Creating Value in a Year Like No Other
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CREATING VALUE IN A YEAR LIKE NO OTHER CONSOLIDATED ANNUAL REPORT 2020 ViN SiO TABle OF contents MANAGEMENT reviEW OUR GOVERNANCE C REATE the 03 2020 Performance at a glance 38 Governance framework 04 CEO and Chairman letters 40 Diversity and inclusion FUTURE OF DAiRY 05 Message from the Chairman: 42 Board of Directors A busy and challenging year 45 Executive Management Team 06 Message from the CEO: Creating value 47 Management remuneration TO BRiNG health and in a year like no other 48 Responsible and transparent tax practices 07 Highlights 49 Risk and compliance management iNSPiRATiON TO the 10 Five year overview WORLD, naturally. OUR PERFORMANCE ReviEW OUR strategy 56 Market overview 12 Business model 57 Performance review 13 Good Growth 2020 strategy 61 Financial outlook 16 Creating efficiencies with Calcium programme 18 Embracing change: Major trends OUR CONSOLidated and strategic responses FiNANCiAL STATEMENTS 20 Dealing with Brexit 63 Primary financial statements 21 Essential business priorities for 2020 73 Notes OUR BRANDS AND OUR CONSOLidated CommerciAL SEGMENTS ENVironmental, SociAL 23 Brands AND GOVERNANCE DATA 25 Europe 120 Primary statements 27 International 123 Notes 29 Arla Foods Ingredients 30 Global Industry Sales 135 Glossary 137 Corporate calendar OUR ResponsiBiLiTY 32 Sustainability strategy 33 Environmental ambition 34 Climate Checks on farms 35 Facilitating better animal welfare 36 International dairy development Management Review Our Strategy Our Brands and Commercial Segments Our Responsibility Our Governance Our Performance Review Our Consolidated Financial Statements Our Consolidated Environmental, Social and Governance Data 2020 PerFORMANCE AT A glance FiNANCiAL PERFORMANCE Cost AND CASH Revenue Performance price Milk volume Profit share* Leverage 10.6 36.9 13.7 3.2% 130 2.7 (billion EUR) (EUR-cent/kg) (billion kg) (of revenue) (million EUR) 2020 10.6 2020 36.9 2020 13.7 2020 3.2% 2020 130 2020 2.7 2019 10.5 2019 36.6 2019 13.7 2019 3.0% 2019 110 2019 2.8 2018 10.4 2018 36.4 2018 13.9 2018 2.8% 2018 114 2018 2.4 Target 2020: 10.4-10.8 billion Target 2020: 2.8-3.2% Target 2020: 75-100 million EUR Target 2020: 2.8-3.4 QualiTY OF BUSiNESS CLimate impact Strategic branded volume Brand share International share** CO₂e emission reduction, CO₂e emission reduction, driven revenue growth scope 1 and 2 scope 3 per kg of milk and whey 7.7% 48.9% 23.6% 24% 7% Baseline: 2015 Baseline: 2015 2020 7.7% 2020 48.9% 2020 23.6% Science Based Target 2030: 30% Science Based Target 2030: 30% 2019 5.1% 2019 46.7% 2019 21.9% 2018 3.1% 2018 45.2% 2018 19.6% Target 2020: 2-4% Target 2020: ≥ 45% Target 2020: ≥ 23% *Based on profit allocated to owners of Arla Foods amba 3 ARLA FOODS ANNUAL REPORT 2020 ** International share is based on retail and foodservice revenue, excluding revenue from third party manufacturing, Arla Foods Ingredients and trading activities. Management Review Our Strategy Our Brands and Commercial Segments Our Responsibility Our Governance Our Performance Review Our Consolidated Financial Statements Our Consolidated Environmental, Social and Governance Data C GREATiN value iN A year LiKE NO other Jan Toft Nørgaard, Chairman of the Board, and Peder Tuborgh, CEO, visit farmer owner Lars Mågård Pedersen at his farm in Gjerlev, Denmark. 4 ARLA FOODS ANNUAL REPORT 2020 Management Review Our Strategy Our Brands and Commercial Segments Our Responsibility Our Governance Our Performance Review Our Consolidated Financial Statements Our Consolidated Environmental, Social and Governance Data A BUSY and challengiNG year A busy and challenging year New ways of working in our democracy 2020 will be remembered as one of the most Our strong As farmer owners we have always valued meeting challenging years in recent times, and Covid-19 COOPERATiVE face-to-face, debating and challenging each other continues to affect our lives and livelihoods. and our business management. Covid-19 Maintaining the food supply has been a critical SPiRiT has BEEN restrictions challenged this democratic set-up, as require ment of all governments, and as farmer CHALLENGED iN most of our regular meetings had to be hosted on owners of a global company we have much to be THiS unusual digital platforms. This was new to many of us, but proud of in the way we have risen to the challenges in the spirit of our cooperative mindset, we have presented by this devastating pandemic. YEAR. managed to overcome this challenge, until we can meet under more normal circumstances again. Thanks to the efforts of everyone in Arla, farmer Competitive milk price owners, employees and management, we have The Arla pre-paid milk price was kept at a competitive Looking ahead kept focus on our core purpose of producing and and relatively stable level throughout 2020. In the coming year, the Board of Directors will dive delivering healthy and nutritious dairy products to We ended the year with a performance price of deeply into forming our new business strategy and our customers and consumers, which is an EUR-cent 36.9 per kilo, indicating our progress define a future-oriented cooperative that meets extraordinary achievement. In addition, as farmers towards a more competitive milk price. That said, the changing demands of our customers and we have continued our collective commitment to as a Board of Directors we fully recognise that consumers. We must constantly adapt to the sustainability with the landmark introduction of farmers are facing increasing production costs and future demands and changes, while maintaining Climate Checks on all Arla farms and the rollout of additional requirements. This is a challenge across the strong core that the cooperative concept gives our updated Arlagården® programme. the European dairy industry that needs to be met us as farmer owners. The Free Trade Agreement by actions across the industry and its wider between the UK and EU was a great relief, and we Strong business results stakeholder group. look positively on the future of our UK business. We entered 2020 with positive sales momentum underpinned by a strong financial position. Even Sustainability Jan Toft Nørgaard though Arla has been affected by the harsh impact As farmer owners we have made great efforts to Chairman of the Board of Directors of Covid-19 on the foodservice sector and global meet important milestones in our transition towards commodity markets, our retail business and strong even more sustainable dairy production, and as a brand portfolio, together with our transformation cooperative we have created strong results. We and efficiency programme Calcium, delivered a have updated and implemented our two major financial performance above our expectations. programmes: Arlagården® and Global Climate Performance price Checks. This enables us to collect one of the world’s In a cooperative, strong results should reflect largest sets of externally verified climate data from directly on its owners. Thus the Board of Directors dairy farming, creating a solid foundation for 36.9 has proposed to the Board of Representatives a benchmarking, knowledge sharing and research (EUR-cent/kg) EUR-cent 1.75 supplementary payment per kilo across the dairy industry. This effort will enable Arla 2020 36.9 milk, thereby exceeding the retainment policy by to lead the way towards a sustainable future for 2019 36.6 0.75 EUR-cent/kg as an extraordinary addition. dairy farming. 2018 36.4 5 ARLA FOODS ANNUAL REPORT 2020 Management Review Our Strategy Our Brands and Commercial Segments Our Responsibility Our Governance Our Performance Review Our Consolidated Financial Statements Our Consolidated Environmental, Social and Governance Data C GREATiN value iN A year LiKE no other A year like no other The improved quality of our business is reflected Expectations for 2021 2020 was defined by Covid-19, disrupting in a performance price of 36.9 EUR-cent/kg, up 2021 will be another challenging year with the consumer behaviour, business plans and political from 36.6 EUR-cent/kg in 2019. Our net profit ongoing impact of Covid-19 and its effects on agendas instantly as the virus spread across the ended at 3.2 per cent and the financial leverage at economies and people’s livelihoods. We expect to world. Despite being challenged at work and at 2.7, enabling the Board of Directors’ proposal to deliver growth, but not to the extent seen in 2020. home, Arla farmers and colleagues maintained a the Board of Representatives of a EUR-cent 1.75 steady flow of dairy to society, whilst doing their supplementary payment per kilo milk, which is The Free Trade Agreement between the EU and best to keep each other safe. 0.75 EUR-cent/kg more than in previous years. the UK announced just before the year end is welcome news. Brexit does bring some non-tariff The global dairy industry was heavily affected, not barriers, however, we are well-prepared to manage least by the impact of lockdowns on the foodservice the new procedures and focused on minimising sector, which precipitated a drop in global commodity R DU ing the extra costs. prices. We saw partial recovery in the second half, but prices have not yet returned to the same levels COViD-19, WE 2021 will also be the year in which we will present as before the pandemic. Despite this and a weaker HAVE proven a new strategy to replace Good Growth 2020, which US dollar, we delivered a relatively strong Arla TO BE AGiLE has successfully improved the quality and resilience performance price, given the volatility seen in the of Arla over the past five years. Our strengthened dairy industry. AND EFFiCiENT position makes our dairy cooperative a solid home iN Times for farmers in the uncertain times ahead.