. scalability is > 2.0. the general business, and includes staff cost, maintenance, energy, cleaning, IT, travelling and MYPC is an abbreviation for Arla’s largest product Strategic brands are defined as products sold consultancy etc. category which contains’ milk, yoghurt, powder, under branded products such as Arla®, Lurpak®, and cooking. Castello® and Puck®. Conversion cost refers to the total cost of production of finished and semi-finished goods, Net interest-bearing debt is defined as current Strategic branded volume driven revenue excluding the cost for milk, divided by the product and non-current interest-bearing liabilities less growth is defined as revenue growth associated volume. The conversion cost enables evaluation of securities, cash and cash equivalents, and other with growth in volumes from strategic branded efficiency improvements in the conversion of raw interest-bearing assets. products while keeping prices constant. milk to production output over time. Net interest-bearing debt inclusive of Trading share is a measure for the total milk CPI is an abbreviation of Consumer Price Index. pension liabilities is defined as current and consumption for producing commodity products non-current interest-bearing liabilities less relative to the total milk consumption, i.e. based EBIT is an abbreviation of earnings before interest securities, cash and cash equivalents, and other on volumes. Commodity products are sold with and tax, and a measure of earnings from interest-bearing assets plus pension liabilities. lower or no value added, typically via busi- operations. ness-to-business sales for other companies to use Financial reports Performance price for Arla Foods is defined as in their production as well as via industry sales of EBITDA is an abbreviation of earnings before the prepaid milk price plus net profit divided by cheese, butter, or milk powder. and major events interest, tax, depreciation and amortisation from total member milk volume intake. It measures ordinary operations. value creation per kg of owner milk including UHT is an abbreviation for ultra-high temperature retained earnings and supplementary payments. (UHT) processing, which is a food processing EBIT margin measures EBIT as a percentage of technology that sterilises liquid food, for example 25 August 2017 total revenue. Prepaid milk price describes the cash payment milk, by heating it above 135 °C. Publication of consolidated half-year farmers receive per kg milk delivered during the report for 2017 Equity ratio is the ratio between equity excluding settlement period. Value-added protein segment contains minority interests and total assets, and is a products with special functionality measure of the financial strength of Arla. Private label refers to retail brands, which are and compounds, compared to standard protein owned by retailers but produced by Arla based on concentrates with a protein content of Free cash flow is defined as cash flow from contract manufacturing agreements. approximately 80 per cent. 11-12 October 2017 operating activities after deducting cash flow Board of Representatives meeting from investing activities. Profit share is defined as the ratio between profit Volume driven revenue growth is defined as for the period allocated to owners of Arla Foods, revenue growth associated with growth in Food cluster is a group of geographically close and total revenue. volumes while keeping prices constant. and inter-connected companies and associated institutions in the food sector. Net working capital is the capital tied up in 21 February 2018 Announcement of annual results for 2017 inventories, receivables, and payables including International share of business is defined as the payables for owner milk. revenue from the zone International as a percentage of the revenue from the zones Net working capital excluding owner milk is International and Europe. defined as capital that is tied up in inventories, 28 February – 1 March 2018 receivables, and payables excluding payables for Board of Representatives meeting owner milk.
2 March 2018 Publication of consolidated annual report for 2017