Annual Report 2001/02

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Arla Foods ambaSkanderborgvej 277DK-8260 Viby J.Denmark

tel. +45 89 38 10 00fax +45 86 28 16 91e-mail arla@arlafoods.comwww.arlafoods.com

CVR-nr. 25 31 37 63

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Key figures . . . . . . . . . . . . . . . . . . . . . 2

The Chairman’s report . . . . . . . . . . . . . 5

Report . . . . . . . . . . . . . . . . . . . . . . . . 6

Changes in the production structure . . . 10

Market reportsHome markets . . . . . . . . . . . . . . . . . . . . . . .13European markets . . . . . . . . . . . . . . . . . . . . .17Overseas markets . . . . . . . . . . . . . . . . . . . . .20

Ingredients for the food industry . . . . . . 24

Relations with co-operative owners . . . . 25

Innovation . . . . . . . . . . . . . . . . . . . . . 27

Environmental considerations . . . . . . . . 28

Subsidiaries . . . . . . . . . . . . . . . . . . . 30

Contents

Managing financial risk at Arla Foods . . . . . . . . . . . . . . . . . . 38

Accounts . . . . . . . . . . . . . . . . . . . . . 40

Accounting policies . . . . . . . . . . . . . . . 41

Profit & loss account . . . . . . . . . . . . . 45

Balance sheet . . . . . . . . . . . . . . . . . . 46

Equity movements . . . . . . . . . . . . . . . 48

Cash flow statement . . . . . . . . . . . . . . 49

Notes . . . . . . . . . . . . . . . . . . . . . . . 50

Group companies . . . . . . . . . . . . . . . . 56

Arla Foods’ Supervisory Board . . . . . . . 58

The people behind Arla Foods’ products. Lars Wamberg met

some of them in Sweden, the UK and Denmark and photographed

them in typical working situations. The photos were all shot under

available light.

The product photos show some of the year’s new products.

The numbers refer to the back flap of the report where there

is a short description of the products.

Front cover: Jessica Russo, 22, a machine operator

at Gothenburg Dairy for the past year, works with

production of drinking milk and yoghurt.

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As a milk producer myself, I canconfirm that earnings from prima-ry production remain under pres-sure. Nevertheless, at the sametime, as Arla Foods’ owners weshould be pleased that our com-pany has achieved a result whichfew international dairy groups canmatch this year.

As the international market fordairy products continues to becharacterised by tough competition,we’re compelled to follow the courseoutlined in our strategy plan. Wehave, however, proved our abilityto operate a profitable business –both under last year’s favourablemarket conditions and under thisyear’s more difficult circumstances.

Arla Foods is now firmly placedon the map of the global dairyindustry. The decision to embarkon a cross-border merger has,therefore, proved to be correct.

In March 2002 we decided tointroduce a new, common milkpricing system with effect from,and including, October 2003. Madeas part of the ongoing harmonisa-tion of the payment system, thedecision reflects the market’s re-quirements with regard to the fatand protein content of milk. Conse-quently, the year saw the imple-mentation of extensive prepara-tions needed for creating commonterms and conditions for all ourco-operative owners.

As we have now concluded thesecond year after the merger, muchfocus will be on October 1, 2003when Arla Foods, in keeping with

the merger agreement, will adopta common milk price for co-oper-ative owners in both countries.

The work regarding the com-pany’s capital structure is proceed-ing within the Board as well as in the Consolidation Commitee. Theanswers to questions as to whetherpart of the equity capital should beindividual and, therefore, transfer-red to co-operative owners’ ac-counts is greatly dependent on thefiscal consequences and we’recurrently awaiting the Danish andSwedish tax authorities’ proposalson this issue.

One pre-requisite is that, afterOctober 1, the joint company willreceive the milk and pay the com-mon milk price instead of the cur-rent situation whereby the processis conducted by the two originalcompanies. Clarification of the taxconsequences is crucial to thefurther work on the cross-bordermerger and for the dismantling ofthe two national companies, Arlaek.för. and MD Foods amba.

During the year many co-opera-tive shareholders engaged in thedebate concerning the qualityprogramme for the entire valuechain from farm to table. This hasprovided us with a better under-standing of the market’s demandson milk producers. The discussionswill continue right up until June2003, when the Board of Repre-sentatives is expected to make itsdecision on the quality programme.

The months ahead will also give abetter insight into the shape of the

agricultural policies of the future,including the EU’s expansiontowards the East and the mid-termevaluation of the reform of theCommon Agricultural Policy.

For Arla Foods, the EU Commis-sion’s proposals for an environ-ment and agriculture-related redi-rection of farm subsidies to moredirect subsidies to farmers will beof crucial importance.

Yet another important issuestems from the phasing out of themilk quota system. If this were totake place without compensation,it could lead to dramatic falls inmilk prices. We are committed toworking towards a solution inwhich Denmark and Sweden obtainsimilar terms as those of ourcolleagues in other countries.

During the year Arla Foods tookleave of a number of co-operativeowners who ceased producingmilk. New co-operative ownershave, however, joined us and wewish to welcome them to thecompany.

This welcome, of course, alsoextends to the 106 milk producersfrom Hellevad Omegns Co-opera-tive Dairy who joined Arla Foods’on October 1, 2002.

The budget for 2002/03 is anambitious one, which, despite theuncertainties in the markets, willallow us to pay a competitive milkprice. Consequently we are wellprepared for the challenges facingus in the coming year.

Lars Lamberg

The Chairman’s Report

At the Samden milk powder factory, trainee Palle Hvid Rasmussen is inspecting

spray tower 1 to ensure that there are no lumps in the powder and that the powder

layer is correct. Palle Hvid Rasmussen, 30, used to work at Fredericia and Taulov

Dairies, but in December 2001, he began to train as a dairy expert.

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partly as a result of increasedsupplies of bulk cheese and partlybecause the launch of the eurogenerated some caution among, inparticular, German consumers.Sales in the US and the MiddleEast were satisfactory and sales inSouth East Asia, with the excep-tion of Japan, give grounds forbelieving that satisfactory earningsare achievable in the region andthat prospects are good.

2001/2002 was a particularlydifficult year in respect of marketconditions in Brazil and Argentinawhere the sales office in BuenosAires was closed down. A majorreorganisation of the Brazilian salescompany is being implemented.

The strategy planIn consequence of the 2001 stra-tegy plan, Arla Foods implementeda number of activities during thefinancial year.

The construction of a whey pro-tein factory in Argentina in a jointventure with Argentina’s largestdairy company, SanCor, is comple-ted and the factory was commis-sioned in September 2002. Thisinvestment will contribute tostrengthening Arla Foods’ positionas a leading global supplier ofwhey proteins to the food industry.The raw material base has alreadybeen fully utilized in Sweden andDenmark and, in order to developthis area further, it is necessary toexpand production elsewhere.

Argentina was selected because ofits extensive cheese production andlarge underexploited raw materialbase.

In the field of ingredients, a50/50 joint venture with Germany’sNordzucker, Europe’s fifth largestsugar producer, was formed forproduction of the sweetener Gaiotagatose. Production is expectedto start in the summer of 2003 atNordzucker’s plant in Hannover.

If successful, the next step willbe to establish a tagatose plant at Arla Foods’ dairy in Taulov inEastern Jutland

Some key decisions were madewith regard to Arla Foods’ thirddomestic market, the UK, duringthe year under review. In October2002, it was decided to build anew liquid milk dairy in Leeds asArla Foods’ existing dairy in thecentre of the city did not allow forfurther expansion. The new dairy,which will be sited adjacent to therecently built warehouse at Stour-ton, is expected to be commissio-ned in October 2004. Havingscope for further expansion, thedairy will be able to play a role inany future rationalisation of dairyproduction in the UK.

The packing and production ofapprox. 35,000 tons butter andspreads from the New Zealanddairy company, Fonterra, wastransferred from the company’sUK plant to Arla Foods’ productionfacilities in Varde in Denmark and

Report

Despite the international economicslowdown, Arla Foods succeededin maintaining last year’s milk pricepaid to its co-operative owners. Inview of the downturn, the resultfor the year should be regarded ashighly satisfactory.

While other dairy companies inEurope as well as countries outsideEurope have cut milk prices by upto 25%, Arla Foods proved moreresistent to falling world prices fordairy products thanks to a goodbalance between bulk productsand brands. The rate for two ofArla Foods’ main currencies, USDdollar and GBP, however, fell duringthe second half of the year.

Developments in Arla Foods’two large domestic markets werecharacterised by considerablepressure and increased competi-tion, not least in Denmark wherethe retail trade continues to focuson own label products. In addition,there is growing concern aboutstagnating sales of organic milk. In2001/02, Arla Foods utilized onlyaround 30% of organic milk as“organic” with the remainder soldas conventional milk products.

In general, the market positionin Sweden was maintained andgood earnings were achieved.

A satisfactory result was achiev-ed in the UK both in terms of thelocal milk business and importsfrom Denmark.

European export markets expe-rienced more pressure on prices,

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Götene in Sweden. This is part ofthe joint venture with Fonterra thatcame into force last year. To ensurea smooth running-in phase consider-able resources were required.

After the close of the financialyear Arla Foods acquired the UKcheese importer, H.T. Webb, whoserange of speciality cheese willbroaden Arla Foods’ product port-folio and strengthen its position ina rapidly growing market segment.

In Denmark, Arla Foods acquired50% of the share capital of CocioChokolademælk A/S with effectfrom March 1, 2002. Before thedeal, Arla Foods supplied milk toCocio which recently commissioneda new production facility.

On October 1, 2002 the dairyHellevad Omegns Andelsmejerimerged with Arla Foods. The twocompanies have enjoyed a closerelationship for some considerabletime.

With regard to marketing ArlaFoods launched the Arla masterbrand which is designed to meetthe need for a common productbrand in a number of markets.The Arla master brand is red withthe name “Arla” in white on thered background – in contrast tothe green company logo. Theobjective of the Arla master brandis to increase awareness of thegroup’s products and its values.An extensive reorganization of theexisting brands has been carriedout and these will be gatheredunder the Arla master brand.

Product categoriesWithin the field of liquid milk, theDanish and Swedish launches ofbottled milk were important events.The launch was successful andhas, so far, resulted in increased

sales of milk from newsagents andservice stations. Arla Mini is nowa realistic and healthy soft drinkalternative.

In general, Swedish milk con-sumption has stabilised followingseveral years of decline. The increased consumption has, inpart, been driven by popular coffeebars’ sales of coffee drinks withmilk. Although the trend has nothad a similar impact in Denmark,the launch of minimilk (with 0,5%fat) in 2000 has led to a reorien-tation of the Danes’ milk-drinkinghabits towards reduced fat.

Cheese sales were characteri-sed by greater supplies to theEuropean market following falls in skimmed milk powder prices.Sales of sliced cheese and creamcheese, particularly to the Germanmarket, have, however, increased.

As for butter/spreads, Lurpakonce again demonstrated its supe-rior strengths in the UK market.At the beginning of the financialyear, a spread with a 60% fatcontent was launched under theLurpak brand achieving better-than-expected sales. Lurpak salesalso continued their upward curvein the Greek market where thepartnership with the local company,Delta Foods, has led to improve-ments to the distribution system.Lurpak butter also increased salesin South East Asia although on alower volume level.

Finally, Arla Foods initiated aprogramme for expanding thegroup’s competencies within thefood service segment. The pro-gramme includes development andsupply of products for consumerson the move. In view of predictionsthat increasing numbers of consu-mers will eat outside the home,

this poses new demands on thetraditional types of home-orienta-ted dairy products.

The structural planDuring the year, substantialprogress was made with the verycomprehensive plan for the group’s post-merger operationalstructure aimed at maximising thesynergies arising from the merger.To date, the Board has approved12 of the plan’s 18 projects andthe entire process is expected tobe concluded during 2005. Finan-cing costs for the plan are expec-ted to be slightly below the DKK2.3 billion envisaged in 2001. Theinvestments under the plan are,however, additional to the ordinaryinvestment programme of DKK1.6 billion.

The decision to construct a milkpowder factory in Vimmerby meansthat Arla Foods is now gathering alarge part of its powder productionin Sweden at the new plant, whichis scheduled for completion in 2004.

In Sweden the special productdairy in Linköping was commissio-ned in June.

FinancingArla Foods’ rapid development has generated an ongoing need for financing. The support by cooperative owners agreeing aconsolidation of 5 øre per kg milkper year ensures a reasonablesolidity. In future, consideration willalso be given to the disposal ofactivities that are not essential tocore dairy activities. In September2002, for instance, Arla Foodssold the former headquarters ofArla in Sweden, Torsgatan inStockholm, under a lease-backscheme.

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Arla Foods is also considering arange of borrowing models for itsfinancing requirements, includingsubordinated loan capital.

Pension commitmentsDevelopments in internationalfinance markets, including thedramatic falls in share prices overthe past 12-18 months, havemeant that the pension commit-ments of numerous US or UK basedcompanies are not fully covered.

This trend has also impacted onArla Foods in the UK which, as atSeptember 29, 2002 had uncove-red pension commitments of GBP38 million. As was the case inprevious years, the amount is notentered in the accounts. At othertimes the company has experiencedconsiderable fluctuations in its pen-sion commitments, including move-ments in the share and bond port-folios which, through independentpension funds cover the company’sliabilities vis-à-vis its workforce,although not to the same extentas since September 11, 2001.

Up to and including 2000/01Arla Foods plc included these diffe-rences over a future number ofyears based on actuarial calcula-tions every three years. For2001/02 this practice has beenadjusted in accordance with inter-national accounting practice albeitstill calculating any differences inthe result over a future number ofyears.

Besides the UK, the group alsohas pension commitments in theSwedish companies. The Swedisharrangement, however, differs fromthe UK system in that amountsare not paid into pension funds butentered in the profit and lossaccounts. Since the Swedisharrangement does not includesecurities, the Swedish companiesare not directly affected by pricemovements in the annual actuarialcalculated commitment.

Ett ArlaFollowing the decisions concerningArla Foods’ organisation, strategyand structural plans as well as itsconsolidation plan, the companyinitiated a comprehensive projectaimed at integrating the workingprocesses and managementsytems of the two original compa-nies into one common systemnamed Ett Arla. When the work iscompleted in 2004, Arla Foods willhave achieved simpler and moreefficient working processesthrough the creation of greatercohesion across divisions andnational borders.

During the project phase thegroup will draw on substantialresources made available byemployees over and above theirdaily duties.

PersonnelInspired by the Swedish part of thegroup, Arla Foods has carried out

a job satisfaction survey among allstaff in Denmark and Sweden. Thesurvey showed a fair degree of jobsatisfaction among staff compara-ble to the average for this type ofsurvey. The poll is a tool formeasuring whether the group isachieving its targets in terms of its employees. It also provides asound basis for further work.

Working procedures and mana-gement principles were set out inthe publication Our Day issued toall employees in the spring. Thepublication aims at creating abroad understanding of the compa-ny’s principles and values.

The futureNo significant cyclical improve-ments are expected for the cur-rent financial year. The consolida-tion of the retail sector and in theEuropean dairy industry continues.Consequently, Arla Foods facesconsiderable challenges in respectof efficiency improvements.

The prospects for the EU’senlargement towards the East andthe impending evaluation of theCommunity’s agricultural reformswill help to clarify the dairy indus-try’s future trends and make iteasier for Arla Foods to adjust itsoperations accordingly.

Credit Control Manager Nicola Purcell discusses

an outstanding payment with her boss at the creditor

department. Nicola Purcell, 34, has been employed at

Arla Foods’ UK headquarters in Leeds since 1989.

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Changes in the production structure The map opposite lists the plants that were subject to closures,

expansion or new constructions in 2001/02.

The back flap of the cover of this report provides an overview of

Arla Foods’ plants as at October 1, 2002.

During the year under review, the Danish and Swedish plants produced

the following volumes within the four main categories:

1,617,000 tons fresh products

330,00 tons cheese

145,000 tons butter and spreads

290,000 tons ingredients and powder products

Butter and spreadsIn Denmark, production of Lurpakbutter at Varde Butter Dairy wastransferred to Holstebro Dairy inJune 2002. Holstebro now produ-ces all Arla Foods’ Danish butterand spreads. From October 1,2002, Varde Butter Dairy tookover the packing of the NewZealand dairy group, Fonterra’sbutter products.

Butter production at HellevadOmegns Co-operative Dairy wastransferred to Holstebro Dairy onNovember 1, 2002.

In Sweden, Götene Dairy tookover production and packing ofFonterra’s spreadable productswith effect from October 1, 2002.Götene Dairy plans further expan-sion in preparation for the transferof butter production from Göten-burg Dairy by the end of 2003.

An agreement with Skånemeje-rierne was signed during the yearfor the transfer of their butter andspreadable products production toGötene.

IngredientsA new milk powder plant with anannual capacity of 380 million kgmilk (i.e. 20% of Arla Foods’ milkvolume is Sweden) is planned forVimmerby. The plant is expected tobe commissioned by the end of2004. The milk powder factoriesat Mjölby and Kimstad will beclosed and powder production at anumber of cheese dairies will bediscontinued.

The expansion of the plant atVisby began in August 2002. The project will more than doublecapacity to 16 million kg powderannually.

In Denmark, the Akafa and Arin-co milk powder factories will beupgraded and expanded. When the expansion programmes arecompleted at the end of 2003, themilk powder factory in Kjersing willclose and its production transfer-red to Akafa and Arinco.

Fresh productsIn Sweden, the dairy at Skövdewas expanded to produce cottagecheese for both the Swedish andDanish market.

The Östgöta project involved theexpansion of the dairy at Linköpingfor the production of yoghurt andcooking products. Norrköping dairywas closed during the summer of2002 and its yoghurt productiontransferred to Linköping dairy.

Fruit juice production is nowcentred on the expanded AlingsåsDairy. Halmstad Dairy will close in2003.

In Denmark, the only changeinvolved the transfer of cottagecheese production from Christians-feld Dairy to Skövde.

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(Overview of production plants affected by structural changes in 2001/02)

Speciality cheeseIn Denmark, Farsø Dairy closed inAugust 2002 when the dairy’smozzarella production was trans-ferred to Rødkærsbro Dairy. Here,capacity was increased by 4,000tons. Arla Foods’ mozzarella isnow produced at Rødkærsbro.

The expansion of HøgelundDairy, which produces DanishBlue, is expected to be completedin the summer of 2004. In Octo-ber 2004, Grenå Dairy will close

and its production of Danish Bluetransferred to Høgelund which willthen be responsible for Arla Foods’entire production of Danish Blue.

As part of an agreement withthe Danish competition authorities,Grøndal Dairy was sold off and itsproduction of feta transferred toBislev Dairy.

A substantial expansionprogramme to increase capacity atHolstebro Cream Cheese dairybegan.

Firm cheeseExpansion of Kalmar Dairy inSweden is under way with expec-ted completion in 2004 afterwhich Borgholm Dairy will beclosed.

It has been decided to upgradeFalkenberg Dairy from the end of2003, after which Stånga Dairywill be closed.

The size of Arla Foods’ marketshares in the Danish and Swedishhome markets restricts furthergrowth within the field of traditio-nal dairy products. The strategyfor these markets, therefore, aimsat developing new products desig-ned to be consumed at differenttimes of the day and, perhaps, bydifferent consumer segments.Within this context, one importantmarket is the food service sectorwhich accounts for a rapidlygrowing share of food consumedoutside the home, i.e. in canteens,restaurants, pizza bars, petrolstations, etc.

The UK is another cruciallyimportant market for Arla Foods.The strong position held in the UKfor butter and fresh milk providesthe foundation for further expan-sion.

DenmarkOverall sales in the Danish marketwere stable and in line with lastyear, although noticeable shiftsoccurred between individual cate-gories.

The successful launch of mini-milk (with 0,5% fat) and Arla Miniportion bottles helped to streng-then sales of liquid milk. This wasparticularly due to Danish consu-mers’ demand for products withreduced fat and a high level ofconvenience and accessibility. Inline with the falling demand forhigh-fat products, sales of butter

and blends have declined whilecheese sales were maintained.

During 2001/02 Arla Foodslaunched more new products thanever before. On average four newproducts were launched eachmonth. Due to a strong campaign,the launch of Arla Mini raisedparticular interest from the mediaand among consumers in general.The products have proved verypopular and have helped to achieveArla Foods’ ambition of increasingmilk consumption, especiallyamong young consumers.

Marketing activities werecomprehensive and the number ofvisitors to the arla.dk websiteincreased markedly following theinclusion of consumer-related in-formation on food.

Competition in the Danishmarket hardened, particularly withregard to butter and spreads and the share of own-labelproducts increased within thefresh products area. Arla Foodsintends to continue the develop-ment and production of its custo-mers’ own-label products – thechallenge will be to maintain areasonable balance betweenproduction of own-label and Arla-branded products.

Cross border consolidation of theretail industry continues with theformation of the retailers Coop Nor-den and Dansk Supermarked’s entryinto the Swedish market as promi-nent examples from the past year.

As for product ranges, the trendtowards a single Northern Euro-pean marketplace continues.Consequently, the challenge is tocreate a Nordic marketing planwhich, based on the Denmark andSweden Divisions, will drive thedevelopment of Arla Foods’ Nordicbrands and ranges over thecoming years. The launch of thenew Arla brand offers particularlyexciting challenges.

Competitive pressures are ex-pected to continue. Despite effici-ency enhancements in both pro-duction and distribution during theyear, focus will be on further re-sources and efficiency measures.

Food and beverage consumptioncan be expected to see furtherchanges with clear trends towardsconvenience food and food services.Arla Foods intends to participatein this development through newservice concepts and products.

Moreover, it will be natural toconsider the dairy range’s competi-tive situation in relation to non-dairy based beverages, cold cutsand breakfast and cookingproducts. The task, therefore, re-mains to continue the developmentof an attractive milk-based productrange that is easily accessible toconsumers in a wide variety ofsituations.

Sweden Sales in the Swedish marketduring the year under review ex-

Home markets

Tanker driver Carsten Nielsen, 42, has been collecting milk on Zealand

since 1978 working out of Slagelse Dairy. This particular afternoon

and evening he is working the 240 km route 15, which will take him to

Stevns. Along the route he will collect 44 tons milk. After his return,

he will start out on a shorter, 60 km trip to the north of Slagelse.

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2.1.

ceeded the budget and the totalvolume of fresh products sold alsoexceeded the previous year’s sales.

A brand analysis in October2002 showed Arla to be Sweden’smost popular brand.

The biggest product in terms ofvolume, liquid milk, where per capi-ta consumption has been in decli-ne for several years, is now show-ing a stable trend. Milk used incoffee and the growing popularityof milk as a good source of nutri-tion at a reasonable price is con-tributing to this development.Sales of junket and yoghurt alsoincreased in volume, partly owingto the hot summer. Sales of creamincreased for the eighteenth yearin succession.

Keso and Kesella (cottage cheeseand fromage frais), also performedwell, with the flavoured varietiesachieving the highest volumes.

Firm cheese also had a goodyear. A weak Swedish krona meantthat competition from importedproducts was not as tough as inprevious years.

The fruit juice market is charac-terised by intense competition withvolumes somewhat lower than lastyear owing to competition fromdiscount products.

In keeping with the trendtowards eating outside the homeand the consequent greater indivi-dual demand for a broader range,increased focus is on product andpackaging development.

Arla Foods, therefore, hasbegun to develop a product rangethat matches consumer demandfor healthy, quick meals for eatingat home or on the road. Recentlaunches include Yoggi Yalla (bott-led yoghurt drinks), milk in portionbottles, junket in portion bottles,Mini Meal (vanilla rice with jam)and fruit juice in bottles. Severalnew products of this type will beadded in the coming financial year.Sales and distribution in this inten-sely competitive market will, howe-ver, continue to have very highpriority.

The transfer of a number ofproducts from one production siteto another during the year impo-sed substantial demands on theorganisation at a time when consi-derable effort was devoted tomaintaining quality standards.

The new production lines atLinköping, Alingsås, and Skövdewere launched successfully, al-though operating below the expec-ted production levels. Some workalso remains in order to ensurestable supply reliability and thishas led to a shortfall in supplies tothe market. Furthermore, a rangeexpansion in conjunction withunstable manning levels in the chil-led stores meant that, on someoccasions, lead times could not bemaintained. Supply reliability is nowa top priority and measures desig-ned to achieve the previous 99%supply reliability levels have been

implemented to ensure that ArlaFoods’ reputation as the premierdistributor is preserved.

Owing to the continued expan-sion of the range, a lack of spacein the chilled stores is causingcontinuing concern. Consequently,over the next four years, invest-ments in expansion at Jönköping,Stockholm and Gothenburg willhave high priority. The expansionprogrammes include increasedautomatisation designed to contri-bute to an improved working envi-ronment.

A continuingly high level of pro-duct development gives ground forbelieving that Arla Foods will re-main at the forefront of consumertrends and continue to be competi-tive. It is expected that the resultfor the coming year will increaseand thus contribute to a stable milkprice paid to farmers in Sweden.

United KingdomThe UK market performed particu-larly well during the year with thevolume of imported products cont-inuing to increase. The launch ofLurpak Lighter Spreadable and thejoint venture with Fonterra forbutter and spreads in the UKmarket contributed to importsfrom Scandinavia reaching theexpected level of 84,000 tons.

Lurpak and Anchor are now thesecond and third largest brands inthe entire butter, spreads andmargarine category and their

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3. 4. 5. 6.

market shares continue to increase.Expectations for both brands are,therefore, substantial. During theyear, production and packing ofAnchor was transferred from theUK to two of Arla Foods’ Scandina-vian operations and the brand wasrelaunched.

On the backdrop of the reorgan-isation of the business coupledwith over capacity in the UK milkmarket, Arla Foods plc anticipateda small loss for the financial year.However, due to the considerableefforts of all involved, the companyachieved a modest profit.

Arla Foods remains committedto a long-term role in the UK mar-ket and is ready to play its part inthe restructuring of the industry.

Product development remains acornerstone in the company’s strat-egy. Alongside the Lurpak products,Cravendale PurFiltre is an exampleof adding value for the consumer,for the retail customers and forthe category. Following its phasedroll-out and test marketing acrossthe country, the brand was launchednationally during the year. Thebrand is now beginning to deliverto its full potential and has achiev-ed high levels of consumer loyalty.It is expected that Cravendale Pur-Filtre will be a UK top 50 brandwithin the next two years.

The restructuring of doorstepsales was completed during theyear with the whole operation nowconverted to independent dairymen.

The year also saw the creationof a new Foodservice BusinessUnit, which will focus on the enor-mous potential of Arla Foods’products and brands in this rapidlygrowing “out of home” sector.

The UK factories continue toperform well in terms of qualityand service which is of major im-portance in the development ofbusiness relationships with cus-tomers.

Investments in the Oakthorpedairy in London continue and theconstruction of the new Stourtondairy in Leeds has begun. The newStourton warehouse, operated inpartnership with the distributioncompany, Wincanton, was com-missioned in September and aftersome initial difficulties, the ware-house is now operating to therequired standard. The opening ofthe warehouse means that thecompany now has full control overthe distribution of all the com-pany’s added value products in the UK.

Arla Foods in the UK receivedseveral awards during the year forboth product quality and market-ing. In addition, the company wonrecognition from the UK retailersregarding its vision of how to addvalue to the butter, speads andmargarine category.

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7. 8. 9. 10.

Operations in European marketswere characterised by tough mar-ket conditions and sharp pricefalls, especially for firm cheese in bulk. The increased price com-petition is owing to a combinationof rising production of cheeseaccompanied by a decline indemand.

Cheese production increased asa result of very low prices for milkpowder and butter. The causes ofthe fall in demand are, however,more complex. Cooked meat hasre-established itself among consu-mers bringing demand for cheesein line with pre-BSE and Foot &Mouth disease levels. The launchof the euro also resulted in Euro-pean consumers adopting a cau-tious attitude as they faced newprice levels. Finally, the economicrecession and general uncertaintiesmeant that German consumers in particular have become morehesitant. Since the beginning ofthe autumn 2002, however, priceshave stabilised at a low level andthe first tentative signs of modestprice increases are noticable.

Despite the tough market condi-tions, Arla Foods had a good yearwith a strong sales performanceand, not least, earnings in Euro-pean markets. The focus on addedvalue products and brands provedits worth during periods of fallingprices for bulk products. Conse-quently, investment in productdevelopment and marketing in

Europe will remain relatively highon the agenda in the coming year.

The consolidation and interna-tionalisation of the European retailsector continues with the largestretail chains becoming increasinglydominant. There is, therefore, nodoubt that Arla Foods’ long-termearnings potential in Europe isdependent on the company’s abilityto create strong market positionsthrough marketing and productdevelopment in combination withensuring a professional service tomultiples.

Resources will also be allocatedto the development of sales to thefood service sector which is experi-encing strong growth throughoutEurope.

During the first months of thecoming financial year, the new ArlaFoods’ brand will appear on thepackaging of a wide range of prod-ucts of strategic importance tothe European business. The aim isto create a leading brand for dairyproducts in order to achieve maxi-mum penetration in European mar-kets. The packaging changes arescheduled for early in the new year.

GermanyLast year’s price increases andrising demand were followed bydeclining demand and stronglyfalling prices, particularly for bulkcheese and fresh products. Inaddition, a significant majority ofconsumers have turned to the

discount sector which experienceda marked increase in sales, whilethe traditional retail sector saw acorresponding fall with, for example,sales of cheese from delicatessencounters in large supermarketsdeclining by more than 20%. Thismeant that Arla Foods suffered asmall volume decline in the largeGerman market. There was alsostrong pressure on prices.

Spain Previous years’ growth in cheesesales continued in the year underreview albeit at a more modestlevel. In particular, mozzarella forthe food industry was subject totough competition where it wasdifficult to maintain price levels. As in previous years, direct salesto the retail sector developed posi-tively as the sector continues itsspectacular development. Over the coming years, Arla Foods will,therefore, strengthen its efforts toshare in the growth of the Spanishmarket.

GreeceThe result for 2001/02 did notmeet expectations. Considerableresources have been committed toimplementing the new companystructure in the form of a jointventure with Delta. The launch andmarketing of local and importedproducts was slightly delayed, whichhad an adverse impact on theresult. At the same time, price

European markets

Christina Jensen, 23, adjusts a labelling machine at Vejle Cheese

Store and Packing Unit (VOP) where she has been employed as a

packing operator since 2002. Most of Arla Foods’ firm cheese is

transported to VOP for slicing and packing before being despat-

ched to customers.

➜

17

12.11.

18

13. 14. 15. 16.

competition for firm cheese wasstronger than expected. Sales ofLurpak butter are, however, devel-oping positively and Lurpak is nowGreece’s leading butter brand. Thedistribution of Lurpak via Delta’ssystem has provided a significantlybroader and more detailed distribu-tion which has positively contributedto the result. As the objective re-mains to establish Arla Foods asthe leading supplier of cheese andbutter, the coming year will see acontinuing high level of activity. Thefinancial result is expected to im-prove significantly.

FinlandThe Finnish subsidiary performedwell in respect of both sales andearnings. This is expected to con-

tinue in the coming years. TheFinnish retail sector, which waspreviously characterised by acertain stability, can expect in-creasing competition after the arrival of some discount chainsduring the year.

ItalyThe Italian subsidiary achieved ahighly satisfactory result althoughsales fell slightly because ArlaFoods, unlike others, did not lowerits prices for bulk cheese. Instead,these product types were profiledon their higher and consistentquality and thus achieved a pre-mium in the market. Sales ofspeciality cheese advanced duringthe year while butter sales werestable.

NorwaySales continue to advance, result-ing in an excellent performance forthe year. The volume of cheeseimported over and above the quotacontinues to increase. The Norwe-gian market offers a range ofinteresting growth opportunitieswhich will be pursued in thecoming years.

FranceThe French subsidiary performedsatisfactorily with regard to bothsales and earnings. The strategycontinues to focus on the largeFrench retail chains that dominatemost of the Southern Europeanmarkets.

19

17. 18. 19. 20.

HollandOver the past few years, ArlaFoods has achieved a strong posi-tion as a foreign supplier of addedvalue speciality cheese. In order tofurther enhance growth as well asdeliver a professional service tothe retail sector, it is necessary tostrengthen our presence in themarket. Increased resources will,therefore, be committed to estab-lishing a local organisation toservice customers and to build upawareness of Arla Foods and itsproducts among Dutch consumers.

BelgiumDuring the year under review,sales of speciality cheese to theretail sector were satisfactory.Arla Foods’ products in Belgium

are sold by Vache Bleu, which isowned by the Finnish dairy com-pany, Valio.

PolandThe past year was characterisedby a difficult economic climate andfalling purchasing power whichmeant that the overall result wasunsatisfactory. However, there isno doubt that the Polish marketoffers great long-term potential.

Other Eastern EuropemarketsArla Foods has only minor marketpositions in the majority of thesemarkets. However, over the nextfew years there will be strongerfocus on selected markets andproduct categories. Although a

number of Eastern European coun-tries are expected to join the EU,significant differences in the poten-tial for growth and sales are likelyto remain. Nevertheless, some ofthese markets already have well-developed retail and dairy sectorsin place.

The Faroe Islands and GreenlandArla Foods’ sales of fresh pro-ducts, fats and a broad range of cheese products developed positively during the past year.

Depot foreman Keith Schofield, 37, has been working at

Arla Foods’ warehouse in Leeds for 20 years. Besides

Arla Foods’ products, a wide range of other goods are

packed here for transportation to local stores. Milkmen

are also supplied with milk from here.

➜

20

21. 22. 23. 24.

Outside Europe, North America,the Middle East and Japan con-tinue to occupy a key role in ArlaFoods’ strategies.

Despite the global economicslowdown and the uncertaintiesfollowing the events of September11, 2001, Arla Foods achieved aparticularly good result in thesemarkets. Total volume sales weresatisfactory and profitable positionswere maintained and developed inmost focus markets.

Although in the second half ofthe year, the US dollar was some-what weaker than expected, satis-factory earnings were maintained,e.g. through price increases. Atthe same time, there was strongpressure on prices for dairy prod-ucts in general. However, the impacton Arla Foods was limited due tothe high proportion of added valueproducts marketed under strongbrands such as Lurpak, Puck, ThreeCows, Power Cow, DANO and Milex.

Saudi ArabiaDespite persistent concerns overfood safety, especially regardingEuropean products, Arla Foodsmaintained its strategy for growthwith most focus products achievingan acceptable rise in tonnage andearnings. Considerable resourceswere committed to maintaining anddeveloping the substantial marketshares that Arla Foods’ brandsenjoy throughout the region.

In addition, substantial sumswere invested in production inorder to expand both processingand packaging capacity. Someproduction was transferred fromDenmark to Saudi Arabia in orderto provide consumers with fresherproducts. With a growing popula-tion and stable oil prices coupledwith Arla Foods’ strong brands,the company is poised to strengthenits market positions over thecoming years.

UAE and OmanDuring the year under review, ArlaFoods experienced a tremendousgrowth in sales of focus productsto this market. This is expected tocontinue.

Bahrain, Kuwait and QatarThrough close contacts withselected key customers, thecompany achieved satisfactorygrowth in tonnage and earnings.

LebanonThe market saw growth in cheesesales, with the Puck brand enjoy-ing a substantial market share.

Sales of Lurpak butter wereaffected by price pressure fromanother supplier.

YemenSales of Arla Foods Ingredients’retail packed milk powder productsare growing and both distribution

and marketing are being furtherdeveloped.

North AfricaSales to Egypt were adverselyaffected by the events of Septem-ber 11, 2001. Sales to Libya,however, developed very positively.

USADespite a considerable decline inmarket conditions and a weakeningof the US dollar, the financial yearsaw highly satisfactory growth.Both the export business and locallicensed production developed fa-vourably. By continuing to focus onadded value products such as theRosenborg, Dofino and Denmark’sFinest brands, these brands weresignificantly strengthened leadingto a particularly attractive financialresult. The coming year is expec-ted to see further growth withinblue mould cheese and havarti.

CanadaThe Canadian market experiencedconsiderable growth in 2001/2002.The purchase of a major importquota in 2001 opened the way forincreased exports. At the sametime, market shares for feta andhavarti, produced locally under alicence agreement, rose. ArlaFoods’ Canadian licence partner,Amalgamated Dairies Ltd. hasprovided extra capacity which willallow for future growth in this busi-

Overseas markets

21

25. 26. 27. 28.

ness area. Despite the weakeningof the Canadian dollar, a highlysatisfactory result was achieved. Agood result for the next financialyear is expected.

ArgentinaAs a consequence of the catas-trophic economic situation, it wasdecided to close Arla Foods’Argentinian subsidiary. A distribu-tor has been appointed to handlefuture exports to Argentina.

BrazilAt the beginning of the accountingyear, Arla Foods entered into anagreement with its partner, DanVigor, for a 100% independentbusiness unit for managing bothlocal production and sales of im-ported Arla Foods’ products. Theimplementation of the new busi-ness plan caused certain problemswhich required corrective action.The situation has now stabilisedalthough market conditions remainweak.

The result for the financial yearis unsatisfactory and a substantialeffort is needed to achieve a satis-factory result.

The Dominican RepublicResults in the Dominican Republic,which is one of Arla Foods Ingredi-ents’ largest markets for retailpacked milk powder products, haveexceeded expectations. This has

been achieved despite some diffi-culties securing free access to themarket under the current quotasystem. Without the quotas, largervolumes could be sold.

JapanThe Japanese economy continuesto suffer from a lack of growthand this is impacting on overallcheese consumption. For the firsttime in a decade, a fall in volumeof around 1% is expected. How-ever, Arla Foods’ sales of creamcheese to industry and cheese tothe retail sector remain largelyunchanged from last year. Theeconomic slowdown does not seemto have affected consumption ofcheese within the fast food sectorwhere the major part of Arla Foods’exports of rindless cheese is sold.However, the most recent declinein world prices for cheese has ledto a weakening of Arla Foods’share of total imports. Hopes arethat improvements to world mar-ket prices and unchanged exportsubsidies will contribute to in-creased sales of, in particular,rindless cheese.

KoreaThe Korean economy continues tobe tight and Arla Foods’ exports,which largely comprise mozzarellato industry, are under pressurefrom suppliers from Oceania. Thishas resulted in a relatively signifi-

cant decline in exports. It is hoped,however, that current levels canbe maintained.

BangladeshSales of Arla Foods Ingredients’retail packed milk powder productsare rising and efforts are beingmade to expand distribution andmarketing.

AustraliaSignificant efforts were devoted tosupporting and developing thedistribution of speciality cheese,particularly under the Rosenborgbrand. This was achieved despitelocal producers’ increasing presen-ce, especially within the field ofblue-mould cheese. In addition, thefirst initiatives were implementedin preparation for next year’slaunch of Lurpak butter to theretail sector.

RussiaUnder the impact of the weakeningdollar, the year did not fully meetexpectations. In addition, localcompanies produced substantialquantities of cheese at very lowprices sustained by high customsduties on foreign cheese. Theensuing price competition causedmany consumers to opt for cheapproducts.

Arla Foods’ position as anattractive supplier of a large rangeof speciality cheese continues to

be developed. Its products areavailable in all retail chains inMoscow and St. Petersburg andthese positions will be furtherenhanced in the coming year.

South East AsiaSales continued to rise and withearnings up 20% on the year, theresult exceeds last year’s in termsof both volume and earnings. Thisshould be seen within the contextof general economic uncertaintiesin world markets. Hong Kong andSingapore remain the largest mar-kets followed by the Philippines.Sales to China remain slightly be-low expected levels. This can belargely ascribed to run-in costs.

Further advancement is expect-ed in the coming year, but thestrong competition from bulk products from Oceania means thatfurther retail products under themain Lurpak and Arla brands mustbe developed and marketed. Asawareness of health and diet issues are growing in Asia, someorganic products from Arla Foodshave been launched in severalcountries. Fat-reduced versions

of well-known products will beintroduced in the coming year.

PakistanDespite the impact from the situa-tion in neighbouring Afghanistan,Arla Foods met its budget. Afterthe war, Arla Foods’ customer hasbeen able to sell Arla Foods’products in Afghanistan.

IndiaIndia proved to be a major chal-lenge with sales for the year wellbelow expectations. Although India,as a member of the WTO, haslowered import levies, obstacles toimports remain.

A high, but realistic, budget hasbeen set for India for the comingyear. This is due not least to thefact that Arla Foods, in conjunctionwith the Danish Embassy in NewDelhi, has instigated an analysis of the potential for becoming asupplier to India’s largest multiples.

Farmer Jens Åge Skipper, 37, drives his heifers

back to Højvang farm, south of Randers, where he

keeps a herd of 80 dairy cows. He took over the

farm from his father.

➜

23

30.29.

24

31. 32. 33. 34.

During the year, Arla Foodsstrengthened its position as theleading and preferred supplier ofadded value dairy-based ingredi-ents products for selected globalcustomers. Despite a highly com-petitive environment, especially forstandard products, the result metexpectations.

Turnover for the year was DKK5,391 million which is on a parwith last year. 1.7 billion kg milkwas received as well as all wheyfrom the Group’s cheese dairies inDenmark, a large part of the wheyfrom Sweden and whey from Ger-many. The raw materials wereprocessed into 290,000 tonsingredients and powder products.

IndustryThis business area comprises theproduction and sale of added valueingredients for global industrial cus-tomers. So far, raw material short-age and lack of production capacityhave restricted the growing sales offunctional milk proteins. However,with the opening of a milk proteinfactory in Argentina and the supplyof concentrated Swedish whey forprocessing in Denmark, the founda-tion has been laid for further growthwithin the milk protein segment.Sales efforts will be further inten-sified by the establishment of anapplication centre in Buenos Aires,Argentina.

Sales of special proteins for clini-cal nutrition, drinks, infant milkformula, etc. are another key area.

Research continues into new prod-ucts and new applications for exist-ing special proteins.

Cheese powder sales are alsodeveloping positively.

The company has a significantmarket position within several areasof application, which will be furtherstrengthened in the coming year.

The milk-based, low-caloriesweetener, Gaio tagatose, isexpected to be launched commer-cially in 2003 following the forma-tion of a joint venture with one ofEurope’s leading sugar producers,the German Nordzucker. Severalinternational customers have, forsome time, been showing an inter-est in the product which has simi-lar sweetness properties to sugar,but with only one third of the calo-ries. Diabetics will also be able tobenefit from the sweetener’s abilityto maintain a stable blood sugarlevel. Gaio tagatose is not harmfulto teeth and has been approvedfor use in selected food productsin the US where it achieved GRASapproval in 2001. Approval is alsobeing sought in Japan and Austra-lia and later in Europe.

RetailThe products in this business areaare milk powder products inconsumer packs under the DANOand Milex brands. The productsare used primarily as basic nutri-tion for children and are sold inselected markets in Latin America,the Middle East, Asia and Africa.

In the main markets – the Domini-can Republic, Yemen and Bangla-desh (see under OverseasMarkets), Arla Foods Ingredientsis either the market leader or themarket’s number two.

The business is developing welland the positive trend is expectedto be maintained in the comingyear.

Licensed productionArla Foods is a global marketleader within licensed productionof milk-based nutritional products.

Major plant investments design-ed to increase capacity and qualityassurance will be implemented tostrengthen this business areafurther.

The significant growth in ton-nage and earnings is expected tobe maintained and developed inthe coming year.

Sales of ingredientsSales of standard products werecharacterised by high prices at thebeginning of the financial year, buta significant increase in supplies,particularly from Oceania, causedprices to plummet in the spring/summer of 2002. The fallingprices, however, were partly offsetby repeated increases in exportsubsidies from the EU. Prices forboth milk powder and milk proteinsstablised in the latter part of theyear at the lower level and thetrend is now towards slowly risingprices.

Ingredients for the food industry

25

35. 36. 37. 38.

The Arla Farm’s considerableimportance as the first link in thecompany’s value chain is a keycomponent of Arla Foods’ strategy.Rooted in the increasing demandson food producers by customersand consumers on issues such asfood safety, a new joint qualityprogramme for the Arla Farm wasinitiated during the year. The pro-gramme, which must be ready byOctober 1, 2003, is based on thecornerstones of Arla Foods’ qualitypolicies: the quality of the milk,food safety, animal welfare and theenvironment and aims at profilingthe Arla Farm and, therefore, con-tributing to enhancing the compe-titiveness of Arla products.

At the same time, Arla Foods iscommitted to bringing milk prod-ucers and consumers closer to-gether through a range of initiativessuch as school visits to farms andconsumer events.

New payment model October 1, 2003 will also see thelaunch of the new milk pricingsystem approved by the Board ofRepresentatives in the spring of2002. Although the joint paymentmodel is part of the harmonisationprocess, it also represents an ad-justment to the markets’ require-ments in that a shift in the fat/protein ratio towards protein isstrongly favoured by consumers.

Fewer co-operative ownersThe structural development among

Arla Foods’ co-operative ownerscontinued in 2001/02 so that bythe end of the year, the group hada total of 13,642 co-operativeowners. In Sweden, the numberfell by 6.4%, to 6,539 while inDenmark the fall was 10.3%, i.e.to 7,103. Overall milk suppliesremain largely unchanged whichmeans that the average annualsupply per farm is now 546 tons inDenmark and 321 tons in Sweden.

The merger between Arla Foodsand Denmark’s second largest co-operative dairy, Hellevad OmegnsAndelsmejeri, became effective inOctober 2002 adding around 100new co-operative owners with a to-tal production of approx. 70 mil-lion kg to Arla Foods’ membership.

Inter-dairy transport streamlinedThe continued streamlining ofinter-dairy milk transport allowedtotal logistics’ costs to be keptdown despite increased wage costs.Round-the-clock milk collection willsoon be introduced in Denmarkwhich, combined with the switchto large tankers, has enabled thenumber of tankers to be cut from190 in the last financial year to170 in 2001/02. This was imple-mented several years ago inSweden where 75 tankers operate24 hours per day. In addition,pump capacity was increased inboth countries. The large tankersin conjunction with fewer suppliershas meant a reduction in the

number of kilometres covered, i.e.from 39.5 million km in 2000/01to 38.6 million km this year.

Relations with co-operative owners

Innovation

Few consumers are more deman-ding with regard to food safety andnutrition than astronauts andcosmonauts. Arla Foods Innova-tion, therefore, faced a huge chal-lenge when, towards the end of2001, it entered into partnershipwith the American space agencyNASA to develop milk-basedproducts for space journeys – forcrews on the space shuttle and,further down the line, for futuremissions to Mars. The aim is tocreate value for both organisationsand the knowledge created duringthis project, especially with regardto nutrition and shelf-life, will be ofgreat importance to Arla Foods’future product development.

This highly specialised task is,however, only a small aspect ofArla Foods’ innovation activities. In fact, Arla Foods develops some200 new products annually andapprox. 200 employees have “inno-vation” as their primary responsibi-lity. About 0.6% of Arla Foods’turnover (more than DKK 200million per year) is invested ininnovation, which is governed byconsumers’ demands and require-ments, expressed or tacit. This istrue of both long-term researchand fast product adjusments. Therationale behind this approach is set out in Arla Foods’ missionstatement: To provide modernconsumers with milk-based foodproducts, which create security,inspiration, and well-being.

At any given time, Arla Foodsworks with 400 innovative prod-

ucts which are implementedthrough the application of acommon project method withincross-disciplinary teams involvingrepresentatives from production,marketing and innovation.

ResearchArla Foods defines research asactivities aimed at creating know-ledge, competencies or methodsthat will lay the foundation forfurther development of technologyand products. It is of paramountimportance that the research istargetted towards tomorrow’sconsumers. Arla Foods’ researchstrategy comprises eight researchareas which cover the entire valuechain, ranging from quality controlof raw materials, ingredients andprocess technologies to qualityexperience and food safety.

In practice, research activitiesare largely carried out by externalpartners such as universities andother institutes of higher learningin Denmark, Sweden and other European countries. Some re-search projects are undertaken inhouse.

Technology developmentAnother innovation-focused area isthe continuing development oftechnology for improving produc-tion calculations and creating thefoundations for entirely new prod-ucts. Production techniques andprocesses are also developed,improved or tested. As is the casewith research projects, it is crucial

that wide-ranging co-operation ismaintained between selectedsuppliers and other partners andArla Foods.

Product developmentAll product areas must be continu-ally maintained and developed.Basic products must be improvedand upgraded and new consumeroptions and new consumer groupsmust be considered. Changingconsumption patterns with varyingeating times, demand for low-calo-rie products and new flavours aswell as greater convenience areconstantly calling for the updatingof product ranges. Arla Foods hasa special commitment to frequentproduct launches particularly inthe Danish and Swedish markets.

In Arla Foods’ strategic plan-ning, food service plays a promi-nent role. All indications are forstrong growth in this segmentwhere a regular flow of new prod-ucts is required. Arla Foods isalready active in the market with a range of new products such asthe MiniMeal series, Arla Mini (milkin plastic bottles) and, indirectly,through the sale of ingredients(e.g. cheese and milkshakes) toleading fast food chains.

Expectations are that, in future,fewer consumers will cater forthemselves, partly due to a short-age of time and partly because ofa lack of cooking skills. Meetingtheir requirements with new, innovative products will provide interesting opportunities.

At 1⁄2 hourly intervals, laboratory assistant Åse Lindblom, 36,

collects milk samples at the packing unit at Stockholm Dairy.

She records the samples at the laboratory and then carries out

bacteriological tests and measures the fat content in the milk.

Åsa Lindblom has been employed at the dairy for 10 years

➜

27

40.39.

The production of milk and dairyproducts affects the environmentall the way from farm to consumer.Arla Foods continually strives toreduce negative environmentalimpact and resource consumption.The Group’s environmental policycovers a series of goals and targetareas which are prioritised bymeans of Life Cycle Analysis (LCA)and other methods that allow ac-tion to be taken against the mostimportant environmental conse-quences.

The Arla FarmThe Arla Farm is the first link inthe chain where efforts to reduceenvironmental impact can be achiev-ed as the basic tenet is that ArlaFoods’ milk producers manage animportant part of Danish andSwedish nature. Recommendationsare being drawn up for areas suchas groundwater protection and re-ducing the effects of climate chan-ge and the emission of greenhousegases.

Water and EnergyTo ensure optimum hygiene stan-dards, the dairies use substantialamounts of water for cleaning.Over the years, a variety of measures have been introduced to reduce water consumption atproduction plants. (See fig. 1).

The goal is to reduce waterconsumption by a further 7.5% by2005/06.

The most energy-intensive pro-cesses are the evaporation anddrying of milk. However, coolingand cleaning also account for con-siderable energy consumption.Over an extended period there hasbeen considerable focus on energyconsumption and new energy man-agement systems and new energyconscious planning have led toconsiderable savings. (See fig. 2).

It is possible, however, to re-duce environmental impact furtherby optimising control of energyconsumption at the individualplants. Work is currently beingcarried out at Esbjerg Dairy tocreate tools for managing energyconsumption and thus ensuremore efficient use of energy. Theexperience gained from this canbe applied in similar endeavours atother plants.

The target is to reduce totalenergy consumption by a further5% before 2005/06.

ChemicalsThe use of chemicals on farms,during production and in connec-tion with cleaning cannot be avoid-ed. To ensure the best possibleworking environment and reduceenvironmental impact, it is impor-tant to limit the quantities of chemicals used and to choose themost environmental-friendly andsafe products for each task.

The objective is that all chemi-cals used at the group’s plants

should be evaluated in relation tohealth safety and environmentalimpact before the end of 2005/06.

EmissionsArla Foods aims at reducing CO2

emissions by 5% and NOx emis-sions by 10% by 2005/06. Toachieve these goals, a number ofinitiatives have been taken. ThusGötene Dairy has introduced thefirst wood pellet bio-combustionplant to replace three old oilgenerators which used approx.10,000 cubic metres of oil peryear. (See Fig. 3).

The transport of milk in trucksaffects the environment in theform of emissions of CO2, NOx andparticles. To minimise these emis-sions, joint environmental targetsfor transport at group level arebeing prepared. At Hobro Garagea two-year project aims at reducingdiesel consumption by trainingdrivers. As the project has prog-ressed, the drivers have been able to monitor the considerablefall in diesel consumption online.Experience from similar projectshas shown a potential saving of 5-10%, with equivalent reductionsin emissions.

Working environmentAlongside the work to reduce theimpact on the environment, effortsto enhance working conditions arealso continuing. For several yearsnow, Arla Foods has focused on

Environmental considerations

41. 42. 43. 44.

28

reducing work-related accidents bye.g. recording and analysing thecause of such accidents. Recently,a comprehensive “safety cultureanalysis” was carried out in co-operation with the Mejeriindustri-ens Bedriftssundhedstjeneste (TheDairy Industry’s Industrial HealthService). Nine Danish Arla Foodsplants took part in the survey,which comprised interviews withemployees, managers and repre-sentatives from the safety organi-sation.

The safety culture is defined asthose values, habits and percep-tions which express the attitudesof management and employees topreventive measures, risks andaccidents. Experience shows thatfocus on a company’s safety cul-ture positively contributes toimproving safety during the dailywork.

In the past year, the DenmarkDivision has been part of theproject “Down with work-relatedaccidents” during which a safetyculture analysis was carried out.This led to a reduction in theaverage accident frequency from34.8 in 2000/01 to 31.4 in2001/02.

Managing the environmentand working environmentArla Foods’ environment and work-ing environment managementsystem helps to ensure that allmembers of the organisation are

actively involved in environmentalwork and that the goals are met.The system is based on ISO 14001and the working environment stan-dard OHSAS 18001 and is imple-mented on an ongoing basis.

The aim is that all productionunits in Denmark and Sweden areISO 14001 accredited by the endof 2005/06. In 2000/01, 31%of the plants had been accredited,with 40% in 2001/02. During theyear, Holstebro Dairy became thefirst Arla Foods plant to achieveOHSAS 18001 accreditation.

Environmental trainingEnvironmental training is an impor-tant tool for increasing awarenessabout environmental impact andabout the opportunities for em-ployees to reduce such effects. Inthe Sweden Division, productionworkers and drivers have beenreceiving such training for manyyears and the focus is now shiftingtowards training sales people andmarketing staff. Since environmen-tal impact etc. depends on prod-ucts and packaging, it is importantthat sales staff are able to explainArla Foods’ efforts within theseareas. Moreover, marketing staff,who are involved in product develop-ment, can affect the entire valuechain from farm to consumer.

Fig. 3 Emission of NOx from Götene

ton/per year

60,0

50,0

40,0

30,0

20,0

10,0

0,0

1996 1997 1998 1999 2000 2001

Fig. 1 Water consumption at

Danish production plants

Key figures in m3/ton finished product

7,00

6,00

5,00

4,00

3,00

2,00

1,00

0,00

96/97 97/98 98/99 99/00 00/01 01/02

Fig. 2 Energy consumption at

Danish production plants

Key figures in MWh/ton finished product

1,40

1,20

1,00

0,80

0,60

0,40

0,20

0,00

96/97 97/98 98/99 99/00 00/01 01/02

By changing from oil

to bio-fuel NOx

emission have been

significantly reduced.

29

45. 46. 47. 48.

Semper AB

Semper continued last year’s posi-tive development with sales risingby 7% and turnover of SEK 1,055million. Exports, which rose by15%, totalled SEK 245 million andnow account for more than 20%of the total turnover. Profit onordinary operations increased bySEK 21 million to SEK 66 million,i.e. a rise of 40%.

Turnover for baby food in theSwedish market rose by 9% toSEK 436 million, strengtheningSemper’s dominant position in theSwedish market. The most impor-tant export markets are Finlandwhere Semper is the second-largest supplier, and Russia whichsaw growth of more than 50%.This positive trend is expected tocontinue.

Friggs’ health products saw a4% increase in turnover to SEK227 million although the marketfor this product type contractedfor the first time in many years.Semper AB has, therefore, main-tained its position as Swedish mar-ket leader in consumer goods. TheFriggs range, which was success-fully launched in Norway, also per-formed well in Finland.

During the year, the health foodcompany in Anjo in Sweden wassold in order to focus on the con-sumer goods business.

In the nutrition sector, Semperis developing and selling productsfor clinical nutrition, primarilyaimed at the Nordic markets, andgluten-free products. SemperNutrition’s positive developmentcontinued during the year, with 8%sales growth to SEK 186 million.Earnings also improved significantly.

The food service sector postedan increase in total turnover of7%, to SEK 275 million. In theSwedish market, turnover rose by3%, while export turnover rose26% to SEK 56 million. Beveragesales rose considerably, as didexports of frozen pancakes whichwere the subject of a considerableinvestment programme during theyear.

Semper’s positive growth isexpected to continue in the comingyear.

Rynkeby Foods

The market for Rynkeby Foods’core products, fruit juice anddrinks, developed positively in2001/02 with turnover risingfrom DKK 806 million in 2000/01to DKK 823 million in 2001/02.Profit on ordinary operations roseto DKK 32 million compared toDKK 28 million in 2000/01. How-ever, a one-off cost of DKK 22million under special items im-pacted on the accounts.

A 5-6% rise in demand for fruitjuice and drinks resulted in in-creased sales to the Danish retailand catering sectors of 5%, while turnover from exports andindustrial customers declined.

The 14% rise in profit on ordi-nary operations, which was achiev-ed despite increasing raw materialprices especially for orangeconcentrate, derives from risinggross margins following ongoingendeavours to improve profitability.

The significant fall in profitsafter tax is solely due to a one-offcost arising from the closure ofthe factory in Rynkeby. Productionat the plant, which accounts forapproximately 12% of RynkebyFoods’ volume, will cease no laterthan June 1, 2003. Rynkeby’sproduction will either be transfer-red to the factory in Ringe, acqui-red by associated companies oroutsourced.

At year end, the construction ofa fully automated tower store atthe factory in Ringe had com-menced. It is expected to becomeoperational in the spring of 2004.By releasing the existing warehouse,extra space will be made availablefor production expansion.

Rynkeby Foods continues toexpect continued satisfactorygrowth in its core product areas.Turnover for 2002/03 is, how-ever, expected to be in line with2001/02 levels. This is partly due

Subsidiaries

The telephone is an indispensible tool for Business Manager Matthew

Lee, 26, who is responsible for liaising with the UK multiple, Tesco.

Tesco operates 720 stores in the UK with another 1,000 in the pipe-

line. Matthew Lee has worked at Arla Foods UK headquarters in

Leeds for three years.

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30

49.

to increased focus and enhancedcompetitiveness and partly to theclosure of the factory in Rynkeby,which will result in the cessation ofcertain products outside the coreranges.

The cost of raw materials canbe expected to continue upwardsin 2002/03. This will be compen-sated for by higher sales pricesand efficiency measures.

On February 1, 2002, RynkebyFoods A/S and JO Bolaget enter-ed a partnership within the fieldsof purchasing, development andmarketing as well as shared brandsand production under joint man-agement. Together, the two com-panies form Scandinavia’s largestjuice producer with a market shareexceeding 60% in Sweden and Den-mark. The vision is one of continu-ous growth as market leaders inthe two domestic markets, and inthe longer-term, to expand into therest of Scandinavia.

JO Bolaget

Jointly owned by Arla Foods andSkånemejerier with a 50% share-holding, JO Bolaget produces fruitjuice, fruit drinks and fruit soup.Sales for 2001/02 totalled 121million litres and turnover rose bySEK 6 million to SEK 885 millionwith fruit juice accounting for 92%of the turnover.

Expectations for the comingyear are positive. The price for themost important raw material,orange juice, is expected to in-crease further.

Danapak

The Danapak Group posted a losson ordinary operations of DKK 22million for 2001/02 against a lossof DKK 33 million in 2000/01. Theturnover, DKK 771 million, wasaffected by the many changes inthe group and is therefore not com-parable with last year’s result. Turn-over for the cartons/packagingbusiness was DKK 434 million.

During the year, Danapak con-tinued to adjust the organisationto the increasing competition inthe marketplace.

In May 2002, Danapak ac-quired a majority share in the cartons company Westergaard &Philipson A/S (now Danapak WP)which is now the leading cartonscompany in the Danish market.

Sales in the UK were unsatisfac-tory and Danapak has discontinuedits operations in Northampton.

In July 2002, Danapak formeda Northern European joint venturewith the Austrian company TeichAG within the field of flexiblepackaging. Danapak has 40% ofthe new company and Teich AG60%.

With a turnover of over DKK800 million, the company is one ofthe largest producers of flexiblepackaging in Northern Europe. It is expected that further synergieswill be realised through rationalisa-tion of production, optimum use ofcapacity, purchasing and customersupport as well as product andrange development. Through TeichAG, the new company is part ofthe Constantia group which isEurope’s third largest producer offlexible packaging. The new com-pany, Danapak Flexibles A/S, isheadquartered in Odense and as a result Danapak has moved itsheadquarters to its cartons factoryin Korsør.

From February 2002, Danapakwas affected by considerable risesin the cost of raw materials forboth plastic and cartons. However,owing to a targetted effort it haslargely been possible to compensatefor the increased costs throughhigher sales prices. By the autumn,the prices of raw materials wereexpected to have stabilised.

During the year, investments infixed assets totalling DKK 27million were made and a numberof efficiency projects were initiated.

During 2002/03 Danapak willcontinue its efforts to increaseprofitability.

In the cartons business, Dana-pak will defend and expand itsposition as market leader inDenmark. Following the purchase

At Vellev Dairy, which produces 11,500 kg Cave Cheese per day,

Anders Kristensen, 33, passes a cheese to a colleague who will wrap

it in a cheese cloth and place it in a cheese mould for pressing.

Anders Kristensen, a third year trainee, has been working at Vellev

Dairy since April 1, 2002.

➜

33

51.50.

34

52. 53. 54. 55.

of Danapak WP, the companyintends to continue to participatein the further consolidation of theDanish cartons industry.

With the formation of theNorthern European joint venture,Danapak is poised to improve itscompetitivness.

Danapak expects an improve-ment in its operating profits in thecoming year.

De danske MejeriersFællesindkøb

De danske Mejeriers Fællesindkøbachieved a turnover of DKK 656million for 2001/02 compared toDKK 588 million in 2000/01. The12% increase exceeded expecta-tions. In general, all companieshave shown satisfactory growth.

Profit on ordinary operationswas DKK 15 million against DKK11 million last year.

Member turnover accounted for73% of group turnover against71% in 2000/01.

The Trade Department’s globalpurchasing partnership with ArlaFoods with regard to “ingredients”continued to develop in 2001/02.This strengthened the depart-ment’s sales to other food indus-tries due to the synergy effectsfrom, inter alia, the alignment ofpurchasing prices.

As at 1 October 2002, theTrade Department changed itsname to Procudan.

The Industry Deparment expan-ded its position within its corecustomer areas (i.e. the bakeryand cake sectors, the confectio-nary industry and the breweryindustry).

Dairy Fruit A/S increased turn-over by 60% largely due to increas-ed co-operation with Arla Foods in Denmark and Sweden. Thecurrent expansion of Dairy Fruits’Development Department will helpstrengthen the company’s innova-tion activities. Exports to newmarkets such as Germany areexpected to increase in 2002/03.

With a rise in turnover of 34%,

Crispy Food contributed positivelyto the 2001/02 result. Theimprovement was largely due toincreased exports to Europeanmarkets, where the Top Cupconcept continues to generateconsiderable interest. Exports toJapan have also been substantial.

Fællesindkøbet’s expectationsfor the period up to and including2004/05 are set out in a newlong-term plan. Despite antici-pated, stronger competition withregard to pricing, quality andservice, prospects are promising.For the 2002/03 financial year, asatisfactory export-led develop-ment in turnover is expected. Theoverall result is also expected tobe satisfactory.

35

56. 57. 58. 59.

Frödinge Mejeri AB

Frödinge Mejeri AB produces andsells frozen layer cakes and a vari-ety of savoury and fruit pies aswell as the Swedish speciality,cheesecake. In 2001/02 thecompany achieved a turnover ofSEK 309 million which representsa 2% advance on the previousyear. Profit on ordinary operationsrose to SEK 26 million against SEK22 million in the previous year.

In the home market where thecompany is a market leader, salesof cheesecake rose slightly. Salesof pies, especially savoury pies,increased considerably althoughFrödinge lost market shares in thelayer cake segment. Frödinge &

Hatting AB, which handles sales toSwedish stores, entered a part-nership with Topp (which is part ofFinland’s frozen vegetables andready-made meals’ Chips Group).This has increased the frozenfoods range.

Sales to the UK, where Frödingehas a market share of around 11%,rose satisfactorily, despite a gene-ral slowdown in sales of this typeof product. The strength of GBPagainst the Swedish krona contrib-uted positively to the result. TheGerman market contracted afterthe loss of a major customer. InFinland sales continue to improveand volume doubled.

Investments totalling SEK 14million included a high-speed free-

zer and packaging machinery forthe new pie range.

Production is expected to in-crease in the coming year, es-pecially with regard to exports toexisting markets as a result ofnew customers.

Medipharm AB

Medipharm AB produces bacteriaculture for the agricultural sectorand the food industry and itsproducts are marketed both insideand outside Sweden.

Profit on ordinary operationswas SEK 18 million against SEK17 million last year.

Distribution driver Bo Thomsen, 44, has worked as a relief driver at

Stockholm Dairy for the past five years. During the day, he and his

colleagues deliver Arla Foods’ products to approx. 5,500 customers

including supermarkets, schools, hospitals, and restaurants in the

Stockholm area.

➜

Within the field of special cultu-res and cheese ripening cultures,Enzobact achieved strong growthduring the year. Renewed marke-ting of starter cultures for salamiand kefir is now resulting in newleads and customers. Supplies ofthe kefir cultures to the home ofkefir, Russia, have begun.

In the ensiling area, the trend is towards more microbiologicalagents as a substitute for chemi-cals. Statements by experts infavour of microbiological agentsare expected to increase sales ofMedipharm’s ensiling productsfurther.

During the year, Medipharmacquired 100% of its US subsid-iary. The move was based on thepotential which Medipharm hasidentified for all product areas inthe US. To meet increased de-mand for the company’s products,a SEK 15 million investment pro-gramme has been launched. Theprogramme includes a 100% in-crease in freeze drying capacity,increased fermenting capacity andthe deployment of new technologyto produce “drip-frozen” products.

As Medipharm operates withinpreviously unexploited productareas where the proportion of newusers or so-called “non-users” issubstantial, the potential for furthergrowth is regarded as particularlygood. The aim is to achieve a 25%increase in turnover year on year.

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 company operates as anintegral part of Arla Foods. Theresult for the year is satisfactory.

Medani A/S

The company owns Arla Foods’head office, Ravnsbjerg Erhvervs-center. The company is also re-sponsible for a number of finan-cing and investment activities.Despite the turbulence in thefinancial markets in 2001/02,Medani achieved a satisfactoryresult.

Arla Insurance Com-pany (Guernsey) Ltd.The company acts as a reinsuran-ce company for the Arla Foodsgroup. The year’s result is satis-factory.

Andelssmør A.m.b.a

Arla Foods owns approx. 92% ofthe shares of Andelssmør A.m.b.a.which handles the vast majority ofDanish butter exports. The com-pany operates as an integral partof Arla Foods. The result for theyear is satisfactory.

AM Foods

In 1996, MD Foods (67%) andArla (33%) formed a joint companyfor the production and sale ofcappuccino and chocolate instantproducts for the food servicesector and retail segments.

Following a period of consolida-tion, the company is undergoingstrong expansion and has postedan approx. 40% improvement onlast year’s result. The 2001/02financial year was satisfactory.

Operator Jessica Russo keeps the fourth bottling line

running during her 5 am to 1 pm shift at Gothenburg Dairy.

She also cleans the machinery and weigh the briquettes

which must weigh between 1,054 and 1,057 grams in

random tests.

➜

37

60. 61.

During the financial year, the Boardapproved a new financial policy forthe Group.

The main objective of the policyis to ensure a stable cash flowand financial flexibility in a volatilemarket.

The new policy is designed toensure a forward-looking approachto financial management as well ascompliance with best practice forcorporate governance and interna-tional accounting standards.

The new policy introduces newquantitative measurement methodsfor financial management.

Arla Foods’ financial policy isdivided into four main areas:

A general finance policy thatdetermines the allocation of re-sponsibility between the SupervisoryBoard, the Management Boardand the Finance Department. Italso specifies which financial pro-ducts and counterparts can beused. The requirements for suchproducts are the existence of awell-functioning market and thatsuch products can be accuratelyvalued. The choice of counterpartsis determined on the basis of long-standing mutual association ofbenefit to both parties. Risks areminimized by selecting partnerswith a high rating only.

In addition, the financial policysets out the Group’s general creditpolicy as well as the systems foroperational management.

A foreign currency policy thatsets out the framework for maxi-mising long-term earnings basedon market conditions. According tothe policy, individual business unitsare responsible for foreign exchan-ge hedging while all external hedg-ing is effectuated by the FinanceDepartment.

The aim of hedging by way offinancial instruments is to generatea stable cash flow and thus mini-mise fluctuations in the milk price.

The Group’s total exports standat approx. DKK 10 billion of whichapproximately 40% is in Euro, 30%in USD and 18% in GBP.

Foreign exchange hedging isbased on commercial considera-tions. To measure the effective-ness of the hedging, an exchangerate index has been set up whichmeasures the result of hedging inrelation to market developments.

Value-at-Risk (VaR), the internatio-nal standard for measuring finan-cial risk, has been introduced tocalculate the total monthly ex-change rate risk to which ArlaFoods is exposed. This tool has a95% probability.

A policy for financing and borro-wing that underpins the Group’sstrategic planning.The overall objective of the financingpolicy is to minimise long-term bor-rowing costs while ensuring a loancomposition that reduces the risk

of refinancing. Diversification ofboth lenders and loan repaymentperiods are utilized to achieve this.

The financing policy lays downbroad targets for the Group’s over-all capital structure as well asinternal rules for the financingrequirements of the Group’s units.

The term target continues to beapplied in connection with the ma-nagement of the Group’s financialassets and liabilities. The term forthe long-term portion of the debtshould be in the interval of 0-7years.

The average repayment time forthe long-term portion of the debtmust be at least 2 years.

The considerable fall in interna-tional interest rates has led theGroup to increase the period ofthe overall debt and more long-term fixed interest loans havebeen taken out.

The terms for the long termdebt have been increased toapproximately 3.2 years, compa-red to 2.6 years last year.

A specific framework for theamortization of the Group’s debt isin place.

The total interest bearing debtstood at approx. DKK 8,019million as at September 29,2002, compared to approx. DKK7,876 million the previous year.The average repayment time onthe long term debt as at 29September, 2002 stood at approx.5.2 years.

Managing financial risk at Arla Foods

38

62. 63. 64. 65.

At the end of the financial year,the distribution of interest bearingdebt was 68% in DKK, 23% inSEK and 6% in GBP and 3% inother currencies.

Leasing is only utilized whendeemed to be attractive for theGroup.

An interest rate and liquidity poli-cy that is linked to the financingpolicy and ensures the Group’sfinancial preparedness so that liqu-idity risk is minimised. This is achi-eved through maintaining sufficientoperating liquidity and liquidity foracquisitions.

Liquidity stand-by consists offunds held in bank accounts,short-term bonds and unexploiteddrawing rights in banks and finan-cial institutions.

The total liquidity reserve wasapproximately DKK 4.3 billion asat 29/09/2002.

A framework for evaluating theinterest risk relating to the Group’sasset portfolio of fixed interestclaims has been determined.

The risk relating to receivablesfrom debtors is not regarded asbeing unusual.

OtherDuring the financial year workcontinued on adapting the Group’sbalance sheet for the purpose ofstrengthening solidity. This workwill continue in the coming finan-cial year.

Figure 1: Position in percentage of

annual budget

%

100

80

60

40

20

0

USD GBP EUR SAR SEK

Figure 2: Arla Foods foreign exchange index

104

103

102

101

100

99

98

97

96

95

Oct.01 Nov.01 Dec.01 Jan.02 Feb.02 Mar.02 Apr.02 May02 Jun.02 Jul.02 Aug.02 Sep.02

Market index

Forward index

66. 67. 68. 69.

39

■

■

■

■

■

Term

Option

Open

40

Auditors’ reportWe have audited the groupaccounts and annual accounts ofArla Foods amba for 2001/2002presented by the ManagementBoard and the Supervisory Board.

Basis of opinionWe planned and conducted ouraudit in accordance with generallyaccepted international auditingstandards and Danish auditingprinciples to obtain reasonableassurance that the accounts arefree from material misstatement.Based on an evaluation of materi-ality and risk, we have during theaudit tested the basis and docu-mentation for the amounts anddisclosures in the accounts. An

audit includes an assessment ofthe accounting policies applied andthe accounting estimates made.In addition, we evaluated the over-all adequacy of the presentation inthe accounts.

Our audit did not result in anyqualifications.

OpinionIn our opinion, the group accountsand annual accounts have beenpresented in accordance with theaccounting provisions of Danishlegislation and give a true and fairview of the Group’s and thecompany’s assets and liabilities,financial position and profit for theyear.

Aarhus, 27 November 2002

KPMG C. Jespersen

E. Black PedersenState AuthorisedPublic Accountant

J. Bräuner KnudsenState AuthorisedPublic Accountant

PricewaterhouseCoopers

Göran TidströmAuthorised Accountant

Jesper LundState AuthorisedPublic Accountant

Annual Report 2001/02

Management’s statementAarhus, 27 November 2002

Management Board of Arla Foods amba

Jens BigumMan. Director

Åke ModigDep. Man. Director

Jørn Wendel AndersenFinance Director

Supervisory Board of Arla Foods amba

Lars Lamberg Knud Erik JensenChairman Deputy Chairman

Bertil Andersson Leif Backstad

Kaj W. Christensen Christer Eliasson

Anders Ericsson Leif Eriksson

Elisabeth Gauffin Åke Hantoft

Tommy Jacobsson Thomas Erling Johansen

Sören Kihlberg Kr. Ole Kristensen

Ove Møberg Hans Peter Nielsen

Per Norstedt Jan Nørgaard

Kaj Ole Pedersen Søren Rasmussen

Pejter Andersen Søndergaard Bent Juul Sørensen

41

General informationThe accounts of the parent compa-ny, Arla Foods amba, and theconsolidated accounts of the ArlaFoods Group have been presentedin accordance with the DanishAnnual Accounts Act with suchdeviations as follow from the spe-cial circumstances of the parentcompany and the Group. Thesedeviations relate, in particular, tothe presentation of the results ofthe non-dairy subsidiaries andassociated companies in the profitand loss account for the parentcompany, cf. below.

The accounting policies areunchanged compared to last yearwith the exception of the accountingtreatment of pension commitmentswhich has been changed to complywith international accounting poli-cies, cf. page 8 of the report.

The changed accounting policiesregarding pension commitmentsdo not have any effect on thecomparative figures for 2000/01and only a minor effect on thisyear’s results.

ConsolidationThe consolidated accounts com-prise Arla Foods amba (the parentcompany) and those subsidiaries,cf. the list of group companies onpages 61-62, in which the parentcompany directly or indirectly holdsmore than 50% of the voting rightsor in which the parent company inother ways has a controlling interest.

The accounts used for theconsolidation have, in all materialrespects, been prepared in accor-dance with the accounting policiesof the parent company.

The consolidated accounts havebeen prepared by a consolidationof similar items from the parentcompany and the individual subsi-diaries’ annual accounts. 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 beenincluded in the consolidated ac-counts for that part of the year inwhich the subsidiaries have beenowned by the Arla Foods Group. Inconnection with the acquisition ofcompanies, the additional value onthe individual assets and liabilitiesand any additional group goodwillhas been capitalised and amortised.

Foreign currency and financial instrumentsFor foreign subsidiaries, the profitand loss accounts are translatedusing the average exchange rates,whereas the balance sheet itemsare translated using the ratesruling at the balance sheet date.The translation differences thatmay arise on translation of theforeign companies’ opening equityusing the rates ruling at the balan-ce sheet date and the translationdifferences resulting from transla-tion of the foreign companies’ profit and loss accounts using theaverage rates are adjusted overthe equity.

For foreign associated under-takings, the reported shares ofprofits and shares of net bookvalue are recognised at the rateruling at the balance sheet date.

In Arla Foods Ingredients S.A.,Argentina, the company’s invest-ments are made in USD. USD isalso the reporting currency.

Financial instruments especiallycomprise forward exchange con-tracts and options.

For financial instruments enteredinto to hedge receivables and pay-ables in foreign currency, thehedged rate is used to value thehedged item. The financial instru-ments are therefore not valued asindependent items. Foreign ex-change rate adjustments of finan-cial instruments which are used tohedge the income and expenditurein the coming year are, however,deferred until such income andexpenditure are realised.

Financial instruments not usedto hedge income and expenditureare valued at their market valuesat the balance sheet date. Bothrealised and unrealised gains andlosses on these are included in theprofit and loss account.

Receivables and payables de-nominated in foreign currencieswhich have not been hedged arestated at the exchange rate rulingat the balance sheet date.

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 oper-ating income at the time when arepayment obligation is no longercontingent.

Accounting policies

42

Profit and loss account

TurnoverThe turnover includes the year’sinvoiced sales of finished productsless sales discounts. Any refundsand production subsidies from theEU are included in the turnover.

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.

Development costsThe costs of developing new prod-ucts are entered as expenses asthey are incurred.

Share of results in subsidiariesand associalted undertakingsThe profit and loss account of theparent company includes theproportionate share of the profitsor losses of the individual dairy-related subsidiaries after tax andafter the deduction of declaredsupplementary payments and unre-alised intra-group profits.

Dairy-related subsidiaries aredefined as subsidiaries which areprimarily involved in the process-ing/selling of the milk weighed infrom Arla Foods’ members. Thesubsidiaries are listed separatelyon pages 56-57.

The share of results after tax ofnon-dairy subsidiaries has not beenincluded in the parent company’sprofit and loss account, but hasbeen taken directly to equity underrevaluation reserves.

The different treatment ofshares of profits in dairy-relatedand non-dairy undertakings in theprofit and loss account of theparent company serves to showthe direct income from the milksupplied by the members of ArlaFoods amba.

Undertakings in which theGroup holds between 20% and50% of the voting rights withouthaving a controlling interest areregarded as associated. Theseundertakings are included underone item in the profit and lossaccount and the balance sheet,and their turnover has thereforenot been included in the consoli-dated turnover.

Financial itemsInterest income and interestexpenditure are recognised in theprofit and loss account at amountsrelating to the financial year.

Furthermore, financial itemscomprise both realised and unre-alised value adjustments of securi-ties and exchange rate adjust-ments.

Corporation taxThe taxable income of the compa-nies is calculated in accordancewith the national rules in forcefrom time to time. For companieswhich are jointly taxed, tax on theresults for the financial year is

entered at the current tax rate,calculated on the basis of the pre-tax results for the year, adjustedfor non-taxable income and expens-es. Deferred tax is stated as onefigure for jointly taxed companies.The deferred tax is entered at thecurrent tax rate of all timing differ-ences between the results foraccounting and tax purposes.

Balance sheet

Fixed assets in generalThe acquisition costs of fixed assetsat the establishment of the ArlaFoods Group at 17 April 2000equal the book values in the found-ing companies and their subsi-diaries at 16 April 2000 subjectto the value adjustments made inthe opening balance sheet at 17April 2000.

Intangible fixed assetsIntangible fixed assets are valuedat cost less accumulated amorti-sation and write-downs.

Intangible fixed assets comprisegoodwill from the acquisition ofundertakings, licences, trade-marks, etc. as well as the equali-sation sum for former members ofKløver Mælk A.m.b.A.

The assets are amortised on astraight-line basis over theirexpected useful lives:

Goodwill 5-20 yearsLicences and trade-marks, etc. 10 yearsEqualisation sum 3 years

43

Tangible fixed assetsTangible fixed assets are valued atcost less accumulated depreciationand write-downs.

The assets are depreciated ona straight-line basis as from thetime of acquisition or commission-ing 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 book value of plant andmachineries, fixtures and fittings,etc. at 17 April 2000 is, however,depreciated on a straight-line basisover five years from this date.

Assets in course of construc-tion are not depreciated.

Assets with a short useful life,minor assets and minor costs ofimprovement and computer soft-ware are expensed in the year ofacquisition.

InvestmentsParticipating interests in subsidia-ries and associated undertakingsare entered at the ownershipshare of the companies’ equityvalue at the end of the financialyear, calculated in accordance withthe Group’s accounting policies.Furthermore, unrealised intra-group profits have been deducted.

For those cooperative societieswhich form part of the Group, theownership share has been calcu-

lated in accordance with the Ar-ticles of Association of the individ-ual companies.

Other investments (shares,mortgage deeds, bond holdings,etc.) are entered at acquisitionvalue, although written down tomarket values, if such values areconsistently lower.

StocksRaw materials, consumables andgoods for resale are valued atcost. The cost of the milk thatforms part of stock has beenentered at the on-account price,including supplementary paymentsto Arla Foods amba members.

Work in progress and finishedgoods are valued at cost consistingof the cost of raw materials andconsumables with the addition ofprocessing costs and other costsdirectly or indirectly related to theindividual goods.

Stocks are valued according tothe FIFO method. If the cost ex-ceeds the net realisable value,write-down is made to the net real-isable value. The net realisablevalue is determined based on theturnover rate, marketability anddevelopment in the expected salesprice of the goods.

ReceivablesReceivables are recorded at nomi-nal value less write-down for antici-pated bad debts based on an indi-vidual assessment of the debtors.

Other current assetsSecurities are valued at market va-lue at the end of the financial year.

EquityAccording to Article 15 of theArticles of Association, the compa-ny’s equity consists of:

Capital account:The company’s capital accountconsists of the undistributed equityof the company.

Reserve A:Reserve A consists of reserves inpersonal accounts in MD Foodsamba, for which the followingterms apply:

1. The Board of Representativesmay decide to service depositsin the personal accounts at arate of interest not exceedingthe official Danish discount rate.

2. Any decisions concerningpayments from the personalaccounts shall be made by theBoard of Representatives.

3. The plan is for the reserve tobe paid out in the course of the2000/2001 - 2007/2008financial years.

No payments shall be made to themembers of Arla Foods ambawhich reduce the total of thecompany’s capital account andReserve A Upon the effecting ofsuch payments from Reserve A, acorresponding amount shall bepaid into the capital account. Inaddition, DKK 280 million shall beadded to the capital accountthrough consolidation and concur-rently with payments from ReserveA. DKK 70 million of this amounthas been transferred to the capital

44

account up to and including thefinancial year 2001/2002.

Reserve B:Reserve B comprises the reservesset aside on the incorporation ofthe company.

Revaluation reserves:The account includes net revalua-tion in accordance with the equitymethod for non-dairy subsidiariesand associated undertakings.Furthermore, unrealised gains onsecurities which are currentassets are included.

Subsidiary reserves:The account includes net revalua-tion of dairy-related companiesaccording to the equity method.

Subordinate loan capitalPursuant to the Memorandum ofAssociation, Arla ekonomisk fören-ing contributed SEK 330 million inthe form of subordinate loan capi-tal, which in the event of the bank-ruptcy of the company ranks afterother claims. The loan, on whichinterest accrues at the same rateas Reserve A, shall be repaid byone eighth annually, the first timein the 2001/2002 financial year.

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 contribu-tion schemes used in the Danishcompanies, the Group currentlypays fixed contributions to inde-pendent pension funds. The Grouphas not commitments of additionalpayments.

Defined benefit schemes, whichare primarily used by the Group’sundertakings in Sweden andEngland, are those for which thecompany is committed to pay acertain amount in connection withretirement, depending on e.g. theseniority of the employees.

The commitment regardingdefined benefit schemes is calcu-lated annually by means of anactuarial computation based onthe expected future development ininterest, inflation and averageuseful lives.

The actuarially calculated currentvalue less the market value of anyassets related to the scheme areprovided in the balance sheet un-der pension commitments.

Actuarial gains and losses arisingas a consequence of the changedassumptions in the calculation ofthe pension commitment or in thecomputation of the assets relatedto the pension scheme are recog-nised in the profit and lossaccount over the anticipated aver-age number of years remaining foreach employee.

If the total actuarial gains andlosses do not exceed 10% of thecurrent value of the pensioncommitment, they will not beincorporated in the accounts.

Other provisions :Other provisions comprise, inparticular, the remaining part ofthe provisions for structural ration-alisations made in the openingbalance sheet at 17 April 2000.

Cash flow statementThe cash flow statement is pre-pared according to the indirectmethod on the basis of the consol-idated 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 operatingactivities is calculated as theconsolidated results adjusted fornon-cash operating items such asdepreciation and write-downs andchanges to the working capital.

The cash flow for investingactivities comprises cash flows inconnection with the purchase andsale of intangible and tangible fixedassets as well as investments.

The cash flow from financingcomprises the raising and repay-ment of long-term and short-termdebt to financial institutions as wellas mortgage lenders.

The cash funds are made up ofcash funds and listed bondsentered in the balance sheet ascurrent assets.

The cash flow statement cannotbe derived solely from the consoli-dated accounts.

45

Profit and loss account

PARENT COMPANY GROUP02.10.00 01.10.01 01.10.01 02.10.00

– 30.09.01 – 29.09.02 DKK million Note – 29.09.02 – 30.09.01

24,526 25,751 Turnover 1 39,441 38,133

–21,772 –22,863 Production costs 2 –31,909 –30,.919

2,754 2,888 Gross profit 7,532 7,214

–1.,311 –1,365 Sales and distribution costs 2 –4,794 –4,548

–320 –404 Administration and joint costs 2/3 –1,304 –1,128

31 50 Other operating income 187 156

–41 –97 Other operating charges –213 –98

1,113 1,072 Operating profit 1,408 1,596

76 31 Results in subsidiaries 4 – –

–10 –16 Results in associated undertakings –6 0

– – Divestment of subsidiary 5 111 –

–165 –82 Net financial items 6 –307 –381

1,014 1,005 Profit before tax 1,206 1,215

–26 –16 Corporation tax 7 –47 –57

988 989 Profit for the year 1,159 1.,

Minority interest share

– – of results in subsidiaries 2 –1

988 989 Arla Foods amba’s share of results for the year 1,161 1,157

Proposed allocation:

690 575 Supplementary payments to Arla Foods’ members 575 690

222 383 Transferred to capital account 383 222

76 31 Transferred to subsidiary reserves – –

– – Transferred to other reserves 203 245

988 989 Total 1,161 1,157

46

Balance sheet

PARENT COMPANY GROUPBalance sheet Balance sheet

at 30.09.01 at 29.09.02 DKK million Note at 29.09.02 at 30.09.01

ASSETS

Fixed assets

Intangible fixed assets 8

0 0 Licences and trademarks, etc. 75 94

296 277 Goodwill incl. group goodwill 642 594

184 92 Equalisation sum 92 184

480 369 Total 809 872

Tangible fixed assets 8

1,380 1,389 Land and buildings 3,199 3,659

1,682 1,898 Plant and machinery 3,887 3,393

60 59 Other assets, fixtures and fittings, etc. 547 521

151 142 Tangible assets in course of construction 481 472

3,273 3,488 Total 8,114 8,045

Investments 9

2,734 2,162 Participating interests in subsidiaries – –

94 99 Part. interests in associated undertakings 274 273

814 823 Other securities and participating interests 1,053 1,324

0 0 Other receivables 3 9

3,642 3,084 Total 1,330 1,606

7,395 6,941 Total fixed assets 10,253 10,523

Current assets

Stocks

428 442 Raw materials and consumables 783 745

766 730 Work in progress 1,125 1,163

153 206 Finished goods and goods for resale 1,852 1,575

1,347 1,378 Total 3,760 3,483

Receivables

1,121 1,120 Trade receivables 4,022 3,988

3,477 3,931 Amounts owed by affiliated undertakings 0 0

204 158 Amounts owed by associated undertakings 360 210

32 24 Land and buildings for disposal 77 62

190 736 Other receivables 1,343 630

7 6 Prepayments and accrued income 81 97

5,031 5,975 Total 5,883 4,987

0 0 Securities 927 560

445 502 Cash at bank and in hand 913 1,305

6,823 7,855 Total current assets 11,483 10,335

14,218 14,796 TOTAL ASSETS 21,736 20,858

47

Balance sheet

PARENT COMPANY GROUPBalance sheet Balance sheet

at 30.09.01 at 29.09.02 DKK million Note at 29.09.02 at 30.09.01

EQUITY, MINORITY INTERESTS AND LIABILITIES

Equity

4,928 5,311 Capital account 5.,11 4,928

649 555 Reserve A 555 649

500 500 Reserve B 500 500

77 284 Revaluation reserve – –

–43 –18 Subsidiary reserves – –

– – Other reserves 266 34

6,111 6,632 Total equity 6,632 6,111

– – Minority interests 10 87 85

252 236 Subordinate loan capital 11 236 252

6,363 6,868 Total capital base 6,955 6,448

Provisions

33 24 Deferred tax 12 240 370

0 0 Pensions 13 699 609

193 149 Other provisions 14 694 735

226 173 Total provisions 1,633 1.,

Payables

Long-term payables 15

1,020 1,882 Mortgage lenders 2,461 1,574

1,652 1,376 Credit institutions, etc. 2,137 2,319

2,672 3,258 Total 4,598 3,893

Short-term payables

112 383 Short-term part of long-term payables 451 171

1,254 373 Credit institutions 2,036 3,040

690 575 Supplementary payments 575 690

804 1,088 Trade payables 2,676 2,292

1,432 1,492 Amounts owed to affiliated undertak. 1,156 1,074

1 0 Amounts owed to associated undertak. 0 7

34 29 Corporation tax 44 60

593 524 Other payables 1,579 1,432

37 33 Accruals and deferred income 33 37

4,957 4,497 Total 8,550 8,803

7,629 7,755 Total payables 13,148 12,696

14,218 14,796 TOTAL EQUITY, MINORITY INTERESTS

AND LIABILITIES 21,736 20,858

Contingent liabilities and guarantees, etc. 16

48

Equity movements

PARENT COMPANY GROUP2001/02 DKK million 2001/02

Capital account:

4,928 Balance at 1 October 2001 4,928

383 Transferred from profit for the year 383

5,311 Total 5,311

Reserve A:

649 Balance at 1 October 2001 649

–94 Paid to MD Foods amba –94

555 Total 555

Reserve B:

500 Balance at 1 October 2001 500

500 Total 500

Revaluation reserves:

77 Balance at 1 October 2001 –

Profit in non-dairy subsidiaries and

172 associated undertakings, net –

35 Exchange rate adjustments, etc. –

284 Total –

Subsidiary reserves:

–43 Balance at 1 October 2001 –

31 Transferred from profit for the year –

–6 Exchange rate adjustments, etc. –

–18 Total –

Other reserves:

– Balance at 1 October 2001 34

– Transferred from profit for the year 203

– Exchange rate adjustments, etc. 29

– Total 266

6,632 TOTAL EQUITY 6,632

49

Cash flow statement

GROUP

DKK million 2001/02 2000/01

Cash flow from operating activities:

Profit for the year 1,161 1,157

Depreciation and other operating items

without cash impact 1,356 1,336

Share of results in investments 6 0

Changes in pensions and other provisions 49 –40

Changes in stocks –277 100

Changes in receivables –896 –170

Changes in trade payables and other payables, etc. –336 –1,118

Corporation tax paid –71 –21

Cash flow from operating activities 992 1,244

Cash flow for investments:

Investments in intangible fixed assets, net –119 –70

Investments in tangible fixed assets, net –1,110 –1,476

Investments in participating interests, net 231 390

Cash flow for investments –998 –1,156

Cash flow from financing activities:

Changes in debt to credit institutions and mortgage lenders –19 –43

Cash flow from financing activities –19 –43

Changes in cash funds and securities –25 45

Cash funds and securities at 30 September 2001 1,865 1,820

Cash funds and securities at 29 September 2002 1,840 1,865

50

Notes

GROUPDKK million 2001/02 2000/01

Turnover

Analysed by market

Sweden 10,281 10,062

Denmark 9,353 9,248

Other EU countries 12,960 12,396

Rest of Europe 770 782

Middle East 2,445 2,103

North America 1,018 928

Central and South America 871 932

Asia 1,264 1,225

Africa 457 430

Other countries 22 27

Total 39,441 38,133

Turnover in markets outside Sweden and Denmark 19,807 18,823

Corresponding to 50% 49%

Analysed by product group:

Fresh products 15,893 15,430

Cheese 10,606 10,640

Butter and spreads 5,120 4,289

Condensed milk products 5,410 5,573

Packaging and additives 974 1,065

Other turnover 1,438 1,136

Total 39,441 38,133

Costs

Staff costs:

By function

–1,840 –1,901 Production –3,672 –3,663

–176 –176 Sale and distribution –1,582 –1,565

–191 –223 Administration and joint costs –622 –534

–2,207 –2,300 Total –5,876 –5,762

By type

–2,083 –2,156 Wages and salaries –4,976 –4,926

–110 –130 Pensions –374 –314

–14 –14 Other social security costs –526 –522

–2,207 –2,300 Total –5,876 –5,762

6,775 6,770 Average number of employees (man years) 17,866 18,200

Salaries and remuneration incl. pensions for the Group include the parent

company's Management Board by DKK 7 million (2000/2001: DKK 6 million)

and fees to the parent company's Supervisory Board and Board of

Representatives of DKK 10 million (2000/2001: DKK 10 million).

Note

1

2

PARENT COMPANY2000/01 2001/02

51

Notes

PARENT COMPANY GROUP2000/01 2001/02 DKK million 2001/02 2000/01

Costs (continued)

Depreciation:

By function

–92 –92 Equalisation sum (production) –92 –92

–433 –518 Production –992 –903

–3 –2 Sales and distribution –136 –128

0 0 Administration –140 –156

4 6 Profit/loss on sale of intangible and tangible fixed assets –11 –12

–524 –606 Total –1,371 –1,291

Fees for the auditors appointed by the Board of Representatives

Audit fee:

–4 –4 KPMG C. Jespersen

–2 –2 PricewaterhouseCoopers

Other services:

–2 –3 KPMG C. Jespersen

0 –1 PricewaterhouseCoopers

–8 –10 Total

Results in subsidiaries

102 42 Profit in subsidiaries before tax

–26 –11 Loss in subsidiaries after tax

76 31 Total

The figures include only the results of dairy-related subsidiaries. The non-dairy

subsidiaries and associated undertakings have achieved the following net profit,

169 172 which has been taken directly to equity:

Divestment of subsidiary

The item only comprises the net profit from the sale of Arla Foods

Fastighetsförvaltning AB, who owns the domicile property in Stockholm.

Financial items, net

Expenses:

–30 –24 Interest payable to affiliated undertakings –17 –20

–331 –201 Other financing charges –426 –601

–361 –225 Total –443 –621

Income:

111 121 Interest receivable from affiliated undertakings 9 8

85 22 Other financing income 127 232

196 143 Total 136 240

–165 –82 Financial items, net –307 –381

Corporation tax

–25 –33 Tax on taxable income for the year –74 –54

–1 10 Adjustment of deferred tax 11 1

0 7 Correction of tax for previous years 16 –4

–26 –16 Total –47 –57

0 24 Corporation tax paid in (including on-account tax)

in the course of the year 71 21

Note

2

3

4

5

6

7

52

Notes

GROUPIntangible and tangible fixed assets

DKK million Intangible fixed assets Tangible fixed assets

Licences Goodwill Plant Other assets Assets inand trade- incl. Equal- Land and fixtures course ofmarks, group- isation and machin- and fit- construc-etc. goodwill sum buildings ery tings etc. tion

Cost at 1 October 2001 106 699 276 3,986 4,358 782 472

Exchange rate adjustm. -1 -1 0 82 61 2 17

Additions during the year 0 127 0 306 1,136 240 237

Transferred during the year 0 0 0 84 161 0 -245

Disposals during the year -2 -13 0 -756 -248 -81 0

Cost at 29 September 2002 103 812 276 3,702 5,468 943 481

Depreciation and write-downs at

1 October 2001 –12 –105 –92 –327 –965 –261 0

Exchange rate adjustm. -1 1 0 -5 -1 -5 0

Depreciation and write-downs

for the year -16 -72 -92 -214 -787 -179 0

Depreciation and write-downs on

discontinued assets 1 6 0 43 172 49 0

Depr. and write-downs

at 29 September 2002 -28 -170 -184 -503 -1,581 -396 0

Net book value at

29 September 2002 75 642 92 3,199 3,887 547 481

New acquisitions for the year have been reduced by EU subsidies and subsidies from other public authorities of DKK 27 million.

At the annual adjustment at 1 January 2002, the total property valuation of Danish properties with a book value of DKK

1,814 million amounted to DKK 1,906 million, to which should be added investments subsequent to this date.

PARENT COMPANYIntangible and tangible fixed assets (continued)

DKK million Intangible fixed assets Tangible fixed assetsGoodwill Plant Other assets Assets inincl. Equal- Land and fixtures course ofgroup- isation and machin- and fit- construc-goodwill sum buildings ery tings etc. tion

Cost at 1 October 2001 323 276 1,520 2,104 78 151

Additions during the year 0 0 88 486 22 142

Transferred during the year 0 0 37 114 0 –151

Disposals during the year 0 0 –11 –4 –10 0

Cost at 29 September 2002 323 276 1,634 2,700 90 142

Depreciation and write-downs

at 1 October 2001 –27 –92 –140 –422 –18 0

Depreciation and write-downs –19 –92 –106 –380 –15 0

Depreciation and write-downs

on discontinued assets 0 0 1 0 2 0

Depreciation and write-downs at 02.09.29 –46 –184 –245 –802 –31 0

Net book value at 29 September 2002 277 92 1.389 1.898 59 142

New acquisitions for the year have been reduced by EU subsidies and subsidies from other public authorities of DKK 26 million.

At the annual adjustment at 1 January 2002, the total property valuation of Danish properties amounted to DKK 1,435

million, to which should be added investments subsequent to this date.

Note

8

53

Notes

GROUPInvestments

Part. interests in Other securities and

DKK million associated undertakings participating interests Other receivables

Cost at 1 October 2001 275 1,313 9

Exchange rate adjustments –49 10 0

Additions during the year 64 0 0

Disposals during the year –3 –276 –6

Cost at 29 September 2002 287 1,047 3

Adjustments at 1 October 2001 –2 11 0

Profit/loss for the year –6 0 0

Other adjustments –5 –5 0

Adjustments at 29 September 2002 –13 6 0

Net book value at 29 September 2002 274 1,053 3

PARENT COMPANYInvestments

Participating interests Part. interests in Other securities and parti-

DKK million in subsidiaries associated undertakings cipating interests

Cost at 1 October 2001 2,478 99 803

Exchange rate adjustments 22 0 9

Additions during the year 34 5 0

Disposals during the year –722 0 0

Cost at 29 September 2002 1,812 104 812

Adjustments at 1 October 2001 256 –5 11

Exchange rate adjustments 6 0 0

Profit for the year 186 3 0

Changes in intra-group profit, stocks –28 0 0

Other adjustments –70 –3 0

Adjustments at 29 September 2002 350 –5 11

Net book value at 29 September 2002 2,162 99 823

Note

9

54

Notes

PARENT COMPANY GROUP02.10.00 01.10.01 01.10.01 02.10.00

– 30.09.01 – 29.09.02 DKK million – 29.09.02 – 30.09.01

Minority interests

Minority interests beginning of year 85 89

Share of results for the year –2 1

Changes in ownership share 4 –5

Minority interests, year-end 87 85

Subordinate loan capital

288 252 Subordinate loan capital, beginning 252 288

–36 18 Exchange rate adjustments 18 –36

0 –34 Repayments during the year –34 0

252 236 Subordinate loan capital, year-end 236 252

Deferred tax

36 33 Deferred tax beginning of year 370 421

–4 1 Exchange rate adjustments 15 –50

– – Disposal on sale of subsidiary –134 –

1 –10 Other changes in deferred tax during the year –11 –1

33 24 Deferred tax, year-end 240 370

Pensions

The provision comprises defined benefit schemes in Sweden

and UK and is computed as follows:

Current value of the pension commitments 1,885 1,654

Not included actuarial losses –441 –219

Market value of the assets of the pension schemes –745 –826

Total 699 609

The defined benefit schemes in UK are administered by independent pension

funds who invest the amounts paid in to cover the commitments. The actuarial

current value of the commitments (DKK 1,191 million at 29 September 2002

against DKK 1,022 million at 30 September 2001) less the market value of the

assets (DKK 745 million at 29 September 2002 against DKK 826 million at 30

September 2001) amounts to DKK 446 million. This actuarial loss is included

in the profit and loss account over the anticipated average number of working years

remaining for the employees.

The defined benefit schemes in Sweden are not covered by payments to pension

funds. The actuarial current value of the commitments is in all material respects

recorded in the balance sheet.

Other provisions

259 193 Other provisions beginning of the year 735 500

0 – Reassessment of the opening balance sheet – 300

259 193 Adjusted other provisions, beginning 735 800

5 0 Provided during the year 9 8

–71 –44 Applied during the year –50 –73

193 149 Other provisions, year-end 694 735

Note

10

11

12

13

14

55

Notes

PARENT COMPANY GROUP30.09.01 29.09.02 DKK million 29.09.02 30.09.01

Long-term payables

Long-term payables falling due after

1,312 2,112 five years after the balance sheet date 2,722 1.876

Contingent liabilities, guarantees, etc.

Contingent liabilities

3,100 2,444 Surety and guarantee obligations 1,121 1,167

142 144 Leasing obligation (total 299 310

Obligations relating to agreement

219 314 on the supply of fixed assets 475 417

To cover exchange risks, the following

forward exchange contracts have been entered into:

1,521 869 Forward contracts (buying) 1,262 1,777

4,665 4,856 Forward contracts (selling) 5,162 4,889

0 1,050 Interest swaps 1,213 0

The following assets have been

deposited as security for debt:

170 170 Owner's mortgage in real property 463 444

468 448 with a book value of 1,221 1,421

0 0 Securities, book value 587 0

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

573 590 calculated as DKK 20 per 1,000 kg milk delivered. 590 573

DKK 0 has been provided as security for debt.

The Group is a party to a number of lawsuits.

The outcome of these cases is not expected to

significantly affect the profit for the year or the

assessment of the Group's financial position.

Note

15

16

56

Group companies

Subsidiaries, associated undertakings and participating interests

The companies marked with x are defined as dairy-related and their results are included in the profit and loss account of the

parent company. The other companies are defined as non-dairy, and their results are therefore taken directly to the equity of

the parent company.

SUBSIDIARIES that are all included in the consolidated accounts Ownership share

● Arla Foods AB, Sweden 100.0%

● ASM Mjölksocker AB, Sweden (100.0%)

● Arla Ost och Smör Produktion AB, Sweden (100.0%)

Friggs AB, Sweden (100.0%)

Eterna Näringsprodukter AB, Sweden (100.0%)

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%)

● Mejerigrossisten Fyn ApS, 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 Specialost AB, Sweden 100.0%

● Arla Foods Inc., USA 100.0%

● Arla Foods S.A.R.L., France 100.0%

● Andelssmør A.m.b.a., Denmark 91.9%

● Arla Foods Fonterra P/S, Denmark 75.0%

● Enigheden A/S, Denmark 51.0%

● 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., UK (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, Danmark (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 Plc., UK

Arla Foods Argentina S.A., Argentina

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%)

Semper Holding AB, Sweden 100.0%

Semper AB, Sweden (100.0%)

Anjo Holding AB, Sweden 100.0%

A/S Anjo, Denmark (100.0%)

57

Group companies

SUBSIDIARIES that are all included in the consolidated accounts (continued) Ownership share

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%)

Kirkeby Mejeri A/S, Denmark (100.0%)

De Danske Mejeriers Fællesindkøb Amba, Denmark 96.0%

Dairy Fruit A/S, Denmark (100.0%)

A/S Crispy Food International, Denmark (100.0%)

IFEG International ApS, Denmark (100.0%)

Ejendomsselskabet Østre Gjesingvej 19 A/S, Denmark (100.0%)

Danapak A.m.b.a., Denmark 93.0%

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., UK (100.0%)

Danapak Leasing ApS, Denmark (100.0%)

Finn Westergaard Holding A/S, Denmark (60.0%)

Danapak WP A/S, Denmark (100.0%)

Dana-Green 2000 A/S, Denmark (51.0%)

ASSOCIATED UNDERTAKINGS

● 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%

Biolac GmbH, Germany 50.0%

Arla Foods Ingredients S.A., Argentina (owned through Arla Foods Ingredients amba) 50.0%

Dan Vigor Ltd. Brazil (owned through Arla Foods International A/S) 50.0%

Matpartner R&S AB, Sweden (owned through Semper Holding AB) 50.0%

Cocio A/S, Denmark (owned through Danmark Protein A/S) 50.0%

Delimo A/S, Denmark (owned through Arla Foods Distribution amba) 48.0%

Danapak Flexibles Group, Denmark (owned through Danapak A/S) 40.0%

Kronost AB, Sweden (owned through Arla Foods AB) 25.0%

PARTICIPATING INTERESTS

Mejeriforeningen, Denmark 89.5%

Svensk Mjölk Ekonomisk förening, Sweden 42.0%

Lantbrukarnas Riksförbund, förening upa, Sweden 19.0%

Pursuant to Section 43(2) of the Danish Annual Accounts Act and section 22(5) of the Danish Statutory Order of

Annual Accounts, information about individual subsidiaries has been omitted as it is deemed that such information

may cause considerable damage to these companies.

The Group moreover owns a number of companies without commercial activities.

Management and Supervisory Board

Jens Bigum

Man. Director

Åke Modig

Dep.-Man. Director

Lars Lamberg

Chairman

Knud Erik Jensen

Deputy Chairman

58

Bertil Andersson Leif Backstad Kaj W. Christensen Christer Eliasson Anders Ericsson

Leif Eriksson Elisabeth Gauffin Åke Hantoft Tommy Jacobsson Thomas Johansen

Sören Kihlberg Kr. Ole Kristensen Ove Møberg Hans Peter Nielsen Per Norstedt

Jan Nørgaard Kaj Ole Pedersen Søren Rasmussen Pejter Søndergaard Bent Juul Sørensen

2

Key figures DKK million

GROUP01.10.01 00.10.02 00.04.17

02.09.29 01.09.30 00.10.01

Profit

Net turnover 39,441 38,133 17,453

outside DK/SE 19,807 18,823 8,200

% outside DK/SE 50 % 49 % 47 %

Net profit 1,161 1,157 392

Supplementary payments 575 690 276

Consolidation 586 467 116

Financing

Balance sheet total 21,736 20,858 21,275

Fixed assets 10,253 10,523 11,055

Gross investments 2,046 1,877 905

Capital base 6,955 6,448 6,343

Equity ratio

In % 32 % 31 % 30 %

Raw materials

Milk received (the Group) million kg 7,041 7,085 3,344

Denmark 3,964 3,967 1,914

Sweden 2,157 2,167 993

Other countries 920 951 437

No. of co-operative owners 13,642 14,909 16,121

Denmark 7,103 7,921 8,639

Sweden 6,539 6,988 7,482

Employees

No. of employees (man years) 17,866 18,200 18,622

TURNOVER01.10.01 – 02.09.29

Divided into markets

1. Sweden 10,281 10,062 5,060

2. Denmark 9,353 9,248 4,193

3. Other EU countries 12,960 12,396 5,305

4. Rest of Europe 770 782 330

5. Middle East 2,445 2,103 885

6. North America 1,018 928 412

7. Central and South America 871 932 601

8. Asia 1,264 1,225 477

9. Africa 457 430 175

10 Other 22 27 15

Total 39,441 38,133 17,453

Diveded into product categories

11 Fresh products 15,893 15,430 7,061

12 Cheese 10,606 10,640 4,652

13 Butter and spreads 5,120 4,289 2,033

14 Condensed milk products 5,410 5,573 2,574

15 Packaging 974 1,065 502

16 Other turnover 1,438 1,136 631

Total 39,441 38,133 17,453

Divided into markets

Divided into product categories

1

23

4

5

11

12

13

14

15 16

67

8 9

After milking, farmer Jens Åge Skipper

feeds his herd of 80 dairy cows.

Originally, Jens Åge Skipper was a

member of the Randers & Viborg

co-operative dairy which merged with

the then MD Foods in 1996.

➜

New products 2001/02

1.2.3.4.5.6.7.8.9.

10.11.12.13.14.15.16.17.18.19.20.21.22.23.24.25.26.27.28.29.30.31.32.33.34.35.36.37.38.39.40.41.42.43.44.45.46.47.48.49.50.51.52.53.54.55.56.57.58.59.60.61.62.63.64.65.66.67.68.69.

Kærgården 475 g, launched Denmark October 2001. Hoobs yoghurt, launched UK October 2001Lurpak Lighter Spreadable, launched UK October 2001A38 Natural Light, launched Denmark October 2001Minimilk 1 litre, launched Denmark October 2001Buko fresh cheese cucumber with garlic, launched Denmark October 2001Herb butter with chilli and lime, launched Sweden October 2001Gratella Mozzarella, launched Sweden January 2002 Kelda mild tomato soup, launched Sweden January 2002Minifraiche 5%, launched Sweden January 2001Dexter’s Laboratory yoghurt, launched UK January 2002Powerpuff Girls yoghurt, launched UK January 2002Karoline’s gratin cheese, launched Denmark January 2002Rosenborg Danish Blue Cheese 25 oz., launched USA January 2002Yoggi peach melba, launched Denmark February 2002Dano full cream milk powder, launched Bangladesh February 2002Cheasy 13% medium mature in slices, launched Denmark February 2002Høng gold danablu, launched Denmark February 2002Malthe 30+ medium mature in slices, launched in Denmark February 2002Cheasy 5% mild in slices, launched Denmark February 2002Magré in slices, launched Sweden March 2002MiniMeal vanilla rice with blueberries, launched Denmark April 2002Arla Mini Vanilla, launched Denmark April 2002Arla Mini Cocoa, launched Denmark April 2002Riberhus 30+ medium mature, launched Denmark April 2002Yoggi Dröm 4-pack, launched Denmark April 2002Bregott organic, launched Sweden May 2002Garlic & chive cold sauce, launched Sweden May 2002Feta Snack, launched Sweden May 2002Cheese and tomato cold sauce, launched Sweden May 2002Herb butter with garlic, launched Sweden May 2002Semi-skimmed milk 3dl, launched Sweden May 2002Milk drink with chocolate flavour, launched Sweden May 2002Milk drink with strawberry flavour, launched Sweden May 2002Yoggi yalla! drinking yoghurt with new flavour, launched Sweden May 2002Organic milk 2 pts. for multiple, launched UK May 2002Cravendale, launched nationwide in UK May 2002World Cup yoghurt, launched UK May 2002Mini milk in cans, launched Denmark June 2002Cheasy 6% fresh cheese chives and onion, launched Denmark June 2002Milex Kinder 1-5, launched Panama June 2002Cream cheese natural, launched Singapore June 2002Cheasy curry sauce, launched Denmark August 2002Lillebror cheese stickers, launched in new packaging Denmark August 2002Winnie the Pooh milk powder, launched Panama August 2002Dano full-cream milk powder, launched Yemen August 2002Cottage cheese & raspberries/blueberries, launched Sweden September 2002MiniMeal vanilla rice with strawberries, launched Sweden September 2002Mild yoghurt with topping and honey, launched Sweden September 2002Scooby-Doo yoghurt, launched UK September 2002Cream cheese light, launched Canada September 2002Cream cheese with pepper, launched Canada September 2002Milex full-cream milk powder, launched Honduras September 2002Rosenborg noble blue, launched USA September 2002Apetina feta, launched Finland October 2002Apetina feta with red pepper, launched Finland October 2002M1 full-cream milk powder, launched Honduras October 2002Low fat spreadable product, launched Kuwait October 2002Apetina feta, relaunched Spain, Holland and Germany December 2002Apetina feta in cubes, relaunched Holland, Belgium, France, Italy, Norway and Sweden December 2002Buko Garli with herbs, launched Holland January 2003Buko fresh cheese, relaunched Germany January 2003Buko fresh cheese with herbs, relaunched Germany January 2003Finello gratin cheese, relaunched Germany January 2003Finello pasta cheese, relaunched Germany January 2003Finello pizza cheese, relaunched Germany January 2003Havarti in slices, relaunched Germany January 2003Cave cheese in slices, relaunched Germany January 2003Buko pineapple, launched Holland January 2003