“ Arla must produce good and healthy dairy products and show respect for animals and the environment” 2004/05 Annual Report Arla Foods’ organisation Corporate Centre Executive Board Peder Tuborgh, Managing Director Povl Krogsgaard, Deputy Managing Director · Andreas Lundby, Deputy Managing Director Corporate Finance/IT Jørn Wendel Andersen, Finance Director Consumer Consumer UK Consumer Global Nordic International Ingredients Hans-Åke Kim Nielsen, Mikael Sternberg Peter Lauritzen, Hammerström, Group Executive Director Christiansen, Group Executive Director Group Executive Director Group Executive Director 2 The Chairman’s Report 27 Finance review 4 Report from the Executive Board 32 Management’s statement and Contents Auditors’ report 8 Fresh products 34 Accounting policies 11 Cheese 39 Profi t and loss account 14 Butter and spreads 40 Balance sheet 16 Ingredients 42 Equity statement 18 Innovation 43 Cash fl ow statement 20 Arlagården 44 Notes 22 Arla Foods’ employees 23 Environment and 54 Group chart working environment 56 Map 25 Other activities Arla Foods Annual Report 2004/05 Financial highlights Group 01.10.2004 01.10.2003 30.09.2002 01.10.2001 02.10.2000 DKK million 30.09.2005 30.09.2004 30.09.2003 29.09.2002 30.09.2001 Profi t Net turnover 46,351 47,263 40,647 39,441 38,133 outside DK/SE 27,784 28,137 20,781 19,807 18,823 % outside DK/SE 60% 60% 51% 50% 49% Operating profi t 1,505 1,193 1,242 1,411 1,596 Interest income and expense, etc. -573 -423 -245 -367 -381 Profi t for the year 801 1,019 1,094 1,085 1,157 Supplementary payments 369 586 546 575 690 Consolidation: Reconsolidation 247 123 123 126 122 Other consolidation 185 310 425 384 345 Financing Balance sheet total 26,382 26,043 26,845 22,017 20,858 Fixed assets 14,901 14,761 13,973 10,395 10,523 Investments in tangible fi xed assets 2,499 2,981 2,062 2,046 1,877 Capital base 7,624 7,541 7,399 7,101 6,448 Equity ratios (%) Capital base 29% 29% 28% 32% 31% Capital base + subordinate bond loan 33% 33% – – – Infl ow of raw milk Total million kg. weighed in in the group 8,415 8,512 7,241 7,041 7,085 hereof in DK 4,058 4,053 4,137 3,964 3,967 hereof in SE 2,114 2,141 2,114 2,157 2,167 others 2,243 2,318 990 920 951 Number of members hereof in DK 5,197 5,877 6,625 7,103 7,921 hereof in SE 5,360 5,728 6,133 6,539 6,988 total 10,557 11,605 12,758 13,642 14,909 Employees Number of employees 20,076 20,855 17,791 17,866 18,200 The comparative fi gures for the year 2000/2001 have not been adjusted for the change in accounting policies in 2002/2003 Arla Foods Annual Report 2004/05 Net turnover Result of the year Net turnover DKK billion DKK million divided into markets (%) 50 1500 Sweden 21% Rest of the world 1.4% 45 1350 40 1200 Other EU countries 12.3% 35 1050 Rest of Europe 1.1% 30 900 Middle East 5.6% 25 750 US 4.4% 20 600 Asia 2.9% 15 450 UK 32.4% 10 300 5 150 Denmark 19.1% 0 0 2001 2002 2003 2004 2001 2002 2003 2004 2002 2003 2004 2005 2002 2003 2004 2005 Balance sheet Solvency Net turnover DKK billion Percentage according to product categories (%) 30 40 Fresh products 44.2% 27 38 24 36 Cheese 25.5% 21 34 18 32 15 30 12 28 Butter and spreads 11.7% 9 26 Powder products 12.4% 6 24 Other 6.2% 3 22 0 20 2001 2002 2003 2004 2001 2002 2003 2004 2002 2003 2004 2005 2002 2003 2004 2005 :bZNQ_ \R Number of employees Weighed-in milk O\\]Q_MaUcQ ZQZNQ_` across markets (%) 24000 ʃʅʁʁʁ Denmark 48% ʃʃʁʁʁ 22000 Other 1% ʃʁʁʁʁ 20000 ʂʉʁʁʁ 18000 ʂʇʁʁʁ 16000 UK 26% ʂʅʁʁʁ 14000 ʂʃʁʁʁ 12000 Sweden 25% ʂʁʁʁʁ 10000 ʉʁʁʁ 8000 ʇʁʁʁ 6000 ʅʁʁʁ 4000 ʃʁʁʁ 2000 ʁ 0 ʃʁʁʂ ʃʁʁʃ ʃʁʁʄ ʃʁʁʅ 2001 2002 2003 2004 ʃʁʁʃ ʃʁʁʄ ʃʁʁʅ ʃʁʁʆ 2002 2003 2004 2005 Arla Foods cares about the environment and about the welfare of animals. Healthy cows and environmental-friendly farming methods are the best guarantee that consumers can enjoy the highest quality milk Arla Foods’ co-operative members This, in turn, allows us to offer a have agreed on a common set of sense of confidence and security rules for milk production at their when consumers purchase our farms. These rules are set out in the products. Arlagården Quality Programme which enables Arla Foods to docu- ment each step of the milk produc- Peder Tuborgh tion process - from farm to table. Managing Director Arla Foods Annual Report 2004/05 The Chairman’s Report On many occasions in the past, Arla Foods has It was with considerable disappointment that, demonstrated its robustness in diffi cult times. in May, we and Campina had to accept that we This resilience will also help us through the times were unable to reach an agreement on a merger ahead. between our two companies. The Board had The pressure on our business is increasing, and invested a substantial amount of eff ort to fi nd a Arla Foods is feeling the impact of the Common solution which we felt was right for Arla Foods. Agricultural Policy reform - as are Europe’s other We continue to believe that Campina could be a dairy companies. The challenge now is to handle potential merger partner, and we will not dismiss the pressure. the possibility of future mergers with Campina or Throughout the company there is a commit- other companies. ment to move forward, and management has As a consequence of the failed merger, mapped out our future course. Over the years, we Managing Director Åke Modig decided to resign have undertaken long-term investments, with his position although he remained in his post for the result that Arla Foods today is a strong organ- a further two months until the Board announced isation. The Supervisory Board is working dedicat- the appointment of the new Managing Director edly to keep the milk price paid to co-operative Peder Tuborgh. members at an unchanged level in 2006. Following the approval of our strategy plan, The year presented substantial challenges, and we tried to avoid further falls in the milk price I have to admit that not everything functioned as during the year under review. smoothly as in previous years. Issues such as a The eff ects of the EU’s Common Agricultural failed merger, falling milk prices and co-operative Policy reform include the gradual removal of the members who have found it diffi cult to retain export subsidies for products destined for third The Supervisory Board, October 2005 their confi dence in the future have taken up a sig- countries. The reform has led to a substantial nifi cant part of the Board’s time. lowering of the milk price. The following board members were absent when the photo was taken: The declining prices mean that some of our co- operative members have found it diffi cult to Thomas Johansen maintain their confi dence. Leif Backstad (elected by the employees) Jan Toft Nørgaard Jan Toft Kaj Ole Pedersen Kaj Ole Pejter Søndergaard Johan von Schéele Johan von Ove Møberg Ove Erik Karlsson Steen Nørgaard Madsen Steen Nørgaard Åke Hantoft, Åke Hantoft, Deputy Chairman Anders Ericsson Anders 2 The Chairman’s Report / Arla Foods Supervisory Board The fall in the number of co-operative members, members can cash in when retiring or leaving the however, is on level with last year. In Denmark, company. The exact nature of the arrangement the number of co-operative members fell by has been subject to much debate, and a proposal approximately 11.5% on the year while the fi gure for supply-based owner certifi cates will be pre- in Sweden was approx. 6.5%. sented to Arla Foods’ Board of Representatives in We must, of course, maintain our focus on the December 2005 for fi nal approval. milk price in everything we do, and the manage- During the fi nancial year, the majority of co- ment is committed to maintaining earnings. The operative members received inspection visits aim is to help give co-operative members from an adviser from the Arlagården Quality renewed confi dence in the value of their work. Programme, which supports the co-operative We believe that our co-operative members share member in taking active ownership in relation to a wish to invest in the future, which is important the Quality Programme. As anticipated, by far the for the company in order to secure stable milk majority of visits resulted in few or no remarks. In supplies for our dairies. the few incidents which resulted in non-conform- The Satisfaction Survey which was carried out ity notes, the co-operative member participated among members in May 2005 showed a fall in actively in rectifying the conditions. Only in one satisfaction levels among Arla Foods’ co-operative case was it necessary to expel a co-operative members. member from the company. The outcome of the survey was aff ected by the A review of the quality programme is under- disappointment at the failed merger and dissatis- way and the Supervisory Board expects all co- faction with declining earnings. The Supervisory operative members to support the ongoing Board, of course, accepts the result of the survey Arlagården process.