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 Funding 4.1 FINANCIAL RISKS 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 policies state 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 2020 2019 Minimum Average maturity, gross debt 5.0 years 5.2 years 2 years Maturity 1 year, net debt Maturity 2 year, net debt 0% 84% 0% 93% 25% 50% How we act and operate In addition to the treasury and funding policy, the Board of Directors have 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 invest in the business. It is the group's objective to maintain its credit quality at a robust investment grade level. positive or negative amount is recognised within other income or other costs respectively. A net gain of EUR 17 million was recognised within other costs compared to a loss of EUR 24 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 73 million compared to the revenue reported last year. Simultaneously, costs decreased by EUR 80 million compared to last year's reported cost. 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 within other compre- hensive income as foreign exchange adjustments. In 2020 a net loss of EUR 84 million was recognised in other comprehensive income compared to a gain of EUR 42 million last year. Indirectly the prepaid milk price absorbs both transaction and translation effects and the net result therefore has limited exposure to currency risks. The prepaid milk is set based on achieving an annual profit of 2.8 to 3.2 per cent. The prepaid price is initially measured and paid out based on a EUR amount and consequently exposed to EUR fluctuations against GBP, SEK and DKK. Compared to last year, the average rate of the USD weakened by 2 per cent, the GBP weakened by 1 per cent and the SEK strengthened by 1 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 currency restrictions represented 4 per cent of the group's revenue in 2020. Revenue split by currency, 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 12 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 within financial income or financial costs. A net loss of EUR 25 million was recognised in financial costs compared to a loss of EUR 3 million last year. Exchange rate losses relate primarily to the devaluations of Lebanese, Nigerian and Argentine currencies, which amounted to EUR 20 million. To manage short term volatility from currency fluctuations, derivatives are used to hedge the currency exposure. When settling the hedging instrument, a 2020 10,644 EUR 30% USD 9% MILLION EUR 94 ARLA FOODS ANNUAL REPORT 2020 Revenue split by currency, 2019 10,527 MILLION EUR GBP 25% SAR 3% SEK 13% Other 8% DKK 12% ■EUR 31% USD 9% GBP 25% SAR 3% SEK 13% Other 7% DKK 12%

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