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Annual Report 2002/03
Annual Report 2002/03
2
Financial highlights
TURNOVER02.09.30 01.10.01
DKK million –03.09.30 –02.09.29
Analysed by markets
1. Sweden 10.216 10.281
2. Denmark 9.650 9.353
3. Other EU countries 13.694 12.960
4. Rest of Europe 885 770
5. Middle East 2.628 2.445
6. North America 1.030 1.018
7. Central and South America 707 871
8. Asia 1.248 1.264
9. Africa 561 457
10 Other 28 22
Total 40.647 39.441
02.09.30 01.10.01
DKK million –03.09.30 –02.09.29
Analysed by product groups
11 Fresh products 16.115 15.893
12 Cheese 10.784 10.606
13 Butter and spreads 5.325 5.120
14 Condensed milk products 5.812 5.410
15 Packaging 729 974
16 Other goods 1.882 1.438
Total 40.647 39.441
GROUP 02.09.30 01.10.01 00.10.02 00.04.17
MDKK –03.09.30 –02.09.29 –01.09.30 –00.10.01
Profit
Turnover 40.647 39.441 38.133 17.453
outside DK/SE 20.781 19.807 18.823 8.200
% outside DK/SE 51% 50% 49% 47%
Operating profit 1.242 1.411 1.596 547
Interest income and expense etc. –245 -367 –381 -159
Profit for the year 1.094 1.085 1.157 392
Supplementary payments 546 575 690 276
Consolidation:
Reconsolidation 123 126 122 0
Other consolidation 425 384 345 116
Financing
Balance sheet total 26.845 22.017 20.858 21.275
Fixed assets 13.973 10.395 10.523 11.055
Investments in tangible assets 2.062 1.919 1.804 875
Capital base 7.399 7.101 6.448 6.343
Equity ratio
Measured in % 28% 32% 31% 30%
Inflow of raw milk
Total million kg. weighed in in the group 7.241 7.041 7.085 3.344
hereof in DK 4.137 3.964 3.967 1.914
hereof in SE 2.114 2.157 2.167 993
others 990 920 951 437
Number of members 12.758 13.642 14.909 16.121
hereof in DK 6.625 7.103 7.921 8.639
hereof in SE 6.133 6.539 6.988 7.482
Employees
Number of employees (man years) 17.791 17.866 18.200 18.622
The comparative figures for the years 2000 and 2000/2001 have not been changed in connection.
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Main and key figures . . . . . . . . . . . . . . . 2
The Chairman’s report . . . . . . . . . . . . . . 5
Management’s report . . . . . . . . . . . . . . 6
Production . . . . . . . . . . . . . . . . . . . . . 8
Market reportsHome markets . . . . . . . . . . . . . . . . . . . . 10Other European markets . . . . . . . . . . . . . . 14Overseas markets . . . . . . . . . . . . . . . . . . 17
Ingredients . . . . . . . . . . . . . . . . . . . . 20
Relations with co-operative owners . . . . 22
Innovation . . . . . . . . . . . . . . . . . . . . . 24
The environment and working environment . . . . . . . . . . . . . . 26
Contents
Subsidiaries . . . . . . . . . . . . . . . . . . . 28
Managing financial risks at Arla Foods . . 34
Annual Report 2002/03 . . . . . . . . . . . 38
Accounting policies . . . . . . . . . . . . . . . 40
Profit and loss account . . . . . . . . . . . . 47
Balance sheet . . . . . . . . . . . . . . . . . . 48
Equity movements . . . . . . . . . . . . . . . 50
Cash flow statement . . . . . . . . . . . . . . 51
Notes . . . . . . . . . . . . . . . . . . . . . . . 52
Group companies . . . . . . . . . . . . . . . . 60
Management and Supervisory Board . . . 62
The United Kingdom became a major focus area during the 2002/03 financial year after Arla Foods announced on March 27 that
it had started merger negotiations with Express Dairies plc. The merger was approved on October 15, 2003 and the new company,
Arla Foods UK plc, is now the UK’s leading supplier of dairy products.
Erik Refner is responsible for the photographs in this Annual Report which depict aspects of daily life in Arla Foods’ third home market, the UK.
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➜
The Chairman’s report
Since it was named “a product of the highest quality” at the World Exhibition in
London in 1879, Danish butter, under the name of Lurpak, has enjoyed a prominent
position in the UK market. Douglas the Butterman, who has represented Lurpak in
TV commercials since 1986, has become as famous as the butter itself.
In September, the Board of Representatives finally parted with the two companies, MDFoods and Arla ek. för and, at the same time, welcomed the new joint company with acommon milk price for Danish and Swedish co-operative members from October 1, 2003.
Thus we have achieved the goal we set ourselves three years ago: to harmonise allimportant aspects of our operations to create identical conditions for all co-operativemembers.
From October 2004, we shall, therefore, introduce common conditions for our organicmembers and the tax issues relating to payments have been clarified so that we canoperate on the basis of one common payment system. The Articles of Association arealso in place with regard to all important economic conditions although the softer issues,electoral eligibility and the electoral system, have yet to be harmonised. With regard tothese, we have decided to maintain respect for the national democratic traditions.
The debate regarding consolidation continues among co-operative members. The aim isto present a proposal on the issue to the Board of Representatives in 2004.
The pleasure in coming so far in the merger process is, however, overshadowed by thefall in the milk price and a decline in our earnings as milk producers. In view of this, thestructural development among milk producers will continue undiminished. The dairy sectornow faces considerable challenges with regard to generating increased earnings for theowners.
We were, however, not unprepared for the EU reform. Now that we are familiar withits content and realise that the cutbacks will not stop here, the framework for the furtherprocess has been laid down.
We should take pride in the fact that, over many years, we have invested in the devel-opment of a dairy group with the capacity for providing its customers with added valueproducts.
Together with rigorous efficiency requirements, the continued development of ourcompany will contribute towards ensuring our survival. On the backdrop of the substantialprice pressure to which the company is subject, the 2002/03 results can be regardedas satisfactory.
Moreover, we were delighted to obtain the UK authorities’ approval of the mergerbetween Arla Foods plc and Express Dairies plc. The British milk market has been charac-terised by considerable instability and the merger will significantly contribute to greaterstability in the market.
Over the coming period, we shall continue to debate Arla Foods’ Vision 2010. Thecurrent strategy plan is nearing completion and based on the objective of ensuring thebest possible milk price for milk producers, we shall now strive to agree on how weproceed towards this goal.
Finally, I would like to extend my sincere thanks to our retiring Managing Director, JensBigum, for his great contribution to the company over the past 33 years.
Knud Erik JensenChairman
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Falling exchange rates, unfavourableeconomic trends and a decline inexport subsidies are now fully im-pacting on the Group. Accordingly,the forecasts given in April’s Inte-rim Report have proved accurate.Under such difficult conditions,Arla Foods’ result for 2002/03should be regarded as satisfactory.
As expected, clearer contoursfor the future emerged during theyear. First and foremost, the politi-cians agreed on a reform of theEU’s agricultural policy under whichthe intervention prices for butterand skimmed milk powder will bereduced in increments from July1, 2004. Then followed the EU’sdecision concerning the forthcom-ing enlargement towards the Eastwhich, in the short-term, will create turbulence in the market,particularly for skimmed milk pow-der, but which will, in the longer-term, open up opportunities in thenew member states.
In 2002/03, the markets werecharacterised by increased pres-sure on sales of bulk products andthe multiples’ strategy of increa-sing sales of own label products.
The home markets in Swedenand Denmark were characterisedby tougher competition from, forinstance, imports of yoghurt in theSwedish market and general pres-sure from importers in the Danishmarket. The result in the UK washighly satisfactory – both in termsof local milk production and pro-
ducts imported from Denmark andSweden.
Sales in the Middle East andNorth America developed satisfac-torily, although trends in SouthEast Asia were adversely affectedby the SARS outbreak in the sum-mer of 2003.
Devaluations had a negativeeffect on sales in South America.However, this had the reverseeffect on locally produced milk pro-teins from Arla Foods’ proteinfactory in Argentina. Productionhere is running on schedule andmilk proteins are exported to seve-ral countries in the region, inclu-ding Mexico.
Strategy planThe highlight of the year was thebreakthrough in the UK marketwhere Arla Foods’ UK subsidiaryannounced a merger with ExpressDairies plc in late March 2003.The merger, which was approvedby the British competition authori-ties in October 2003, makes thenew joint company the largestsupplier of liquid milk in the UKmarket.
The ongoing company, ArlaFoods UK plc, is listed on theLondon Stock Exchange.
Late in the financial year, ArlaFoods Board of Representativesinitiated a new vision debate: Vi-sion 2010. The draft for the visionwill be discussed among Arla Foods’co-operative owners in the winter
of 2003/04 so that the Board ofRepresentatives can consider itduring the current financial year.
The productsThe low dollar rate adversely affec-ted Arla Foods’ earnings on exportsoutside Europe. The stronger Euroresulted in price pressure in theEuropean cheese market – notleast in Germany where consu-mers are increasingly opting fordiscount lines as a replacementfor the more expensive products inthe delicatessen counters.
During the year, a joint marke-ting plan for Arla Foods’ productsfor the Scandinavian market wasdrawn up comprising a range offermented products and snacks.
Sales of butter increased, parti-cularly in Danish butter’s undispu-ted key market, the UK. Therewere also increasing sales of but-ter in a number of Middle Easternmarkets, with the exception ofSaudi Arabia.
Within the Ingredients area, themarket was characterised by pres-sure on added value ingredients tothe food industry.
Structural planThe year saw strong focus oncontinued rationalisation of theproduction and comprehensiverationalisation measures wereimplemented within administrationand production. On the productionside, it was decided to close 7
Management’s report
7
dairies in accordance with thestructural plan of 2001.
Of the 18 projects covered inthe structural plan, 13 have been,or are about to be, implemented.Two have been put on hold indefini-tely and three have not yet beenapproved.
The projects under the structu-ral plan are expected to be com-pleted during 2005.
Ett Arla A wide ranging project for the inte-gration of working procedures andmanagement systems was initiatedin order to achieve a more integra-ted company with simpler andmore efficient working procedures.Ett Arla, therefore, will createstronger cohesion across divisionsand national borders.
At year end, the first part ofthe project was implemented inthe central administration and at anumber of dairies. Most of thework was carried out concurrentlywith daily tasks which involved asignificant extra workload for manystaff. The project is of consider-able importance to the company’sdaily business and future manage-ment.
HRIn 2002, the Group carried out ajob satisfaction survey among itsemployees which showed job satis-faction among Arla Foods’ emplo-yees to be good and comparable
with the average for this type ofsurvey. Managers across the orga-nisation worked seriously with theresults of the survey and a newpoll was taken in November 2003.At the time of publication of thisAnnual Report, the results are stillto be processed.
With regard to the recruitmentof new dairy trainees, the desirednumber of trainees was recruiteddespite the fact that fewer young-er people joined the general labourmarket.
Many employees across theorganisation also took part inextensive further training pro-grammes. Training programmesfor staff from Sweden, UK andDenmark were also initiated.
In May 2003, the Group an-nounced a cut of 600 in the num-ber of administrative employeesover three years. This aims atachieving stronger integration ofthe two former companies. Thecutbacks will apply across the enti-re organisation.
The futureFour factors will characterise thecoming year: first and foremost,the EU reform will come into forceand put further pressure on themilk price. In the short-term, it isdifficult to predict the full marketeffect of this. For the 2003/04budget, the company has givennotice of a negative change in themilk price.
Secondly, there are uncertain-ties regarding international econo-mic trends. Thirdly, the EU enlar-gement towards the East with 10countries joining in May 2004, isset to have a short-term negativeeffect with pressure on the ceilingfor intervention. Finally, develop-ments in foreign exchange marketsare likely to create problems forthe Group.
All in all, the future containsconsiderable challenges for thecompany and its co-operativeowners. The EU reform and theenlargement towards the Easthave made the Group’s futuretasks clearer.
Jens BigumManaging Director
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➜TV’s Bob the Builder and his friends are a great hit with children – as are Bob the
Builder cartons of fromage frais. Produced at Brabrand Dairy in Denmark, the Bob the
Builder range contributes to the increasing volumes of imported brands to the UK.
The most important year on yearchange is the significant increasein volume of butter and spreads.This is a consequence of ArlaFoods assuming responsibility forFonterra’s packing of butter andspreads for the UK market fromOctober 1, 2002.
The following changes werecarried out in the productionstructure during 2002/03:
Cheese:Operations at Hellevad Dairy wereshut down in June 2003 and pro-duction was transferred to otherDanish cheese dairies.
Falkenberg Dairy is being expan-ded with the intention of closingdown Stånga Dairy. The process isexpected to be completed byMarch 2004.
Kalmar Dairy is being extendedin order to close Borgholm Dairy.
This process is expected to becompleted by June 2004.
In early summer 2003, anextension programme was initiatedfor Høgelund Dairy in preparationfor the closure of Grenå Dairy atthe end of 2004. Arla Foods’Danish Blue production will centreon Høgelund. Work is in progressto significantly expand capacity atHostebro Flødeost.
Snejbjerg Dairy will ceaseoperations in December 2003.
Glejbjerg Dairy will be closed onApril 1, 2004 and the productionwill be transferred to Taulov Dairy.
Vellev Dairy will be closed onSeptember 1, 2004 after whichHjørring Dairy will take over Vellev’sproduction. Åseda and Vestervikdairies will be cease operations bythe end of 2004. The dairies’ pro-duction will be transferred to Nr.Vium Dairy and Falkenberg Dairy.
Butter: Götene Dairy has been expandedto prepare for the transfer ofbutter production from Gothenburgdairy from October 1, 2003.
Fresh products:Production at Halmstad Dairy wasterminated in June 2003 and themajority of production transferredto Gothenburg Dairy.
IngredientsIn Sweden, the construction of thenew powder plant in Vimmerbybegan in August 2003. The plant,which will have an annual capacityof 380 million kg milk, is expectedto commence trial production bythe end of 2004. The milk powderfactories at Mjölby and Kimstadwill then close. At the same time,powder production at variouscheese dairies will cease.
The expansion programme atthe plant at Visby has beencompleted, doubling the plant’scapacity to an annual production of16 million kg powder.
In Denmark, the expansion ofAkafa and Arinco milk powderfactories has largely been com-pleted. As of March 31, 2004,production at the milk powderplant in Kjersing will be terminatedand divided between Akafa andArinco.
Production
During the financial year, the Danish and Swedish plants produced the following volumes within the four main areas:
1,645,000 tons fresh products330,000 tons cheese185,000 tons butter and spreads305,000 tons ingredients and powder products
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Market conditions changed gradu-ally during the financial year. Firstand foremost, the competitivepressures on all businesses withinthe food sector increased underthe impact of strong growth withinthe own label and discount sectors.This, of course, also applied toArla Foods.
In addition, the internationalisa-tion of Arla Foods’ customerscontinues while, multiples areexpanding across national borders.At the same time, customer de-mand for more own label products,which favours large internationaloperations, is increasing. In future,customer demands on Arla Foods– besides competitive and lowprices – will include advancedadded value and category manage-ment.
Price awareness among consu-mers was strengthened under theimpact of the growing discountsector and the general economicslowdown. It is estimated thatbranded products will continue tocome under pressure from compe-titors and, not least, from ownlabel products. Consequently ArlaFoods’ is faced with the challengeof forging stronger links to consu-mers and meeting genuine consu-mer preferences with regard tothe company’s brands.
In the battle for market share,however, Arla Foods must alsomeet customer wishes for ownlabel products within the product
areas that the Group and itscustomers regard as suitable.
Co-operation and synergiesbetween Denmark and Sweden arenow materialising. The DenmarkDivision and the Sweden Division,for instance, initiatied a Nordicmarketing plan in 2002/03. Sofar, a 100% Nordic brand hasbeen developed which involvesidentical marketing and design forthe Høng and Minimeal brands.The same is planned for Buko,Yoggi and Cultura. The Nordicmarketing plan aims at managingthe Group’s Nordic brand andrange development over thecoming years by making use of thered Arla master brand. So far,Arla is the master brand for bothcountries’ entire milk ranges.
DenmarkSold volumes declined slightlyduring the financial year due toprice pressure from own label anddiscount chains which now control30% of the market for conveniencegoods.
There were, however, substanti-al differences in development with-in the individual categories. Salesof soups and sauces increasedconsiderably and fermented pro-ducts, flavoured milk, cheese forcooking and cream, processed andsliced cheese also advanced. Milksales were stable as was firmcheese. However, declining EU pri-ces for dairy products had a knock-
on effect within this area. Saleswithin the BSM category continueto decline, but Arla Foods succee-ded in stabilising its market sharefor butter and spreads. Organicproducts also suffered a slightdecline.
In 2003, Arla Foods providedsupport to a humanitarian organi-sation. Via the newly developedorganic product, Smoothie, ArlaFoods donated DKK 1 per unitsold to the Red Cross.
The food service sector continuesto grow. One of the new initiativeswithin this area is a chef project in which Arla Foods collaborateswith several leading chefs for thepurpose of creating gourmet typeproducts for the country’s topchefs.
With effect from April 1, 2003,Arla Foods acquired Karoline’sKitchen from the Danish DairyBoard in a move that will lead toincreased product development ofcooking products.
In the distribution area, 150staff at the Christiansfeld FreshGoods Terminal were made redun-dant towards the end of the yearafter the Co-op took back thedistribution of fruit and vegetables.In return, the Co-op moved its milkdistribution to Arla Foods. Theoverall outcome, therefore, waspositive.
In view of Arla Foods’ strongposition within dairy products, it isonly natural to define the main
Home markets
11
competitors outside the dairy cate-gory, e.g. the suppliers of drinks,cooked meat, breakfast products,cooking products etc. The chal-lenge, therefore, is to ensure thatthe Group – with its firm base inmilk – is capable of creating anattractive range which is easilyaccessible to future consumers inall situations.
SwedenArla remains a strong brand inSweden – perhaps the strongest inthe country. Nevertheless, thechallenge remains to provide con-sumers with dairy products for alltimes of the day. This applies tothe product itself, packaging anddistribution. The work aimed atincreasing the level of added valueand building more convenience intothe products continues.
Sales volumes in the Swedishmarket are relatively stable. In2002/03, sales of milk were moreor less as the year before. Fer-mented products, however, did notbenefit from the same positivedevelopment as in the previousfinancial year. In particular, themarket for fruit yoghurt was affec-ted by tough competition causingArla Foods to lose market shareeven if the market as a whole ex-perienced growth. For the comingyear, the objective is to regainmarket share. Cream productsperformed extremely well during2002/03. Advances within the
soup area should be mentioned,too.
Although imports of yellowcheese increased, Arla Foods ismaintaining its market share inthis tough market. Capacity at thecheese dairies was optimised andhigh and stable supply reliabilitywas maintained. The sale of freshcheese products, however, decli-ned somewhat during the year.Fruit drinks saw increased compe-tition from own label products andArla Foods lost some volume, par-ticularly within the long-life range.
One year ago, some supply pro-blems arose within the fresh pro-ducts range following the manyproduction restructurings relatingto the new structure for specialityproducts. However, the problemswere quickly solved. Since Novem-ber 2002, supply reliability hasbeen very stable.
At Jönköping, a new chillingroom was commissioned and workcontinues on increasing the levelof automation to improve the work-ing environment and to increaseefficiency. During 2003/04, in-vestments will be channelled intothe construction of an extension ofthe packing line at Linköping and anew production line at Allingsås.
2003/04 will offer considera-ble challenges for the Arla Foods’organisation in Sweden. Althoughcompetition is increasing, the com-pany must maintain and developits market share. It is expected
that the result will be somewhatlower, largely because rising costsare unlikely to be compensated forby price increases. This means, ofcourse, that focus will be on costreducing projects.
United KingdomThe UK market achieved consider-able success during the 2002/03financial year when Arla Foodsachieved its best ever result. Thiswas driven by increased growthand profit improvement in thefresh milk business, CravendalePurFiltre and sterilised milk. Fur-thermore, volumes of importedbranded products also made consi-derable gains and for the first timeexceeded 100,000 tons.
The year’s dominant event inthe UK was the merger withExpress Dairies plc.
As part of the negotiations, itwas agreed that: ● The Arla Foods Group will not
increase its ownership share of51% for a period of 2 years.
● The Arla Foods Group has 3 outof the 7 external seats on theBoard of Directors.
● The Arla Foods Group will extendsubordinate loan capital of GBP91.5 million (approx. DKK 1billion) to strengthen the compa-ny’s financial base.
The new and enlarged company,Arla Foods UK plc, is the categoryleader in liquid milk and cream and
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➜ The former Express Dairies plc operates eight dairies. The dairy in Ashby
produces milk and fruit juice. Prior to the merger with Arla Foods plc,
fresh milk and cream accounted for almost all Express Dairies plc’s sales.
a leading supplier of flavouredmilk. The company also has astrong position in both the foodservice and doorstep milk sectors.
Another important event was theacquisition in November 2002 ofH.T. Webb & Co., the UK’s leadingimporter of speciality cheese.
In the BSM category, Lurpak,the second largest brand in themarket, continued its growth thanksto the success of Lurpak Spread-able and Lurpak Lighter Spreadable.As Arla Foods also markets thethird largest brand, Anchor, theGroup now occupies the leadingposition within the whole of thecategory.
In cheese, Arla Foods madefurther advances with the relaunchof the Discover range of specialitycheeses and through the sale ofsoft cheese to UK retailers. At thesame time, the Anchor range wasexpanded through the addition ofconvenience cheese products. Over-all, the acquisition of H.T. Webbrepresents a decisive move intothe growing market for specialitycheese.
The doorstep milk market con-tinues to decline although this hasbeen managed through a combina-tion of rationalisation and in-filldepot acquisitions. This strategymeant that this part of the busi-ness weathered the decline betterthan the market in general.
New investments were channel-led into the Oakthorpe Dairy in
London. Last autumn the coldstore operations were moved fromOakthorpe to the new depot inStratford.
The construction of the newdairy at Stourton, near Leeds,which will be operational by theautumn of 2004, is progressingwell. On October 1, 2003, ArlaFoods took over the managementof the cold store at Stourton whichhad been managed by a distribu-tion company. On a site adjacentto the new dairy, the new leasedhead office for Arla Foods UK plcis being completed according toplan.
As a consequence of themerger with Express Dairies plcfull consolidation of Express Dairies plc’s balance sheet hasbeen made in the annual accountsas at 30.9.2003. The total effecton the balance sheet is approx.DKK 5 billion.
In terms of operations, themerger will take effect from Octo-ber 2003. Consequently, the profitand loss account for 2002/03and the Group’s equity as at30.9.2003 have not been affected.
With regard to Arla Foods’consolidated balance sheet as at30.9.2003, the full pensioncommitments in both existing andacquired UK companies have beentaken into account as have expec-ted restructuring costs. Theamount totals approx. DKK 2.1billion.
The expected tax effect of theseitems is entered as a tax asset inthe balance sheet and will be reali-sed as the costs are defrayed. Thetax asset increased by approx.DKK 0.7 billion.
Consequently, goodwill is calcu-lated at approx. DKK 1.8 billionwhich is capitalised and will bedepreciated over a maximum of20 years.
The coming year will focus on theintegration of the two originalcompanies into the new Arla FoodsUK plc.
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Market conditions for butter andcheese products in Europe contin-ued to be characterised by toughprice competition especially forstandard cheeses. This develop-ment was further accelerated bythe economic slowdown in Europewhich is encouraging consumersto shop in discount outlets or toopt for low-cost alternatives. In thepast year, the market share of lowprice products increased in Euro-pe, while delicatessen productsand branded products came underpressure.
The situation varies greatly fromcountry to country, but conditionsin Arla Foods’ most important Euro-pean market, Germany, were onceagain difficult.
European cheese productionremained high, leading to consis-tently low price levels.
Within the European retail sec-tor, discounters have experiencedgrowth in recent years. In addition,they are operating ever more in-ternationally. The largest retailchains continue to gain marketshares and are becoming moredominant.
All things considered, ArlaFoods had a satisfactory year inEuropean markets with addedvalue and branded products ac-counting for an increasing share ofthe profits. The continued strength-ening of brand positions and pro-duct development will be highlyprioritised over the coming years.
In addition, more resources willbe invested in enhancing professio-nal services to the multiples.
In connection with the launch ofthe Arla master brand, the firstmajor marketing initiatives wereimplemented in selected marketswith highly satisfactory results. Inmarkets where consumer marke-ting is applied, the Arla masterbrand has achieved a satisfactorylevel of awareness and it is expectedthat the brand will become familiarto almost 100 million Europeanconsumers over the next 3-4 years.
GermanyThe competitive situation in theGerman market tightened furtherduring the year as reflected in thecontinuing fall in the German milkprice which is now at 1999 levels.The result is a hardened competiti-ve situation on the supply side. Theweak economic development inGermany led to a situation whereconsumers are increasingly turningtowards cheap products. Thistrend is benefitting the discountsector and own label products.
In the traditional food sector,sales of speciality products fromdelicatessen counters continue todecline. Although the decline has,to some degree, levelled out, saleshave fallen by 30% over the tworecent calendar years. Increasedsales of added value productsfrom in-store self-service countershave, however, compensated for
the negative development in salesof cheese from serviced cheesecounters.
HollandIn the past year, Arla Foodsfurther strengthened its directservice of the retail sector. Initialresults have been particularly posi-tive and these endeavours will beintensified over the coming year.
Arla Foods has a strong posi-tion as a foreign supplier of speci-ality cheese.
BelgiumIn the Belgian market, Arla Foodspartners Valio Vache Bleue, asubsidiary of the Finnish dairycompany, Valio, with regard tosales of products to the retailsector. During the past year, salesdeveloped satisfactorily with salesof Apetina Feta showing particularstrength. On the other hand, salesof delicatessen products fell.
The Faroe Islands and GreenlandArla Foods exports a wide rangeof fresh products, BSMs and cheese to the North Atlanticmarkets. Sales developed positivelyduring the year.
PolandThe year was characterised by thepreparations for Poland’smembership of the EuropeanUnion in May 2004. This meant
Other European markets
In the autumn of 2003, the roof was put on the new dairy at Stourton,
south of Leeds. With a capacity of 250 million litres liquid milk per year, Stourton will
be one of Arla Foods’ largest liquid milk dairies. It will start operations at the end of
2004 and employ approx. 260 employees when it reaches its full capacity.
➜
that Arla Foods’ Polish subsidiarystarted exporting to some EUcountries, that the organisationwas strengthened further and thatlocal activities in the Polish marketwere enhanced. The initiatives aimat ensuring the strongest possibleplatform for future growth inPoland.
Purchasing power remains lowcompared to the rest of Europe,but living standards are expectedto rise following Poland’smembership of the EU. Exports of
added value products to Polanddoubled over the year, althoughthey remain at a fairly low level.Profit margins were affected bythe fact that local activities arestill under development. The pricelevel of dairy products remains low.
The rest of Eastern EuropeWhile significant differences inpurchasing power are expectedbetween the new member countri-es and the current EU membersfor some years to come, some of
the markets already have welldeveloped retail and dairy sectors.Arla Foods has strengthened itsfocus on these markets in order to secure a share of the growthpotential over the coming years.
FinlandIn general, Arla Foods enjoyed asatisfactory year in the Finnishmarket, a year that was characte-rised by a strong performance inadded value products and brands.Marketing campaigns for Apetina
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Feta were organised under thenew Arla master brand. However,sales of volume products weredisappointing particularly due totough competition from low priceproducts from German and Dutchcheese producers.
Next year, Arla Foods will buildon this to develop market shareswithin both branded and volumeproducts.
NorwayArla Foods had a particularly goodyear in the Norwegian market withsales growth exceeding 15%. During the year, the quota systembetween Norway and the EU wasrenegotiated with the result thatthe quota was expanded. It is an-ticipated that this will lead tostronger competition in a marketwhere demand for foreign cheeseis rapidly increasing.
Over the year, the Norwegiankrone fluctuated considerably. Itsrecent weakening has put earningsunder pressure.
The retail sales partnershipwith the local company, SynnøveFinden, was terminated and ArlaFoods has set up an independentsales operation.
ItalyThe result was satisfactory, notleast on the backdrop of substanti-ally increased price competition foryellow cheese. In general, theItalian subsidiary succeeded in
maintaining firm price policies forvolume products. Further work willaim at extending the range andimproving distribution through theretail trade. Lurpak is seeing satis-factory development where in-storemarketing is increasing alongsidethe introduction of more varietiesof the famous butter brand.
Rationalisation measures wereimplemented during the year. Acontract for the sale of warehouseand office premises in Lomazzowas signed and the organisationwas streamlined.
SpainSales of cheese to the Spanishmarket continue to grow while, atthe same time, Spain has becomean important market for butterand blends. Ordinary profit wasparticularly satisfactory and Spainis now Arla Foods’ fifth largestmarket within the EU.
As part of the strategy toservice parts of the retail tradedirectly, a new sales company wasestablished in Madrid at the begin-ning of the new financial year. It isexpected that the new company,coupled with further investmentsin marketing, will generate increa-sed growth in the Spanish marketfor Arla Foods.
FranceBoth sales and profit marginsshowed sound progress in theFrench market. Direct sales to the
retail trade rose by 15% on theyear. Industrial sales volumes alsoperformed well.
GreeceThe results from the Greek busi-ness were unsatisfactory. This ispartly due to the fact that theGreek market, in line with otherEuropean markets, received asubstantial supply of very cheapcheese products from local produ-cers as well as from importers.
Although it was possible tosustain earnings from exports ofcheese and butter to the Greekmarket, generating satisfactoryearnings from local activities wasless successful. A restructuring ofthe company is planned so thatthe overall product offering willmake a positive contribution to thecompany’s operations. Costs rela-ting to these restructurings had anegative effect on the 2002/03result.
17
The Middle East, North Americaand Asia continue to rank amongArla Foods’ most important mar-kets outside Europe in terms ofsales of butter and cheese. In the year under review, substantialvolume growth was achieved andan important part of this growthderived from Middle Easternmarkets.
In terms of foreign exchange,the majority of overseas marketsare dependent on the US dollarrate. As the dollar developed nega-tively for most of the year, thisimpacted on the financial result.
Nevertheless, through hedgingand price increases it was possibleto offset a significant proportion ofthe fall in the exchange rate. Thefact that it proved possible to im-plement price increases is largelydue to Arla Foods’ added valuerange and strong market positionsfor established brands such asLurpak, Puck, Three Cows andPower Cow.
During the year, positions werefurther enhanced in most focusmarkets and new initiatives weretaken in relevant markets – inclu-ding the United ArabEmirates/Oman and Russia.
The development in the value ofexport subsidies and the allocationof export licences were fairlyfavourable for most of the year.
Saudi ArabiaAll product groups – especially
focus products – experienced fairgrowth in tonnage. Earnings wereaffected by foreign exchange devel-opments, which necessitated priceincreases. Again this year, ArlaFoods’ dairy in Riyadh invested inproduction facilities and prospectsfor growth are regarded as pos-itive for the coming years.
The United ArabEmirates/OmanOn January 1, 2003, Arla Foodsembarked on a joint venture withthe previous local distributor,National Food Product Company.The joint venture, which covers theEmirates and Oman, aims at ensu-ring the necessary focus on ArlaFoods’ brands and main productgroups. In the Emirates, in particu-lar, the retail sector is experien-cing strong development in whichthe number of supermarkets isgrowing while smaller shops arecoming under pressure. The deve-lopment in tonnage and marketshares for focus products wereparticularly encouraging. With thenew joint venture, the necessaryplatform for future growth hasbeen created.
Bahrain/Kuwait/QatarThe close relations with local distri-butors were further enhancedthrough the appointment of a keyaccount manager. Sales growthwas positive and the combinationof the company’s strong regional
Overseas markets
brands combined with ongoingproduct development is set toensure continued growth in thesemarkets over the coming years.
LebanonThe past year saw particularlysatisfactory growth for cheese.Puck, Arla Foods’ most importantcheese brand in the Lebanesemarket, enjoys a healthy marketshare and the Puck range will nowbe extended to further exploit thebrand’s potential.
USAA weak US economy, a sharp fallin the rate of the dollar as well as historically low American milkprices put massive pressure ongrowth and earnings. Neverthe-less, Arla Foods achieved con-siderable growth in added valuebrands. Local production of Ha-varti cheese also saw positivedevelopment.
Consolidation of the US retailsector continues. During the year,Arla Foods’ relations with theleading multiples strengthened andthe company enjoyed particularsuccess in terms of increasingsales through the growing “ware-house club” segment.
Marketing efforts were centredon the Lurpak and Rosenborgbrands. US economic trends areexpected to improve over thecoming year and moderate salesgrowth is anticipated. Some uncer-
tainty relates to the impending USlegislation against biologicalattacks which may incur somenon-budgeted costs.
CanadaOnce again, highly satisfactoryresults were achieved in the Cana-dian market. The Canadian dollarlost only moderate ground againstthe Danish kroner and internalprice trends were stable. Duringthe year, focus was on generatinggrowth in the added value productrange. In addition, several new
products were launched, distribu-tion was extended and local pro-duction developed positively. Theprospects are for continued growthin volume and profitability.
BrazilA weak economy with decliningpurchasing power and a strongrise in the price of milk had anegative impact on the result forArla Foods’ joint venture, Dan-Vigor. During the year, major cut-backs were successfully introducedinto the organisation and a signifi-
cant improvement in the result isexpected for the coming year.
JapanIn recent years, the Japaneseeconomy has suffered from aneconomic slowdown which hasbeen exacerbated by similar trendsin the US and Asia. As privateconsumption has declined, therehas been more focus on price,partly to the detriment of thenormally high quality requirements.Developments in foreign exchangemarkets contributed to reducing
19
the price competitiveness of Euro-pean dairy products. Despite thenegative developments, Arla Foodsexperienced fair sales growth ofapproximately 10% on the year.
It is to be hoped that theeconomy will recover and that thiswill lead to growth in cheeseconsumption.
South KoreaDespite tough price competition,Arla Foods’ exports to SouthKorea developed positively with amarked increased in tonnage com-pared to the 2001/02 financialyear. The Korean economy is show-ing signs of improvement followinga slowdown in recent years andthe consumption of cheese hasseen a moderate rise, although itremains below 1 kg per capita perannum. Expectations for the com-ing year are relatively optimistic.
AustraliaSales to Australia increased mar-kedly by approx. 30% on the year.The increase derives from a broadrange of products, not leastRosenborg which has receivedwidespread recognition.
IndiaAlthough Arla Foods’ products arein demand, sales fell below expec-tations. This is primarily due to theIndian authorities’ protectionistattitude to imported dairy productsand to logistic challenges, inclu-
ding the requirement for an unbro-ken chilled chain.
Although India’s overall importsof cheese and butter are increa-sing, they remain limited.
PakistanDespite a very limited marketingeffort, Pakistan has been a solidand stable market for Lurpak andPuck for several years. The com-ing year will see increased focuson Pakistan which is expected tohave an immediate effect on sales.
South East AsiaSales to the region, where HongKong and Singapore remain thelargest markets, continue the posi-tive development of recent years.Irrespective of difficult conditionssuch as SARS, terrorist activityand the negative development inthe US dollar, sales rose by 14%on the year.
For the coming year, the outlookis for continued advances althoughthe ever increasing competitionfrom Oceania in terms of volumeproducts means that even moreretail products must be developedand marketed under the two mainbrands, Lurpak and Arla. On thebackdrop of a significant demandfor light products, Arla Foodsexpects to launch several productswithin this growing segment.
RussiaOn the basis of the substantial
potential and the economic reco-very since the crisis in the Russianmarket in 1998, a new RegionEast has been established. Theregion will primarily focus onRussia.
Arla Foods regards Russia as afuture market with large potential.Various strategic considerationsconcerning the future are expec-ted to be completed in the NewYear.
Cravendale PurFiltre® is produced at Arla Foods’ dairy in Hatfield Peverel in Essex
where the milk passes through a process of special filtration after conventional
pasteurisation. While almost all bacteria is eliminated, the milk retains its natural
content of vitamins and calcium and can be kept longer than ordinary milk.
➜
A difficult year for ingredients andmilk powder was characterised bytough competition for both specia-lity and standard products. More-over, pressure on the US dollarand falling export subsidies madean impact. Arla Foods Ingredients,however, retained its position asthe leading and preferred supplierof added value milk-based ingredi-ents products for selected globalcustomers.
Turnover for the year was DKK5,193 million which is on a parwith last year.
When the structural plan forprocessing milk powder in Den-mark and Sweden is completed atthe end of 2004, Arla Foods willboast one of the world’s most effi-cient and advanced productionplants for processing milk-basedingredients.
Arla Foods’ ingredients businessis divided into four business areas:industry, retail, own label milkpowder and sales of ingredients.
IndustryThis business area comprises the
production and sale of added valueingredients for global food produ-cers. Developments within the fieldof functional milk proteins for thedairy industry were good, withstrong focus on reduced fat pro-ducts. Within this field, Arla Foodsis now a world market leader.
In the field of special nutrition,the production of hydrolysatesexpanded during the year. Somespecial products have, however,encountered increased competitionin world markets due to a largersupply from Oceania and the US.
Ingredients
21
Sales of cheese powder met thehigh expectations for this businessarea.
In view of China’s rapid growth,Arla Foods set up a representativeoffice here in 2002/03.
Arla Foods’ joint venture withthe Argentinian dairy company,SanCor, is proceeding well withCentral America buying substantialamounts of milk proteins from thefactory in Argentina.
Towards the end of the financialyear, a joint venture for productionof the milk-based, low caloriesweetener, Gaio tagatose, was for-med with one of Europe’s leadingsugar producers, Nordzucker, inNordstemmen, Germany. The pro-duct was launched commercially inthe US where it is used by, amongothers, PepsiCo. Approval of Gaiotagatose has also been obtained inKorea and is underway in Japan.EU approval is expected to beforthcoming within the next fewyears. If warranted by future de-mand, production capacity will besignificantly increased over a two-three year period.
RetailArla Foods’ milk powder sold inretail outlets occupies a significantposition in several markets, inclu-ding the Dominican Republic, Ye-men and Bangladesh. The pro-ducts are sold in consumer packsunder the DANO and Milex brands.
In the key markets, the weaker USdollar and local devaluations meantprice increases for imported milkpowder. As a result, Arla Foods’competitiveness was somewhatweakened.
Own label milk powderToday Arla Foods is a global leaderwithin own label production of milk-based nutrition products. With thecompletion of the plant structureplan, Danish production facilitieshave been substantially upgradedto ensure efficient and profitableoperations. A pilot plant for smal-ler special productions, which cansubsequently be used for clinicaltrials for customers, has also beenestablished.
The business area continues to offer considerable potential asmajor international companiesoutsource parts or the whole oftheir production. The significantgrowth in tonnage and earnings isexpected to continue in the comingyear.
Ingredients salesSales of standard products werecharacterised by fair prices earlyin the financial year. However, asubstantial increase in supplies,particularly from Oceania, combin-ed with a low US dollar rate meantthat prices reached a historic low(measured in Danish kroner)during the spring/summer 2003.
Nevertheless, the prices for bothmilk powder and milk proteinsbegan to show a slight upwardtrend late in the year.
With a milk production of approx. 14 billion kg, the UK ranks
third in the EU after Germany and France. There are around
30,000 British milk producers.
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22
In September, three years afterthe merger between Arla and MDFoods, the two companies’ Boardsof Representatives were finally ableto close the two companies downand approve the new commonArticles of Association for ArlaFoods amba.
The completion of several largeprojects concerning co-operativeownership generated many mem-ber meetings in 2002/03.
The new joint quality program-me, Arlagården, was finalised andcame into force, as planned, onOctober 1, 2003. Based on custo-mers’ and consumers’ rising de-mand for food safety, its objectivesare based on the quality policy’scornerstones: milk quality, foodsafety, animal welfare and the envi-ronment. The programme is inten-ded to emphasise Arlagården’simportance as the first link in thecompany’s value chain and thuscontribute to the enhancement ofthe competitiveness of Arla Foods’products.
On October 1, 2003, a newcommon payment model came intoforce in keeping with the harmoni-sation process between Danish andSwedish co-operative members.The model, however, also reflectsadjustments to market demands.Since demand for milk proteins isrising at the cost of milk fat, therelation between fat and proteinhas shifted considerably in favour
of protein. Based on the launch of the
quality programme and the newpayment model, a new commondatabased payment system be-came operative on October 1,2003 as part of Ett Arla.
Within the organic area, a deci-sion was taken as to how the or-ganic business should be harmoni-sed. As part of this process, analignment of the received volumesof organic milk in relation to volu-mes sold will be carried out inDenmark. It was also decided toset up an organic committee com-prising Swedish and Danish orga-nic co-operative members to dealwith a variety of issues. In Den-mark, the contracts with organicco-operative members will be re-newed during the autumn of 2003.The Swedish organic co-operativemembers’ contracts will be review-ed early in 2004.
Fewer co-operative membersIn 2002/03, the number of ArlaFoods’ Danish and Swedish co-operative members fell to 12,758at year end. In Sweden, the totalnumber declined to 6,133, i.e.6.3%, while the fall in Denmarkwas 6.8%, i.e. 6,625 members.This means that the trend towardsfewer, but larger, farms is continu-ing. The total amount of milk recei-ved, 6,252 million kg, was 2%higher on the year. This means
that the annual average supply perfarm is now 615,000 kg inDenmark and 341,000 kg inSweden.
Overall, Arla Foods has approx.900 organic co-operative mem-bers, with a total production of490 million kg milk.
Inter-dairy transportIn line with previous years, inter-dairy transport was rationalisedand streamlined further during theyear. In Denmark, the transition tothe 24 hour milk collection systemcontinues alongside the introduc-tion of the so-called tractor/trailersystem.
In Sweden, faster emptying offarm milk tanks by new tankerswith increased pumping capacityhas led to more efficient collectionand thus a reduction in the num-ber of tankers.
New common collection ruleswere introduced during the finan-cial year.
A special co-operative memberappendix has been prepared forthe Annual Report. This containsinformation of particular interestto Arla Foods’ co-operative mem-bers.
Relations with co-operative owners
Rosenborg is the UK market’s biggest blue cheese brand. In order to meet consumers’
requirements, new packaging and portions, e.g. slices and cubes, are being developed.
Special focus is on strengthening the brand in supermarkets’ delicatessen counters.
➜
23
➜Cravendale PurFiltre® has made huge advances and now ranks,
as expected, among the UK’s 100 largest brands.
Each year, Arla Foods Innovationdevelops approx. 200 new pro-ducts. Development takes placewithin a project environment inwhich staff work in teams compri-sing colleagues from production,marketing and innovation.
During the past year, researchand product development werelargely unchanged in terms ofcosts. Increasing efficiency in boththe selection and implementationof projects, however, enhanced thereal value of the work.
Product developmentOngoing work aims at maintainingand developing each of the Group’sproduct areas. Basic products areimproved and upgraded and newconsumer opportunities and seg-ments are analysed.
Changes to eating patterns andmeal times, consumer preferencesfor low calorie products, frequentshifts in taste and a higher level ofconvenience in the shape of newpackaging and increased prepara-tion levels present a constantdemand for innovation.
In the Danish, Swedish and UKmarkets, where Arla Foods has aparticular commitment to a highlaunch frequency and service toconsumers, around 125 productsare launched each year. This willalso be the case in the coming year.
A dominant consumer trend isthe demand for products withfewer calories. This is why, for
many years, Arla Foods has beendeveloping a comprehensive rangethat meets this demand: Minimilkwith 0.5% fat, fermented productswith 0.1% fat, yellow cheese with5% fat and cream cheese with 0.1%fat, to name just a few examples.Arla Foods can, therefore, offerconsumers healthy milk compo-nents with a limited calorie intake.
In the ingredients area, workcontinues to identify new functionalmilk proteins for the global foodindustry. This applies to productswithin the so-called functional foodarea and to products with consis-tency-giving properties.
Technology developmentThrough the continual developmentof process technology, Innovationcan improve production calculationsand lay the foundation for entirelynew products. In connection withthe implementation of Arla Foods’structural plan, which comprisesdairy closures as well as the open-ing of new plants – and thus thetransfer of productions – there isa need for advanced technologicalsupport to ensure that, for instan-ce, a cheese maintains its highflavour quality. Innovation has de-veloped high-tech methods whichmake for the smooth transfer andpreservation of the quality of pro-ducts between production plants.
ResearchThe Group’s long-term – and cruci-
al – focus on research is reflectedin Arla Foods’ research strategy.The research topics are dividedinto three areas: a product orien-tated area such as milk fat, bio-active components and raw milkquality; a process-orientated areasuch as process technology,biotechnology and food informa-tics, and finally, a consumer-orien-tated area such as food safety andquality experience.
This research is carried out inconjunction with universities inDenmark, Sweden and other Euro-pean countries.
Innovation
24
26
0 20 40 60 80 100 120
0 10 20 30 40
70 75 80 85 90 95 100
70 75 80 85 90 95 100
70 75 80 85 90 95 100
70 75 80 85 90 95 100
Arla Foods’ environmental respon-sibilities begin at the farms which,in Denmark and Sweden, are a keycomponent of the quality program-me, Arlagården which, amongother things, focuses on the re-duction of environmental impact.
The moment the milk leaves thefarm, the company assumes directenvironmental responsibility for theensuing processes, including thetransport of milk from farm todairy, production at the dairies,the transport of products to thestores and for the packaging ofthe products. Arla Foods is alsoresponsible for ensuring that themilk and other ingredients used inproduction are produced in anenvironmentally sustainablemanner.
Arla Foods’ ambition is to cont-inue to reduce the environmentalimpact from farm to table and toretain focus on a healthy and safeworking environment in order topromote sustainable development.
Arla Foods’ environmental worktakes place within the frameworkof the Group’s environmental policyand the related targets for theenvironment and the working envi-ronment. The environmentaltargets must be met before2005/06.
So far, targets have beenprescribed for: water consump-tion, energy consumption, emis-sion of CO2 and NOx from produc-tion and transport, environmentalaccreditation, industrial injuriesand chemicals.
The graphs, which cover theGroup (with the exception of theUK), provide an overview of thestatus of the targets.
The environment and working environment
ISO 14001 accredited units
Arla Foods in Sweden and Denmark
Target 2005/06
2002/03
2001/02
2000/01
Water consumption
(index, water consumption in relation to raw materials and finished products)
Target 2005/06
2001/02
2000/01
Energy consumption
(index, energy consumption in relation to raw materials and finished products)
Target 2005/06
2001/02
2000/01
CO2 emission
(index, CO2 emission in relation to raw materials and finished products)
Target 2005/06
2001/02
2000/01
NOx emission
(index, NOx emission in relation to raw materials and finished products)
Target 2005/06
2001/02
2000/01
Accident frequency - DK
(Number of accidents per 1 million working hours)
Target 2005/06
2002/03
2001/02
2000/01
0
20
40
60
80
100
0
10
20
30
40
50
27
■ 2001/2002 7 15 23 30 37 41 51 54 58 70 73 87
■ 2002/2003 2 11 18 23 25 33 39 42 45 52 62 66
■ 5,8 11,6 17,4 23,2 29 34,8 40,6 46,4 52,2 58 63,8 70
■ 2001/2002 42,0 36,9 27,6 22,7 26,4 21,3 20,8 22,7 22,4 26,7 28,6 22,0
■ 2002/2003 35,0 30,0 27,0 28,6 26,0 26,8 21,0 22,4 24,5 15,8 18,6 28,0
ChemicalsThe properties of all chemical pro-ducts used at the Group’s plantsmust be assessed in relation tothe effect on health and the envi-ronment no later than the end ofthe 2005/06 financial year. Atpresent, cleaning and disinfectantshave been assessed and dividedinto the following colour-codedcategories:Green: Complies with the generalenvironmental requirements orcarries an environmental stampYellow: Does not entirely complywith the requirements, but meetsthe defined requirements andexceptionsRed: Does not comply with theenvironmental and/or healthrequirements
The plants can select chemicalsfrom the best categories providinghygienic requirements are met.
Environmental work in the UKArla Foods has set out clear tar-gets in relation to the environmentand working environment at its UKplants. In order to achieve thesetargets, co-ordinators have beenappointed within the area of health,safety and the environment at allplants. The work is centrally mana-ged by a group that advises oncontrol and regulatory compliance.During 2002/03, the new organi-sation produced a range of majorimprovements:
Energy consumption was redu-ced by 11% and water consump-tion cut by 16%
Within the field of the workingenvironment, the number of acci-dents leading to absences of morethan three days fell by 25% (seefig. 1). The accident rate also fell(see fig. 2).
Before April 1, 2005, all ArlaFoods’ production plants in the UKmust be IPPC approved (IPPC –Integrated Prevention PollutionControl), which is currently thebiggest challenge facing thecompany’s environmental endea-vours. In order to establish anoverview of the resources requiredto achieve IPPC accreditation, the
Figure 1: Accumulated accidents per period in the UK
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Target
Figure 2 Accident frequency rate in the UK
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
environmental conditions at theplants were examined and thereports on “best practice” are nowbeing discussed at the plants aswell as in the relevant workinggroups.
Environmental approvalsThe Group’s units in Denmark,Sweden and the UK, which accountfor 99% of the Group’s total pro-duction, are all subject to commonEU regulations. In Denmark andSweden these EU regulationsconcerning environmental appro-vals have been implemented.
Average 02/03: 25Average 01/02: 27
Dairy activities
AM Foods
Arla Foods produces and sells milk-based vending machine productsprimarily to the food servicesector in Scandinavia, Central andEastern Europe. However, theproducts are also sold to Scandin-avian retailers. In the financial year2002/03, turnover totalled DKK260 million against DKK 240million in 2001/02.
Operating profit continues todevelop positively and totalled DKK
19.2 million in 2002/03 againstDKK 14.5 million in 2001/02.
The largest product groups arechocolate, cappuccino and toppings.With sales of 14,000 tons duringthe 2002/03 financial year, AMFoods is a leading supplier in theEuropean market for vendingmachine products. In France, AMFoods expanded its sales forceand improved its market positionby 15%.
In view of the general economicslowdown in the food service sec-tor and substantial price increasesfor raw materials, AM Foods achi-eved a particularly satisfactory re-
sult. For the coming year, the com-pany expects the positive develop-ment in key markets to continue ata sales growth of at least 5%.
Delimo A/S
In 2003, Arla Foods acquired allthe shares in the cheese importingcompany, Delimo A/S. In Septem-ber 2003, Delimo acquired thecheese importing company, OlafSørensen. Delimo’s concept forsliced speciality cheese achieveddouble digit growth which is expec-ted to continue in 2003/04. Over
Subsidiaries
29
the coming year, Delimo is increa-sing its focus on supplying cheesefrom selected European brandsuppliers to the retail trade inDenmark, while its broad cheeseportolio will continue to be sold todelicatessens and restaurants.Next year will also focus on develo-ping sales of speciality cheese forthe other Nordic countries.
Andelssmør A.m.b.a.
Arla Foods owns approx. 94% ofthe company which handles thevast majority of Danish butterexports. The company operates asan integral part of Arla Foods. Theresult for the year is satisfactory.
Other activities
Rynkeby Foods A/S
For the financial year 2002/03,turnover for Rynkeby Foods fell toDKK 790 million against DKK 823million last year. However, opera-ting profit was DKK 36 millionagainst DKK 32 million the pre-vious year. The decline in turnoverstems from product areas thathave been terminated – or arebeing terminated – in connectionwith the closure of the factory inRynkeby.
Within the core areas of fruitjuice and squash, the market againdeveloped positively and RynkebyFoods achieved a modest increasein turnover. The market was cha-racterised by changes in tradingpatterns where the discount sec-tor and own label are gainingincreasing market shares in ahighly competitive environment.This impacted on the product mixand sales costs and, in conjunc-tion with declining turnover, putoperating profit under pressure.
The explanation for the substan-tial improvement in the year’s pro-fits, from DKK 4 million last yearto DKK 36 million this year, liespartly with the increase in the ope-rating profit and partly with theitems that relate to the closure ofthe factory in Rynkeby. In 2001/2002, DKK 22 million was expen-sed for this purpose, of which DKK6 million was carried back in2002/03.
As planned, the factory in Ryn-keby was closed on June 1, 2003and its production was either out-sourced or wound down. Withregard to the latter, this involvedsome major licensed productionagreements.
The construction of a new fullyautomatic warehouse began inAugust 2002 at the factory inRinge. The warehouse will be com-missioned in March 2004.
In a market that remains underpressure, Rynkeby Foods expects
a reasonable increase in turnoverwithin its core areas for 2003/04,with particularly good growth in thechilled juice sector. At the sametime, the cessation of licensedproduction agreements and therange reduction in 2002/03 willtake full effect in 2003/04. Over-all turnover, therefore, is only ex-pected to see a modest increase.
JO Bolaget AB
JO Bolaget, which is jointly ownedby Arla Foods and Skånemejeriernewith 50% each, produces fruitjuice, fruit drinks and fruit soups.
Sales totalled 117 million litresand turnover increased by DKK 21million to SEK 906 million in the2002/03 financial year. Fruit juiceaccounts for 93% of the turnoverwith chilled juice accounting for60%. During the financial year, thissegment grew by 9%.
Prospects for the next financialyear are good although volumesales are not anticipated to rise.However, the value shift fromaseptic to chilled juice is expectedto continue. Among other positivefactors are the dollar rate at thebeginning of the new financial yearand the prices for orange juiceconcentrate. The integrated partnership betweenRynkeby Foods A/S and JO BolagetAB developed positively in 2002/03.The partnership focuses on activiti-
As the biggest producer of fresh milk and supplier of Lurpak, the second
largest brand in the BSM category, Arla Foods UK plc plays a prominent
role on many UK consumers’ breakfast tables.
➜
30
es within purchasing, developmentand marketing, joint brands andproduction under a common mana-gement team.
Between them, the two compa-nies are the Nordic area’s largestfruit juice producer and the objec-tive is to provide continued growthin the two home markets andexpansion in the other Nordiccountries. So far, the partnershiphas performed well within thefields of joint purchasing, productdevelopment and product plans.As part of a joint Nordic strategyfor chilled juice, Rynkeby Foodslaunched “Rigtig Juice” in a newScandinavian design and, in colla-boration with JO Bolaget, alsolaunched a product called “RigtigJuice Smoothies.”
De danske MejeriersFællesindkøb amba
In the financial year 2002/03, Dedanske Mejeriers Fællesindkøbamba achieved a turnover of DKK643 million against DKK 656million in 2001/02. The consoli-dated operating profit was DKK 6million against DKK 15 million lastyear.
During the year, the number ofco-operative members was redu-ced to one, i.e. Arla Foods amba.The other co-operative members
were bought out during the springof 2003.
The change in the ownership ispart of the ongoing restructuringof De danske Mejeriers Fællesind-køb amba. The plan is to divide thegroup into three independentoperating units: Procudan A/S,Dairy Fruit A/S and A/S CrispyFood International.
The Trading Department Procu-dan’s field of operations has con-sequently undergone changes andadjustments. The part of the com-pany that was previously respon-sible for purchasing on behalf ofArla Foods was transferred to ArlaFoods Global Purchasing and indivi-dual productions have been shutdown. In order to strengthen theExport Department, a branch offi-ce was opened in Sweden and thecompany expects to see an in-crease in ingredients sales. TheTrading Department is expected tobe converted to Procudan A/S inthe new financial year.
During the financial year, DairyFruit A/S expanded its business toinclude licensed production of fruitporridge and marmelade. The fulleffect will materialise during thecoming financial year. The result ofthis, together with an increasedsales effort in near export markets,is expected to increase earnings in2003/04. One negative element,however, is that raw material prices for primary fruit types areexpected to increase.
During the past financial year,A/S Crispy Food Internationalworked towards enhancing itsmarket profile and the result hasbeen a fair increase in turnover.The initiatives are expected toimpact fully in the coming yearduring which growth in turnover isexpected to continue.
Danapak
The packaging group, Danapak,posted a loss on ordinary opera-tions of DKK minus 46 million forthe financial year 2002/03against a loss of DKK 22 million in2001/02. The result was stronglyinfluenced by developments inWestergaard & Philipson A/Swhich performed unsatisfactorily.Turnover for the financial year wasDKK 429 million against DKK 771million the previous year. The turn-over is, however, not directlycomparable with the previousfinancial year in that it was affec-ted by the group’s restructuring.Within the continuing cartons busi-ness, turnover fell from DKK 434million in 2001/02 to DKK 429million in 2002/03.
During 2002/03, Danapakcontinued its efforts to adapt thecompany to the ever increasingcompetition in the market place.
In May 2003, Danapak acquiredthe remaining 40% of the sharesin Westergaard & Philipson A/S.
31
At the end of the financial year, itwas decided to transfer the com-pany’s production to two otherDanapak Kartonnage plants whichnow operate production in Korsør,Herning and Bremen. The disposalof W&P has resulted in a loss ofDKK 25 million.
The joint venture with the TeichGroup produced a loss for Dana-pak of DKK 12 million, which ismainly due to costs relating to theclosure of the factory in Derby.
In 2002/03, the investmentprogramme amounted to DKK 19million.
Market conditions in Germanywere influenced by the generaleconomic slowdown which is ex-pected to continue. In general, theGerman market is suffering fromover capacity and consolidationwithin the sector is minimal. Dana-pak wishes to participate in – andpromote – further consolidation.
With the establishment of aNorth European joint venture inthe field of flexible packaging, theconditions for increasing competiti-veness within the industry havebeen enhanced. Danapak expectsto improve its ordinary result forthe coming year.
Frödinge Dairy AB
Besides the Swedish speciality,cheesecake, Frödinge Dairy ABproduces and sells frozen layer cake
and tarts to markets in Sweden,the rest of the Nordic area, Ger-many and the UK. During the yearunder review, the company’s turn-over was SEK 300 million againstSEK 309 million the previous year.The decline is owing to fallingsales in the Swedish and Germanmarkets coupled with the Swedishkrona’s relatively strong rate inrelation to the euro and sterling.Profit on ordfinary operation wasSEK 17.2 million which is in linewith earnings in percentage ofturnover.
In the Swedish domestic mar-ket, sales of cheesecakes andtarts fell marginally. Sales of fro-zen layer cake continue to developfavourably although sales of savou-ry tarts are suffering as retailersreduce the number of products intheir range and increasingly relyon own label products. However,Frödinge Dairy AB has chosen toadhere to its strategy of selling itsown branded products within allproduct ranges.
The company increased itsexport share of total producedvolumes to approx. 42%.
During the year, the companyset up its own representative office at Arla Foods’ office in Düs-seldorf in Germany. Sales in theGerman market have, however,been negatively affected by theGerman economic slowdown. Salesto the UK rose, although failing tomeet the budgeted levels. The
positive development in Finland isbeing maintained and in Norway anumber of products were listedwith a major retailer.
During the year, SEK 8 millionwas invested in production.
Turnover is expected to in-crease over the coming financialyear while exports, primarily to theUK and German markets, will ac-count for the biggest volume growth.
Medipharm AB
Medipharm AB produces bacteriacultures for the agricultural andfood industries and the productsare marketed in Sweden as well as abroad.
Sales failed to meet last year’slevel which resulted in a fall inturnover from SEK 136 million toSEK 126 million, while operatingprofit totalled SEK 9 million againstSEK 18 million last year.
The fall is at least partly due tothe summer’s hot and dry weatherconditions in Southern and CentralEurope which more or less halvedthe market for Medipharm’s ensi-ling products. Exchange rate devel-opments also had a negative im-pact on Medipharm’s result.
The starter cultures (kefir) andhuman and feed probiotica productareas, however, experienced rea-sonable growth.
During the year, a significantinvestment programme was imple-
32
mented aimed at increasing capa-city within the fields of freeze dry-ing and fermentors. The invest-ments have prepared the companyfor further expansion in the market.
During the year, the companyassumed all responsibility for thesubsidiary, Medipharm InvestmentLtd., in the US, following which anew business system was set upleading to a general strengtheningof the company’s organisation.
The subsidiaries in the CzechRepublic and Hungary were alsoaffected by the climate which im-pacted negatively on the expectedgrowth.
Over the past five years, growthof 17% has been achieved. Howe-ver, the objective remains to incre-ase turnover by 25% per year.
Semper AB
During the year, Semper furtherstrengthened its market positionsespecially within the fields of infantfood in Sweden, Finland and Russiaand within gluten-free products,health food and special nutrition.
As Semper’s business areasare no longer part of Arla Foods’future core business, the subsid-iary was sold in July 2003 at aprofit of DKK 220 million.
Arla Foods Holding A/S
Wholly-owned by Arla Foods, ArlaFoods Holding A/S is the holdingcompany for a number of ArlaFoods’ shareholdings, includingMedani A/S, Arla InsuranceCompany (Guernsey) Ltd. andRynkeby Foods A/S.
The result for the year is satis-factory.
Medani A/S
The company owns Arla Foods’head office, Ravnsbjerg Erhvervs-center. The company is also re-sponsible for a number of financingand investment activities. Medaniachieved a satisfactory result.
Arla Insurance Com-pany (Guernsey) Ltd.
The company acts as a reinsuran-ce company for the Arla Foodsgroup. The rising costs of liabilityinsurances resulted in a need tostrengthen reserve provisions. Thecompany, therefore, achieved asmall, negative result.
The former Express Dairies plc was the UK’s largest supplier of
fresh milk to leading supermarket chains as well as having the largest
doorstep sales where milk and other products are delivered to more than
one and a half million private customers nationwide.
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During the financial year 2001/2002, the Supervisory Board ofArla Foods amba adopted a newfinance policy laying down guidelinesfor the group's financial risk profile.
The main objective of ArlaFood's finance policy is to ensure astable cash flow and financial flexi-bility in a volatile market.
The finance policy is designed toensure compliance with best prac-tice and with the tightened account-ing requirements on large interna-tional companies.
The finance policy underpins thegroup's strategic plans.
The general finance policydetermines the allocation ofresponsibilities between the Super-visory Board, the ManagementBoard and the Finance Depart-ment. It also specifies which finan-cial products and counterpartscan be used. The requirementsare that a well-functioning marketexists for such products and thatthey can be reliably measured.
Financial counterparts areselected based on a wish for along-standing mutual associationbenefiting both parties. The Group'sinternational strategy makes
higher and higher requirementswith respect to the internationali-sation of our bankers. Risks areminimised by selecting partnerswith high rating only.
In addition, the finance policy setsout the Group's general credit policyas well as specifies the systems foroperational management. To managethe intragroup accounts, the FinanceDepartment has implemented SAPR3 In House Cash, which functionsas a management tool for theGroup's internal bank. Medani A/Sserves as internal bank for anumber of the Group's subsidiaries.
Managing financial risks at Arla Foods
35
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90
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100
102
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The foreign currency policy setsout the framework for maximisinglong-term earnings based onmarket conditions. According togroup policy, individual businessunits are responsible for foreignexchange hedging whereas allexternal hedging for the divisionsis effectuated by the central Finan-ce Department.
The main purpose of hedging byway of financial instruments is togenerate a stable cash flow tominimise fluctuations in the milkprice. The Group uses bothforward exchange contracts and
option strategies for currencyhedging to ensure flexibility.
The company's total exports inforeign currencies from Denmarkand Sweden amount to approx.DKK 10 billion, of which approxi-mately 48% is in EUR, 26% inUSD, 16% in GBP and 5% in SAR(Saudi Arabia).
Foreign exchange hedging isbased on commercial considera-tions. To measure the effective-ness of the hedging, a foreignexchange index has been set up.This index measures the results of hedging in relation to market
In 1990, the then MD Foods (now Arla Foods) began investing in the British milk industry. The first acquisition was the Leeds-based,
Associated Fresh Foods, which also operated production units in Settle and Newcastle. Two further acquisitions were to follow.
In 1992, MD Foods bought Oakthorpe Dairy in North London from CRS and in 1993, Bamber Bridge dairy was acquired from
Dairy Crest. In 1996, MD Foods bought Hatfield Peverel from Lord Rayleigh in 1996.
developments. The foreignexchange index, figure 1 below,demonstrates that the consequen-ces of recent years' decreases incurrency rates have been minimi-sed by means of financial transac-tions. The market index for Octo-ber 2002 is set at 100.
In addition, the Group's curren-cy risks are measured by meansof the international standard formeasuring financial risks, Value-at-Risk (VaR), which provides 95%probability in measuring thecurrency risks that Arla Foodsfaces on a month-for-month basis.
Figure 1: Foreign exchange index
Forward index
Market index
Oct01
Nov01
Dec01
Jan02
Feb02
Mar02
Apr02
May02
Jun02
Jul02
Aug02
Sep02
Oct02
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36
The financing policy underpinsthe Group's strategic plans and its wish to minimise the risk ofimpacts from financial instability.
The overall objective of thefinancing policy is to minimise thelong-term borrowing costs whileensuring a loan composition thatreduces the risks of refinancing.
The Group has a conservativeloan policy. Loans are raised whenthe Group believes the terms to beattractive and the financing of theGroup's strategic initiatives is inthis way analysed in advance.
Both lenders and loan repay-ment periods are diversified toachieve this. As the internationalawareness of the Group increases,the plan is to utilise the internatio-
nal capital markets as a supple-ment to our existing lenders. Atthe moment, Arla Foods has issu-ed a Commercial Paper Program-me in Sweden with duration of upto 12 months.
The financing policy lays downthe broad targets for the Group'soverall capital structure as well asinternal rules for the financing ofthe Group's entities.
The duration indicates how longthe interest rate on the debt willbe fixed on average.
The duration target is applied inconnection with the managementof the Group's interest risks onfinancial assets and liabilities. Theduration of the long-term portionof the debt should be between 0-7
years. Throughout the year, seve-ral long-term fixed interest loanshave been raised so that the dura-tion of the debt is maintained atapprox. 3.2 years.
Furthermore, the policy specifi-es that the short-term portion ofthe total interest-bearing loansmust not be higher than thecorresponding ratio betweencurrent assets and fixed assets.
The average repayment periodof the long-term debt increasedfrom approx. 5.2 years to approx.5.8 years thereby fulfilling the finance policy of at least 2 years.At 30 September 2003, the totalinterest-bearing debt amounted toapprox. DKK 8,971 million compa-red to approx. DKK 8,019 millionlast year.
The currency risks on invest-ments in foreign subsidiaries arenormally not hedged if they arepart of the Group's long-term stra-tegy. At the end of the financialyear, the distribution of interest-bearing debt was 60% in DKK, 16%in SEK, 14% in GBP, 7% in USDand 3% in other currencies. Lea-
Approx. 1250 milk producers are affiliated to Arla Foods UK plc. The total weighed in milk of the
former Arla Foods plc amounted to 0.9 billion kg, of which approx. 350 million kg came from about 400
farmers on contract. Nearly half of the former Express Dairies plc' weighed in quantities of 1.4 billion kg
milk came from approx. 850 farmers. The rest of the milk is purchased through milk collection societies.
➜
0
20
40
60
80
100
SEKEURGBPSARUSD
Figure 2: Hedging compared to annual budget
Forward exchange contracts
Options
Open
Hedging of foreign currency positions is assessed currently and thisyear a number of hedging transactions have been made regarding themost sensitive currencies such as USD, GBP and SAR. Figure 2 showsthat approx. 75% of the most risky currencies are hedged by a combination of forward exchange contracts and options.
37
sing is only utilised when deemedto be attractive for the Group.
The liquidity policy is linked tothe company's financing policy andensures that the liquidity risk isminimised. This is achieved bymaintaining sufficient operatingliquidity and sufficient liquidity foracquisitions. During the year, theFinance Department has workedand is still working on an optimisa-tion of the cash flow and the needfor drawing rights in the banks,among other things, by establish-ing an internal bank and cash
pools in Denmark, Sweden and theEuro Zone.
The total liquidity reserve amoun-ted to approx. DKK 4.8 billion at30 September 2003. The risks re-lating to receivables from debtorsare not considered unusual.
During the financial year, initiati-ves have been taken to adjust theGroup's balance sheet to strength-en the solidity and to minimise theneed for working capital. Thecoming year will also focus on initi-atives to reduce the balance sheettotal and to strengthen the solidity.
38
Annual Report 2002/03
Management's statement
The Management Board and the Supervisory Board have today discussed and adopted the annual report ofArla Foods amba for the financial year 30 September 2002 – 30 September 2003.
The annual report has been prepared in accordance with the Danish Financial Statements Act. We considerthe accounting policies applied to be appropriate. Accordingly, the annual report gives a true and fair view ofthe Group's and the parent company's assets, liabilities and financial position at 30 September 2003 as wellas of the results of the Group's and the parent company's activities and cash flows for the financial year 30September 2002 - 30 September 2003.
We recommend that the annual report be approved by the Board of Representatives.Aarhus, 26 November 2003
Management Board of Arla Foods amba
Jens BigumMan. Director
Åke ModigDep. Man. Director
Jørn Wendel AndersenFinance Director
Supervisory Board of Arla Foods amba
Knud Erik Jensen Åke HantoftChairman Deputy Chairman
Leif Backstad Sören Kihlberg
Viggo Ø. Bloch Ove Møberg
Steen Bolvig Per Norstedt
Bjarne Bundesen Jan Toft Nørgaard
Christer Eliasson Kaj Ole Pedersen
Anders Ericsson Gunnar Pleijert
Leif Eriksson Søren Rasmussen
Elisabeth Gauffin Pejter Andersen Søndergaard
Thomas Erling Johansen Bent Juul Sørensen
39
We have audited the annual reportof Arla Foods amba for the finan-cial year 30 September 2002 –30 September 2003.
The annual report is the re-sponsibility of the company’s Mana-gement Board and SupervisoryBoard. Our responsibility is toexpress an opinion on the annualreport based on our audit.
Basis of opinionWe conducted our audit in accor-dance with International andDanish Auditing Standards. Thosestandards require that we planand perform the audit to obtainreasonable assurance that theannual report is free of materialmisstatement. An audit includesexamining, on a test basis, eviden-ce supporting the amounts anddisclosures in the annual report.An audit also includes assessing
the accounting policies used andsignificant estimates made by theManagement Board and theSupervisory Board, as well asevaluating the overall annualreport presentation. We believethat our audit provides a reasona-ble basis for our opinion.
Our audit has not resulted inany qualification.
OpinionIn our opinion, the annual reportgives a true and fair view of theGroup’s and the parent company’sassets, liabilities and financial position at 30 September 2003and of the results of the Group’sand the parent company’s opera-tions and cash flows for the finan-cial year 30 September 2002 – 30 September 2003 in accord-ance with the Danish FinancialStatements Act.
Auditors' report
To the members of Arla Foods amba
Aarhus, 26 November 2003
KPMG C. JespersenStatsautoriseret Revisionsinteressentskab
E. Black PedersenState Authorised Public Accountant
J. Bräuner KnudsenState Authorised Public Accountant
PricewaterhouseCoopersStatsautoriseret Revisorinteressentskab
Göran TidströmAuthorised Public Accountant
Jesper LundState Authorised Public Accountant
40
Accounting policies
General informationThe annual report of Arla Foodsamba for 2002/03 has beenprepared in accordance with theprovisions applying to large class Centerprises under the DanishFinancial Statements Act.
Changes inaccounting policiesAs a result of the new DanishFinancial Statements Act, theaccounting policies have beenchanged in the following areas:
1. Product development projectsProduct development costs arerecognised in the balance sheetand amortised over three yearsprovided that certain criteriahave been met. Previously, alldevelopment costs were recog-nised in the profit and loss ac-count when incurred. In accor-dance with the transitional pro-visions of the Danish FinancialStatements Act, the applicationof this policy will have effectfrom this year and onwards.
2. Finance leasesAssets held under finance lea-se are recognised in the balan-ce sheet and depreciated inaccordance with the generaldepreciation principles of theGroup. The capitalised value ofthe residual lease payments isrecognised as a liability in thebalance sheet and the interestpart of the lease payment isrecognised in the profit andloss account. Previously, leasepayments were recognised
directly in the profit and lossaccount.
3. Investments in subsidiariesand associatesThe proportionate share of theindividual subsidiaries' and as-sociates' profit is recognised inthe profit and loss account ofthe parent company. Previously,the results of non-dairy compa-nies were not recognised in theprofit and loss account of theparent company, but taken di-rectly to equity. Non-dairycompanies were defined ascompanies whose primary activities do not relate to theprocessing/selling of the milkweighed in from Arla Foodsamba's members.
4. Other investmentsOther investments are measu-red at fair value. Previously,other investments were recog-nised and measured at cost.
5. Derivative financial instrumentsDerivative financial instrumentsare measured at fair value andrecognised as other receiva-bles/other payables. If theinstruments are designated ashedges of future assets andliabilities, the changes in thevalue of the hedging instrumentare recognised directly in ca-pital and reserves until thehedged item is realised. Pre-viously, the value of derivativefinancial instruments designa-ted as hedges of future assets
and liabilities was not recogni-sed in the balance sheet.
6. Deferred tax assetsDeferred tax assets are recog-nised in the balance sheet atthe expected value of their util-isation. Previously, deferred taxassets were not recognised inthe balance sheet.
Apart from the capitalisation ofproduct development projects, thecomparative figures for 2001/02have been restated to comply withthe changed accounting policies.
The accumulated effect of thechanges in accounting policies forthe parent company is an increasein profit for the year of DKK 315million (2001/2002: DKK 96million) of which DKK 313 million(2001/2002: DKK 172 million)relates to shares of profits in non-dairy related enterprises. The ba-lance sheet total increases by DKK186 million (DKK 199 million at 29September 2002), whereas theequity at 30 September 2003 in-creases by DKK 149 million (DKK146 million at 29 September 2002).
The accumulated effect of thechanges in accounting policies forthe Group is an increase in profitfor the year of DKK 2 million. Thebalance sheet total increases byDKK 435 million, whereas theequity at 30 September 2003increases by DKK 149 million.
The changes in accounting poli-cies have had the following effecton the Group:
41
In addition to the changes inaccounting policies, the layout ofthe financial statements have beenchanged within the following areas:
Goodwill regarding investments insubsidiaries and associatesGoodwill regarding investments insubsidiaries and associates arerecognised as investments. Pre-viously, these were recognisedseparately as intangible assets in the parent company's balancesheet.
Other provisionsSome amounts previously shownas other payables have been trans-ferred to other provisions.
In connection with the transition tothe new Danish Financial State-ments Act, the description of theaccounting policies have beenamplified and the terminology hasbeen changed accordingly. Theeffect of the alteration on theannual report is purely editorial.
ConsolidationThe consolidated financial state-ments comprise Arla Foods amba(the parent company) and thosesubsidiaries, cf. the list of groupcompanies on pages 61-62, inwhich the parent company directlyor indirectly holds more than 50%of the voting rights or in which theparent company in other ways hasa controlling interest. Enterprisesin which the Group holds between20% and 50% of the voting rightsand over which it exercises signifi-cant influence, but which it does notcontrol, are considered associates.
The consolidated financial state-ments have been prepared by aconsolidation of similar items fromthe parent company's and the in-dividual subsidiaries' annual reports.Intra-group income and expenses,shares, outstanding accounts, divi-dends and unrealised gains andlosses have been eliminated.
As regards the acquisition andsale of subsidiaries, the operationsof such subsidiaries have been in-cluded in the consolidated financialstatements for that part of theyear in which the subsidiaries have
been owned by the Arla FoodsGroup.
Acquisitions of enterprises areaccounted for using the purchasemethod, according to which theidentifiable assets and liabilitiesacquired are measured at theirfair values at the date of acquisi-tion. Provision is made for costsrelated to adopted and announcedplans to restructure the acquiredenterprise. The tax effect of therestatement of fair values is takeninto account.
Gains or losses on full or partdisposal of subsidiaries are statedas the difference between thesales amount and the carryingamount of net assets at the dateof disposal including non-amortisedgoodwill and anticipated disposalcosts. Gains and losses are recog-nised in the profit and loss account.
Any excess of the cost of theacquisition over the fair value ofthe identifiable assets and liabilitiesacquired (goodwill) is recognisedas intangible assets and amortisedin the profit and loss account ba-sed on an individual assessment ofthe useful life of the asset, not
THE GROUP: Profit Assets Equity
DKK million 2001/02 2002/03 2001/02 2002/03 2001/02 2002/03
According to previous policies 1,161 1,092 21,736 26,410 6,632 7,006
Changes:
Development projects – 34 – 34 – 34
Finance leases 0 0 135 286 0 0
Other investments –57 –6 16 23 16 23
Derivative financial instruments 0 0 30 18 30 18
Deferred tax assets –19 –26 100 74 100 74
After changes in policies 1,085 1,094 22,017 26,845 6,778 7,155
42
exceeding 20 years. Any excess ofthe fair values of the identifiableassets and liabilities acquired overthe cost of the acquisition (negativegoodwill), representing an anticipa-ted adverse development in theacquired enterprises, is recognisedin the balance sheet as deferredincome and recognised in the pro-fit and loss account as the adversedevelopment is realised.
If the restatement of the fairvalues of the acquired enterprise'sassets and liabilities results innegative net asset values in theacquired enterprise, then anyminority assets are recognised aspart of the positive difference. Thepositive difference relating to theminority asset is amortised untilthe minority interest represents aliability again. At the same time,the results from the acquiredenterprise is recognised in full inthe consolidated results. Amortisa-tion for the year on the minorityasset is determined so that theimpact on the group's results isthat only the group's share of theresults is recognised.
Minority interestsIn the consolidated financial state-ments, the items of subsidiariesare recognised in full. The minorityinterests' proportionate shares ofthe subsidiaries' results and capi-tal and reserves are adjustedannually and recognised separatelyin the profit and loss account andbalance sheet.
Foreign currency translationFor foreign subsidiaries, the profitand loss accounts are translatedusing the average exchange rates,whereas the balance sheet itemsare translated using the exchangerates at the balance sheet date.
For foreign associates, theshares of results are recognisedat average exchange rates andshares of net book value arerecognised at the exchange rateat the balance sheet date.
The translation differences thatmay arise on translation of theforeign companies' opening equityusing the exchange rates at thebalance sheet date and the trans-lation differences resulting fromtranslation of the foreign compa-nies' profit and loss accounts usingthe average rates are adjustedover the equity.
Derivative financial instrumentDerivative financial instrumentsare initially recognised in the ba-lance sheet at cost and are subse-quently measured at fair value.Positive and negative fair values ofderivative financial instruments areincluded in other receivables andpayables, respectively.
Changes in the fair value ofderivative financial instrumentsdesignated as and qualifying forrecognition as a hedge of the fairvalue of a recognised asset orliability are recognised in the profitand loss account together with
changes in the value of the hedgedasset or liability.
Changes in the fair value ofderivative financial instrumentsdesignated as and qualifying forrecognition as a hedge of futurecash flows are recognised directlyin the equity. Income and expensesrelating to such hedging transac-tions are transferred from theequity on realisation of the hedgeditem and recognised in the sameitem as the hedged item.
For derivative financial instru-ments that do not qualify forhedge accounting, changes in fairvalue are recognised in the profitand loss account when they occur.
SubsidiesEU subsidies and subsidies fromother public authorities for invest-ments in fixed assets are deductedfrom the purchase price.
Subsidies granted for productdevelopment, etc. are entered asincome under the item other ope-rating income at the time when arepayment obligation is no longercontingent.
Profit and loss account
TurnoverThe turnover includes the year'sinvoiced sales less salesdiscounts. Any refunds andproduction subsidies from the EUare included in the turnover.
43
The turnover for Arla Foodsamba also includes declaredsupplementary payments fromother sales companies within theArla Foods Group.
Production costsProduction costs include cost ofsales, including purchases fromArla Foods' members as well ascosts, including depreciation,wages and salaries incurred torealise the turnover for the year.Purchases from members do notinclude supplementary payments.
Share of the results in subsidiaries and associatesThe proportionate share of theresults after tax of the individualsubsidiaries is recognised in theprofit and loss account of theparent company after full elimina-tion of intra-group profits/lossesand less declared supplementarypayments.
The proportionate share of theresults after tax of the associatesis recognised in both the parentcompany and the consolidated pro-fit and loss accounts after elimina-tion of the proportionate share ofintra-group profits/losses.
Financial itemsInterest income and expense arerecognised in the profit and lossaccount at amounts relating to thefinancial year.
Furthermore, financial itemscomprise both realised and unreali-
sed value adjustments of securitiesand exchange rate adjustments.
Corporation taxThe taxable income of the compa-nies is calculated in accordancewith the national rules in forcefrom time to time. For companies,which are jointly taxed, tax on theresults for the financial year isentered at the current tax rate,calculated on the basis of the pre-tax results for the year, adjustedfor non-taxable income and expen-ses. The deferred tax is measuredat the current tax rate on alltemporary differences between thecarrying amount and the tax base.
Balance sheet
Fixed assets in generelFixed assets are written down tothe recoverable amount (net reali-sable value) if this is lower thanthe carrying amount. Annualimpairment tests are conducted ofindividual assets or groups ofassets. Impairment tests aremade for goodwill in relation to theexpected future net income fromthe business or activities to whichthe goodwill relates.
Intangible assetsIntangible assets are measured atcost less accumulated amortisa-tion and impairment.
Intangible assets comprisegoodwill from the acquisition of
enterprises, product developmentprojects, the IT developmentproject Ett Arla, licences, trade-marks, etc. as well as the equali-sation sum for former members ofKløver Mælk A.m.b.A.
Product development projectsqualifying for recognition in thebalance sheet are measured atcost, including indirect costs incur-red. Other development costs arerecognised currently in the profitand loss account.
For the IT development projectEtt Arla, only external costs forthe establishment of the Group'sfuture IT system are capitalised.Internal systems developmentcosts are recognised currently inthe profit and loss account.
The assets are amortised on astraight-line basis over their expec-ted useful lives:
Goodwill 3-20 yearsLicences and trademarks, etc. 10 yearsEqualisation sum 3 yearsProduct development projects 3 yearsThe IT development project Ett Arla 5-8 years
Intangible assets are amortisedfrom the date of acquisition orwhen the assets are taken into use.
Tangible assetsTangible fixed assets are valued atcost less accumulated depreciationand impairment.
44
Cost comprises the purchaseprice and any costs directly attri-butable to the acquisition until thedate when the asset is availablefor use.
The assets are depreciated ona straight-line basis as from thetime of acquisition or commissio-ning based on the expected usefullives of the assets as follows:
Office buildings 50 yearsProduction buildings 20-30 yearsPlant and machinery 5-10 yearsFixtures and fittings, tools and equipment 3-7 years
The carrying value of plant andmachinery, fixtures and fittings,etc. at the establishment of theArla Foods Group on 17 April2000 is, however, depreciated ona straight-line basis over five yearsfrom this date.
Assets in course of construc-tion and land are not depreciated.
Assets with a short useful life,minor assets and minor costs ofimprovement are expensed in theyear of acquisition.
Gains and losses on the realisa-tion of tangible assets are recogni-sed as depreciation.
Lease contracts regardingtangible assets, where the Groupholds all major risks and rewardsincident to ownership (financelease), are measured at their initi-al recognition in the balance sheetat the lower of fair value and thepresent value of the future leasepayments. For the calculation of
the net present value, the interestrate implicit in the lease or anapproximation thereof is used asdiscount rate. Assets held underfinance lease are hereafter treatedas the company's other tangibleassets.
The capitalised residual leasepayments are recognised in thebalance sheet as a liability and theinterest part of the lease paymentis recognised in the profit and lossaccount over the term of thecontract.
InvestmentsInvestments in subsidiaries andassociates are measured accor-ding to the equity method.
Investments in subsidiaries andassociates are measured in thebalance sheet at the proportionateshare of the enterprises' net assetvalues calculated in accordancewith the parent company's accoun-ting policies plus or minus unreali-sed intra-group profits and losses.
For those cooperative societiesthat form part of the Group, theownership share, and thereby theshare of the net asset value, hasbeen calculated in accordance withthe Articles of Association of theindividual companies.
Net revaluation of investmentsin subsidiaries and associates istransferred to the reserve for netrevaluation according to the equitymethod as equity to the extent thatthe carrying amount exceeds cost.
Other investments (shares,mortgage deeds, bond holdings,
etc.) are measured at fair value atthe balance sheet date.
StocksRaw materials, consumables andgoods for resale are measured atcost. The cost of the milk thatforms part of stock has beenrecognised at the on-accountprice, including expected supple-mentary payments to Arla Foodsamba's members.
Work in progress and finishedgoods are measured at costconsisting of the cost of raw mate-rials and consumables with theaddition of processing costs andother costs directly or indirectlyrelated to the individual goods.Indirect production overheadscomprise indirect materials andwages and salaries as well as depreciation of production equip-ment.
Stocks are measured accordingto the FIFO method. If the costexceeds the net realisable value,write-down is made to the netrealisable value. The net realisablevalue is determined based on theturnover rate, marketability anddevelopment in the expected salesprice of the goods.
ReceivablesReceivables are recognised atamortised cost less write-down foranticipated bad debts based on anindividual assessment. Amortisedcosts correspond in all materialrespects to nominal values.
Prepayments comprise costs
45
incurred concerning subsequentfinancial years.
Other current assetsSecurities are measured at marketvalue at the end of the financialyear.
EquityThe parent company's equity at 30September 2003 consists of:
Capital account:The company's capital accountconsists of the undivided equity ofthe company.
Reserve A:Reserve A is reserves in return ofpersonal accounts in MD Foodsamba, for which the followingterms apply:
1. The Board of Representativesmay decide for the reserves tocarry interest, however notexceeding the official Danishdiscount rate.
2. Any decisions concerning distri-bution from the personalaccounts shall be made by theBoard of Representatives.
3. The plan is for the reserve tobe paid out in the course ofthe 2000/2001 –2007/2008 financial years.
No payments shall be made to themembers of Arla Foods ambawhich reduce the total of thecompany's capital account andReserve A. If such payments are
made from Reserve A, a corres-ponding amount shall be paid intothe capital account. In addition,DKK 280 million shall be added tothe capital account through conso-lidation and concurrently with pay-ments from Reserve A. DKK 105million of this amount has beentransferred to the capital accountup to and including the financialyear 2002/2003.
Reserve B:Reserve B comprises the reservesset aside on the incorporation ofthe company.
Net revaluation according to theequity method:The account includes net revalua-tion in accordance with the equitymethod for subsidiaries and asso-ciates.
Subordinate loan capitalPursuant to the Memorandum ofAssociation, Arla ekonomisk före-ning contributed SEK 330 millionin the form of subordinate loancapital, which in the event of thebankruptcy of the company ranksafter other claims. The loan, onwhich interest accrues at thesame rate as Reserve A, shall berepaid by one eighth annually, thefirst time in the 2001/2002financial year.
Corporation tax and deferred taxCurrent tax payable and receivableis recognised in the balance sheet
as tax computed on the taxableincome for the year, adjusted fortax on the taxable income of prioryears and for tax paid on account.
Deferred tax is measured on alltemporary differences between thecarrying amount and the tax baseof assets and liabilities.
Deferred tax assets, includingthe tax base of tax loss carryfor-wards, are recognised at theexpected value of their utilisation;either as a set-off against tax onfuture income or as a set-offagainst deferred tax liabilities inthe jointly taxed enterprises.
Deferred tax is measuredaccording to the tax rules and atthe tax rates applicable in therespective countries at the balan-ce sheet date when the deferredtax is expected to crystallise ascurrent tax.
Tax assets are set off in thebalance sheet against tax liabilitieswithin the same legal tax entity.
Other provisionsPensions:The Group has entered into pen-sion agreements with many of theGroup's employees.
The pension schemes comprisethe defined contribution schemesand the defined benefit schemes.
As regards the defined contri-bution schemes used in the Danishcompanies, the Group currentlypays fixed contributions to indepen-dent pension funds. The Group hasnot commitments of additionalpayments.
46
Defined benefit schemes, whichare primarily used by the Group'sundertakings in Sweden and theUK, are those for which thecompany is committed to pay acertain amount in connection withretirement, depending on e.g. theseniority of the employees.
The commitment regarding defi-ned benefit schemes is calculatedannually by means of an actuarialcomputation based on the expectedfuture development in interest, in-flation and average life expectancy.
The actuarially calculated pre-sent value less the fair value ofany assets related to the schemeare provided in the balance sheetunder pension commitments.
Actuarial gains and lossesarising as a consequence of thechanged assumptions in the calcu-lation of the pension commitmentor in the computation of the assetsrelated to the pension scheme arerecognised in the profit and lossaccount over the anticipatedservice lives of the employees.
If the total actuarial gains andlosses exceed 10% of the presentvalue of the pension commitment,any excess amounts above the10% will be recognised in profitand loss account over the averageremaining service life of the em-ployees covered by the pensionscheme.
In connection with the acquisi-tion of 51% of the shares in Ex-press Dairies plc., the full pensioncommitment in both existing andacquired enterprises in the UK
was recognised in the balancesheet at 30 September 2003.
Other provisions:Other provisions comprise, inparticular, the provisions for obli-gations in connection with mergersand reorganisations.
LiabilitiesAmounts owed to mortgage creditinstitutions and banks are recogni-sed at the date of borrowing atthe net proceeds received lesstransaction costs paid. In subsequ-ent periods, the financial liabilitiesare measured at amortised cost.
Financial liabilities also includethe capitalised residual obligationon finance leases.
Other liabilities, such as supple-mentary payments to members,trade payables, amounts owed togroup enterprises and associatesand other payables, are measuredat amortised cost – usually corre-sponding to the nominal value.
Deferred income comprisespayments received concerningincome in subsequent years.
Cash flow statementThe cash flow statement is prepa-red according to the indirectmethod on the basis of the conso-lidated results. The statementshows the cash flows of theGroup, divided into operating,investing and financing activitiesand how these cash flows haveaffected the Group's cash funds.
The cash flow from operating
activities is calculated as theconsolidated results adjusted for non-cash operating items suchas depreciation and write-downsand changes to the working capital.
The cash flow from investingactivities comprises cash flows inconnection with the purchase andsale of intangible and tangibleassets as well as investments.
The cash flow from financingactivities comprises the raisingand repayment of long-term andshort-term debt to financial institu-tions as well as mortgage lenders.
The cash funds are made up ofcash at bank and in hand andlisted bonds recognised in thebalance sheet as current assets.
The cash flow statement cannotbe derived solely from the consoli-dated financial statements.
Segment informationInformation is provided for dairyactivities and other activities.
The items recognised in theprofit for the year, including invest-ments in associates and financialitems, are allocated based onwhether the items relate directlyor indirectly to the activities. Otheritems are allocated proportionately.
Segment fixed assets comprisefixed assets used directly or in-directly in the operating activitiesof the segment.
Segment liabilities compriseliabilities resulting from the opera-ting activities of the segment,including trade payables and otherpayables.
47
Profit and loss account
PARENT COMPANY GROUP2001.10.01 2002.09.30 2002.09.30 2001.10.01
–2002.09.29 –2003.09.30 MDKK million Note –2003.09.30 –2002.09.29
25,751 26,034 Turnover 1 40,647 39,441
–22,904 –23,175 Production costs 2 –32,873 –31,909
2,847 2,859 Gross profit 7,774 7,532
–1,363 –1,395 Sales and distribution costs 2 –4,941 –4,791
–404 –475 Administrative and joint costs 2/3 –1,433 –1,304
50 41 Other operating income 125 187
–97 –183 Other operating expenses –283 –213
1,033 847 Operating profit 1,242 1,411
95 83 Results in subsidiaries 8 – –
3 –2 Results in associates 8 –20 –6
111 220 Divestment of subsidiary 220 111
–141 –37 Net financial items 4 –245 –367
1,101 1,111 Profit from ordinary activities before tax 1,197 1,149
–16 –17 Corporation tax 5 –106 –66
1,085 1,094 Profit for the year 1,091 1,083
Minority interest share of
– – results in subsidiaries 9 3 2
1,085 1,094 Arla Foods amba’s share of results for the year 1,094 1,085
Proposed profit appropriation:
575 546 Supplementary payments to Arla Foods' members 546 575
Tranferred to capital account:
126 123 Reconsolidation acc. to the articles of association 123 126
286 344 Other transfers 344 286
412 467 Total 467 412
98 81 Net revaluation acc, to the equity methods – –
– – Other reserves 81 98
1,085 1,094 Total 1,094 1,085
48
Balance sheet
PARENT COMPANY GROUPBalance sheet Balance sheet
at 02.09.29 at 03.09.30 DKK million Note at 03.09.30 at 02.09.29
ASSETS
Fixed assets
Intangible assets 6
0 0 Licences and trademarks, etc. 53 75
– – Group goodwill 2,260 642
92 0 Equalisation sum 0 92
– 359 Development projects 375 –
92 359 Total 2,688 809
Tangible assets 7
1,389 1,423 Land and buildings 3,906 3,209
1,905 1,948 Plant and machinery 4,678 3,944
105 105 Fixtures and fittings, tools and equipment 523 615
142 325 Tangible assets in course of construction 932 481
3,541 3,801 Total 10,039 8,249
Investments 8
2,628 1,977 Investments in subsidiaries – –
0 1,147 Subordinate loans to subsidiaries – –
99 96 Investments in associates 281 274
830 833 Other securities and investments 958 1,060
0 0 Other receivables 7 3
3,557 4,053 Total 1,246 1,337
7,190 8,213 Total fixed assets 13,973 10,395
Current assets
Stocks
442 491 Raw materials and consumables 780 783
730 682 Work in progress 1,119 1,125
206 256 Finished goods and goods for resale 1,906 1,852
1,378 1,429 Total 3,805 3,760
Receivables
1,120 1,178 Trade receivables 4,604 4,022
3,871 3,013 Amounts owed by group enterprises 0 0
158 119 Amounts owed by associates 158 360
770 434 Other receivables 1,229 1,459
– – Deferred tax assets 11 786 100
6 9 Prepayments 79 81
5,925 4,753 Total 6,856 6,022
0 0 Securities 785 927
502 874 Cash at bank and in hand 1,426 913
7,805 7,056 Total current assets 12,872 11,622
14,995 15,269 TOTAL ASSETS 26,845 22,017
49
Balance sheet
PARENT COMPANY GROUPBalance sheet Balance sheet
at 02.09.29 at 03.09.30 DKK million Note at 03.09.30 at 02.09.29
EQUITY, MINORITY INTERESTS AND LIABILITIES
Equity
5,174 5,895 Capital account 5,895 5,174
555 461 Reserve A 461 555
500 500 Reserve B 500 500
539 299 Net revaluation acc. to the equity method 0 0
10 0 Hedging instruments 18 30
– – Other reserves 281 519
6,778 7,155 Total equity 7,155 6,778
– – Minority interests 9 44 87
236 200 Subordinate loan capital 10 200 236
7,014 7,355 Total capital base 7,399 7,101
Provisions
24 22 Deferred tax 11 342 240
0 0 Pensions 12 2,966 699
266 127 Other provisions 13 575 824
290 149 Total provisions 3,883 1,763
Liabilities
Long-term liabilities 14
1,882 1,791 Mortgage credit institutions 2,423 2,461
1,376 1,624 Banks, etc. 3,290 2,238
3,258 3,415 Total 5,713 4,699
Short-term liabilities
383 24 Short-term portion of long-term liabilities 31 451
380 463 Credit institutions 2,297 2,070
575 546 Supplementary payments 546 575
1,088 909 Trade payables 2,930 2,676
1,538 1,413 Amounts owed to group enterprises 1,206 1,156
0 13 Amounts owed to associates 13 0
29 26 Corporation tax 137 44
407 956 Other payables 2,571 1,449
33 0 Deferred income 119 33
4,433 4,350 Total 9,850 8,454
7,691 7,765 Total liabilities 15,563 13,153
TOTAL EQUITY, MINORITY INTERESTS
14,995 15,269 AND LIABILITIES 26,845 22,017
Contingent liabilities,
guarantees, etc. 15
Related parties 16
50
Equity movements
GROUP
Balance at Balance at
02.09.29 Changed 02.09.29
according to accounting according to Profit for Other
DKK million previous policy policies new policy the year adjustments Total
Capital account 5,311 –137 5,174 467 254 5,895
Reserve A 555 – 555 – –94 461
Reserve B 500 – 500 – – 500
Net revaluation acc.
to the equity method 0 0 0 0 0 0
Hedging instruments – 30 30 – –12 18
Other reserves 266 253 519 81 –319 281
Total 6,632 146 6,778 548 –171 7,155
PARENT COMPANY
Balance at Balance at
02.09.29 Changed 02.09.29
according to accounting according to Profit for Other
DKK million previous policy policies new policy the year adjustments Total
Capital account 5,311 –137 5,174 467 254 5.895
Reserve A 555 – 555 – –94 461
Reserve B 500 – 500 – – 500
Net revaluation acc.
to the equity method 266 273 539 81 -321 299
Hedging instruments 0 10 10 – –10 0
Total 6,632 146 6,778 548 –171 7,155
51
Cash flow statement
GROUPDKK million 2002/2003 2001/2002
Cash flows from operating activities
Profit for the year 1,094 1,085
Depreciation and other operating
items without cash impact 1,796 1,432
Share of results in investments 20 6
Changes in provisions 43 49
Changes in stocks 41 –277
Changes in receivables 570 –896
Changes in trade payables and other payables –722 –336
Corporation tax paid –66 –71
Cash flows from operating activities 2,776 992
Cash flows from investing activities
Investment in intangible assets, net –286 –119
Investment in tangible assets, net –1,983 –1,110
Other investments, net 112 231
Cash flows for investing activities –2,157 –998
Cash flows from financing activities
Changes in debt to banks and
mortgage credit institutions –385 –19
Cash flows from financing activities –385 –19
Changes in cash funds and securities 234 –25
Cash funds and securities at 30 September 2002 1,840 1,865
Addition of cash on acquisition of enterprise 137 0
Cash funds and securities at 30 September 2003 2,211 1,840
52
Notes
Note 1: Segment information
Group 2002/03
DKK million Dairy activities Other
Turnover 37,693 2,954
Operating profit 1,087 155
Total fixed assets 13,022 951
Total liabilities 14,783 780
The geographical distribution is shown on page 2 of the annual report.
Note 2: Costs
PARENT COMPANY GROUP2001/2002 2002/2003 DKK million 2002/2003 2001/2002
Staff costs:
By function
–1,901 –1,979 Production –3,769 –3,672
–176 –170 Sale and distribution –1,580 –1,582
–223 –269 Administration and joint costs –671 –622
–2,300 –2,418 Total –6,020 –5,876
By type
–2,156 –2,259 Wages, salaries and remuneration –5,088 –4,976
–130 –144 Pensions –378 –374
–14 –15 Other social security costs –554 –526
–2,300 –2,418 Total –6,020 –5,876
6,770 6,742 Average number of employees (man years) 17,791 17,866
Salaries and remuneration incl. pensions for the Group
include the parent company's Management Board of DKK
7 million (2001/02: DKK 7 million) and fees to the parent
company's Supervisory Board and Board of Representatives
of DKK 10 million (2001/02: DKK 10 million).
PARENT COMPANY GROUP2001/2002 2002/2003 DKK million 2002/2003 2001/2002
Depreciation:
By function
–92 –92 Equalisation sum (production) –92 –92
–499 –557 Production –1,149 –996
–14 –39 Sale and distribution –162 –154
0 0 Administration –144 –140
Profit/loss on sale of intangible and
6 3 tangible assets 2 –11
–599 –685 Total –1,545 –1,393
53
Notes
Note 3: Fee to the auditors appointed by
the Board of Representatives
PARENT COMPANY GROUP2001/2002 2002/2003 DKK million 2002/2003 2001/2002
Audit fee:
–4 –4 KPMG C. Jespersen –10 –9
–2 –2 PricewaterhouseCoopers –7 –6
– – Others –1 –1
Other services:
–3 –3 KPMG C. Jespersen –15 –17
–1 –1 PricewaterhouseCoopers –12 –2
–10 –10 Total –45 –35
Note 4: Net financial items
PARENT COMPANY GROUP2001/2002 2002/2003 DKK million 2002/2003 2001/2002
Expense:
–24 –16 Interest expense to group enterprises –11 –17
–260 –234 Other financing charges –415 –486
–284 –250 Total –426 –503
Income:
121 130 Interest income from group enterprises 6 9
22 83 Other financing income 175 127
143 213 Total 181 136
–141 –37 Net financial items –245 –367
Note 5: Corporation tax
PARENT COMPANY GROUP2001/2002 2002/2003 DKK million 2002/2003 2001/2002
–33 –29 Tax on taxable income for the year –95 –74
10 2 Adjustment of deferred tax –23 –8
7 10 Correction of tax from previous years 12 16
–16 –17 Total –106 –66
54
Notes
Note 6: Intangible fixed assets
GROUP
Licences and Product IT
trademarks, Group Equalisation development development
DKK million etc. goodwill sum projects project
Cost at 30.09.2002 103 812 276 – 0
Exchange rate adjustments –1 –21 0 – 0
Additions on acquisition of enterprises 0 1.978 0 0 0
Additons during the year 0 4 0 40 341
Disposals during the year –23 –306 –276 0 0
Cost at 2003.09.30 79 2.467 0 40 341
Amortisation and impairment 30.09.2002 –28 –170 –184 – 0
Exchange rate adjustments 2 6 0 – 0
Amortisation and impairment for the year –12 –93 –92 –6 0
Depreciation and impairment, disc. assets 12 50 276 0 0
Amortisation and impairment
2003.09.30 –26 –207 0 –6 0
Carrying amount at 2003.09.30 53 2,260 0 34 341
PARENT COMPANY
Product IT
Group Equalisation development development
DKK million goodwill sum projects project
Cost at 30.09.2002 323 276 – 0
Transferred to investments –323 0 – –
Additions during the year 0 0 22 341
Disposals for the year 0 –276 0 0
Cost at 2003.09.30 0 0 22 341
Amortisation and impairment 2002.09.30 –46 –184 – 0
Transferred to investments 46 0 – –
Amortisation and impairment for the year 0 –92 –4 0
Amortisation and impairment, disc. assets 0 276 0 0
Amortisation and impairment
2003.09.30 0 0 –4 0
Carrying amount at 2003.09.30 0 0 18 341
55
Notes
Note 7: Tangible fixed assets
GROUPFixtures and Assets in
Land and Plant and fittings, tools, course of
DKK million buildings machinery etc. construction
Cost at 2002.09.30 3,702 5,468 943 481
Change in accounting pol., finance leases 10 71 123 –
Exchange rate adjustments –52 –46 –7 –6
Additions on acquisition of enterprises 647 693 57 0
Additions for the year 348 992 80 642
Transferred during the year 91 94 0 –185
Disposals for the year –55 –87 –118 0
Cost at 2003.09.30 4,691 7,185 1,078 932
Depreciation and impairment 2002.09.30 –503 –1.581 –396 0
Change in accounting pol., finance leases 0 –14 –55 –
Exchange rate adjustments 7 20 4 0
Depreciation and impairment for the year –302 –972 –195 0
Depreciation and impairment, disc.assets 13 40 87 0
Depreciation and impairment 2003.09.30 –785 –2.507 –555 0
Carrying amount at 2003.09.30 3,906 4,678 523 932
Assets held under finance lease 9 206 49 0
Depreciation and impairment include DKK 125 million regarding structure rationalisation write-downs. The amount is transferred from the balance sheet item Other provisions and has therefore not affected the profit and loss account for 2002/03.Additions for the year have been reduced by EU subsidies and subsidies from other public authorities of DKK 1 million. The official annual valuation of Danish land and buildings with a carrying amount of DKK 1,858 million is assessed at DKK 1,890 million at 1 January 2003, to which should be added investments subsequent to this date.
PARENT COMPANY
Fixtures and Assets in
Land and Plant and fittings, tools, course of -
DKK million buildings machinery etc. construction
Cost at 2002.09.30 1,634 2,700 90 142
Change in accounting pol., finance leases – 8 77 –
Additions during the year 116 462 42 325
Transferred during the year 69 72 0 –142
Disposals for the year –10 0 –24 0
Cost at 2003.09.30 1,809 3,242 185 325
Depreciation and impairment 2002.09.30 –245 –802 –31 0
Change in accounting pol., finance leases 0 –1 –31 –
Depreciation and impairment for the year –145 –491 –28 0
Depreciation and impairment, disc. assets 4 0 10 0
Depreciation and impairment 2003.09.30 –386 –1,294 –80 0
Carrying amount at 2003.09.30 1,423 1,948 105 325
Assets held under finance lease 0 5 34 0
Depreciation and impairment include DKK 72 million regarding structure rationalisation write-downs.The amount is transferredfrom the balance sheet item Other provisions and has therefore not affected the profit and loss account for 2002/03.Additions for the year have been reduced by EU subsidies and other public authorities of DKK 1 million.The official annual valuation of land and buildings at 1 January 2003 is assessed at DKK 1,439 million, to which should beadded investments subsequent to this date.
56
Notes
Note 8: Investments
GROUPOther
Investments in securities and Other
DKK million associates investments receivables
Cost at 2002.09.30 287 1.047 3
Exchange rate adjustments –8 3 0
Additions on acquisition of enterprises 45 0 2
Additions during the year 85 94 5
Disposals during the year –95 –221 –3
Cost at 2003.09.30 314 923 7
Adjustments at 2003.09.30 –13 6 0
Changes in accounting policies – 7 –
Results for the year –20 13 –
Other adjustments 0 9 0
Adjustments at 2003.09.30 –33 35 0
Carrying amount at 2003.09.30 281 958 7
PARENT COMPANYSubordinate Securities
Investments in loans to Investments in and other
DKK million subsidiaries subsidiaries associates investments
Cost at 2002.09.30 1.812 0 104 812
Tranferred from goodwill 323 – – –
Exchange rate adjustments –69 0 0 2
Additions during the year 153 1.147 66 10
Disposals during the year –541 0 –67 –31
Cost at 2003.09.30 1,678 1,147 103 793
Adjustments at 30.09.2002 350 0 –5 11
Change in accounting policies 189 0 0 7
Tranferred from goodwill –46 – – –
Disitribution/dividends –306 0 0 0
Profit for the year 98 0 3 13
Amortisation of goodwill for the year –15 0 –5 0
Changes in intra-group profit on stocks 16 0 0 0
Other adjustments 13 0 0 9
Adjustments at 2003.09.30 299 0 –7 40
Carrying amount at 2003.09.30 1,977 1,147 96 833
Of which goodwill 30.09.2003 138 – 30 –
57
Note 9: Minority interests
GROUPDKK million 2002.09.30 2001.10.01
–2003.09.30 –2002.09.29
Minority interests beginning of year 87 85
Share of results for the year –3 -–2
Changes in ownership shares, withdrawn
minority interests etc. –40 4
Minority interests, year end 44 87
Note 10: Subordinate loan capital
PARENT COMPANY GROUP2001.10.01 2002.09.30 2002.09.30 2001.10.01
–2002.09.29 –2003.09.30 DKK million –2003.09.30 –2002.09.29
252 236 Subordinate loan capital, beginning 236 252
18 3 Exchange rate adjustments 3 18
–34 –39 Repayments during the year –39 –34
236 200 Subordinate loan capital, year end 200 236
Note 11: Deferred tax
PARENT COMPANY GROUP2001.10.01 2002.09.30 2002.09.30 2001.10.01
–2002.09.29 –2003.09.30 DKK million –2003.09.30 –2002.09.29
33 24 Deferred tax, beginning of year 140 370
– – Changes in accounting policies – –119
1 0 Exchange rate adjustments 13 15
– – Addition on acquisition of enterprises –607 –
– – Disposal on sale of subsidiary –13 –134
–10 –2 Other changes in deferred tax 23 8
24 22 Deferred tax, year end –444 140
Deferred tax in the Group consists of an liability of DKK
342 million (DKK 240 million at 29 September 2002) and
a deferred tax asset of DKK 786 million (DKK 100 million
at 29 September 2002). The change for the year of DKK
23 million (2001/2002: DKK 8 million) represents a
reduction of DKK 3 million (a reduction of DKK 11 million
in 2001/2002) regarding the liability and a reduction of
DKK 26 million (a reduction of DKK 19 million in
2001/2002) regarding deferred tax assets.
Notes
58
Notes
Note 12: Pensions
The provision comprises defined benefit schemes in
Sweden and the UK and is computed as follows:
GROUPDKK million 2003.09.30 2002.09.29
Present value of the pension commitments 6,750 1,885
Non-included actuarial losses 0 –441
Market value of the assets of the pension schemes –3,784 –745
Total 2,966 699
Development in provisions for the year
can be specified as follows:
2002.30.09 2001.10.01
DKK million –2003.30.09 –2002.09.29
At the beginning of the year 699 609
Exchange rate adjustments 10 39
Additions on acqusition of enterprises 1,690 –
Transferred from other provisions 531 –
Other movements, net 36 51
At year end 2,966 699
The defined benefit schemes in the UK are administered by independent pension funds who invest the amounts paid to cover the commitments. The actuarial present value of the commitments (DKK 6,019 million at 30 September 2003 against DKK 1,199 million at 29 September 2002) less the market value of the assets (DKK 3,784 million at 30 September2003 against DKK 745 million at 29 September 2002) amounts to DKK 2,235 million.
The defined benefit schemes in Sweden are not covered by payments to pension funds. The actuarial present value of the commitments is recognised in the balance sheet at DKK 731 million.
Note 13: Other provisions
PARENT COMPANY GROUP2001.10.01 2002.30.09 2002.30.09 2001.10.01
–2002.09.29 –2003.30.09 DKK million –2003.30.09 –2002.09.29
193 266 Other provisions, beginning of year 824 748
– – Additions on acquisition of enterprises 293 –
– – Transferred to pensions –531 –
117 51 Provided during the year 184 126
–44 –190 Applied during the year –195 –50
266 127 Other provisions, year end 575 824
Note 14: Long-term liabilities
PARENT COMPANY GROUP2001.10.01 2002.09.30 2002.09.30 2001.10.01
–2002.09.29 –2003.09.30 DKK million –2003.09.30 –2002.09.29
Long-term payables falling due after five years
2,112 2,526 after the balance sheet date 2,944 2,722
59
Notes
Note 15: Contingent liabilities, guarantees, etc.
PARENT COMPANY GROUP2001.10.01 2002.09.30 2002.09.30 2001.10.01
–2002.09.29 –2003.09.30 DKK million –2003.09.30 –2002.09.29
Contingent liabilities
2,444 2,371 Surety and guarantee obligations 999 1,121
46 38 Operating leases obligations 748 269
Obligations relating to agreement
314 476 on the supply of fixed assets 1,278 475
To cover exchange risks, the following
forward contracts have been entered into:
869 998 Forward contracts (buying) 1,159 1,262
4,856 4,563 Forward contracts (selling) 4,613 5,162
1,050 1,050 Interest swaps 1,216 1,213
The following assets are deposited as security for debt:
170 170 Owner's mortgage in real estate 375 463
448 422 with a carrying amount of 1,099 1,221
0 0 Securities, carrying amount 336 587
Arla Foods amba has received guarantee certificates from
members of the cooperative. The basis for these
guarantees is the individual member's deliveries over
the past 5 financial years, calculated as DKK 20 per
590 604 1,000 kg milk delivered. 604 590
DKK 0 has been provided as security for debt.
There are a number of share option schemes in the former Express Dairies plc, which gives the employees and management
the opportunity to buy shares in the company over a number of years on a predetermined price. The schemes comprise a
total of 0.8% of the share capital.
The group is a party to a few lawsuits. The outcome of these cases is not expected to significantly affect the profit for the
year or the assessment of the financial position of the group.
Note 16: Related parties
Related parties comprise the Board of Representatives, the Management Board and the Supervisory Board,
group enterprises and associates, cf. the group chart on pages 60-61.
Related parties with controlling interest comprise MD Foods amba and Arla Ek. f. Members of the Board of Representatives
and the Supervisory Board are paid for milk deliveries by MD Foods amba and Arla Ek. f. on equal terms with other members
of these two companies.
There have been no other transactions with related parties during the year apart from intra-group
transactions that have been eliminated in the consolidated financial statements.
Salaries and remuneration including pensions have been disclosed separately in the note regarding staff costs.
60
Group companies
Subsidiaries, associates and investments at 30 September 2003
Subsidiaries Ownership
Arla Foods AB, Sweden 100.0%
ASM Mjölksocker AB, Sweden (100.0%)
Arla Ost och Smör Produktion AB, Sweden (100.0%)
Arla Foods Specialost AB, Sweden (100%)
Bregott AB, Sweden (62.4%)
Arla Foods Distribution amba, Denmark 100.0%
Danos A/S, Denmark (100.0%)
Gredstedbro Ost A/S, Denmark (100.0%)
Danmark Protein A/S, Denmark (100.0%)
Delimo A/S, Denmark (100.0%)
Økomælk A/S, Denmark (100.0%)
Enigheden A/S, Denmark (100.0%)
Arla Foods Holding AB, Sweden 100.0%
Oy Arla Foods Ab, Finland (100.0%)
Arla Foods AS, Norway 100.0%
Arla Foods Inc., Canada 100.0%
Arla Foods GmbH, Germany 100.0%
Arla Foods S.r.l., Italy 100.0%
Arla Foods Inc., USA 100.0%
Arla Foods S.A.R.L., France 100.0%
Arla Foods S.A., Spain 100.0%
Andelssmør A.m.b.a., Denmark 95.4%
AFF P/S, Denmark 75.0%
Arla Foods Ingredients amba, Denmark 100.0%
Arla Foods Ingredients GmbH, Germany (100.0%)
Arla Foods Ingredients Inc., USA (100.0%)
Arla Foods Ingredients KK, Japan (100.0%)
Arla Foods Ingredients AB, Sweden (100.0%)
Arla Foods Ingredients Ltd., England (100.0%)
Arla Foods Ingredients Korea Co. Ltd., South Korea (70.0%)
AM Produktion K/B, Sweden (66.7%. The remaining 33.3% is owned by Arla Foods AB)
AM Foods K/S, Denmark (66.7%. The remaining 33.3% is owned by Arla Foods amba)
Arla Foods Sp. Z o.o., Poland 100.0%
Arla Foods International A/S, Denmark 100.0%
Danya Foods Ltd., Saudi Arabia
Arla Foods UK Plc., England
Arla Foods Plc., England
Express Ltd., England
Arla Foods Holding A/S, Denmark 100.0%
Medani A/S, Denmark (100.0%)
Kingdom Food Products ApS, Denmark (100.0%)
Arla Foods Leasing A/S, Denmark (100.0%)
Ejendomsanpartsselskabet St. Ravnsbjerg, Denmark (100.0%)
Rynkeby Foods A/S, Denmark (50.0%. The remaining 50.0% is owned by Kinmaco ApS)
Kinmaco ApS, Denmark (100.0%)
GB Finans A/S, Denmark (100.0%)
Arla Insurance Company (Guernsey) Limited, Guernsey (100.0%)
Arla Foods Trading A/S, Denmark (100.0%)
61
Group companies
Subsidiaries, associates and investments at 30 September 2003
(continued)
Subsidiaries Ownership
De Danske Mejeriers Fællesindkøb Amba, Denmark 100.0%
Dairy Fruit A/S, Denmark (100.0%)
A/S Crispy Food International, Denmark (100.0%)
Ejendomsselskabet Østre Gjesingvej 19 A/S, Denmark (100.0%)
Danapak A.m.b.a., Denmark 94.2%
Danapak A/S, Denmark (100.0%)
Danapak Kartonnage A/S, Denmark (100.0%)
Danapak Plast A/S, Denmark (100.0%)
Tölkki OY, Finland (100.0%)
Danapak Faltschachtelsysteme GmbH, Germany (100.0%)
Danapak Cartons Ltd., England (100.0%)
Danapak Leasing ApS, Denmark (100.0%)
Danapak WP A/S, Denmark (100.0%)
Frödinge Holding AB, Sweden 100.0%
Frödinge Mejeri AB, Sweden (100.0%)
Medipharm Holding AB, Sweden 100.0%
Medipharm AB, Sweden (100.0%)
Munka Invest AB, Sweden (100.0%)
Medipharm Investments Ltd., USA (100.0%)
Medipharm CZ s.r.o., The Czech Republic (100.0%)
Medipharm Hungary Kft, Hungary (51.0%)
Associates
JO-Bolaget Fruktprodukter HB, Sweden (owned through Arla Foods AB) 50.0%
HB Grådö Produktion, Sweden (owned through Arla Foods AB) 50.0%
Synbiotics AB, Sweden (owned through Arla Foods AB) 50.0%
Arla Foods Hellas S.A., Greece 60.0%
Arla Foods Ingredients S.A., Argentina (owned through Arla Foods Ingredients amba) 50,0%
Biolac KG, Germany, (owned through Arla Foods Ingredients GmbH) 50.0%
Dan Vigor Ltd. Brazil (owned through Arla Foods International A/S) 50.0%
Danske Immobilien K/S, Denmark (owned through Medani A/S) 35.0%
Cocio A/S, Danmark (owned through Danmark Protein A/S) 50.0%
The Danapak Flexibles Group, Denmark (owned through Danapak A/S) 40.0%
Arla National Food Products LLC, The United Arab Emirates 40.0%
Kronost AB, Sweden (owned through Arla Foods AB) 25.0%
Other investments
Mejeriforeningen, Denmark 91.3%
Svensk Mjölk Ekonomisk förening, Sweden 42.0%
Lantbrukarnas Riksförbund, förening upa, Sweden 19.0%
According to Section 127(4) of the Danish Financial Statements Act, information about individual subsidiaries has not been
disclosed, as it is believed that such information may cause significant damage to these enterprises.
The Group moreover owns a number of companies without commercial activities.
62
Management and Supervisory Board
Jens Bigum
Man. Director
Åke Modig
Dep.-Man. Director
Knud Erik Jensen
Chairman
Åke Hantoft
Deputy Chairman
Leif Backstad Viggo Ø. Bloch Steen Bolvig Bjarne Bundesen Christer Eliasson
Anders Ericsson Leif Eriksson Elisabeth Gauffin Thomas Johansen Sören Kihlberg
Ove Møberg Per Norstedt Jan Toft Nørgaard Kaj Ole Pedersen Gunnar Pleijert
Søren Rasmussen Pejter Søndergaard Bent Juul Sørensen
70 75 80 85 90 95 100
Vandforbrug
(indeks, vandforbrug i forhold til råvarer og færdigvarer)
Mål 2005/06
2001/02
2000/01
0 20 40 60 80 100 120
ISO 14001 accredited units
Arla Foods in Sweden and Denmark
Target 2005/06
2002/03
2001/02
2000/01
70 75 80 85 90 95 100
Target 2005/06
2001/02
2000/01
Water consumption
(index, water consumption in relation to raw materials and finished products)
70 75 80 85 90 95 100
Target 2005/06
2001/02
2000/01
Energy consumption
(index, energy consumption in relation to raw materials and finished products)
70 75 80 85 90 95 100
Target 2005/06
2001/02
2000/01
CO2 emission
(index, CO2 emission in relation to raw materials and finished products)
70 75 80 85 90 95 100
Target 2005/06
2001/02
2000/01
NOx emission
(index, NOx emission in relation to raw materials and finished products)
0 10 20 30 40
Accident frequency - DK
(Number of accidents per 1 million working hours)
Target 2005/06
2002/03
2001/02
2000/01
0
20
40
60
80
100
■ 2001/2002 7 15 23 30 37 41 51 54 58 70 73 87
■ 2002/2003 2 11 18 23 25 33 39 42 45 52 62 66
■ 5,8 11,6 17,4 23,2 29 34,8 40,6 46,4 52,2 58 63,8 70
Figure 1: Accumulated accidents per period in the UK
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Target
0
10
20
30
40
50
■ 2001/2002 42,0 36,9 27,6 22,7 26,4 21,3 20,8 22,7 22,4 26,7 28,6 22,0
■ 2002/2003 35,0 30,0 27,0 28,6 26,0 26,8 21,0 22,4 24,5 15,8 18,6 28,0
Figure 2 Accident frequency rate in the UK
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Average 02/03: 25Average 01/02: 27
90
92
94
96
98
100
102
104
106
108
110
Figure 1: Foreign exchange index
Forward index
Market index
Oct01
Nov01
Dec01
Jan02
Feb02
Mar02
Apr02
May02
Jun02
Jul02
Aug02
Sep02
Oct02
Nov02
Dec02
Jan03
Feb03
Mar03
Apr03
May03
Jun03
Jul03
Aug03
Sep03
0
20
40
60
80
100
SEKEURGBPSARUSD
Figure 2: Hedging compared to annual budget
Forward exchange contracts
Options
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