Arla Foods Consolidated Annual Report 2021

93 Arla Foods Consolidated Annual Report 2021 / Consolidated Financial Statements / Notes Funding 4.1 FINANCIAL RISKS Contents III Risk Risk mitigation Liquidity and funding are vital for the group to be able to pay its financial liabilities as they become due. It also impacts our ability to attract new funding in the longer term and is crucial to fulfilling the group's strategic ambitions. Average maturity Policy The treasury and funding policy states the minimum average maturity threshold for net interest-bearing debt and sets limitations on debt maturing within the next 12- and 24-month periods. Unused committed facilities are taken into account when calculating average maturity. Maximum Policy 2021 2020 Minimum Average maturity, gross debt 5.8 years 5.0 years 2 years Maturity 1 year, net debt 0% 100% 0% 84% 25% 50% Maturity 2 years, net debt How we act and operate In addition to the treasury and funding policy, the Board of Directors has approved a long-term financing strategy, which defines the direction for financing of the group. This includes counterparties, instruments and risk appetite and describes future funding opportunities to be explored and implemented. The funding strategy is supported by members' long-term commitment to investing in the business. It is the group's objective to maintain its credit quality at a robust investment grade level. a positive or negative amount is recognised in other income or other costs, respectively. A net loss of EUR 31 million was recognised in other costs compared to a gain of EUR 17 million last year. A loss from hedges will be expected in years where export currencies strengthen during the year and vice versa. The group is exposed to translation effects from entities reporting in currencies other than EUR. The group is mainly exposed to translation of entities reporting in GBP, DKK, SEK, CNY and USD. Due to translation effects, revenue decreased by EUR 40 million compared to the revenue reported last year. Simultaneously, costs decreased by EUR 27 million compared to last year's reported costs. The group's financial position is similarly exposed, impacting the value of assets and liabilities reported in currencies other than EUR. The translation effect on net assets is recognised in other comprehen- sive income as foreign currency translation adjustments. In 2021, a net gain of EUR 132 million was recognised in other comprehensive income compared to a net loss of EUR 84 million last year. Indirectly the prepaid milk price absorbs both transaction and translation effects, and the net profit or loss therefore has limited exposure to currency risks. The prepaid milk price is set based on achieving an annual profit of 2.8 to 3.2 per cent. The prepaid milk price is initially measured and paid out based on a EUR amount and is consequently exposed to EUR fluctuations against GBP, SEK and DKK. Compared to last year, the average rate of the USD weakened by 4 per cent, whereas the GBP and SEK strengthened by 3 per cent. The group is increasingly involved in emerging markets where efficient hedging is often not feasible due to currency regulations, illiquid financial markets or expensive hedging costs. Among the most important markets are Nigeria, the Dominican Republic, Bangladesh, Lebanon and Argentina. Countries with less efficient currency markets represented 4 per cent of the group's revenue in 2021. 4.1.2 Currency risk CURRENCY IMPACT ON REVENUE, COSTS AND FINANCIAL POSITION The group is exposed to both transaction and translation effects from foreign exchange rates. Transaction effects are due to sales in currencies other than the functional currencies of the individual entities. The group is mainly exposed to USD and USD-pegged currencies as well as GBP. Revenue decreased by EUR 13 million compared to last year due to negative transaction effects. Part of this exposure was hedged by costs in the same currency. Financial instruments such as trade receivables, trade payables and other items denominated in currencies other than the individual entities' functional currencies are also exposed to currency risks. The net effect from the revaluation of these financial instruments is recognised in financial income or financial costs. A net loss of EUR 28 million was recognised in financial costs compared to a loss of EUR 25 million last year. Exchange rate losses relate primarily to the devaluations of the Lebanese, Nigerian and Argentine currencies, which amounted to EUR 21 million. To manage short-term volatility from currency fluctuations, derivatives are used to hedge the currency exposure. When settling the hedging instrument, Revenue split by currency, 2021 11,202 MILLION EUR Revenue split by currency, 2020 10,644 MILLION EUR EUR 31% USD 9% GBP 25% SAR 3% ■SEK 13% Other 8% ■DKK 11% ■EUR 30% USD 9% ■GBP 25% ■SAR 3% ■SEK 13% Other 8% DKK 12%

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