Arla Foods Annual Report 2020

Management Review Our Strategy Our Brands and Commercial Segments Our Responsibility Our Governance Our Performance Review Our Consolidated Financial Statements Our Consolidated Environmental, Social and Governance Data Net working capital 2.1 NET WORKING CAPITAL, OTHER RECEIVABLES AND CURRENT LIABILITIES Net working capital position improved Net working capital decreased by EUR 144 million to EUR 679 million, representing an improvement of 17.5 per cent compared to last year. Continued focus on optimising net working capital, including initiatives such as increased use of global procurement agreements, improved payment terms, as well as utilisation of finance programmes with our customers and supplies, supported this development. A higher inventory level was partly offset by reclassification of spare parts to plant and machinery and by write downs. Inventory Inventory decreased by EUR 12 million to EUR 1,080 million, compared to EUR 1,092 million last year. Underlying inventory increased with 10 per cent primarily driven by higher volumes in International, especially in MENA, and by a different composition of inventories compared to last year. This was offset by reclassification of spare parts to plant and machinery, write-downs and exchange rates. Trade receivables Historically, amounts written off as irrecoverable were relatively low. This was unchanged in 2020, with EUR 3 million recognised in the income statement as losses arising from bad debt, compared to EUR 6 million last year. Trade and other payables Trade and other payables increased with EUR 54 million to EUR 1,212 million, compared to EUR 1,158 million last year. Continued utilisation of global contracts, focus on payment terms and use of supply chain finance programmes resulted in trade and other payables increased with EUR 66 million partly offset by adverse foreign exchange effects of EUR 11 million. Trade receivables decreased by EUR 78 million to EUR 811 million, compared to EUR 889 million last year. Excluding the effect of currencies and others, trade receivables decreased EUR 51 million. This decrease was driven by a focus on cash collection and utilisation of trade receivables finance programmes. The group utilised these programmes to manage liquidity and reduce credit risk on trade receivables. programmes had a positive impact on the net working capital level compared to last year. Other receivables and other current liabilities Other receivables increased EUR 184 million to EUR 424 million compared to EUR 240 million last year, mainly driven by postponed declaration of VAT and duty receivables in Denmark. A number of Arla's strategic suppliers participate in supply chain finance programmes, where the supply chain finance provider and related financial institutions act as a funding partner. When suppliers participate in these programmes, the supplier has the option, at their own discretion and flexibility, to receive early payment from the funding partner based on invoices sent to Arla. This is conditioned by Arla's recognition and approval of received goods or services and an irrevocable acceptance to pay the invoice at due date via the funding partner. The arrangement of early payment is an exclusive transaction between the supplier and the supply chain finance provider. Managing credit risk exposure on trade receivables is guided by group-wide policies. Credit limits are set based on the customer's financial position and current market conditions. The customer portfolio is diversified in terms of geography, industry sector and customer size. In 2020, the group was not extraordinarily exposed to credit risk related to significant individual customers, but to the general credit risk in the retail sector. Read more about credit risk in note 4.1.5. Development in net working capital (EURM) 900 32 -54 823 800 850 The liability for Arla, represented by the invoice, is recognised within trade and other payables until maturity. The programme is one of many components in the overall relationship between strategic suppliers and Arla to improve the cash position for both parties. Extended payment terms are not embedded in the programmes themselves but agreed with vendors directly. The liquidity risk for Arla by termination of programmes is limited. The payment terms for suppliers participating in the programmes are no more than 180 days. Increased utilisation of supply chain finance 750 700 650 600 1 January 2020 Inventory Trade receivables Other current liabilities increased EUR 113 million to EUR 387 million compared to EUR 274 million last year, mainly due to extended payment terms for employee income taxes as part of the Danish government's Covid-19 funding programmes. 99 -56 excluding owner milk Trade and other payables Owner milk M&A -57 Currency 679 31 December 2020 80 ARLA FOODS ANNUAL REPORT 2020

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