Arafura Resources Annual Report 2018

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FY2018 Annual Report · Arafura Resources

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CONSOLIDATED ANNUAL REPORT

2018

Transforming
for the future

O nly yoghurt and fruit,
nothing else

M ost eco-friendly carton

to date

Scene setter

As we are the largest
organic dairy producers in
the world, and have the
second largest milk pool
in Europe, we are creating
the blueprint for a more
sustainable industry. Now
we are also transforming Arla
for the future we want to see:
with fresh thinking and
smarter spending, we keep
finding new ways to meet
and exceed the expectations
of our owners, customers
and consumers.

Content

Management Review

03
04

08
10
11

2018 Performance at a glance
Message from the Chairman
of the Board of Directors
Message from the
Chief Executive Officer
Highlights
Five year financial overview
Essential business priorities for 2018

Our Strategy
13
14
15
16
18
20
21
24

Who we are
Our business model
Good Growth 2020
Embracing change
Our risk landscape
Preparing for Brexit
Our transformation programme, Calcium
Essential business priorities for 2019

Arla®
Lurpak®
Castello®
Puck®

Our Brands and Commercial Segments
26
27
28
29
30 Milk based beverages
31
33
35
36

Europe
International
Arla Foods Ingredients
Trading

Our Governance
38
40
42
43

Governance framework
Executive Management Team
Board of Directors
Management Remuneration

Our Responsibility
45
46
47
48
49
50
51
52

Our Code of Conduct
Our compliance activities
Our tax affairs
Leading the sustainability agenda
Sustainable dairy farming
Sustainability highlights 2018
Arlagården®
Diversity and inclusion

Our Financial Review
54
56
62

Market overview
Financial performance
Financial outlook

Consolidated Financial Statements

Primary financial statements
Notes

66
75
121 Statement by the Board of Directors

and the Executive Board

Endorsement
122 Independent auditor’s report

123 Glossary
125 Corporate calendar

2018 Performance
at a glance

Milk volume

Profit share**

13.9BILLION KG

2.8%OF REVENUE

114MILLION EUR

2018
2017
2016

13.9
13.9
13.9

2018
2017
2016

2.8%
2.8%

3.6%

2018

114

Target 2018 2.8 - 3.2%

Target 2018: 30 million

Revenue
BILLION EUR

2018

10.4
10.3
9.6

2017

2016

Performance price
EUR-CENT/KG

36.4

38.1

36.4

30.9

Strategic branded volume
driven revenue growth

3.1%

2018
2017
2016

3.1%
3.0%

5.2%

Target 2018 2.5 - 3.5%

2016

2017

2018

Brand share

International share*

Leverage

45.2%

19.6%

2.4

2018
2017
2016

45.2%
44.6%
44.5%

2018
2017
2016

19.6%
20.2%
19.7%

2018
2018
2017
2017
2016
2016

2.4
2.4

2.6
2.6

2.4
2.4

Target 2018 >45%

Target 2018 >20%

Target 2018 2.8 - 3.4

Target 2018 EUR 10 - 10.5 billion

* International share is based on retail and foodservice revenue, excluding revenue from third party manufacturing,

Arla Foods Ingredients and trading activities. ** Based on profit allocated to owners of Arla Foods amba.

ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements
MESSAGE FROM THE CHAIRMAN

A year of changes
and challenges

2018 was a year of changes, challenges and opportunities
– for many of us even more significantly so than anticipated
12 months ago.

ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements MESSAGE FROM THE CHAIRMAN

2018 easily could have been a year characterised
by its turbulent start with declining milk and
commodity prices, combined with continuing
uncertainty from the ongoing Brexit negotiations,
which impacted our overall performance. However,
we were able to offset these challenges with a
strong focus on price and margin management as
well as the introduction of our game-changing
Calcium transformation programme.

A great effort was put into realising Calcium by
both management and employees and the effort
resulted in the programme contributing far beyond
expectations in its first year, helping us get back on
track. With a performance price of 36.4 EUR-cent/kg
for 2018, we have now set the direction to further
improve our performance.

In July we said goodbye to Åke Hantoft, who
crowned his work as chairman and board member
by completing our journey towards becoming One
Arla. A milestone was marked when British and
Central European farmers voted a resounding ‘yes’
to becoming direct members, thereby paving the
way for ONE Arla with equal rights and obligations.
Being ONE Arla will make us stronger as a cooperative
and as a business. It will give us a consistent and
transparent structure across all owner countries and
give us the means to act as a truly global company.

A great achievement, and I would like to thank Åke
for the effort he put in to this and for all he has
contributed to our company during his over thirty

ARLA FOODS ANNUAL REPORT 2018

years as an elected representative, and seven
years as chairman.

For me as newly appointed chairman, it was
encouraging that by midterm our remarkably
strong balance sheet allowed the board to initiate
a proposal to pay out the entire 2018 net profit to
our farmer owners. This can be done without adding
risks to our investment plan securing our future
growth. To be able to make this proposal at
a time when the effects of the drought of 2018
are still felt is very empowering.

As a global farmer-owned dairy company, we are
measured not only on our products and financial
performance, but on how we operate our business.
In 2018 sustainability and climate rose even higher
up the agenda for us and our customers. The
environmental footprint of farming and food
production is, quite rightly, becoming increasingly
scrutinised and challenged for improvement.

Sustainable dairy starts on farm level. As dairy
farmers we have come a long way already, and have
every reason to be proud of this. Now we have to
go further, find new initiatives to adapt to future
demands and at the same time make a reasonable
living and develop our farms. We have only seen
the beginning of the climate and sustainability
discussion, that we in Arla address through our new
environmental strategy and by developing a quality
assurance programme like Arlagården®.

2018

2017

2016

We know that 2019 will be another volatile year
for dairy. Let’s embrace the future and take bold
decisions to strengthen our business, in part by
unfolding the sustainability agenda even more
in 2019. It will not be an easy journey, but I’m
confident we have set the right course.

Jan Toft Nørgaard
Chairman of the Board of Directors

Let’s embrace the
future and take bold
decisions to strengthen
our business.

Performance price
EUR-CENT/KG

36.4

38.1

30.9

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements MESSAGE FROM THE CHIEF EXECUTIVE OFFICER

Decisive action
improved our performance
after a rough start

While the political and market volatility continued to
impact our business, we made significant improvements
to our profitability and delivered on our Good Growth
2020 strategy.

ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements MESSAGE FROM THE CHIEF EXECUTIVE OFFICER

After a rough start, we finished the year beating our
expectations, reaching our full-year targets for net
profit and branded growth. We balanced the effect
of a continued weak GBP and unfavourable fat and
protein prices with substantial cost reductions and
relentless focus on growing our strategic brands.

Our international markets outside Northern Europe
also continued to deliver profitable growth. Our
largest region, the Middle East and North Africa,
progressed well with strong branded growth in our
core categories despite low macroeconomic growth
and political uncertainty.

To strengthen Arla’s performance, decisive action
was taken by the management team and the
Board of Directors to ramp up our transformation
programme Calcium. It is already substantially
changing the way we work, spend and invest in our
business. It is set to deliver EUR 400+ million of
sustainable annual savings by the end of 2021 that
will be invested in a higher milk price for our farmer
owners and in future growth. I’m delighted that
the results in the first year have exceeded our
expectations, delivering EUR 114 million in savings.

Branded growth and strategic milestones
Despite higher retail prices consumers remained
attracted to our strategic brands, Arla® and Puck®
and our licensed brand StarbucksTM all of which
delivered particularly strong performances.

Retail and food service sales in Europe grew at the
top end of our expectations and brands grew faster
than anticipated. Specifically our branded milk and
yogurt businesses grew against a backdrop of
declining dairy consumption trends and adverse
currency effects.

During 2018 important deals were signed that will
enable us to fast-forward our Good Growth 2020
strategy. The acquisition of the Yeo Valley organic
brand for milk, butter and spreads in the UK will
build our position as the world’s leading organic
dairy. The planned acquisition of Mondeléz’
Kraft-branded processed cheese business in the
MENA region, including a state-of-the-art production
facility in Bahrain, will step up our growth outlook in
the region. A 21-year licence agreement with
StarbucksTM secures our rights to produce and
market their milk-based coffee beverages business
for Europe, Middle East and Africa.

2019 outlook and Brexit uncertainties
Another year of political uncertainty and milk
price fluctuations is expected for 2019, not least will
the outcome of Brexit remain a significant risk. To
further strengthen our resilience, we will harvest the
benefits of the first year’s Calcium programme and
continue the transformation with heavy focus on
supply chain. We expect to deliver further branded
growth in the Europe and international zones.
We will continue to bring innovation into the

ARLA FOODS ANNUAL REPORT 2018

marketplace and engage with our customers
in creating value in their offline and online
sales channels.

We will also show strong leadership and action on
one of the most important agendas facing us today
– climate change. We will present an ambitious
strategy, that will accelerate the transition to
sustainable dairy in every part of our value chain
to maintain trust in dairy’s role in a healthy and
sustainable diet.

We finished the

year beating our
expectations, reaching
our full-year targets
for net profit and
branded growth.

Peder Tuborgh
CEO

114

MILLION EUR

Actual 2018

Target 2018

114

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements Highlights

2018 showcased the first steps in our transformation journey,
new product launches, innovative initiatives and key investments
for the future. With exceptional drive and creativity, all segments
of our business contributed fresh ideas as we continue to fulfil
our Good Growth 2020 strategy.

Starbucks™ extends strategic partnership
After seven years of a successful business
partnership, Arla and Starbucks™ signed a 21-year
strategic agreement, giving Arla the license to
continue to manufacture, distribute and market
Starbucks™ premium milk-based, ready-to-drink
coffee beverages for the EMEA region. Arla has now
launched Starbucks beverages in 38 countries
across EMEA and sells over 115 million units
per year.

ARLA FOODS ANNUAL REPORT 2018

Transforming Arla
through Calcium
The Calcium transformation
programme commenced in
2018 to create significant cost
and operational efficiencies and
reinvestment opportunities in
Arla’s continued growth.
The programme will run over
three years and aims to
unleash the full potential of
our organisation. Calcium
exceeded the 2018 target:
we saved EUR 114 million
with the programme, EUR 84
million more than expected.

Most environmentally friendly carton yet
Arla® Øko (Eco) launched our most eco-friendly milk carton
to date, reducing our climate impact by 358 tonnes of CO2
annually. The new carton is manufactured without whitening
processes, consequently we can remove a layer of packaging.
In addition, the plastic lid is now also 100 per cent bio. By
constantly aiming for the most sustainable solutions, we have
reduced emissions by a total of 35 per cent since 2014
compared with the production of the traditional milk carton.

Bold re-launch of Dano in Bangladesh
Arla® re-launched the 56-year-old household name Dano as Dano Power in Bangladesh
with a powerful marketing campaign. The main message is that Dano Power is here to
make the new generations strong. Thanks to a massive media presence in the local
market and the slogan #RaiseThemStrong, Dano Power has already generated over
18 million digital engagements. The commercial impact is also strong with 8 per cent
revenue growth and the 2 per cent market share gain in 2018.

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements Highlights (continued)

Two simple ingredients,
one new innovation
A growing concern for the level of
sugar and additives in products led
to a decline in fruit yoghurt
consumption. Arla® takes our
responsibility to deliver healthier
and more natural products very
seriously. For this reason, we were
the first major company to
introduce fruit yoghurts with no
additive sugar and no additives.
The innovative “Nur” yoghurt was
launched in Germany in 2018 and
will be expanded to other core
European markets in 2019.

ARLA FOODS ANNUAL REPORT 2018

Partnering with Britain’s leading
organic dairy brand
Arla acquired Yeo Valley Dairies Limited,
enabling Arla to use the Yeo Valley brand in
the UK market for milk, butter, spreads and
cheese under an intellectual property license
with Yeo Valley. The investment provides a
significant opportunity to strengthen our
branded organic business segment in the UK.

Leading the whey
Arla Food Ingredients (AFI), a 100 per cent
owned Arla subsidiary and a global leader
in whey-based ingredients announced
plans to open a new innovation centre in
Nr. Vium, Denmark. The investment was
approved by the Board of Directors,
supporting the company’s strategic focus
on innovation and AFI’s trajectory of high
growth. At the centre, scientists, techni-
cians and innovators will use cutting edge
research and technology to explore milk
and whey to their full potentials as
ingredients as nutrition for children,
athletes, patients and other consumers.
Construction will begin in the fall of
2019, and the centre is expected to
open in 2021.

Arla to acquire MENA cheese business
from Mondeléz International
In December we announced our plans to acquire
Mondeléz International’s processed cheese
business in MENA, currently licensed under the
Kraft brand. The acquisition also gives full
ownership of a state-of-the-art cheese production
site in Bahrain, which provides the company with
the opportunity to further expand branded
cheese production in the region, which is one of
the key regions in our strategy. The deal delivers
much-needed capacity growth and gives us a
strong regional supply chain footprint that
enables us to secure long-term competitiveness
through scale and efficiency.

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements Financial overview

Financial key figures

2018

2017

2016

2015

2014

Financial key figures

2018

2017

2016

2015

2014

Performance price (EUR-cent)
/kg owner milk

Income statement (EURm)
Revenue
EBITDA
EBIT
Net financials
Profit for the year

Profit appropriation for the year (EURm)
Individual capital
Common capital
Supplementary payment

Balance sheet (EURm)
Total assets
Non-current assets
Current assets
Equity
Non-current liabilities
Current liabilities
Net interest-bearing debt including pension liabilities
Net working capital

Financial ratios
Profit share
EBIT margin
Leverage
Interest cover
Equity ratio

36.4

38.1

30.9

33.7

41.7

10,425
767
404
-62
301

10,338
738
385
-64
299

0
0
290

6,635
3,697
2,938
2,519
1,694
2,422
1,867
894

2.8%
3.9%
2.4
14.9
37%

38
120
127

6,422
3,551
2,871
2,369
1,554
2,499
1,913
970

2.8%
3.7%
2.6
12.9
36%

9,567
839
505
-107
356

30
193
124

6,382
3,714
2,668
2,192
1,742
2,448
2,017
831

3.6%
5.3%
2.4
13.3
34%

10,262
754
400
-63
295

10,614
681
368
-30
320

31
141
113

6,736
3,903
2,833
2,148
2,084
2,504
2,497
999

2.8%
3.9%
3.3
13.2
31%

39
171
104

6,613
3,774
2,839
1,874
2,137
2,602
2,547
928

3.0%
3.5%
3.7
8.2
28%

Cash flows (EURm)
Cash flow from operating activities
Cash flow from investing activities
Free cash flow
Cash flow from financing activities
Investments in property, plant and equipment
Purchase of enterprises

Inflow of raw milk (mkg)
Inflow from owners in Denmark
Inflow from owners in the UK
Inflow from owners in Sweden
Inflow from owners in Germany
Inflow from owners in Belgium
Inflow from owners in Luxembourg
Inflow from owners in the Netherlands
Inflow from others
Total inflow of raw milk

Number of owners
Owners in Sweden
Owners in Denmark
Owners in Germany
Owners in the UK
Owners in Belgium
Owners in Luxembourg
Owners in the Netherlands
Total number of owners

649
-425
217
-191
-383
-51

4,937
3,196
1,826
1,762
517
156
52
1,457
13,903

2,630
2,593
1,841
2,289
702
202
62
10,319

386
-286
167
-155
-248
-7

4,827
3,203
1,855
1,759
524
151
54
1,564
13,937

2,780
2,675
2,327
2,395
815
215
55
11,262

806
-167
639
-624
-263
-

4,728
3,210
1,909
1,758
515
144
56
1,554
13,874

2,972
2,877
2,461
2,485
852
218
57
11,922

669
-402
267
-274
-348
-29

4,705
3,320
1,995
1,741
531
130
41
1,729
14,192

3,174
3,027
2,636
2,654
882
221
56
12,650

511
-416
95
-93
-429
15

4,550
3,088
2,035
1,526
403
119
17
1,832
13,570

3,366
3,144
2,769
2,854
997
228
55
13,413

For in-depth info please refer to the Consolidated Financial Statements (from page 64).
For calculations click on the highlighted texts.

ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements Essential business priorities for 2018

In 2018 our essential business priorities focused on re-establishing our historical strong performance and maintaining our competitive
milk price. The launch of our three year transformation programme, Calcium, and the successful initiatives to increase product prices
and margins helped us building a stronger company to face the volatile dairy market.

Improve gross margins

Create the future of dairy
with more innovation

Take efficiencies to a new level

Drive strategic brand growth

In a continuously volatile commodity market,
we maintained a strategic focus on proactive
price management to increase prices in our
branded retail segments. We worked hard to
balance product margins in light of significant
changes in fat and protein prices, and increased
our Group’s underlying profitability compared
to 2017.

Innovation is at Arla’s core to fuel long-term
growth and value creation. In the first half of
2018, we rolled out the a new visual identity
and eco-friendly packaging for our Arla®
Organic product range, while in the second
half we launched several highly innovative
healthy products. We strengthened our
efforts to measure the innovation pipeline,
which is expected to deliver over EUR 500
million in the next 3 years in incremental
revenue.

With the kickstart of our holistic transformation
programme, Calcium, we aim to realise EUR
400 + million net savings to reinvest EUR 100
million into growth areas. We delivered EUR
114 million contribution to date, ahead of our
EUR 30 million first year target. The main
areas of savings were production,
marketing and other indirect costs.

Successfully securing a strategic portfolio of
higher-margin and consumer-orientated offerings
delivered a strong branded growth, increasing our
brand share to 45.2 per cent. Growth was driven
by our strong innovation game in the European
zone, where StarbucksTM, Arla® Skyr, and our line
of organic products performed strongly, and by
our international zone, where Dano and Puck®
delivered strong growth.

Drive growth in high-profit areas

Win with customers

Transform Germany and the UK
in light of new realities

Arla Foods Ingredients next

We delivered branded growth in high-profit
market segments by successfully extending our
market-leading Puck® cream cheese range in
MENA, expanding Arla® Organic into KSA, and
successfully re-launching Dano in Bangladesh.
That said, we underperformed expectations in
USA and Nigeria. We also signed a 21 year
strategic partnership agreement with
Starbucks™ , a brand that achieved
double digit growth in 2018.

Customer service and strong partnerships is a
top priority for Arla. In 2018, we improved
delivery services by switching into “hypercare
mode” with several key accounts across Europe.
Our efforts paid off, as we reached 4.1 per cent
branded growth with our top 12 customers.
However, our delivery accuracy was below target
in Europe. We also made headway with
our aim to expand e-commerce
activities, growing this valuable platform
by 15-20 per cent across markets.

We continued our efforts to ensure our voice is
heard at the highest levels, as the outcome of
Brexit negotiations remains unclear. Purchasing
Yeo Valley Dairies Ltd. in the UK showed our
long-term commitment to our UK segment. As
part of our efforts to transform Germany, we solved
capacity utilisation and started building a powder
tower at Pronsfeld. Profitability significantly
increased in Germany due to
strategic price management and
strong brands like Skyr.

In 2018 we kept our position as global leaders
in the value added whey product business and
to position ourselves for strategic growth,
we purchased the remaining shares in
whey-business Arla Foods Ingredients S.A,
Argentina. Arla Foods Ingredients further
advanced their innovation journey as the plans
for their new innovation centre in
Denmark were approved by the Board
of Directors.

ARLA FOODS ANNUAL REPORT 2018

• Performance on track

• Trend on track

• Target challenged

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements OUR
STRATEGY

Our strategy, Good Growth 2020 has
been our guiding star since 2015. It
is vital to our business to constantly
review this strategy and align
ourselves to new realities. In the
following section we present how
Arla embraces emerging trends,
such as rapidly changing consumer
demands, how we respond to risks,
such as Brexit, and how we
augmented our strategy by
introducing our comprehensive
transformation programme, Calcium.

Founded in who we are

Arla is the world’s oldest cross-border dairy cooperative.
We are the fourth largest dairy company in the world, based
on milk intake and the world’s largest organic dairy producer.
Our farmer owners are at the core of our business model,
true to our cooperative structure. Our mission is to secure the
highest value for our farmers’ milk. Our vision is to create the
future of dairy, and fulfill the needs of our customers and
consumers with our natural and healthy products.

ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements Our business
model

Consumers and customers
With our unique products and brands we are able to provide
our consumers and customers the opportunity to live a
healthy and balanced lifestyle. Our extensive product portfolio
caters to a broad range of consumer preferences and needs.

Production and logistics
With 19,190 employees across 105 countries, we
work to achieve efficient operations. We treat the milk
inflow from our farmer owners as ONE milk pool,
processed in our global, integrated supply chain. Our
dairy activities are global and earnings are different in
individual markets and across product categories.
Earnings on all markets contribute positively to the
performance price.

Innovation
We aim to fulfil the growing demand for more
and better natural dairy products by using all our
knowledge in dairy farming, milk expertise, nutrition
science, product and packaging design to bring new
and exciting products to market. These innovations
build our strong brands and create the future of dairy.

ARLA FOODS ANNUAL REPORT 2018

ONE milk pool, ONE milk price
We want to create the maximum value for all
collected raw milk: ONE milk pool, with the same
quality requirements, together with an efficient
supply chain, enables Arla to balance the raw milk
volumes in the most profitable way. Our farmer
owners farm across seven countries and are all
paid ONE milk price, The prepaid milk price is set
with the ambition to reach the target net profit
share of 2.8 to 3.2 per cent.

Value creation
Our most important goal is to secure
a competitive milk price for our farmer owners.
In order to achieve this, Arla creates value per kg
of milk through the creation of strong brands, the
development of innovative products and the
expansion into international markets with
incremental sales and margin opportunity.

Farmer owner
As the world’s oldest cross-border dairy cooperative, our production
philosophy dates back to the 1880s when dairy farmers joined forces with
one common goal: to produce and provide the best dairy products. Both
suppliers and owners, our famers are at the centre of our business. As a
cooperative, Arla is obliged to collect ALL of our farmer owners’ milk at ONE
price, with a commitment to add value to it.

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements Good Growth 2020

In December 2015, Arla launched our corporate strategy for the next five years called Good Growth 2020. This strategy is our response to the
changing world around us, where competition is fierce and we face new demographic realities and fast-changing consumer trends. By excelling
in eight categories, focusing on six regions and winning as one Arla we strive to create value for our farmer owners’ milk. Three years into
Good Growth we believe this strategy is the right one for us, and this year we accelerate it with our transformation programme, Calcium.

Our vision
Create the future of dairy to bring health and inspiration to the world, naturally.

Our mission
To secure the highest value for our farmer’s milk while creating opportunities for their growth.

Our identity

Good

Growth

Our points of focus

Good Growth describes who we are and how we are creating the future of dairy.
It is what we stand for as a company, defined and shaped by our actions. It guides how we
develop our cooperative, products, markets and ways of working.

Cooperative Growth
Growing by being
farmer-owned and
cooperating with all
our stakeholders for
mutual benefit.

Healthy Growth
Growing by promoting
dairy nutrition and
helping people live
healthier lives.

Natural Growth
Growing by making
natural products of
the highest quality.

Responsible Growth
Growing by ensuring
safety, taking
responsibility for our
impact on society and
the environment, and
having a long-term
perspective in
everything we do.

Excel in eight categories
The global dairy industry is
developing at high speed and
is characterised by a constant
evolution of consumer habits
and preferences. Matching
these trends to our own
strengths, we identified eight
product categories that are
the core focus for our efforts
to shape the dairy market. Our
key categories are milk and
powder; milk-based beverages,
spreadable cheese, yoghurt,
butter and spreads, specialty
cheeses, mozzarella and
ingredients.

Focus on six regions
Six regions represent the
markets in which we believe
Arla has the biggest potential
to grow a long-term profitable
business. Arla has a strong
position in Northern Europe as
the preferred dairy company
for consumers, and in the
Middle East and North Africa
where our brands are among
the strongest in the food
industry. Arla is continually
expanding market positions in
growth markets such as China,
South East Asia and Sub-Saha-
ran Africa, whilst further
engaging in opportunities in
the US and Russia.

Win as ONE Arla
After significant growth with
mergers and acquisitions, and
aligning the different compa-
nies into ONE, Good Growth
2020 is taking unity to the next
level. Arla’s ambition is that all
our 19,190 employees work
from ONE strong common
platform. Unity is ever more
important as our strategy is
accelerated by our transforma-
tion programme, Calcium. Arla
can’t win without addressing the
most pressing issues of our
times, therefore we have a
strategical focus on sustainability
and aim to significantly reduce
our ecological footprint.

ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements Embracing change

We believe that our strategy must constantly evolve to incorporate changing market conditions, consumer trends and base assumptions.
Here we highlight the major trends and our corresponding responses to ensure the delivery of our strategy.

Digitalisation is growing rapidly
14 per cent of global consumers with internet access
regularly buy groceries online, and 30% are planning to do so
in the near future3
58 per cent of average global consumers say they are on
the internet constantly4
90 per cent of average global consumers prioritize
experiences over material possessions5

Consumers seeking healthy,
natural, on-the-go foods
58 per cent of global consumers want more
all-natural foods1
33 per cent finds it important to buy organic food,
and 33 per cent is willing to pay more for it2

Arla is the largest organic dairy producer
in the world and a leading producer of
lactose-free alternative dairy products.
We continuously innovate and expanded
our product portfolio to cater to a broad
range of health needs and consumption
preferences, from high-protein to low
sugar and on-the-go alternatives.

Our social media engagement grew 55 per cent
compared to 2017, and we launched an array of digital
marketing initiatives. We collaborate with all major
e-commerce players in our markets, both in the Brick &
Click segment, like Tesco or Albert Hein, and also have
partnerships with the “pure player” giants like Ocado and
Amazon. In 2018 we launched an e-commerce platform
in the UK for our Arla Organic Baby & Me products.

Sustainability is increasingly important
51 per cent of people globally think that climate change is
already harming people6

Partly as a response to environmental concerns, dairy
alternatives are predicted to grow by 17 per cent by 20247
A third of consumers are actively choosing to buy from
brands they believe are doing social or environmental good8

We have to think about how dairy farming
could become more sustainable and still be
profitable. Our farmer owners deeply care
about the environment, and they show their
commitment by regularly and systematically
evaluating the well-being of their cows in our
enhanced quality assurance framework,
Arlagården® Plus. We constantly work on
innovative packaging solutions and are part of
a project encouraging carbon sequestration on
farms. For more information, refer to page 49.

ARLA FOODS ANNUAL REPORT 2018

Sources: 1 Nielsen Global Health and Ingredient-Sentiment Survey 2016. More than 30,000 online respondents in 63 countries. 2 Nielsen Global Health and Wellness Survey 2015. 30,000 online respondents in
60 countries. 3 The Nielsen Global Connected Commerce Survey, Q3 2016. 4 Kantar Consulting Global Monitor 2018. 5 See above. 6 Pew Research Center Spring 2015 Global Attitude Survey. 7 Grand View
Research: Dairy Alternatives Market Size, Share & Trend Analysis Report. 8 Kantar Consulting Global Monitor 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements Embracing change (continued)

New volatility characterises Europe
On 29 March 2019 the United Kingdom is scheduled
to leave the European Union

Politics in Europe remain volatile, with fears of
a disintegrating EU

Significant shifts in fat and protein prices had a negative
effect on product margins

Increased risk to do business globally

The future of China-US trade relations is unknown
EU-Japan agreement steps into force 1 February

EU in trade negotiations with relevant third countries
with market potential for Arla

Emerging markets drive global dairy growth
More than 6 BILLION people consume dairy
products worldwide, and the majority of them live
in developing countries9

Dairy consumption increased twofold in developing
countries in the past 30 years10

Emerging markets generate approximately
85 per cent of dairy growth

We have a wide presence in emerging markets.
Our international zone continues to drive solid
growth rates and exhibits a positive growth
outlook into 2019. The Middle East is a special
focus area for us, being our biggest strategic
growth market outside Europe. We further
strengthened our position in the region in 2018
by the announced acquisition of a processed
cheese business from Mondeléz International,
including a modern production site in Bahrain
that secures our local production capacity.

As Brexit negotiations progress we continue to deliver
strong, evidence-based arguments for the free movement
of people and goods to politicians and policy makers hand
in hand with our farmer owners and peers in the dairy
industry. To read more on Brexit please refer to page 20.
To mitigate the effects of shifting in fat and protein prices,
as market leader in BSM, we have utilised our strong brand
position to manage prices to support higher underlying
commodity prices.

The future of the global trade system faces more risk and
uncertainty than at any time since it was created after.
Free trade is under pressure and the future relationships
between big traders are unknown. Access to new markets
is crucial to Arla’s business and the continuous work for
improved trade relations and a smooth flow of goods is
vital for us. We will utilise our global presence and agility
to assure that we take advantage of the possibilities that
new agreements give us, just as we will absorb the
challenges that the current system presents to us.

ARLA FOODS ANNUAL REPORT 2018

Sources: 9 FAO. 10 FAO.

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements Our risk landscape

Arla’s risk landscape highlights our top emerging, strategic and operational risks, which are characterised as either
event or trend risks. We assess risks based on the potential impact on Arla’s profit and/or reputation, as well as
the likelihood of the risk to occur within the next three to five years. The assessment shown here is based on the
net effect after all current mitigating actions.

MAJOR

T
C
A
P
M

MODERATE

€

T
I
F
O
R
P
r
o
/
d
n
a
N
O
T
A
T
U
P
E
R

MINOR

POSSIBLE

LIKELY

VERY LIKELY

LIKELIHOOD

ARLA FOODS ANNUAL REPORT 2018

Market risks and global instability
Consequences of Brexit
Other political and macro-risks

Financial and IT risks
Currency, interest and pension
Cyber attacks

Milk price and volume volatility
Milk price and volume volatility

Supply chain
Product recalls

Changing consumer demands
Transforming consumer preferences
Digital disruption

Business ethics, legal and HR risks
Loss of key personnel
Non-compliance with regulations

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements

Our risk landscape (continued)

Market risks and global
instability

Financial
and IT risks

Milk price and volume
volatility

Supply
chain

Changing consumer demands
and digital disruption

Business ethics, legal
and HR risks

Having the majority of our business
in Europe means that we are
naturally exposed to changes in
market positions in these key
markets. Such changes are
continuously monitored, and
mitigating steps are planned. The
uncertainty caused by Brexit
negotiations and the potential
consequences after the UK leaves
the EU have been identified as our
most critical risk. We undertook
extensive analysis to understand
the potential implications for our
business and further developed our
plans to prepare for the possible
scenarios, including a no deal. To
learn more about our preparation
to Brexit please refer to page 20.
We are also exposed to macro risks
in emerging markets, especially in
MENA, and where our business
grows the fastest. The US trade
deals in China disrupting the trade
patterns are also a significant risk.

Arla’s main financial risks relate to
exchange rates, interest rate
changes and pension liability
valuations. To manage this risk, the
Group hedges expected future
cash flows for selected key
currencies. Furthermore, we
constantly monitor and review
worldwide tax matters to ensure
our compliance in all locations.
Refer to page 46 for more details.
We put high attention on IT risks
as well. Such risk can materialize
in various ways, including
unavailability of business-critical
data, theft of data, locking of data
leading to production shutdown.
etc. To minimise IT risks, we
continuously review our activities
and search for vulnerabilities in our
systems. Furthermore, in 2018 we
strengthened our data privacy
efforts to ensure compliance
with GDPR, which commenced
on 25 May 2018.

Continued milk volume and
price volatility strongly influence
our sales volumes and profit
respectively. Arla’s Good Growth
2020 strategy focuses on value
creation through our strong
brands and products, which aim at
continually reducing exposure to
commodity pricing. To reduce
these risks, we have further
enhanced our price performance
management in 2018.

Being in control of the entire
value chain from cow to the
consumer gives Arla a major
foundation to manage our risks
well. Guaranteeing food safety is
our key priority. Clear and
professional crisis management
processes and actively applied
structured root cause analyses
ensure our ability to improve
product quality and prevent
reoccurring failures. Our quality
assurance programme, Arlagården®
and our comprehensive quality,
health, environment and safety
model safeguards the highest
quality for all our products. In
2018 we updated and refined our
standards for quality and food
safety as well as health and safety
for our colleagues. Further, we
have launched a cornerstone
programme to drive change in
behavioral safety.

During 2018 environmental
implications of food choices
became important for an
increasing number of consumers.
In particular there’s an increasing
number of consumers who eat
mostly meat free or plant based.
War on plastic and waste became
a topic for many more consumers
in 2018. We have work in our
pipeline to respond to these
consumer trends. Trust in our
brands requires a high focus on
digital transparency and dialog
with the consumers. Dialog
requires an open ear to feedback,
but also ready responses if
criticism arises. We mitigate by
being open in our communication,
and increase our digital engage-
ments with our consumers.

Arla Foods has impact on both
climate and environment through
our activities. This area is well
regulated for most issues, but for
some, regulation is still in the
making. Failure to comply with
regulations or expectations may
result in restrictions on milk
production. In 2018 Arla Foods
continued to make good progress
towards its environmental
ambitions and this is reported in
our CSR report. The loss of key
personnel in strategic positions
and the inability to recruit and
retain sufficiently qualified people
also pose risks to our business
performance. Significant reduc-
tions in some support functions
due to our transformation
programme, Calcium increased
this risk in 2018. To mitigate, we
strive to create a positive corporate
culture and work environment.

Risk scenario

Significant change in European
market position
Consequences of Brexit and further
EU exits and protectionism

Major turmoil in emerging markets

Currency, interest and pension risks

Milk price and volume volatility

Major cyberattack

Major product recall damaging the
Arla brand image

Production or logistics disruption

Digital disruption, e-commerce and
new channels
Transformation of consumer
preferences, incl. growing anti-dairy
movement

Loss of key personnel in strategic
positions and inability to recruit and
retain the best talent
Non-compliance with national and
EU environmental and climate
regulations

ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements Preparing for Brexit

Brexit is our biggest risk. As exit negotiations progress, Arla continues to make our position clear, as
a company in favour of the free movement of goods and people. The future trading relationship between
the EU and the UK remains uncertain, and we are preparing to handle the possible Brexit scenarios.

Arla in the UK

It is important for Arla that our products can
move freely across the markets in which we
operate. Successful brands in the UK market,
including Lurpak®, Arla® Skyr and Lactofree, are
imported to the UK, while others, like Castello®
are exported from the UK, and changes to the
EU-UK trade relationship may significantly
challenge this business.

One of the main risks concerning Brexit relates
to Arla’s currency exposure, through transaction
risk on export business and translation effect
on value added by local UK business. If an
agreement will be reached between the EU and
the UK by the end of March, we expect the GBP
to stabilize and potentially strengthen, which will
be advantageous for Arla. No agreement could
lead to continuing uncertainty on the GBP/EUR
relationship with a risk of a negative impact
on our performance price relative to our
competitors. To mitigate this uncertainty, we
have increased hedging of our GBP exposure.

Other risks relate to extra costs in the form of
customs duties and customs clearance being
imposed on Danish exports affecting demand
and increased administrative burdens.

In 2018, we saw effects from a weak GBP. The
uncertainty surrounding future implications
have been incorporated when assessing asset
values, e.g. on goodwill where EUR 459 million
is allocated to UK. Following the Brexit process,
expected cash flow supporting the carrying
value of goodwill in the UK is inherently more
uncertain. This was reflected in the risk-adjusted
cash flow used for the impairment test. Read
more about the details on impairment tests
performed in note 3.1.1.

The Arla Brexit Task Force has throughout 2018
continued to monitor and assess the various
scenarios, considering possible impacts and
mitigating actions. Our management team and
Board of Directors have been updated frequently
and relevant newsletters have been shared with
our owners.

At the time of finalising this annual report we
are focusing on four possible outcomes
a Customs Union or Free Trade Agreement
(FTA), our preferred scenario without tariffs
for dairy products;

a World Trade Organisation (WTO)
relationship with a transition period, under
which most-favoured-nation (MFN) tariffs are
imposed on dairy products;
a WTO relationship without a transition
period, where EU will impose MFN tariffs
and UK grant duty free quota access for
EU imports,
a ‘no-deal scenario’ with immediate effect,
under which dairy would be traded under
WTO MFN tariffs with a significant impact on
our business as well as the UK Dairy industry.

We want the final trade deal between the UK
and EU to be free from tariff and non-tariff
barriers in milk and dairy. We are collaborating
with partners in the dairy industry and the wider
food and farming community to build a united
position across Europe. To ensure our position
is heard at the highest level, we are engaged
with both the UK government and the EU.

Revenue, BILLION EUR

2.7

Total assets, BILLION EUR

1.1

23%

of the total inflow of raw milk

Number of farmers in UK

2,289

Number of employees

3,387

Number of production facilities

Key brands
Arla®, Lurpak®, Anchor®, Cravendale®

ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements accelerates our strategy

Good Growth 2020 is the right strategy for the industry and market trends around us. However, several realities are changing the context of the
political, economic and social landscape that we are operating in. Therefore in 2018 we commenced our transformation programme, Calcium
which will accelerate our strategy by transforming the way we work, spend and invest. Calcium will strengthen our bones, create efficiencies and
release cash to reinvest in our growth.

THE WHY

THE WHAT

Brexit
The UK contributes 26 per cent
of our revenue, which is a
much higher exposure than our
competitors. The negative impact
of GBP currency fluctuations
since the announcement of
Brexit cost Arla approximately
EUR 150 million.

Fat and protein prices
The last two years increase in
commodity prices for dairy fat
has reduced the relative
competitiveness of our branded
high-fat products, costing
approximately EUR 125 to 175
million in relative performance
to our competitors.

Cost consciousness
As a low margin business
ongoing cost consciousness is a
prerequisite to stay competitive
and deliver on our targets to our
farmer owners.

ARLA FOODS ANNUAL REPORT 2018

Net value
400+

MILLION EUR

Milk price
300

MILLION EUR

Reinvestments
100+

MILLION EUR

Our ambition is to achieve EUR 400+ million bottom line impact by 2021. With EUR 300+ million we will
increase the competitiveness of our milk price, and we plan to reinvest EUR 100+ million into growth areas.
We delivered EUR 114 million contribution to date, ahead of our EUR 30 million first year target.

The Calcium transformation is more than just cost savings:
We are increasing our focus on the frontline of our business, where we are the closest to our
customers and consumers. They are at the heart of every decision we make.
Our decision making is becoming quicker, more data driven, and more transparent throughout
the organisation
We are eliminating waste wherever it doesn’t add real value for the customers and consumers
We are also eliminating complexity where it doesn’t add value. We are becoming simpler and
more streamlined, both in production and as an organisation.

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements transforms nine areas of our business

Logistics
New transparency in data will enable us to eliminate
waste of finished goods and optimise both the milk
pick-up at the farms and the distribution to the
customers – route by route – creating value for us
and our customers.

Innovation
Our process from idea to market will be
simpler and shorter to capture new
opportunities faster. We will experiment
more in the markets and scale successes quickly.

Organisation
Our central functions have become smaller, so
that we can increase focus on the frontline in
our markets.

Marketing
We will spend less on developing campaigns and
more on reaching consumers. Our content will
be developed cheaper, faster and better in new
in-house digital studios.

Range
To reduce complexity in Supply Chain and scale
our products’ bottom line impact, we will share more
products across markets. We will pick from a
standard list of ingredients and meet a minimum
volume target for new products.

Retail promotions
Better data will enable us to
optimise retail promotions
for us and our customers
empowering Key Account
Managers to make informed
decisions on the spot.

Procurement
The Procurement function has a stronger mandate
to integrate experts and best practice into our
buying decisions to secure compliance, maximise
the value of goods and services that we buy in Arla
and to safeguard responsible sourcing.

THE HOW

Production
We will create profound change at every site
and in every role. We will shift from dairy
structure efficiency to individual line efficiency.
New transparency in data means our people will
benchmark and optimise – line by line, week
by week.

Indirect spend
New transparency of data has enabled us to
challenge the way we spend money and significantly
reduce all spending that is not frontline focused.
Going forward our people have better control of
costs not related directly to our products – e.g.
office equipment, IT, travel, consultants etc.

ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements Calcium delivers
strong first year results

Insourcing marketing to make it better
As part of our Calcium efforts to boost our
marketing strategy and make it more
cost efficient, we are insourcing content
development wherever possible. We are
setting up an internal creative agency to
develop digital content, and insource media
buying. Thereby we not only reduce agency
fees and ensure higher quality, but by
becoming more digital savvy we also
empower our own employees to become the
best communicators and marketers. We
expect to save up to EUR 6.5 million yearly
with this solution.

Calcium helped Arla secure a cheese contract worth millions
Calcium can also be a great way of strengthening relations with customers
and winning new contracts. Calcium certainly helped when Arla entered into
contract negotiations with one of our top 12 retail partners. The retailer’s
agenda aligns well with Calcium, and during the negotiations we demonstrated
our focus on driving operational efficiencies for both businesses. Arla’s frontline
obsession and customer centric attitude were also important factors in securing
the contract with retail sales of EUR 500+ million.

ARLA FOODS ANNUAL REPORT 2018

When less is more
When Arla UK wanted to launch a new yoghurt portfolio, instead of developing
one themselves they looked across the markets to check what is available, and
then launched existing products from Sweden and Denmark. As straightforward
as it sounds, in the pre-Calcium times product development was country specific.
As a part of the Calcium process, we established a core European yogurt assortment
that will be sold across all markets, and achieved a 25 per cent reduction in the
number of fruit preparations, which means significant cost reduction.

From 270 supplier to 1
Before Calcium, Arla had over 270 print
suppliers. On our Supplier Day in May
we invited potential suppliers to our
headquarters, and used our print orders
from the past as a baseline for an e-auction.
One supplier made a bid offering 30 per
cent savings without compromising quality.
Now when employees need printing, they
reach out to this one supplier, which also
considers using our own printing capacities.
Calcium gave our procurement team a
greater mandate to finalize this deal, and
their involvement in the commercial
negotiations benefitted all involved parties.

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements Essential business priorities for 2019

Arla’s essential business priorities are the annual focal points on the Good Growth 2020 journey.
They are set by our Executive Management Team and approved by the Board of Directors.

Continuous price & margin management
while driving volume driven revenue growth

Deliver on Calcium
to transform Arla

Increase innovation output
and speed

Drive strong and profitable
branded growth agenda

In a volatile, low margin business price
management ensures healthy short-to
midterm margins. In 2019 we will maintain our
focus on volume driven growth across our core
categories and markets, while ensuring
proactive margin and price management.
To secure growth and adapt to changing
customer preferences we will take advantage of
our increasingly diverse milk pool.

Our holistic transformation programme,
Calcium will embark on its second year in
2019, which will lead to further changes in the
way we work, spend and invest. To increase
our competitiveness, we aim to create a
frontline-obsessed company. Our ambition
is to achieve a bottom line impact of more
than EUR 75 million in 2019.

In 2019 we will review and change our
innovation model to significantly increase
output speed and decrease product complexity.
Our key focus in innovation is the increasingly
popular natural and filling dairy products and
on-the-go formats, while we also plan to
experiment with products for flexitarian
consumers. We will leverage existing technologies
and competencies – while developing and
creating competitive strength and align with
external market perspectives.

Securing a strategic portfolio of higher-margin
and consumer-oriented offerings is key to our
future growth. In 2019, we will continue to
develop and sharpen the profile of our strategic
brands Arla®, Castello®, Lurpak® and Puck®
specifically by reviewing our strategy in face of
new consumer habits and by expanding into
new markets.

Win in focus markets

Take lead on sustainability

Power-up AFI

In 2019, we will strategically focus on delivering
branded growth and/or higher-profit in key
market segments, such as Bangladesh, Nigeria,
China and MENA by strengthening our brand
portfolio and entering into new categories and
partnerships in these regions. In 2019 we
expect a challenging year in Europe, where
we have to operationally prepare for the
uncertainty following Brexit and secure our
UK market.

Sustainability is high both on our consumers’
and on our own agenda. Arla already has many
different sustainability initiatives in place, such
as our quality assurance and animal welfare
programme, Arlagården®. In 2019 we set out to
launch our new environmental strategy, and to
track both tangible sustainability outputs and
consumer perception of our efforts.

Further investment in AFI is a top priority
for 2019. We will focus on the continued
transformation of existing products to
higher-value specialties, through new
investments and focused research and
development efforts. As the demand for our
specialised ingredients keeps accelerating we
will also strive to grow our raw material pool
to secure more whey, enabling us to serve our
global customer base.

ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements OUR BRANDS
AND COMMERCIAL
SEGMENTS

Our brands are at the heart of our business
and drive the majority of Arla’s profitability.
To extend our position as a leading global
dairy company we focus our activities on two
commercial zones, Europe and international,
which represent the regions where we
believe Arla has the biggest potential to
grow. Our whey business, Arla Foods
Ingredients is also a core strategic priority. In
the following section we present the growth
of our strategic brands, and the successes
we achieved in our commercial zones and
with AFI and trading.

Arla®: Moving from strength to strength in 2018

The Arla® brand has continued to outperform the market in Europe. We sought to build equity through aligned
global positioning and our new ‘strength comes from within’ campaign, whilst building clear positions with new
sub-brands, such as Dano Power, Arla &More and Arla® Organic. 2018 was a success for Arla®’s brand communication
as well: we amped up consumer’s engagement through accelerating communication on digital channels, and won
over 50 marketing awards.

Arla &More is breaking down
the breakfast barrier
Our busy lifestyles rarely allow us to consume meals
in the traditional way. That’s why our new sub-brand,
Arla &More developed a range of healthy, natural
and filling products such as yoghurts with grains
and buckwheat, oat and fruit smoothies and
fresh-flavored porridge. These products aim to break
down the breakfast barrier dairy has been facing for
so long: they were designed to be consumed any
time of the day to fuel strength and keep you going.
Arla &More is currently available in Finland and
Sweden with other European markets being
launched across 2019.

Continuing to build digital engagement
Digital engagement for the Arla® brands grew 90
per cent compared to 2017, from 100 million to
190 million engagements. Arla® leveraged data
driven marketing principles to drive brand
engagement based on audience passion points,
shopper missions and buying occasions. With digital
investment remaining consistent over the last 12
months, the increase in digital engagement is due
to the strong use of first party data to drive
engagement across owned media channels with
stronger content and optimising our consumer
experiences at the ultimate moment of truth, when
consumers are searching for an Arla® product.

Animal welfare as our unique selling point
Sommarmjölk® launched in Sweden in 2018 is a
unique commercial animal welfare initiative, which
compensates conventional (non-organic) Arla
farmers who sign-up for 25 per cent extra summer
grazing time for their cattle, over and above Swedish
grazing legislation requirements. With three out of
four conventional Arla
farmers participating, Arla
has been able to make a
difference both for our
cows, farmer owners and
consumers.

Summer milk generated a
market share uplift in all
categories and a massive
strengthening of key KPI
“protecting animal welfare”
in consumer perception.
The communication
campaign was very
successful, with an ONS
score of 75* .

Revenue, MILLION EUR

3,034

2017: 3,026

Strategic branded volume
driven revenue growth

1.8%

2017: 3.4%

Share of branded revenue

64.7%

2017: 65.8%

ARLA FOODS ANNUAL REPORT 2018

* Market average ONS result is 50 in the Milward Brown Database.

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements Lurpak®: Strength in softness

Lurpak® has been a symbol of Denmark’s dairy heritage since 1901. It is now sold and loved in more
than 75 countries, from Denmark to the Middle East and beyond. We continue to drive our brand mission:
make good food central to the lives of people.

Tough environment
2018 has been a tough environment for
butter, as high fat prices were passed
onto the customer. It is a testament to
the strength of the Lurpak® brand that
we are seeing growth in our key markets
during this time, with a volume driven
revenue growth of 2.7%. Driving our
equity is key to encourage consumers
to pay more for our brand, and we are
seeing results to reflect this.

Innovations based on
real consumer insights
In 2018, we launched two new innovations
to our biggest markets. Lurpak® Softest
was developed from a true consumer
insight that, for some, our spreadable was
not spreadable straight from the fridge.
Launched in the UK in May, it’s already
a success with a revenue amounting to
EUR 8.9 million and above expectations.
Lurpak® Mini Blocks was the second big
launch for the brand in 2018. 4x50 g
blocks in a convenient box was launched
in Denmark in March. The revenue from
Lurpak® Mini Blocks was EUR 2.6 million
in 2018. Both launches were supported

with campaigns offline and online, on
social media and more, and are making
waves to disrupt the BSM category.

Lurpak® Liquid and Spray were
re-launched this year in both the
MENA region and in Denmark. The aim
was to focus more on the occasion and
usage of the product to further promote
trial. Therefore a new packaging
with stronger branding and a clearer
understanding of the product alongside
a brand new campaign will certainly
win with consumers..

Winning digital
Our strong communication throughout
2018 drove the awareness and
engagement with the brand beyond the
launches. The Game On Cooks campaign
was active in many of our markets not
only on TV, but across channels from
digital to in-store. We delivered another
strong digital year with 43 million
consumer engagements to year end.

ARLA FOODS ANNUAL REPORT 2018

Revenue, MILLION EUR

561

2017: 528

Strategic branded volume
driven revenue growth

2.7%

2017: -2.7%

Share of branded revenue

12.0%

2017: 11.5%

SPREADS EFFORTLESSLY, STRAIGHT FROM THE FRIDGE

Lurpak® Softest is our softest full fat spreadable

ARL2876_Softest_KV_A3P_White.indd 1

JOB NUMBER: ARL2876_Softest_KV_A3P_White
SIZE (H x W): A3P
SCALE: 100%

10/07/2018 16:43

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements Castello®: Indulging sensations

Castello® has a tradition of creative cheese making since 1893. Castello cheeses are developed with a
deep understanding of how we perceive flavour and taste, so you can experience an indulgent sensation
in every bite. Our speciality cheeses are sold in 87 countries around the world under the Castello brand.

A successful global campaign
Each Castello® cheese brings the
consumer a unique and indulgent
sensation. Be it the intensity of Castello®
yellow cheese, the creaminess of the
whites or the sharpness of the blues,
each cheese delivers a unique taste
experience. These sensations are
brought to life in our latest brand
campaign “Sensations by Castello®”,
which has been executed across seven
key global markets in 2018.

EXPERIENCE

CRUMBLY

WITH A SIDE OF TANGY

Tr y Castello® Cheddar with apple and tomato jam

Castello_Sensations_A3L_CHEDDAR.indd 1

03/09/2018 17:11

ARLA FOODS ANNUAL REPORT 2018

Strengthening our core assortment
Castello® is the leading blue mould
cheese brand in many markets, however
blue mould cheese is only part of a larger
specialty cheese universe. In 2018 we
became even more important to
consumers by expanding our core
assortment to include yellow cheeses
and white mould cheeses. Multiple new
product launches in these segments led
to an exceptionally good volume driven
revenue growth in Finland, the USA and
Canada in yellow cheese, and in the UK
and Germany on white mould cheese.

Castello achieving growth
Through strong execution across
markets to increase awareness of
Castello® and drive penetration of a
broader Castello® assortment, the brand
achieved a strategic branded revenue
growth of 3.8 per cent in 2018, with
especially strong growth in USA
(28 per cent), Finland (8 per cent)
and Canada (6 per cent).
.

Revenue, MILLION EUR

180

2017: 181

Strategic branded volume
driven revenue growth

3.8%

2017: 2.7%

Share of branded revenue

3.8%

2017: 3.9%

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements Puck®: Innovation is the name of the game

The Puck brand originated as a spreadable cream cheese in Germany and is currently available across the
world in over 30 markets, from Syria to Sweden, Kuwait to Kazakhstan. Produced at four of Arla’s dairies
in Denmark, it is one of the leading dairy brands in the Middle East.

Snaps about Puck
In 2018 Puck® also challenged category
norms by engaging with customers
digitally, and embarking on gamification.
Through an unprecedented collaboration
with Snapchat, Puck® engaged its core
audience, mums and kids, in a unique
and fun way. The interactive campaign
received around 5 million impressions.
Other Puck® campaigns were also very
successful, the brand won 4 prestigious
Effie marketing awards this year.

Less fat, more health
As consumers in the Middle East are
becoming ever more aware of diet-related
health issues such as obesity, the need
for healthier products is growing. Our
iconic Middle Eastern brand, Puck®,
already exploits this trend: by launching
a 30 per cent less fat, 25 per cent less salt
variant of its flagship cream cheese, Puck
beat category decline and added EUR 4
million in net revenue to the business.

Widening horizons
For Puck® to keep its strong position in
the Middle East, the health agenda is
just one part of the innovation strategy.
Venturing into new categories and
occasions, and bringing even more
variations to the cream cheese brand is
also key. In 2018 Puck® launched a wide
range of products in the cooking
category as well: a range of sauces, an
innovative shredded cheese, Cheddarella,
and a new spread, Labneh. With our
acquisition of a processed cheese
business from Mondeléz International in
the Middle East, 2019 is bringing new
opportunities for expansion.

ARLA FOODS ANNUAL REPORT 2018

Revenue, MILLION EUR

352

2017: 339

Strategic branded volume
driven revenue growth

8.9%

2017: 4.4%

Share of branded revenue

7.5%

2017: 7.4%

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements MBB: Tradition and innovation go hand-in-hand

The vision of the milk based beverages (MBB) unit is to build meaningful connections with millennials
through better beverage experiences. The portfolio includes strong brands like Cocio®, Matilde®,
and the licensed brand, StarbucksTM.

Continuous double-digit StarbucksTM growth
Consistently strong year-on-year performances
during the last 7 years paved the way for a new
21 year strategic agreement between Arla® and
StarbucksTM, giving Arla the license to continue to
manufacture, distribute and market StarbucksTM
premium ready-to-drink coffee beverages for the
Europe, the Middle
East and Africa region.

Cocio® unlocks a new occasion
Established in 1951, Cocio® has a great heritage and
is among the most well-known brands in Denmark.
In 2018 Cocio® launched a strategic partnership
with HBO®, aiming to make more of the streaming
momentum. Free HBO® subscriptions and unique
prizes were the main levers in the campaign. The
campaign contributed positively to Cocio®’s overall
strategic branded growth of
5 per cent in 2018.

Throughout 2018, the
StarbucksTM premium
ready-to-drink (RTD)
coffee beverages yet
again achieved
double-digit growth,
finishing the year
with strategic branded
growth of 30 per cent.
This development is a
result of a dedicated
focus to expand the
distribution across
regions by using
new channels
and reaching new
customers on
new markets.

ARLA FOODS ANNUAL REPORT 2018

Matilde® disrupted
the chocolate milk category
The brand essence of Matilde® is the unique Danish
‘Hygge’ since 1970. During the summer the iconic
design changed for 8 weeks and was replaced by
colourful illustrations that visualised what Matilde is
all about to consumers. By utilising the pack as
media, Matilde®
created disruption
and significant
differentiation
towards private
label. Matilde®
achieved strategic
branded growth
of 16 per cent
in 2018.

Total MBB results

Revenue, MILLION EUR

248

2017: 225

Strategic branded volume
driven revenue growth

22.7%

2017: 12.3%

Share of branded revenue

4.0%

2017: 3.4%

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements Europe

The Europe zone, representing 62 per cent of the total revenue, continued its Good Growth journey in 2018
with a year of very strong branded growth. Our core brands performed above expectations, with Skyr growing
22 per cent, Starbucks 24 per cent, our organic line 2 per cent, and our Lactofree products by 4.7 per cent in
revenue. In our foodservice business, we grew our branded business by 4.4 per cent, driven by particularly
strong performance in the UK, Denmark, Sweden and Finland.

Revenue, MILLION EUR

6,507

2017: 6,568

Strategic branded
volume driven
revenue growth

2.5%

2017: -0.1%

Brand share

50.4%

2017: 48.3%

Key brands

Revenue split by country,
MILLION EUR

6,507

UK
Sweden
Germany
Denmark
Netherlands,
Belgium and France
Finland

2018
35%
21%
18%
16%

5%
5%

2017
34%
21%
21%
15%

4%
5%

ARLA FOODS ANNUAL REPORT 2018

We had a year of great branded
growth of 2.5 per cent. As part of our
transformation programme, Calcium,
we created a more frontline driven
structure within the Europe zone that
will enable further acceleration of the
innovation and branded growth
agenda. We have in 2018 further
improved utilising our Europe-wide
product portfolio that contributed
to our strong branded delivery.

Peter Giørtz-Carlsen, Vice CEO, Executive Vice President, Europe

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements Europe (continued)

UK
The Arla brand was growing significantly faster than our competitors.
Arla® Skyr Fruit & Oats was voted Product of the Year in 2018, following
the same recognition given to Organic, BoB and Skyr in previous year.
Our famer-owned model and our Calcium transformation were key to
win contracts with our top UK retail partners. We continue to develop
robust plans to deal with the eventual outcome of the Brexit negotia-
tions. Refer to page 20 for more detail.

Germany
The implementation of our long-term strategy and continued focus on
branded growth significantly improved profitability in Germany. The
strengthening of the business over the past 2 years is starting to pay off
and our branded business grew by 6.5 per cent in 2018. In close
collaboration with our customers, we successfully introduced high
value-added products, such as our Arla® Bio yoghurt. Arla® Skyr in
Germany is amongst the fastest growing areas in Europe.

Denmark
We achieved record high branded growth of 4,6 per cent despite
declining dairy consumption trends by focusing on existing and new
product concepts. Our reputation is also at all-time high, and 2018 was
a record year for our organic branded sales. We engaged our consumers
in a fruitful conversation about the health value of milk with our
Milk-without-Milk campaign.

Sweden
Arla had a year of roughly unchanged turnover, despite a very challenging
overall category development and a weakened Swedish currency.
Our market shares in Sweden of both cheese and yoghurt reached an
all-time high, and the Arla® brand was significantly strengthened during
2018. Arla was ranked amongst the top suppliers across all categories
by customers. The campaign “Only milk tastes milk” has slowed down
the milk category decline and was awarded as Sweden’s best advertising
film amongst all categories.

ARLA FOODS ANNUAL REPORT 2018

Netherlands, Belgium and France
Our Dutch market share in fresh dairy reached the highest level ever
and is now running above 11 per cent. Within fresh dairy, Arla® had the
largest growth for two consecutive years now, with Skyr and our
organic products driving the double-digit growth. Skyr was successfully
introduced in Belgium. Our company is ranked as the number one dairy
supplier in Netherlands.

Finland
Despite a long-term trend of decreasing dairy consumption, our key
focus brands, Arla® Luonto+ in yoghurt and Lempi in cooking, kept
growing. Our Foodservice business also delivered strong growth. To
further strengthen our commitment to food safety and transparency,
we introduced blockchain technology that enables the consumers to
trace back where the milk is from.

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements International

The international zone, which comprises 15 per cent of total revenue, continued to deliver
profitable growth in 2018. We continued to seek new opportunities by launching innovative
products and expanding to new markets in South East Asia.

Revenue, MILLION EUR

1,576

2017: 1,616

Strategic branded
volume driven
revenue growth

4.6%

2017: 10.5%

Brand share

85.0%

2017: 83.9%

We had good performance this year
in challenging market conditions. Even
though our growth was somewhat less
than expected, we are on a good track
to fully execute our growth strategy in
2019 and beyond with our planned
acquisition of a processed cheese
business from Mondeléz International
in MENA.

Tim Ørting Jørgensen, Executive President, International

Key brands

Revenue split by region,
MILLION EUR

1,576

Middle East and
North Africa
Russia, SUBs &
Distributor Sales
Americas
South East Asia
Sub-Saharan Africa
China

2018

2017

36%

34%

23%
20%
9%
6%
6%

23%
20%
8%
9%
6%

ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements International (continued)

Middle East and North Africa
Our strategic agenda in the Middle East and North Africa progressed
well in 2018, despite low economic growth and political uncertainty
affecting the region. Strong branded growth in our core categories
was driven by the Puck® brand. The Arla® Organic brand launch is
progressing well in UAE and Saudi Arabia, and the recent launch of
Arla® Kids is gaining good traction. Our announced acquisition of a
processed cheese portfolio from Mondeléz International in MENA
gives us a strong foundation to build on going forward.

Sub-Saharan Africa
We experienced solid market share growth in Nigeria, with Dano
emerging as the fastest-growing milk powder brand there. However, on
consolidated level Arla Foods’ business in Nigeria has been impacted
negatively in 2018 driven by challenges in the bulk business with
unfortunate timing of import and changes in market prices. In other
SSA markets we have seen good traction, e.g. in Senegal, where the
Dano brand is now the leading milk powder brand.

China
During 2018, China improved the overall business profitability
significantly. Our organic infant milk formula, Baby & Me had an
impressive growth in the market. The brand market share is growing
faster than the market. The shareholder agreement for the joint
venture between Arla and Mengniu was signed in the beginning of
2018; the project to establish the JV is moving on the right track.
Despite the good traction, we have experienced delays in some
authority approvals impacting the performance negatively.
However, we keep a positive outlook for China in 2019.

South East Asia
Arla has made strong progress in SEA delivering growth and
profitability. Bangladesh continues to grow the Dano brand market
share and household penetration. Japan and Korea delivered very
strong branded growth and doubled the business, and we see good
traction in the Philippines. Arla® Organic milk has just been launched
in Singapore exceeding expectations. To expand Arla’s footprint in the
region, we are preparing the launch in Indonesia with our newly
established Joint Venture Arla/Indofood.

Americas
US and Canada continued to deliver branded growth in 2018. In the
US, Arla® Cream Cheese, yellow cheese and Castello have established
positive resonance with consumers and customers gaining further
market shares – however, the performance did not meet our expecta-
tions. Canada’s strategic agenda has progressed well, strengthening
brand power and delivering strong profit. In the Dominican Republic,
Arla’s Milex brand continues to lead and grow the milk powder market.

Russia, SUBs & Distributor Sales
We showed growth in our branded business and at same time
doubled the net result. A key growth driver were the milk based
beverages, particularly StarbucksTM and Arla® Protein. StarbucksTM was
successfully launched in more markets and alongside Arla® Protein
they grew in both retail and convenience channels. Despite high fat
prices, our Lurpak® products continue to grow in Australia and Greece,
our strongholds. Russia continued to improve profitability mainly driven
by strong sales of StarbucksTM products.

ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements Arla Foods Ingredients

Arla Foods Ingredients (AFI) is a 100 per cent owned subsidiary of Arla and a global leader in whey-based
ingredients used in a wide range of categories from bakery, beverages and dairy to clinical, infant and sports
nutrition. In addition, we manufacture child nutrition products for third parties.

For more than 20 years, AFI has delivered solid
growth. In 2018 we achieved EUR 652 million in
revenue, compared to EUR 651 million last year.
Our value creation was largely driven by value
added ingredients and a strong Child Nutrition
Manufacturing (CNM) business.

AFI’s customers demand specialised products
Significant changes are underway in the whey
industry. In the past, whey was regarded as a simple
by-product from cheese production. Today whey is
a high-value ingredient in its own right, and in the
future, AFI’s core markets will need even more
product differentiation. Thus, AFI’s growth will be
based on sale of our unique value-added products
like alpha-lactalbumin, whey protein hydrolysates,
MFGM and whey protein isolate. We will continue to
increase our value-add ratio compared to standard
products, delivering advanced and innovative
functionalities to our customers.

Our strategy supports the changing industry
To succeed and to continue to grow our business,
AFI focuses on strategic projects and priorities:
AFI will continue to deliver more value to our
customers and our farmer-owners by investing
heavily in growing our value-add ingredient
business. In 2018, AFI acquired full control of Arla
Foods Ingredients S.A. Argentina, taking over
100% of the company shares. Furthermore, we
broke ground on a new drying tower at our plant
in Denmark.

ARLA FOODS ANNUAL REPORT 2018

We aim to deliver on our ambitious innovation
agenda, driven by our customers’ motivation to
deliver better nutrition and hold a strong pipeline
of new products. We will make full use of the
available raw material, turning it into specialised
and unique products.
AFI seeks to grow its raw material pool and we are
on track with strategic projects securing this. In
2018 we signed a Memorandum of Understanding
with the U.S. dairy cooperative Foremost
Farms. The MoU formalised the possibility of a
future partnership and we hope to reach final
agreements in 2019.
In 2018 our child nutrition business was

negatively affected by major changes in Chinese
infant formula regulations. Nevertheless, we
introduced an ambitious strategy aiming to
secure continuous growth of our Child Nutrition
products which included investing in significant
capacity increases. This will enable us to utilise
Arla’s position as the global market leader in
organic milk to serve strong demand in China for
organic Child Nutrition.

In recent years we have worked hard to address
the future demands to Quality & Food Safety in
collaboration with our customers. In 2019, we
will continue to invest heavily in people and
infrastructure to stay at the forefront as a global
leader in food safety and product quality.

Our strategic ambition is to become the leading global
supplier of value-added whey and advanced child nutrition
products. By combining our mindset with our customers’
demands and expectations, we will discover and deliver all
the wonders whey can bring to people’s lives.

Henrik Andersen, Group Vice President

Sales contribution of standard products
and value add products

Revenue split by regions,
MILLION EUR

Index
151

Standard
products

Index
100

79%

95%

Value
products

2013

2018

652*

2017: 651

Europe, the Middle
East and Africa
Asia
Americas

2018 2017

47% 49%
38%
41%
15% 10%

* A significant part of Arla Foods Ingredients activities are carried out in joint ventures, which are not fully consolidated in the Financial Statements, Revenue including joint ventures amounts to EUR 695 million.

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements Trading

In addition to our main sales channels, Arla conducts business-to-business sales to other companies for use
in their production, as well as industry sales of cheese, milk powder and butter. We refer to these activities as
trading, and although this is not a core business segment for Arla, it is critical to our success.

The market for dairy has become increasingly
volatile, especially since the abolition of the EU
quota system in 2015 in Europe, making it difficult
to predict milk volumes. Trading allows us to
manage seasonal and geographical availability
in milk intake.

Our strategic decision to increase trading capacities
in higher value commodities, such as mozzarella
and fat-filled milk powder, coming on line from
mid-2019, strengthens our business. It gives us
more options in managing our milk pool and
helping to reduce our exposure to low-margin
private label contracts.

The share of overall milk intake volumes going
through the trading business increased to 23.9 per
cent from 20.2 per cent last in 2017 as a result of
a deliberate shift from private label volumes to
better performing trading products and customers.

ARLA FOODS ANNUAL REPORT 2018

As a result trading sales increased 12.4 per cent to
EUR 1,690 million versus EUR 1,503 million last
year, representing 16.6 per cent of total revenue for
Arla in 2018.

Alongside the now expected volatility, perhaps the
biggest change in the trading portfolio in 2018 was
the increased volume in fat based products. This
was a result of increased fat prices in reducing
consumer demand but driving traders and food
manufacturers to secure volumes for own usage.

Combined fat and protein prices, three year cycle
showing volatility in the dairy industry
EUR-CENT PER KG

Jan 2008

Jan 2009

Jan 2010

Jan 2011

Jan 2012

Jan 2013

Jan 2014

Jan 2015

Jan 2016

Jan 2017

Dec 2018

Revenue split by product categories
MILLION EUR

1,690

2017: 1,503

Raw milk
Powder
Cheese
Butter
Other

2018 2017
34% 34%
32% 36%
22% 21%
3%
6%

7%
5%

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements OUR
GOVERNANCE

Arla is owned by dairy farmers in seven
countries. In 2018 we transformed our
structure to become ONE Arla, with direct
membership for all of our owners. This
structure ensures more harmonisation
and transparency, preparing Arla as a
cooperative for the future. In the following
section we present our cooperative
and corporate governance and our
democratic framework.

Governance framework

For a cooperative like Arla good governance is essential for achieving success and trusting relations with our farmer owners, employees
and other key stakeholders. Good governance represents responsible and transparent management and corporate control.

Cooperative governance

District councils in
DK, SE, UK, DE, BE, NL and LUX

Area councils
Board of Directors

18**

Executive
Management Team

Owners

10,319

Board of
Representatives

187*

Executive Board/
Executive Director
(CEO)

Employees

19,190

ARLA FOODS ANNUAL REPORT 2018

* Including 12 employee representatives.
** Including three employee representatives.

Corporate governance

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements Governance framework (continued)

Cooperative governance

Arla’s democratic structure gives decision-making
authority to the Board of Directors (BoD) and to
the Board of Representatives (BoR). Their primary
tasks are to develop the ownership base, safeguard
the cooperative democracy, embed decisions
and develop leadership competencies amongst
farmer owners.

Owners
In 2018, 10,319 milk producers in Sweden, Denmark,
Germany, the UK, Belgium, Netherlands and
Luxemburg were the joint owners of Arla. Last year,
the cooperative had 11,262 joint owners. All
cooperative owners have the opportunity to
influence significant decisions. The decline in the
number of farmers is partly due to farmers who
stopped producing milk, or had their business
acquired by another member, and to a lesser extent
due to famers resigning to supply another dairy
company. This decline is in line with the trend seen
in the whole dairy sector over a number of years.

District councils
Each year, cooperative owners convene for a local
annual assembly in their respective countries to
ensure democratic influence of the cooperative
owners in the owner countries. The members in the
district council elect members to represent their
district on the BoR.

Board of Representatives
The BoR is the supreme decision making body
comprising 187 members, of whom 175 are
cooperative owners, and 12 are employee

ARLA FOODS ANNUAL REPORT 2018

representatives. Owner representatives are elected
every other year in odd years. The next election is
announced for May 2019. The BoR makes decisions
including appropriation of profit for the year and
elects the BoD. The BoR meets at least twice a year.

Board of Directors
Appointed by the BoR, the BoD is responsible
for strategic direction setting, monitoring the
company’s activities and asset management,
maintaining the accounts satisfactorily and
appointing the Executive Board. The BoD is also
responsible for ensuring that Arla is managed in
the best interest of the farmer owners and making
decisions concerning the ownership structure.
They also take care of other stakeholders’ interests
in the company: lenders, investors in bond
instruments and employees, among others. The
BoD consists of 15 elected farmer owners and
three employee representatives. The composition
of the BoDs reflects Arla’s ownership structure across
the countries.

Area councils
Arla has four area councils that are sub-committees
of the BoD and consists of members of the BoD, as
well as members of the BoR. The area councils are
established in the four democratic areas: Sweden,
Denmark, Central Europe and the UK; to take care of
the matters that are of special interest to the farmer
owners in each geographic area.

Corporate governance

Corporate governance in Arla is shared between
the Executive Board and the Board of Directors
(BoD). Together they define and ensure adherence
to the company’s strategic direction, organise and
manage the company, supervise management and
ensure compliance.

Executive Board / Executive Director
The Executive Board, appointed by the Board of
Directors, is responsible for managing the company,
ensuring the proper long-term growth of the
company from a global perspective, driving the
strategic direction, following up on targets for the
year and defining company policies, while striving
for a sustainable increase in company value.
Furthermore, the Executive Board ensures
appropriate risk management and risk controlling,
as well as compliance with statutory regulations
and internal guidelines. In 2018, following the
retirement of Povl Krogsgaard, the Executive Board
was represented by the Executive Director in
solitary. From 1st February 2019, Executive Vice
President, Peter Giørtz-Carlsen was appointed to
enter the Executive Board as Vice CEO.

Executive Management Team
The Executive Management Team (EMT) is
appointed by the Executive Board.

The EMT is responsible for Arla’s day-to-day
business operations, preparing strategies and
planning the future operating structure. The EMT
consists of the CEO plus four functional experts and
two commercial leaders. The functional experts

cover the management areas Finance, IT and Legal
(CFO), Marketing and Innovation (CMO), Human
Resources (CHRO), and Supply Chain (COO); while
the commercial leaders are responsible for the
commercial zones Europe and international. The
members of the Executive Management Team
(EMT) keep each other informed on all significant
developments in their business area and align on
all cross-functional measures. In 2018, further
increasing the diversity of the team, Sami Naffakh,
a French national, joined Arla as an Executive Vice
President and Head of Supply Chain.

Employees
Arla has 19,190 full time employees (FTE) globally,
compared to 18,973 last year. Our employees are
represented by three members in the BoD and 12
members in the BoR.

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements Executive Management Team

The Executive Management Team consists of the CEO plus four functional experts and two commercial leaders, one for the
European and one for the international zones. With a range of different backgrounds and expertise, the Executive Management
Team is responsible for Arla’s day-to-day business operations, preparing strategies and planning the future operating structure.
The members of the Executive Management Team are also individually responsible for managing their respective business areas.

ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements Executive Management Team (continued)

Sami Pascal Naffakh
COO
Exectuive Vice President,
Supply Chain

Hanne Søndergaard
CMO
Executive Vice President,
Marketing and Innovation

Tim Ørting Jørgensen
Executive Vice President,
International

Natalie Knight
CFO
Executive Vice President,
Finance, IT and Legal

Peder Tuborgh
CEO
Head of Milk, Members
and Trading
Head of Arla Foods
Ingredients

Peter Giørtz-Carlsen
Executive Board member,
Executive Vice President,
Europe

Ola Arvidsson
CHRO
Executive Vice President, HR
and Corporate Affairs

1970
French

1965
Danish

1964
Danish

1970
American

1963
Danish

1973
Danish

1968
Swedish

Sami joined Arla in January
2018. He has 25 years of
experience in supply chain
and operations from across
several industries, and he
worked in seven countries
before joining Arla. His most
recent position was SVP
Global Supply Chain EMEA
at the Estee Lauder
Companies, but he also has
thorough knowledge of the
dairy industry, as he worked
in multiple senior executive
positions at Danone Early
Life Nutrition. In his free
time Sami enjoys chilling
out with his friends and
family. His favoruite product
is Arla Unika® Gammel Knas.

Hanne has been with Arla for
29 years, first joining under
MD Foods and then moving
to the UK where she played a
leading role in developing
the Arla UK business. She
became the Vice CEO for Arla
UK before moving back to
Denmark in 2010. With a
natural ability for marketing,
Hanne was responsible for
various brands and categories
before taking on her current
role. Hanne is also the
member of the board of Arla
Fonden and of the Technical
University of Denmark. She
lives in Aarhus with her
partner and enjoys kayaking
and cooking. With its Nordic
heritage and healthy
characteristics, Hanne’s
favourite product is Skyr.

Tim joined Arla in 1991
under MD Foods. He has
worked in many senior and
executive positions across
Denmark, Saudi Arabia,
Brazil and Germany before
becoming the Executive
Vice President for Interna-
tional. Tim has been part of
the team since 2007. Tim is
also the member of the
board of Royal Greenland
and Mengniu. When he is
not working, Tim loves
spending time with his wife
and four children. When he
gets the chance, he enjoys
hunting and music. After 27
years in Arla, his favourite
product is the staple Danish
summer dessert, Koldskål®.

Natalie joined Arla Foods as
CFO in 2016, following 17
years at adidas where she
held several senior finance
positions, including SVP
Group Functions Finance,
SVP Brand and Commercial
Finance, CFO of adidas North
America and VP Investor
Relations and M&A. After
having lived and worked in
five countries, Natalie is now
based in Aarhus, Denmark
with her husband and
teenage daughter. She is also
a member of the Board at
Grundfos and Biomar. Her
favourite Danish song is
Flying on the wings of love,
and her favourite product is
Arla® Protein, which she
loves as a healthy follow-up
to a variety of sport activities.

Peder has been with Arla for
31 years, formerly under MD
Foods, and has held various
senior management and
executive positions including
Marketing Director, Divisional
Director and Executive Group
Director. He has worked in
Germany, Saudi Arabia and
Denmark as part of his
longstanding career with
Arla. He is also the Chairman
of the Board of Pandora.
Above all, he enjoys
spending time with his wife,
son and four daughters. His
favourite product is an Arla
classic, Castello®.

Peter joined Arla in 2003 as
Vice President of Corporate
Strategy, and has held various
senior positions in Arla,
including Managing Director
of Cocio Chokolademælk and
Executive Vice President of
Consumer DK and most
recently Consumer UK. He
has been Executive Vice
President of Europe since
2016. Outside of Arla, Peter
has also served as the Vice
CEO at Bestseller China
Fashion Group (Tianjin). Peter
is currently an executive
advisor at FSN Capital
Partners AS since 2012. He
enjoys road biking, skiing and
golfing, and spending time
with his partner and their two
children. His favourite product
is Unika® rød løber.

Ola joined Arla in 2006 as
Corporate HR Director, and
has been the Chief HR
Officer of Arla since 2007.
He previously came from
Unilever, where he held
various director positions
across Europe and the
Nordics, with his last
position as Vice President in
HR. Prior to Unilever, Ola
served as an Officer in the
Royal Combat Engineering
Corps in the Swedish Army.
Ola is also a member of the
board of AP Pension and a
central board member of DI.
Ola dedicates his free time
to his wife and three
children. His favourite
product is a cold glass of
Arla® Mellanmjölk together
with one of his children’s
homemade cinnamon buns.

Year of birth

Nationality

ARLA FOODS ANNUAL REPORT 2018

* From 1st February 2019, Executive Vice President, Peter Giørtz-Carlsen was appointed to enter the Executive Board

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements

Board of Directors

Our Board of Directors has a wealth of knowledge, consisting of 15 elected farmer owners and three employee representatives. In 2018 Jan Toft Nørgaard
became Chairman, and Heléne Gunnarson was elected as the first female Vice Chairman. Arthur Fearnall and Janne Hansson joined as new members.
The Board of Directors’ primary responsibility is to ensure that Arla is managed in the best interest of all farmer owners.

1
Jan Toft Nørgaard
Chairman
1960
Danish
2000

2
Heléne Gunnarson
Vice Chairman

1969
Swedish
2008

3
Manfred Sievers

1955
German
2013

4
Inger-Lise
Sjöström
1973
Swedish
2017

5
Torben Myrup

6
Harry Shaw

7
Janne Hansson

1956
Danish
2006

1952
British
2013

1963
Swedish
2018

8
Ib Bjerglund
Nielsen
1960
Danish
2013

9
Manfred Graff

1959
German
2012

10
Håkan Gillström

1953
Swedish
2015

11
Steen
Nørgaard Madsen

1956
Danish
2005

12
Viggo Ø. Bloch

13
Jonas Carlgren

14
Bjørn Jepsen

15
Johnnie Russell

1955
Danish
2003

1968
Swedish
2011

1963
Danish
2011

1950
British
2012

16
Arthur Richard
Fearnall
1963
British
2018

17
Markus Hübers

18
Simon Simonsen

1975
German
2016

1970
Danish
2017

ARLA FOODS ANNUAL REPORT 2018

Year of birth

Nationality

Member of the board since

Employee representative

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements

Management remuneration

Arla’s executive remuneration policy is designed to encourage high performance and support value creation.
The policy ensures alignment of the Group’s strategic direction with the interests of our farmer owners. We have
a structured approach to remuneration, ensuring that salaries are unbiased towards gender, nationality and age.

Our philosophy
Remuneration packages are constructed to ensure
attraction, engagement and retention of the best
senior leaders, and at the same time drive strong
performance in both short and long-term business
results. Our remuneration levels package is reviewed
annually by external advisors using market data
sources. Although the majority of remuneration is
fixed in line with Scandinavian practice, an increasing
portion in recent years has become variable to
ensure that total remuneration is also dependent on
achievement of Arla’s short and long-term financial,
social and environmental targets. All executives and
members of senior management are employed on
terms according to international standards,
including adequate non-compete restrictions, as
well as confidentiality and loyalty restrictions. The
Board of Representatives (BoR) is regularly updated
on remuneration of the Board of Directors (BoD) and
the development in variable pay for executives and
senior management.

Our performance measures
Board of Directors (BoD)
The remuneration of the BoD comprises a fixed fee
and is not incentive-based. This ensures that the
Board pursues the cooperative’s long-term interests

without taking into consideration what this may
mean in terms of the value of incentive-based
remuneration. The Chairman and the Vice Chairman
(together: Chairmanship) receive a fee that is three
times and two times the base fee respectively, and
the remaining members of the Board receive equal
compensation. Beyond a minimal travel per diem,
no additional compensation is paid for meeting
attendance or committee service. The BoD’s
remuneration is assessed and adjusted on a
bi-annual basis and approved by the Board of
Representatives (BoR). The most recent adjustment
made was in 2017. For more details on specific
amounts please refer to page 115.

Executive Board/Executive Director (CEO)
The Executive Board is appointed by the BoD
and registered as Executive Director at the Danish
Business Authority. The Executive Board appoints
the members of the Executive Management Team
(EMT) and assumes the overall authority and
responsibility for planning, directing and controlling
the Group’s activities. In 2018, following the
retirement of Povl Krogsgaard, the Executive Board
was represented by the Executive Director in solitary.
Remuneration of the Executive Director is based on
a fixed salary, short- and long term variable pay, a

pension contribution and non-monetary benefits
such as company car, telephone etc. The variable
pay component consists of both an annual
short-term variable incentive (STI) plan and a
three-year long-term variable incentive (LTI) plan.
The BoD assesses the remuneration paid to
the Executive Board annually, based on recommen-
dations from the Chairmanship. For 2018, the fixed
pay was maintained on par with last year. For more
details on specific amounts please refer to page 115.

Executive Management Team
and other senior leaders
In addition to the CEO, four functional experts and
two commercial leaders comprise Arla’s Executive
Management Team (EMT). Other senior leadership is
defined as Vice Presidents and above, constituting of
72 people in total.

The remuneration package for the Executive
Management Team and other senior leaders is
based on external benchmarks against European
and International FMCG companies, providing a
competitive and sustainable mix of fixed and variable
pay, as well as a benefit package including a pension
contribution. Levels of fixed remuneration are set
based on individual experience, contribution and

function, while variable pay reflects performance
against annual business targets. The variable pay
component consists of an annual short-term
variable incentive (STI) plan and in limited cases
a three-year long-term variable incentive (LTI)
programme. During 2018, the STI was based on
different, area specific measures for senior leaders,
and on other individually specified targets for other
senior leadership. The LTI was based on strategic
branded revenue growth and performance versus a
peer group index. For 2018, fixed salary grew on
average 2% in line with market-assessed inflation.

ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements OUR
RESPONSIBILITY

As a global dairy company, Arla has
responsibilities in many areas. Beside the
2018 highlights of our agenda to inspire
healthy food habits, preserve and improve
the environment and to spread respect for
human rights, in the following section we
also present our quality assurance
programme, Arlagaarden, our Code of
Conduct, and our efforts to enhance
compliance and our tax affairs.

Our Code of Conduct

The Code of Conduct is the foundation of the high standards we maintain for our products, the environment
and the people we employ and do business with. The Code of Conduct applies to all Arla employees and at all
our sites worldwide and forms the foundation for how we act and operate.

Responsible company
In Arla profitability and ethical business practices go
hand in hand. This is achieved through commitment,
know-how, willpower and hard work.

Confidence in products
Supplying safe products is our top priority. And we
strive to do even more – we aim to make it possible
for consumers to make their own informed and
healthy choices of products based on information
and knowledge.

Care for the environment and animal welfare
As a farmer-owned dairy cooperative, we have a
natural interest in good environmental and dairy
farming practices. We work to reduce our adverse
environmental impact, and maintain high animal
welfare standards.

Responsible relations
We have relationships with people, organisations,
and communities in many countries. No matter
what the relationship is, we are committed to
maintaining mutual respect and understanding.

Food safety
Food safety cannot be compromised. This is why
we have certified food safety systems, quality
programmes and committed employees which
ensure safe products of high quality, no matter
where they are manufactured.

Nutrition and health
We are committed to meeting our consumers’
demand for natural and healthy products, and
reliable labelling of nutritional information
and ingredients. This helps our consumers to
make well informed decisions.

Environment and climate
Our ambition is to reduce our environmental
impact from cow to consumer through food
production and transportation of goods. We
continually improve our environmental
performance by applying sound and sustainable
principles throughout our entire value chain.

Dairy farming
Sustainable dairy farming is a priority for Arla.
Together with our farmer owners, we formed and
regularly update our quality assurance programme
Arlagården® which covers aspects such as animal
welfare, milk quality and the environment.

Workplace
We provide safe and healthy working conditions
for our competent, committed and engaged
employees, creating a workplace that is inclusive,
stimulating and respectful.

Human rights
At Arla it’s our top priority to create a culture that
upholds internationally recognised human rights.

Society and community relations
We engage in open, respectful and constructive
community relations and establish long-term
relationships to contribute to both local and global
development.

Business principles
We comply with the local laws in all the countries
in which we operate.

Operational principles
We manage our business in a responsible and
cooperative way that promotes the financial
interests of our farmer owners. Our farmer owners’
participate in important decisions.

Market conduct
We have a transparent and ongoing dialogue
with consumers and customers, and we support
competition on equal terms.

Procurement and supplier relations
We expect our suppliers to assume social and
environmental responsibility as we do ourselves,
so we can purchase goods and services in a
sustainable manner.

ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements Our compliance activities

In Arla, it is a given that profitability and ethical business practices go hand in hand. Knowing right from wrong
goes beyond laws and regulations. For us a responsible business conduct also comes from living our company
values, following our Code of Conduct, through our culture of openness and transparency.

Through our compliance framework we drive
continued adherence to our Code of Conduct and
corporate policies by ensuring that adequate
policies, processes and guidelines are established,
embedded and enforced throughout the business.

All white-collar employees are trained in our Code of
Conduct by policy awareness e-learnings as well as
in other high-risk compliance areas such as IT
Security and third party relations.

Our Risk, Controls & Compliance team continuously
monitor high-risk areas through internal compliance
reviews, self-assessments and internal controls.
Furthermore, all employees are encouraged to
speak up and voice any concerns or violations
to the Code of Conduct through our external
whistle-blower service.

Examples of compliance activities

Safeguarding of assets
Arla continuously works to develop a robust internal
controls environment by strengthening and
automating existing controls and establishing new
controls to mitigate identified risk in order to
safeguard Arla’s assets. These could be financial,
physical or reputational assets. Our internal controls
framework provides a transparent overview of
financial and operational risks and highlights areas
of weakness which are addressed with mitigating
activities.

This year, special attention has been given to GDPR
effective from May 25th, 2018, where new controls
have been designed to mitigate potential risks
associated to this area.

New policy site
We want to let our employees know that we have
corporate policies governing our behaviour as
stated in the Code of Conduct in all aspects of the
company, embedding a responsible culture.
Therefore in 2018 we restructured our internal
policy site to show employees how each policy is
linked to our Code of Conduct representing all areas
of our value chain.

ARLA FOODS ANNUAL REPORT 2018

IT security
Arla continuously assesses the increasing threats
from the online world to ensure that we have proper
IT Security policies and internal controls in place.
Our employees are the first line of defence and we
prioritise education in cyber-security for all Arla
employees.

In 2018 Arla has completed a major system access
rights project resulting in improved risk monitoring
as well as more thorough access allocation process.

ESTABLISH
Corporate policies,
processes and
guidelines

EMBED
Leadership
Communication
& training
Objectives &
initiatives

ENFORCE
Auditing & review
Monitoring & reporting
Complaints handling &
remediation

Fraud and Bribery
It is Arla’s policy to conduct business in an honest
and ethical manner and we have a zero-tolerance
to fraud and bribery. We are committed to,
implementing and enforcing effective systems,
processes and controls to counter corruption and
fraud, and to acting professionally, fairly and with
integrity in all our business dealings, transactions
and relationships.

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements Our tax affairs

In recent years, multinationals have experienced a growing interest from media, non-governmental organisations and
the public on tax matters. As a globally operating group, Arla acknowledges the key role of taxes in the countries where we
operate. Our approach to tax conforms with Arla’s global Code of Conduct and is founded on a set of key tax principles
approved by our Board of Directors.

The OECD’s project against base erosion
and profit shifting (BEPS) led to the
development of new tax principles
and documentation requirements for
multinationals in recent years.
Arla is fully committed to meeting all
requirements on tax reporting and
transparency. We strive for an open
dialogue with tax authorities around the
world regarding our business and our
tax reporting.

Our key tax principles
Arla’s strategic ambition is to act as a
responsible citizen in all tax matters,
achieving a balance between managing
tax costs, driving efficiencies and
reporting tax in a responsible way. The
cornerstones for all tax-related matters
in Arla are our key tax principles:
We aim to report the right and proper
amount of tax according to where the
value is created
We are committed to pay taxes
legally due and to ensure compliance
with legislative requirements
in all jurisdictions in which the
business operates

We do not use tax havens to reduce
the group’s tax liabilities
We do not set up tax structures
intended for tax avoidance which have
no commercial substance and do not
meet the spirit of the law
We are transparent about our
approach to tax and our tax position.
Disclosures are made in accordance
with relevant regulations and
applicable reporting standards such
as International Financial Reporting
Standards (IFRS)
We build on good relationships
with tax authorities and trust that
transparency, collaboration and a
proactive attitude minimises the
occurrence and extent of tax disputes.

Accountability and governance
The complexity of our business requires
a significant focus on tax management.
Our global tax function is organised to
ensure that we have the right policies,
people and procedures in place to
adhere to our key tax principles and to
ensure strong and transparent tax
management.

ARLA FOODS ANNUAL REPORT 2018

We continuously work on improving the
internal standards and controls required
to adhere to our key tax principles.
Accountability for tax processes, with
a few exceptions, lies with the global
tax function.

are also our suppliers, and earnings do
not accrue in the company but go back
to the owners in the form of the highest
possible milk price. The earnings of the
Arla group can therefore be viewed as
the owners’ personal income.

Operating under a cooperative
tax scheme
As a cooperative based in Denmark, Arla
Foods amba is governed by the Danish
tax rules for cooperatives. Arla’s owners

The owners of Arla will generally pay
income tax on the amount received for
their milk. Danish cooperative tax rules
reflect the fact that the cooperative acts
as its members’ extended arm, and as

such, Arla Foods amba pays income tax
in Denmark based on its equity.

Arla group owns several subsidiaries
globally. Our subsidiaries are typically
limited liability and private limited
companies subject to regular corporate
taxation.

What is the main difference between a cooperative and a listed company

Limited liability company

Cooperative

Profits

Minimum
payment for
commodity

Shareholder

Supplier

Maximum
payment for
commodity

Owner/supplier

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements Leading the sustainability agenda

We operate our business in a sustainable and responsible
manner, based on our Code of Conduct. At Arla, we believe
sustainability and profitability go hand in hand, and that our
dedication to being responsible will benefit our business.
The core of our sustainability strategy is our respect for
human rights, and we focus our efforts on the areas where
we have the biggest impact: access to nutritious dairy
products, inspiring good food habits and improving the
environment. With our sustainability efforts, we contribute
to the UN’s Sustainable Development Goals (SDGs).

ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements Sustainable dairy farming

Animal welfare
Working with animals is a key reason why dairy farmers
choose their line of work. The well-being of animals is key for
their success and is at the very heart of the dairy farm. In 2018
84 per cent of farmer owners engaged in quarterly, systematic
evaluations of their individual cows from an animal welfare
perspective (see page 51 for more information). We are
developing an animal welfare index in cooperation with
Copenhagen University, to create a common ground for
discussion and further improvement of animal welfare.

Emissions reduction
Our goal is to reduce the emission of greenhouse gases from
farms by 30 per cent per kilo of milk, from 1990 to 2020. We
provide carbon assessments performed by external experts to
our farmers to help them further reduce emissions. By the end
of 2018, Arla farm level emissions had been reduced by
24 per cent per kg of milk. Many Arla farmers produce
renewable electricity based on solar, wind or biogas. The
amount produced is comparable to 61% of the annual use on
farm. From January 2019, our organic farmers in Denmark will
cover their net electricity requirements not generated on farm
with the purchase of renewable electricity certificates. This is
already the case for organic farmers in Sweden.

Nr of
sustainability
workshops for
farmers**

693

Nr of carbon
assessments*

5,062

Reduction of
greenhouse gas
emissions per kg
of milk***

24%

Serving the ecosystem
One important ecosystem service Arla farms deliver is the uptake of carbon in grasslands, hedges and pasture lands, which
mitigates climate change. To develop a method for estimating carbon sequestration on farm, we have initiated a project together
with other large companies within the food industry. The goal is to have a method that will support and encourage farmers to
implement activities and practices that promote carbon sequestration.

Read more about our commitments
and achievements for 2018 in Arla’s

Corporate Responsibility Report in
accordance with section 99a in the Danish
Financial Statements Act.

ARLA FOODS ANNUAL REPORT 2018

* Since the start of the programme in 2010. ** Since the start of the programme in 2010. *** Compared to 1990

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements 2018 sustainability highlights

“At Arla, we are committed to accelerate the transition to sustainable dairy production
and build confidence in dairy as part of a healthy and sustainable diet.”
Peder Tuborgh, CEO

Health
Increasing access to healthy
dairy nutrition

Inspiration
Actively inspiring good food habits
and choices

Natural
Making a positive contribution
to a more sustainable future

Human rights
Respecting human rights
across the globe

In 2018 we further increased affordability
and enhanced compliance with the Arla®
Nutrition Criteria. Currently 93 per cent
of Arla® branded products comply with
the criteria.

First and foremost, we want to ensure that
eating or drinking our products is always safe.
The number of product recalls was reduced
by 80 per cent in 2018.

We continuously explore how we can
help people eat more healthily. We have
launched a range of on-the-go products for
health-conscious consumers, for example,
a highly innovative product, Arla Bio that
contains only yoghurt and fruit.

In 2018 Danish, Swedish and German farms

hosted more than 140,000 children to
educate them about the life on a farm and
origins of their food.

In 2018, Arla Sweden began labelling fresh
dairy products including milk, cream and
yoghurt ‘Best before, often good after’. This
was done to discourage unnecessary food
wastage, since many products can safely be
consumed beyond the best before date, if
they have been stored at the correct
temperature.

Arla co-hosted seminars with over 1,000
participants and several workshops to
improve the skills and knowledge of Chinese
farmers and farm workers, in an effort to
enhance animal welfare and milk quality.

Small step-by-step packaging improvements
can have a large aggregated impact in a
company such as Arla. Some products that
were previously packaged in white
HDPE-plastic, are now available in clear PET
with PET sleeves. In addition to improving
recyclability, the bottle weight has been
reduced by approximately 20 per cent.

Our ambition is to use as much renewable
energy as possible at Arla sites; with an aim
of at least 50 per cent by 2020. In 2018, we
continued to work across sites with projects
to improve energy efficiency, increase
share of renewable energy and reduce
climate impact.

As part of a continuous partnership, we held
a stakeholder workshop in Nigeria to identify
human rights risks within the project’s dairy
value chain.

In the Middle East, we employ many migrant

colleagues and we acknowledge our
particular responsibility to respect their
human rights. One focus point is to provide
them with decent housing. In 2018 improve-
ments were made in this respect in Saudi
Arabia, Qatar, Oman and United Arab Emirates.

ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements Arlagården®, our quality assurance
Arlagården
and animal welfare programme

Food safety and animal welfare enable Arla to create growth for our products and brands and thereby growth
for our farmer owners. As a cooperative in control of the entire value chain, our quality assurance programme,
Arlagården®, ensures high quality milk produced responsibly. Arlagården® Plus, our farm documentation
center gives us a competitive advantage, as we are the only large dairy company to have regularly updated,
comprehensive data regarding the wellbeing of our farmers’ herds.

What is Arlagården®?
High quality is an important part of our strategy
and key to creating the future of dairy. As high
quality in our products starts on the farm, all of our
10,319 farmer owners are governed by our farm
assurance programme, Arlagården®.

comply with Arlagården®. As a farmer owned
cooperative, Arla makes sure that farmers who
need support and guidance in implementing
further improvements receive sufficient support
from farm advisors to develop further.

Arlagården® covers all the good work our farmers
are doing every day to ensure superior raw milk
quality, and welfare for both animals and the
environment. Our farmers are proud of how they
farm and for Arla, it is a strength that our owners
are committed to shared principles and standards.
Arlagården® enhances our ability to compete in
both European and International markets
and protects our reputation for supplying high
quality milk.

Food safety, traceability and raw milk quality
assured by Arlagården®
Arlagården® is built on four cornerstones: milk
quality, food safety, environment and animal
welfare. It includes regulations and guidelines that
are audited and actively enforced to ensure
excellent food safety, traceability and raw milk
quality. Every single Arla farm is audited by third
party agricultural advisors to ensure that farms

Arlagården® Plus for the benefit of
consumers and owners
It is increasingly important to share the story about
all the good we do on the farms as consumers and
customers are increasingly interested in the origin
of our products, what farmers feed their cows and
how they look after them. Arlagården® Plus
enables that as it contains a wide range of
regularly updated facts about the cows, from their
feed and health plan to their daily routine, but also
other important facts about farm, like the state of
facilities and land use. To have these facts is
unique in the dairy industry, and thus it gives a
competitive edge to our brands and strengthens
our position with consumers and customers.

Furthermore, Arlagården® Plus serves as a
benchmarking tool, enabling the individual farmer
to benchmark his or her own development in
terms of animal welfare against groups of other
Arla farmer owners.

Farm facts from Arlagården® Plus*

1,344,285

96%

NUMBER OF
COWS

OF THE MILK POOL COVERED BY
ARLAGÅRDEN® PLUS

83%

183

COWS INVOLVED IN A HEALTH PLAN IN
COLLABORATION WITH A VETERINARIAN

DAYS/YEAR OF GRAZING ON AVERAGE
FOR ORGANIC COWS

8.3 m2

AVERAGE SPACE/COW
INDOORS

120**

DAYS/YEAR OF GRAZING ON AVERAGE
FOR CONVENTIONAL COWS

ARLA FOODS ANNUAL REPORT 2018

* The facts below are based on the data submitted to Arlagården® Plus. To date, 84 per cent of our owners submitted data to the system.
**This average pertains to the conventional cows who graze. The majority of conventional cows don’t graze.

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements Diversity and inclusion

At Arla we believe that no matter who you are, you can and should be yourself. Diversity and inclusion are imperative to the
success of our business and we know that a diverse and inclusive workforce generates positive energy, innovation and results.
We define diversity broadly as differences between people with a diverse range of backgrounds, while inclusion is about
valuing differences among individuals.

Our employees come from a total of 105 countries
and represent multiple generations and genders
with a broad range of experiences, backgrounds and
skills. We highly value age diversity as it creates an
environment where each generation brings different
skills and talents to the table. Our aim is that all teams
have a representation of a minimum of 30 per cent
and no more than 70 per cent of the same gender,
nationality and age group. This is necessary to
secure diversity of thought in all teams and an
environment of creativity, engagement and
performance across Arla. Diversity statistics are
calculated monthly and shared with HR Business
Partners and the business.

In our recruitment processes we apply a competency-
based approach when assessing candidates to
ensure decisions are data-based, thereby removing
any bias in the selection process. All recruiters are
continuously trained in securing unbiased processes
and working closely with our hiring managers is also a
way of making sure that we hire based on sound
arguments.

Age distribution

Gender distribution*

Nationalities

21%

22%

Total number of countries

105

25%

Female

Male

24%

44%

56%

<30

30-39 40-49 50-59

>60

2017: 42%

2017: 58%

Other
20%

17%

38%

Average age at Arla

EMT

BoD**

BoR

2018 2017

29% 29%

71% 71%

13% 13%

87% 87%

13% 8%

87% 92%

15%

Nationalities in the EMT

ARLA FOODS ANNUAL REPORT 2018

* This is the gender ratio in the white collar workforce. Gender ratio in blue collar workforce: female: 20%; male: 80% ; and in Arla in total: female: 28%; male: 72%.** The ratio pertains to the
general assembly members of the BoD (excluding employee representatives). In accordance with section 99b of the Danish Financial Statements Act, in 2018 Arla has set a 4-year
target to achieve a female representation in the Board of Directors of at least 20 per cent, to be reviewed going forward. In 2018 we didn’t achieve the target as there was no election.

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements

OUR FINANCIAL
REVIEW

We measure our performance by the value
we add to each kilo of milk supplied by our
owners. We call it our performance price
and it is our key financial indicator. In the
following section we present key financial
developments in 2018 and give an outlook
for 2019.

Market Overview

Volatile milk markets continued into 2018, with European and global milk prices drifting apart. However, healthy farmer milk prices
characterised most of 2018. Worldwide milk production grew at a slow pace and farmers in Europe were impacted by a severe drought
and high feed prices. The macroeconomic development was clouded by political uncertainty around Brexit and free trade; GDP growth
slowed down in both developed and emerging markets, and major currencies relevant to Arla were under pressure.

Challenging macroeconomic environment
After a strong start in 2018 global economic
development decelerated and GDP growth in
Europe and key emerging markets slowed
significantly. Increasing political uncertainty caused
by ongoing Brexit negotiations, the trade conflict
between the US and China as well as discussions
regarding a renegotiation of NAFTA also contributed
to a challenging and unpredictable business
environment. This impacted GBP, USD and SEK
exchange rates, which are the most relevant
currencies to Arla. The GBP decreased on average

1.0 per cent versus already very low 2017 values,
mainly due to instability around Brexit, while the
SEK depreciated by 6.1 per cent due to low interest
rates and political uncertainty. The USD appreciated
during most of 2018, but remained on average
4.4 per cent below 2017 levels. While Arla was not
significantly affected by macroeconomic challenges
in 2018, the developments have generally been
unfavourable for globally-oriented companies
relying on free trade and open markets.

Milk prices and volumes relatively stable
After a very volatile last year, farmer milk prices
decreased early in 2018, but recovered in Q3,
remaining stable for the rest of the year. Fat
continued to be more valuable than protein,
following the trend seen in the second half of 2017
– however, the price gap started to close slightly
toward the end of the year. European cheese prices
recovered in mid-2018 from the low level at the end
of 2017, remaining stable for the rest of the year.
Global Dairy Trade auction prices fell moderately
over the course of 2018. Butter prices, though
remaining firm, fell back from the high levels of 2017.

The EU intervention scheme was effectively closed
for the year, resulting in very low skim milk powder
prices while substantial stocks remained. However,
towards the end of the year, significant volumes
were sold.

Milk production growth in the world’s main
exporting regions slowed down throughout 2018
and stalled at the end of the year. Large parts of
Europe, including Arla’s main member areas, were
affected by a severe drought, which started to
impact milk production in Q4, mainly due to the
reduced stocks and resulting increasing cost of feed

Gross Domestic Product* (expressed in purchasing power parity)
GROWTH YEAR-ON-YEAR

GBP, SEK, USD exchange rate development**
GROWTH YEAR-ON-YEAR

3.7%

2.2%

2.0%

1.9%

2.4%

W orld

Europe

Den m ark

Germ any

S w eden

ARLA FOODS ANNUAL REPORT 2018

1.4%

U nited
Kingdo m

6.6%

1.9%

1.7%

2.2%

2.9%

1.18

1.14

1.10

0.92

0.88

0.84

0.80

0.106

0.104

0.102

0.100

0.98

0.96

China

Nigeria

Russia

Saudi
Arabia

USA

Q1
2017

Q2
2017

Q3
2017

Q4
2017

Q1
2018

Q2
2018

Q3
2018

Q4
2018

GBP (left axis)

USD (left axis)

SEK (right axis)

* Source: IMF
** Source: Bloomberg

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements
This brought farm economies under pressure,
with herd sizes shrinking, and the development is
expected to continue into the first half of 2019. The
EU market is still finding its footing after the removal
of milk quotas and the launch of new phosphate
regulations in the Netherlands, which both further
limited supply growth in 2018. Overall, EU volumes
grew by 1.0 per cent versus 2017, with this increase
being weighted towards those areas not impacted
by the drought. Production in Arla’s core countries
remained, in aggregate, largely flat.

Demand and consumption growth
strongest in emerging markets
The latest available global consumption numbers
from 2017 show that per capita consumption of
dairy grew faster in developing markets at 4.4 per
cent year on year versus developed markets,
where consumption increased by 2.5 per cent.
In absolute numbers, approximately 85 per cent
of dairy consumption growth was driven by
emerging markets.

At retail, market volumes for most dairy categories in
our European core markets were in decline, with the
exception of milk in Denmark, yellow cheese in
Germany, and yoghurt in Denmark and Sweden.
Volumes for ready-to-drink coffee grew significantly
across markets. With changes in world market
commodity prices for dairy products settling
into consumer products, category value increased
substantially across categories in 2018.

Global Dairy Trade prices,
average, Whole Milk Powder
USD/TONNE

European Cheese* prices,average
EUR/TONNE

4,000

3,500

3,000

2,500

3,233

2,674

Jan.
2016

Dec.
2016

Dec.
2017

Dec.
2018

2,188

Dec.
2016

Dec.
2017

Dec.
2018

EU intervention stock development**
SMP, TON

Stock volumes

Sales volumes

400,000

350,000

300,000

250,000

200,000

150,000

100,000

50,000

120,000

100,000

80,000

60,000

40,000

20,000

Jan 2018

Feb 2018

M ar 2018

Apr 2018

M ay 2018

June 2018

July 2018

Aug 2018

Sept 2018

Oct 2018

N ov 2018

Dec 2018

Jan 2019

ARLA FOODS ANNUAL REPORT 2018

*Cheddar, Gouda, Mozzarella, Emmental – EXW prices. Source: Trigona Dairy Trade. **Source: EU Milk Market Observatory

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial StatementsFinancial performance

In 2018, Arla improved its milk price performance relative to competition– in absolute terms the milk price delivered to farmer owners
decreased by 4.5 per cent due to lower market prices, resulting in a still strong performance price of 36.4 EUR-cent/kg. This was mainly driven
by a successful first year of Calcium and solid branded growth in EU. Our strong balance sheet gave the Board of Directors (BoD) confidence
to propose a one-time pay-out of the full profit for the year to our farmer owners in response to the extraordinary drought situation.

Owner milk price decreases slightly in line
with lower commodity market milk prices
Arla’s mission is to secure the highest value for our
farmers’ milk while creating opportunities for their
continued growth. Our commitment to maximise
both short- and long-term value for our owners
requires strong commercial execution on all levels
of the business through active price management,
delivering favourable branded growth as well as firm
cost control. In 2018 we were able to enhance the
shape of our business and deliver a continued
strong milk price for our farmer owners.

Performance price is the most important KPI for
Arla, measuring the value Arla creates per kilogram
of owner milk. In 2018, the performance price
decreased by 4.5 per cent to 36.4 EUR-cent/kg,
compared to 38.1 EUR-cent/kg last year. This
decrease was largely driven by lower commodity
market prices, impacting our milk price particularly
in Q1. This impact was largely offset by branded
growth and deliveries of our transformation
programme, Calcium, as well as strong price
management towards retailers. For more
information on the performance price please
refer to Note 1.4.

The largest component of performance price is the
prepaid milk price, which represents the on-account
payment farmer owners receive per kilogram of
milk delivered during the settlement period. Coming
from a low level at the end of the first quarter,
we succeeded in increasing our prepaid price
significantly, leading to an improvement in our
relative performance and a milk price that
outperformed competitors throughout the last
three quarters of 2018. For the full year 2018 our
prepaid price nevertheless decreased by 5.0 per
cent to 34.1 EUR-cent/kg versus 35.9 EUR-cent/kg
last year, reflecting overall lower market prices.

Arla owner milk intake in 2018 grew only 0.6 per
cent compared to last year’s levels, impacted by the
slightly lower milk price environment as well as the
drought. This year-on-year stability masks modest
seasonality in milk intake throughout the year.
During the first and second quarter of 2018,
milk intake expanded by 1.7 and 1.1 per cent
year-on-year respectively. During the third and
fourth quarter, the impact of the year’s severe
drought became visible, leading to a milk intake
reduction of -0.4 and -0.7 per cent year-on-year.

39
38
37
36
35
34
33
32

3,300

3,250

3,200

3,150

3,100

3,050

3,000

2,950

2,900

ARLA FOODS ANNUAL REPORT 2018

Prepaid milk price and owner milk volumes
EURC/KG; TONNES

Q1
2017

Q2
2017

Q3
2017

Q4
2017

Q1
2018

Q2
2018

Q3
2018

Q4
2018

Prepaid price

Farmer milk volume

Quarterly milk intake from our owners
MKG

2017

2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements
Revenues grow, driven by higher sales
volumes and improving product mix
In 2018, revenue increased by 0.8 per cent to EUR
10.4 billion, compared to EUR 10.3 billion last year,
which is in the higher end of our expected range.
At Arla, there are four components of revenue
development: sales prices, volumes and product
mix, exchange rates, as well as changes due to
acquisitions and/or divestments. Branded volumes
and product mix, and to a lesser extent acquisitions,
were the drivers of sales growth in 2018. The
development of exchange rates impacted revenues
negatively. Underlying revenue development,
excluding foreign exchange effects and acquisitions,
was 2.0 per cent.

After strong sales price increases last year, price
levels were relatively stable in 2018, with a small
negative impact of 0.5 per cent for the full year.

Improving product mix through continued strategic
branded volume growth of 3.1 per cent was the
main driver of revenue growth. Private label
volume-driven revenue growth was negative at
-6.3 per cent based on a strategic decision to step
out of unprofitable contracts in Germany and the
UK. As a result, the share of branded business, which
represents our most important quality of business
indicator, reached 45.2 per cent, which exceeded
our Good Growth 2020 long-term ambition of 45
per cent two years ahead of schedule.

Due to our European operations in non-Euro
currencies and our increasingly international
business, Arla is significantly exposed to currency
fluctuations. In 2018, these negatively impacted
our sales by EUR 210 million, primarily due to the
weaker SEK and USD.

Sales were positively impacted with EUR 89 million
by the acquisition of Yeo Valley in the UK and
Gefleortens in Sweden as well as by the purchase of
the remaining shares in Arla Foods Ingredients S.A. in
Argentina. For more details on revenue develop-
ment please refer to Note 1.1.

Branded growth and continued innovation
signal improving quality of business
Our brands are at the heart of our business and drive
about two thirds of Arla’s profitability. Increasing
branded sales is critical for us to achieve stronger
relative profitability on a medium- and long-term
basis. We also know that branded revenue and
profitability is less volatile and drives a fundamentally
strong connection with consumers. In line with our
strategy Good Growth 2020, Arla continues to focus
on growing our branded share of volume and
increasing our investments in product innovation.

In 2018, strategic branded volume grew 3.1 per
cent, following a 3.0 per cent increase last year.
This strong result is at the top end of our target
range, despite significant reductions in marketing
spend compared to last year, thanks to Calcium-in-
spired initiatives that led us to increase marketing
spend efficiency.

In absolute terms, most of our branded growth in
2018 was driven by our core brands in Europe,
supported by strong innovation and brand execution.
Brand growth in our international zone was limited
by challenges in China and Nigeria. Nevertheless,
core brands Puck® and Lurpak® performed strongly
in international markets. From a brand and category
perspective, milk based beverages (including
StarbucksTM) was our fastest-growing segment in
2018 followed by Puck®, Castello®, Lurpak® and the
Arla® brand. For more details on our brands refer to
pages 26 to 30.

Branded revenue, split by brands
PER CENT

Revenue split by commercial segment
PER CENT

Other
supported brands

Milk based
beverages

Puck®

Trading and
other sales

16%

Arla Foods
Ingredients

Lurpak®

12%

64%

Arla®

63%

Europe

International

15%

Castello®

ARLA FOODS ANNUAL REPORT 2018

3.1%

In 2018, strategic branded volume
grew 3.1 per cent, in line with our target
of 1-3.5% growth. Increasing branded
sales is critical for us to achieve
stronger relative profitability on a
medium- and long-term basis.

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial StatementsOur brands

Arla®
The Arla® brand is central to our global business, and the key driver of our branded growth.
In 2018, Arla® brand sales grew 0.2 per cent to EUR 3,034 million. Arla® strategic branded volume growth
(SB VDRG) amounted to 1.8 per cent, primarily as a result of successful sub-brand launches in both
European and international markets. Price-driven revenue growth (PDRG) excluding exchange rate
effects, which were negative, was 0.8 per cent. For definitions on SB VDRG and PDRG please refer to the
glossary.

Lurpak®
Revenue for our leading brand in the butter and spreads
category increased 6.1 per cent to EUR 561 million in 2018
driven mainly by sales prices with a PDRG effect of 5.4 per cent,
which was a necessary response to rising market prices for milk
fat. Despite these higher price levels, SB VDRG also reached 2.7
per cent – as a result, Lurpak® once again remains the biggest
global butter brand.

Milk based beverages incl. StarbucksTM
Our milk based beverages segment includes strong
brands such as Cocio, Matilde, and most importantly,
the licensed StarbucksTM brand. In 2018 branded
sales in the MBB segment grew by 10.1 per cent to
EUR 248 million, driven by a very strong SB VDRG of
22.7 per cent, while sales prices had a minor negative
PDRG impact of 1.0 per cent. Our licensed StarbucksTM
brand achieved an SB VDRG of 29.7 per cent driven
by significantly expanded distribution, while our
Matilde brand reached an SB VDRG of 15.7 per cent
thanks to improved differentiation. Cocio SB VDRG
amounted to 5.1 per cent driven by a new collaboration
with HBO and strong communication.

Castello®
Sales of our Castello® specialty cheese
brand declined 1.0 per cent to EUR 180
million mainly due to exchange rates
– PDRG excluding exchange rate effects
had a minor impact of -1.3 per cent.
Nevertheless, the brand reached a SB VDRG
of 3.8 per cent, which is a very good result
that reflects an improving product mix.
This was enabled by an expanded portfolio
with big bets in white mould and yellow
cheese, supported by the strong and
globally executed “Sensations by Castello”
campaign.

Puck®
Our region MENA’s leading brand
continued to perform strongly for
Arla in 2018. Puck® revenues grew
3.7 per cent to EUR 352 million
driven by an SB VDRG of 8.9 per cent,
which is over twice the 2017 rate.
Prices excluding exchange rate
effects had a negative PDRG effect of
1.6 per cent due to strong growth in
lower price point markets.

ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial StatementsOur commercial zones and segments

Europe
Sales in Europe declined 0.9 per cent to EUR 6,507
million compared to EUR 6,568 million last year.
Positive price effects, higher branded sales volumes
as well as additional revenue from our acquisitions
were more than offset by negative currency effects
of EUR 108 million. Lower volumes in our private
label business, resulting from our strategic decision
to step out of unprofitable contracts, also had a
small negative impact on European sales. Revenue
growth excluding currency effects was 0.7 per cent.

Europe’s strategic branded volume-driven revenue
growth of 2.5 per cent reflects the solidity of our
European core branded business. Main drivers were
our central European markets Germany (+6.5 per
cent) and Netherlands/Belgium/France (+12.9 per
cent), while Denmark (+4.6 per cent) and UK
(+4.1 per cent) also performed strongly. Branded
sales declined by 0.8 per cent in Sweden, impacted
by the increasing trend towards private label
products and dairy alternatives. For further details on
the development of each of our strategic European
markets, please refer to page 31.

International
International sales declined by 2.5 per cent to EUR
1,576 million, compared to EUR 1,616 million last
year, bringing our International share of retail and
foodservice revenues to 19.6 per cent vs. 20.2 per
cent last year and thus below our target of 20 per
cent. This reflects a negative currency effect of EUR
67 million. Revenues excluding currency effects
increased by 1.7 per cent.

In this high-margin segment, SB VDRG amounted to
4.6 per cent. Our largest international commercial
region MENA exceeded SB VDRG expectations at
7.9 per cent despite challenging market dynamics.
SB VDRG in the SEA region reached 25.9 per cent,
mainly driven by Dano’s success in Bangladesh and
strong growth in Japan and Korea. In North America,
we achieved an SB VDRG of 3.2 per cent driven by
very good results in Canada across all categories,
partially offset by only modest growth in the US
despite a major marketing offensive. In China, an SB
VDRG of -8.0 per cent was driven by lower sales of
infant milk powder following new regulations as well
as lower UHT milk volumes based on a profitability-
driven reprioritisation of our product portfolio. In
Nigeria, SB VDRG was also negative at -15.2 per cent
due to lower volumes of foodservice milk powder,
while retail sales performed well. For more details on
our performance in International, please refer to
page 33.

ARLA FOODS ANNUAL REPORT 2018

Arla Foods Ingredients
In 2018, sales grew by 0.1 per cent to EUR 652
million compared to EUR 651 million last year.
The full consolidation of Arla Foods Ingredients S.A.
Argentina had a positive impact on sales of EUR
45 million following its acquisition in the first quarter
as explained in Note 3.5. Revenue in our core whey
business was stable, driven by positive impacts from
the product mix improving towards more specialised
products and a volume-driven upside on lactose, as
well as a negative price development in relation to
standard products. Revenues in our third-party
manufacturing business for infant milk formula in
China also decreased temporarily, caused by new
regulation limiting the number of customers for
which a specific site can produce – in 2019 and
onwards we expect no negative impacts from
this. Refer to page 35 for more information on our
AFI journey.

Trading
Sales of trading products and commodity liquid milk
increased 12.4 per cent to EUR 1,690 million versus
EUR 1,503 million last year. This higher revenue is
the direct result of the improved quality of our
trading portfolio, with less focus on commodity
liquid milk. We expect to continue selling higher-value
trading products into 2019 thanks to our substantial
capacity investments as well as higher retail and
foodservice milk consumption in Europe and
International, leading to less milk available for sale of
lower-value commodity liquid milk. The trading
share of overall milk intake volumes, however,
increased to 23.9 per cent compared to 20.2 per
cent last year as a result of our intentional shift away
from private label volumes to more profitable
short-term trading opportunities. To read more
about our trading segment, refer to page 36.

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statementsmillion in 2018 – a reduction equivalent to
3.8 days measured on a trailing 3-month basis.
Compared to 2014 levels, we have been able
to reduce NWC by nearly 10 days.

Leverage decreases to historically low level,
driven by lower debt and higher earnings
Financial leverage is calculated as the ratio of net
interest-bearing debt to operating profit, i.e. EBITDA.
The ratio measures Arla’s ability to generate profit
compared to our net financial debt. Financial
leverage is our most important balance sheet
performance indicator, and we have a long-term
target range of 2.8 to 3.4. In 2018 leverage was
reduced to 2.4 compared to 2.6 last year, which
significantly outperformed our target range. Net
interest-bearing debt including pension liabilities
decreased to EUR 1,867 million compared to
EUR 1,913 million last year. EBITDA was EUR 767
million versus EUR 738 million last year.

These further improvements in working capital
and leverage have made our balance sheet
stronger than ever.

114MILLION EUR

Our transformation programme,
Calcium delivered exceptionally good
first year results of EUR 114 million
savings, ahead of our EUR 30 million
target. Calcium is our response to
challenging external developments.

Calcium savings exceed first year expectations
Early 2018 we launched our comprehensive
transformation programme, Calcium, as our
response to challenging external developments,
such as the decline of the GBP and SEK, as well as
the historic shift in value between milk fat and
protein, and to optimise our internal cost structure.
Calcium delivered strong first year savings of EUR
114 million, which significantly exceeded our initial
target of EUR 30 million. This number excludes
reinvestments and one-time investments as well as
non-Calcium related cost. The primary cost
categories driving these savings included sales and
administrative costs, marketing, and supply chain
costs. For more details on Calcium, please refer to
page 21.

From a profit and loss perspective, these significant
Calcium contributions are not directly visible on all
cost lines due to inventory revaluation, volume-mix
effects in supply chain driven primarily by a positive
brand mix development, as well as additional
logistics costs to optimise our trading sales.
Reported cost levels also include negative one-time
impacts, such as supply chain and Calcium
restructuring costs. For more details on our cost
development, please refer to Note 1.2.

Net profit in target range and proposed to be
paid out fully to member farmers for 2018
At Arla, we target an annual net profit share in the
range of 2.8 to 3.2 per cent of revenue. This allows
us on an ongoing basis to actively balance the
retained capital for future investments and provide
supplementary payment to our farmer owners while
continuing to pay out the largest possible share of

our profit via the prepaid milk price. In 2018, we
again prioritised prepaid milk prices throughout the
year and achieved a profit share of 2.8 per cent
(2017: 2.8 per cent). Although there were positive
and negative one-offs in 2018, they had no material
net effect on profit.

On the basis of our very strong balance sheet and
hence leverage, the Board of Directors made an
exceptional proposal in August 2018 to pay out the
full net profit for the year as a supplementary
payment to support our farmer owners.

Our balance sheet is a critical lever for success. It
provides Arla with the financial strength to invest in
delivering our strategy, Good Growth 2020, and
create the future of dairy. Arla is considered a robust
investment grade company, and we continually
strive to uphold this status.

Working Capital reduced further
Inventory values on our balance sheet declined 4.6
per cent to EUR 1,074 million versus EUR 1,126
million last year, driven by price levels and our
continued efforts to optimise stock. Receivables
increased 5.0 per cent to EUR 989 million versus
EUR 942 million last year, after we decided to not
fully utilise our customer financing agreements to
reduce cost, enabled by our strong cash position.
Payables increased by 6.5 per cent to EUR 1,169
million compared to EUR 1,098 million last year,
thanks to the utilisation of Supply Chain Financing
programmes with our suppliers – please see Note 2
for details. As a result, total net working capital
(NWC) excluding owner milk was reduced by 6.1 per
cent from 1,175 million last year to EUR 1,103

ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial StatementsStrong cash flow despite
significantly higher investments
Cash flow from operating activities increased to EUR
658 million compared to EUR 386 million last year
due to a higher EBITDA and strong improvements in
working capital. At the same time, we increased
CAPEX investments by 47 per cent from EUR 298
million (including intangible assets) last year to EUR
438 million in 2018, leading to a free operating cash
flow of EUR 224 million vs. EUR 100 million last year.
Our M&A activity in 2018 led to a net investment
compared to a net income from divestments
last year.

Strong investment activity in CAPEX and M&A
Approved capital expenditure, also referred to as
CAPEX, for 2018 was EUR 527 million, increasing by
57.3 per cent from EUR 335 million last year. Actual
CAPEX spend of EUR 438 million was incurred in
2018 primarily due to the timing of payments and
strategic reprioritisation. Major focus areas included
new production methods, new whey processing
technology in AFI, capacity expansion, for example
within child nutrition and milk powder, as well as
structural optimisation of our fermented dairy
production footprint.

ARLA FOODS ANNUAL REPORT 2018

Leverage*

2.4

Target 2018 2.8 - 3.4

2.6

2.4

In February 2018 we acquired the remaining 50 per
cent share in our joint venture Arla Foods Ingredients
S.A. Argentina from our partner SanCor to secure
the whey necessary for supporting AFI’s growth
ambition. In June we acquired Yeo Valley Dairies Ltd.
in the UK, a subsidiary of Yeo Valley Group. This gives
us the right to use the Yeo Valley brand in the UK
market for milk, butter, spreads, and cheese, which
supports our high ambitions for organic dairy. In
combination, these acquisitions had an investment
cash flow impact of EUR 51 million in 2018.

Group Net Working Capital
DSO, DIO, DPO (DAYS)

36.9

-9.6

46.3

42.4

39.6

40.7

36.9

2016

2017

2018

2014

2015

2016

2017

2018

*NIBD incl. pensions/EBITDA

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial StatementsFinancial outlook

In 2019, we will continue our Calcium transformation journey as well as our branded growth focus, and we are committing significant
investments to deliver our strategy, Good Growth 2020. The macroeconomic outlook is challenging, and the dairy industry remains
volatile – market signals are mixed. Our recent acquisitions will support us on our journey as we leverage our global strategic brands to
create the future of dairy.

Puck®, leveraging also our fast-growing brands in
milk-based beverages, e.g. StarbucksTM. We will
introduce new additions to our broad product
portfolio and continue to invest to increase the
share of branded sales, thereby ensuring our future
growth and profitability. We are targeting an SB
VDRG of 1.5 to 3.5 per cent as we continue to
pursue our Good Growth 2020 strategy with
significantly higher growth rates in International
compared to Europe.

Macroeconomic environment clouded by
slowing growth and heightened risks
We enter 2019 with the expectation of lower GDP
growth in most markets compared to 2018 on the
back of moderating investments and increasing
trade tensions, impacting both developed and
emerging markets. While the outlook for dairy prices
is stable, expectations for many other commodities
and export in general are subdued. Financial market
pressure and interest rates are rising in most
markets. The political environment remains
unstable, with developments regarding Brexit being
the most impactful macroeconomic topic to watch
for Arla. US actions on trade could also impact our
business both positively and negatively through
higher barriers and potential tariffs. We therefore
expect a challenging year in terms of the economic
and political environment. While we do not currently
expect significant changes in global consumption
trends or big shifts in global trade patterns during
2019, continuous monitoring and ensuring our
ability to react and adapt quickly will be imperative
in the year ahead, and beyond.

Stable market milk price
and production outlook
The outlook on market milk prices is firm as we enter
2019. The lingering effects of the drought in our
production areas on the one hand, combined with
relatively stable price levels on the other, lead us to

expect our milk supply to be stable into 2019 with
growth returning later in the year. As a result, we
anticipate stable to slightly increasing prices in the
first half of the year with increasing volatility later.
This will depend on a myriad of variables, including
weather and the relationship between milk price and
feed prices.

Mixed demand signals,
with China picking up again
Demand signals for dairy products are stable in the
US as well as the EU, where intervention stocks were
effectively emptied by the start of 2019, and positive
from China due to low stock levels and slowing local
production. Limited GDP growth and weakening
currencies in emerging markets, which have
supported the underlying demand growth in recent
years, may impact buying power and thereby dairy
sales and prices.

The main consumer trends we expect to impact
dairy sales in 2019 include living healthy and
conscious lives in times of increasingly busy and
fragmented schedules, combined with a higher
demand for transparency and accountability.

Continued focus on branded growth
In 2019, we will continue to expand the value of our
business by accelerating and sharpening the profile
of our strategic brands Arla®, Castello®, Lurpak® and

ARLA FOODS ANNUAL REPORT 2018

500MILLION EUR

In 2018 we strengthened our efforts to
measure our innovation pipeline,
which is expected to deliver over
EUR 500 million in the next three years
in incremental revenue.

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial StatementsCost improvements driven by Calcium
We expect to further strengthen Arla’s competitiveness,
driven by Calcium where our ambition for 2019 is to
achieve savings of EUR 75-100 million. In 2018 we
significantly overdelivered on our Calcium ambition,
and solid plans are in place to progress towards our
2021 target of EUR 400+ million run-rate savings, of
which EUR 100 million will be reinvested.

M&A focus on integrating acquisitions
in the UK and Bahrain
In 2018 we announced our intention to acquire
Mondelez’ cheese business and production plant in
Bahrain. Pending regulatory approval, the deal is
scheduled to be finalised end of May 2019, after
which our focus will be on integrating and leveraging
the acquisition – we expect this acquisition to have
top- and bottom-line impact from June 2019.
Furthermore, after the acquisition of Yeo Valley
Dairies Ltd. in the UK in June 2018 we expect to
absorb the full run-rate effect in 2019 and achieve
solid commercial traction.

Net profit of at least 2.8% expected
As we always focus on paying out the largest
possible share of our profit via the prepaid milk price
to our farmer owners, we continue to target a net
profit share for 2019 in the range of 2.8 to 3.2 per
cent. Our net profit target range is a full year target,
and results at half-year 2019 are expected to be
below the annual target range due to seasonality
in our profit creation.

Significant investments planned
In terms of capital expenditure, we expect 2019 to
be another big investment year, with a CAPEX
outlook of EUR 458 million driven by structural
investments and Calcium efficiency initiatives. Our
main projects include a new powder tower in
Pronsfeld, Germany, the consolidation of our
footprint for fermented products in northern Europe,
as well as large investments in AFI. Our strong
balance sheet allows us to increasingly invest in the
capacities and technologies required to succeed in
the future, with a focus on energy efficiency,
such as combined heat-and-power facilities at our
plants, and a range of Calcium initiatives driving
line efficiency.

Leverage expected within target range
despite 2018 profit pay-out to farmer owners
The availability of sufficient financial manoeuvring
room is a priority to Arla Foods, as it enables us to
strategically position ourselves for future growth.
Based on our ambitious investment plans for 2019
as well as the extraordinary pay-out of 2018 profits
to our farmer owners, we expect 2019 leverage to
increase versus the 2018 level. However, continued
improvement of our working capital position and a
strong operational cash flow will allow us to stay
firmly within our target range of 2.8 to 3.4.

The implementation of IFRS 16 leases as of 1 January
2019 is expected to have very limited effect on the
reported leverage. Refer to note 5.6 for more details.

Expectations for 2019

Revenue

Profit share

10.2-10.6

BILLION EUR

2.8-3.2%

OF REVENUE

Strategic branded volume
driven revenue growth

1.5-3.5%

Brand share

≥46.0%

BILLION EUR

International share

≥20.0%

Calcium

75-100

MILLION EUR

Leverage

2.8-3.4

ARLA FOODS ANNUAL REPORT 2018

The forward-looking statements in this annual report reflect our current expectations for future events and financial results. Such statements are inherently
subject to uncertainty, and actual results may therefore differ from expectations. Factors which may cause the actual results to deviate from expectations
include general economic developments and developmentsin the financial markets, changes or amendments to legislation and regulation in our markets,
changes in demand for products, competition and the prices of raw materials. See also the section on risk (from page 18).

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial StatementsOUR CONSOLIDATED
FINANCIAL
STATEMENTS

Our financial reporting follows best practise
standards and we aim at producing a
reader-friendly report. We have grouped
the consolidated financial statement into
sections to increase understanding of each
accounting area. The consolidated financial
statements consist of the primary statements
and related notes. The notes include our
financial figures and financial comments
in addition to our accounting policies and
areas where significant management
judgement has been applied.

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements

Content

Primary statements

Notes

Note 4
Funding
Note 4.1 Financial items
92
Note 4.2 Net interest-bearing debt
93
Note 4.3 Financial risks
98
Note 4.3.1 Liquidity risk
98
100 Note 4.3.2 Currency risk
102 Note 4.3.3 Interest rate risk
103 Note 4.3.4 Commodity price risk
104 Note 4.3.5 Credit risk
106 Note 4.4 Derivative financial instruments
107 Note 4.5 Financial instruments disclosed
108 Note 4.6 Sale and repurchase agreements
109 Note 4.7 Pension liabilities

Note 5
Other areas
113 Note 5.1 Tax
115 Note 5.2 Fees to auditors appointed by

the Board of Representatives

115 Note 5.3 Management remuneration

and transactions

116 Note 5.4 Contractual commitments,
contingent assets and liabilities
116 Note 5.5 Subsequent events after the

balance sheet date

117 Note 5.6 General accounting policies

Introduction to notes

Note 1
Revenue and cost
75
77
79

Note 1.1 Revenue
Note 1.2 Operational costs
Note 1.3 Other operating income
and costs
Note 1.4 Performance price

Note 2
Net working capital, other receivables
and current liabilities
80

Note 2.1 Net working capital, other
receivables and current liabilities

Note 3
Capital employed
83
86
88
89
90

Note 3.1 Intangible assets
Note 3.2 Property, plant and equipment
Note 3.3 Associates and Joint ventures
Note 3.4 Provisions
Note 3.5 Purchase and sale of business
or activities

66
Income statement
66 Comprehensive income
67 Profit appropriation
68 Balance sheet
69 Equity
72 Cash flow

ARLA FOODS ANNUAL REPORT 2018

Income statement

Comprehensive income

Note

2018

2017 Develop-
ment

(EURm)

Profit for the year

Note

2018

2017

301

299

Other comprehensive income
Items that will not be reclassified to the income statement:
Re-measurements of defined benefit schemes
Income tax on actuarial gains and losses on defined benefit plans

Items that may be reclassified subsequently to the incomestatement:
Value adjustments of hedging instruments
Fair value adjustment of certain financial assets
Foreign currency translation
Income tax on items that may be reclassified to profit or loss
Other comprehensive income, net of tax

4.7

4.4

Total comprehensive income

Allocated as follows:
Owners of Arla Foods amba
Minority interests
Total

25
-6

3
-3
-10
-1
8

58
-10

48
14
-77
-1
32

309

331

297
12
309

321
10
331

1.1
1.2

10,425
-8,163
2,262

10,338
-8,063
2,275

-1,540
1.2
-422
1.2
118
1.3
1.3
-43
3.5 -
29
3.4
404

-1,584
-419
71
-39
44
37
385

767
3.5 -
-363
1.2
404

4.1
4.1

5.1

2
-64
342

-41
301

-11
290

694
44
-353
385

13
-77
321

-22
299

-14
285

1%
1%
-1%

-3%
1%
66%
10%
-100%
-22%
5%

11%
-100%
3%
6%

-85%
-17%
5%

86%
1%

21%
2%

(EURm)

Revenue
Production costs
Gross profit

Sales and distribution costs
Administration costs
Other operating income
Other operating costs
Gain from sale of enterprise
Share of results after tax in associates and joint ventures
Earnings before interest and tax (EBIT)

Specification:
EBITDA excluding gain from sale of enterprise
Gain from sale of enterprise
Depreciation, amortisation and impairment losses
Earnings before interest and tax (EBIT)

Financial income
Financial costs
Profit before tax

Tax
Profit for the year

Minority interests
Arla Foods amba's share of profit for the year

ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements Notes

Profit appropriation

(EURm)

2018

2017

Proﬁt appropriation for 2018

Profit for the year
Minority interests
Arla Foods amba's share of net profit for the year

Profit appropriation:
Supplementary payment for milk
Interest on contributed individual capital
Total supplementary payment

Transferred to equity:
Reserve for special purposes
Contributed individual capital
Total transferred to equity
Appropriated profit

301
-11
290

287
3
290

-
-
-
290

299
-14
285

124
3
127

120
38
158
285

ARLA FOODS ANNUAL REPORT 2018

Supplementary payment:
1 EUR-cent/kg owner milk

Consolidation principles:
Common capital 2/3
Individual capital 1/3

Performance price
36.4

EUR-cent/kg

Standard prepaid
milk price
34.1 EUR-cent/kg

Supplementary
payment
124 EURm
3*
EURm
163 EURm
290

EURm

Proﬁt for the year
290*
EURm
2.3 EUR-cent/kg

Consolidation
109 EURm
54 EURm
EURm

-163
0

EURm

Common capital
109 EURm
-109 EURm
0 EURm

Individual capital
54 EURm
-54 EURm
0
EURm

* Based on proﬁt allocated to owners of Arla Foods amba
Numbers in blue reﬂect extraordinary one-time decision to deviate from Arla’s consolidation policy

Profit appropriation

The Board of Representatives made an extraordinary
one-time proposal to pay out the full profit for the
year, EUR 290 million, as supplementary payment
corresponding to 2.3 EUR-cent/kg owner milk. Interest
on the carrying value of contributed individual capital
amounts to EUR 3 million. Contributed individual capital
carried an interest of 1.53 per cent in 2018.

If the consolidation policy had been applied Arla would
have paid out EUR 127 million as supplementary
payment while EUR 163 million would have been
consolidated and split into 1/3 to individual capital
(contributed individual capital), amounting to EUR 54
million, and 2/3 to common capital (reserve for special
purposes), amounting to EUR 109 million.

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements Notes

Balance sheet

(EURm)

Assets
Non-current assets
Intangible assets
Property, plant and equipment
Investments in associates and joint ventures
Deferred tax
Pension assets
Other non-current assets
Total non-current assets

Current assets
Inventory
Trade receivables
Derivatives
Other receivables
Securities
Cash and cash equivalents
Total current assets

Total assets

ARLA FOODS ANNUAL REPORT 2018

Note

2018

2017 Develop-
ment

(EURm)

Note

2018

2017 Develop-
ment

3.1 887
3.2 2,308
3.3 439
5.1 30
4.7 4
29
3,697

2.1 1,074
2.1 989
4.5 37
2.1 254
465
119
2,938

811
2,212
454
43
-
31
3,551

1,126
942
19
182
511
91
2,871

6,635

6,422

9%
4%
-3%
-30%
100%
-6%
4%

-5%
5%
95%
40%
-9%
31%
2%

Equity and liabilities
Equity
Common capital
Individual capital
Other equity accounts
Proposed supplementary payment to owners
Equity attributable to the owners of Arla Foods amba
Minority interests
Total equity

Liabilities
Non-current liabilities
Pension liabilities
Provisions
Deferred tax
Loans
Total non-current liabilities

Current liabilities
Loans
Trade and other payables
Provisions
Derivatives
Current tax
Other current liabilities
Total current liabilities

Total liabilities

Total equity and liabilities

1814
456
-89
290
2,471
48
2,519

4.7 224
3.4 17
5.1 84
4.2 1,369
1,694

4.2 860
2.1 1,169
3.4 11
4.5 85
5
2.1 292
2,422

1,781
502
-77
127
2,333
36
2,369

277
12
59
1,206
1,554

1,013
1,098
11
87
11
279
2,499

4,116

4,053

6,635

6,422

1%
-9%
3%
128%
6%
33%
6%

-19%
42%
42%
14%
9%

-15%
6%
0%
-2%
-55%
5%
-3%

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements Notes

Equity

(EURm)

Equity at 1 January 2018
Supplementary payment for milk
Interest on contributed individual capital
Minority interests
Profit for the year
Other comprehensive income
Total comprehensive income
Payments to owners
Dividend to minority shareholders
Acquisition of non-controlling interests
Supplementary payment related to 2017
Foreign exchange adjustments
Total transactions with owners
Equity at 31 December 2018

Equity at 1 January 2017
Supplementary payment for milk
Interest on contributed individual capital
Reserve for special purposes
Contributed individual capital
Minority interests
Profit for the year
Other comprehensive income
Total comprehensive income
Capital issued to new owners
Payments to owners
Dividend to minority shareholders
Supplementary payment related to 2016
Foreign exchange adjustments
Total transactions with owners
Equity at 31 December 2017

ARLA FOODS ANNUAL REPORT 2018

Common capital

Individual capital

Other equity accounts

d
e
s
a
b
-
y
r
e
v
i
l

e
D

s
e
t
a
c
fi
i
t
r
e
c

r
e
n
w
o

d
e
t
c
e
n

a
t
i
p
a
c

d
e
t
u
b
i
r
t
n
o
C

a
u
d
v
d
n

y
r
a
t
n
e
m
e
p
p
u
s

d
e
s
o
p
o
r
P

t
n
e
m
y
a
p

r
o
f
e
v
r
e
s
e
R

a
t
i
p
a
c

t
n
e
m

t
s
u
d
a
e
u
a
v

t
n
u
o
c
c
a

a
t
i
p
a
C

895
-
-
-
-
19
19
-
-
-
-
14
14
928

829
-
-
-
-
-
-
48
48
3
-
-
-
15
18
895

s
e
s
o
p
r
u
p

a
c
e
p
s

r
o
f
e
v
r
e
s
e
R

886
-
-
-
-
-
-
-
-
-
-
-
-
886

766
-
-
120
-
-
120
-
120
-
-
-
-
-
-
886

243
-
-
-
-
-
-
-17
-
-
-
-4
-21
222

223
-
-
-
38
-
38
-
38
-
-12
-
-
-6
-18
243

79
-
-
-
-
-
-
-6
-
-
-
-1
-7
72

87
-
-
-
-
-
-
-
-
-
-7
-
-
-1
-8
79

180
-
-
-
-
-
-
-15
-
-
-
-3
-18
162

193
-
-
-
-
-
-
-
-
-
-9
-
-
-4
-13
180

127
287
3
-
290
-
290
-
-
-
-121
-6
-127
290

124
124
3
-
-
-
127
-
127
-
-
-
-120
-4
-124
127

g
n
g
d
e
h

f
o

s
t
n
e
m
u
r
t
s
n

-75
-
-
-
-
3
3
-
-
-
-
-
-
-72

-122
-
-
-
-
-
-
47
47
-
-
-
-
-
-
-75

r
i
a
f

r
o
f
e
v
r
e
s
e
R

h
g
u
o
r
h
t
e
u
a
v

C
O

r
o
f
e
v
r
e
s
e
R

e
g
n
a
h
c
x
e

n
g
e
r
o
f

s
t
n
e
m

t
s
u
d
a

17
-
-
-
-
-3
-3
-
-
-
-
-
-
14

3
-
-
-
-
-
-
14
14
-
-
-
-
-
-
17

-19
-
-
-
-
-12
-12
-
-
-
-
-
-
-31

54
-
-
-
-
-
-
-73
-73
-
-
-
-
-
-
-19

a
t
o
T

2,333
287
3
-
290
7
297
-38
-
-
-121
-
-159
2,471

2,157
124
3
120
38
-
285
36
321
3
-28
-
-120
-
-145
2,333

y
t
i
r
o
n
M

s
t
s
e
r
e
t
n

36
-
-
11
11
1
12
-
-12
12
-
-
-
48

35
-
-
-
-
14
14
-4
10
-
-
-9
-
-
-9
36

y
t
i
u
q
E

a
t
o
T

2,369
287
3
11
301
8
309
-38
-12
12
-121
-
-159
2,519

2,192
124
3
120
38
14
299
32
331
3
-28
-9
-120
-
-154
2,369

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements Notes

Equity (continued)

Understanding equity

Equity accounts regulated by the Articles of Association
can be split into three main categories: common capital,
individual capital and other equity accounts. The
characteristics of each account are explained in detail:

Minority interests
Minority interests include the share of Group equity
attributable to holders of minority interests in Group
companies.

Common capital

Common capital is by nature undivided and consists of
the capital account and the reserve for special purposes.
The capital account represents a strong foundation for
the cooperative’s equity, as the non-impairment clause,
described on page 71, ensures that the account
cannot be used for payment to owners. The reserve for
special purposes is an account that in extraordinary
situations can be used to compensate owners for losses
or impairments affecting the profit for appropriation.
Amounts transferred from the annual profit
appropriation to common capital are booked to
this account.

Individual capital

Individual capital is capital allocated to each owner
based on their delivered milk volume. Individual capital
consists of contributed individual capital, delivery-based
owner certificates and injected capital. Amounts
registered to these accounts will, subject to approval
by the Board of Representatives, be paid out when
owners leave the cooperative. Amounts allocated to
contributed individual capital as part of the annual profit
appropriation are interest-bearing. Also characterised
as individual capital is the account for proposed
supplementary payment that will be paid out following
the approval of the annual report.

Other equity accounts

Other equity accounts include accounts prescribed by
IFRS. These include reserves for value adjustment of
hedging instruments, the reserve for fair value
adjustments of certain financial assets and the reserve
for foreign exchange adjustments.

ARLA FOODS ANNUAL REPORT 2018

Equity improved

During 2018, equity increased by EUR 150 million
compared to last year.

Other comprehensive income explained
Other comprehensive income includes revenue,
expenses, gains and losses that are excluded from the
income statement, typically, they have not yet been
realised. Other comprehensive income amounting to a
net income of EUR 8 million attributable to actuarial
gains on pension liabilities, negative value adjustments
on hedging instruments and net assets measured in
foreign currencies.

Payments to and from owners
A supplementary payment relating to 2017 totalling
EUR 121 million was paid out in March 2018.
Additionally, EUR 38 million was paid out to owners
resigning or retiring from the cooperative. In connection
with farmers in the UK and Central European becoming
direct members, 131 members from Central Europe
decided to leave Arla, representing 79 million kg of milk
and resulting in extraordinary repayment of individual
capital of EUR 3 million.

The Board of Directors proposes to payout EUR 290
million in March 2019 as supplementary payment for
the year. Furthermore it is expected that EUR 23 million
will be paid out in 2019 to owners resigning or retiring.
Read more about owner development on page 36.

Development in equity
(EURm)

2,700

2,650

2,600

2,550

2,500

2,450

2,400

2,350

2,300

2,250

2,200

2,369

Equity after minority
1 January 2018

301

-121

-38

2,519

Other payments to owners

Other equity adjustments

Equity after minority
31 December 2018

Proﬁt for the year

Supplementary payment related to 2017

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements NotesEquity (continued)

Regulations according to Articles of Association and IFRS

Common capital
Recognised within the capital account are technical
items such as movements on actuarial gains or losses on
defined benefit pension schemes, effects from disposal
and acquisitions of non-controlling interests in
subsidiaries and exchange rate differences in the owners’
equity instruments. Furthermore, the common capital
account is impacted by agreed contributions from new
members of the cooperative.

Recognised within the reserve for special purposes is the
annual profit appropriation to common capital. It may,
upon the Board of Director’s proposal, be applied by the
Board of Representatives for the full or partial off-setting
of material extraordinary losses or impairment in
accordance to article 20.1(iii) of the Articles of Association.

Individual capital
Individual capital instruments are regulated in article
20 of the Articles of Association and the general
membership terms.

Equity instruments issued as Contributed individual
capital relate to amounts transferred as part of the
annual profit appropriation. The individual balances carry
interest at CIBOR 12 months + 1.5 per cent that are
approved and paid out together with the supplementary
payment in connection with the annual profit appropriation.

Delivery-based owner certificates are equity instruments
issued to the original Danish and Swedish owners. Issue
of these instruments ceased in 2010.

Injected individual capital are equity instruments issued
in connection with cooperative mergers.

Balances on Delivery-based owner certificates and
Injected individual capital carry no interest.

Individual owners’ balances on delivery-based owner
certificates and on contributed capital can be paid out
over three years upon termination of membership of
Arla Foods amba in accordance with the Articles of
Association, subject to the Board of Representatives’
approval. Balances on individual accounts are
denominated in the currency relevant to the country
in which the members are registered. Foreign currency
translation adjustments are calculated annually,
the amount of which is then transferred to the
capital account.

Proposed supplementary payment to owners is
recognised separately in equity until approved by
the Board of Representatives.

Other equity accounts
Reserve for value adjustments of hedging instruments
comprises the fair value adjustment of derivative financial
instruments classified as and meeting the conditions for
hedging of future cash flows and where the hedged
transaction has not yet been realised.

Reserve for fair value adjustments through OCI
comprise of the fair value adjustments of mortgage credit
bonds classified and measured as financial assets
measured at fair value though other comprehensive
income.

Reserve for foreign exchange adjustments comprises
currency translation differences arising during the
translation of the financial statements of foreign
companies, including value adjustments relating to
assets and liabilities that constitute part of the
Group’s net investment, and value adjustments
relating to hedging transactions that hedge the Group’s
net investment.

Non-impairment clause
Under the Articles of Association, no payment may be
made by Arla Foods amba to owners that impair the sum
of the capital account and equity accounts prescribed by
law and IFRS. The non-impairment clause is assessed on
basis of the most recent annual report presented under
IFRS. Individual capital accounts and reserve for special
purposes are not covered by the non-impairment clause.

Minority interests
Subsidiaries are fully recognised in the consolidated
financial statements. Minority interests’ share of the
results for the year and of the equity in the subsidiaries
that are not wholly owned are recognised as part of the
consolidated results and equity, respectively, but are
listed separately.

On initial recognition, minority interests are measured at
either the fair value of the equity interest or the
proportional share of the fair value of the acquired
companies identified assets, liabilities and contingent
liabilities. The measurement of minority interests is
selected on a transactional basis, and disclosure is made
in note 3.5 pertaining to business combinations.

ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements NotesCash flow

(EURm)

Note

2018

2017

(EURm)

Note

2018

2017

3.5

3.3
2.1

5.1

3.1
3.2
3.2

3.5
3.5

767
-
767
-29
90
-73
-43
11
-46
1
-29
649

-55
-383
13
-425

738
-44
694
-37
-200
8
-10
7
-52
5
-29
386

-50
-248
12
-286

224

100

44
-51
-
-7

-
-7
74
67

-432

-219

217

167

Financing
Supplementary payment regarding the previous financial year
Paid out from equity regarding terminated membership contracts
Loans obtained, net
Payment to pension liabilities
Cash flow from financing activities

4.2.c

Net cash flow

Cash and cash equivalents at 1 January
Exchange rate adjustment of cash funds
Cash and cash equivalents at 31 December

Free operating cash flow
Specification
Cash flow from operating activities
Operating investing activities
Free operating cash flow

Free cash flow

Cash flow from operating activities
Cash flow from investing activities
Free cash flow

-121
-38
5
-37
-191

91
2
119

-120
-28
32
-39
-155

84
-5
91

2018

2017

649
-425
224

386
-286
100

2018

2017

649
-432
217

386
-219
167

EBITDA
Reversal of gain from sale of enterprise
EBITDA excluding gain from sale of enterprise
Reversal of share of results in joint ventures and associates
Change in net working capital
Change in other receivables and other current liabilities
Reversal of other operating items without cash impact
Dividends received, joint ventures and associates
Interest paid
Interest received
Taxes paid
Cash flow from operating activities

Investment in intangible fixed assets
Investment in property, plant and equipment
Sale of property, plant and equipment
Operating investing activities

Free operating cash flow

Sale of financial assets
Acquisition of enterprises
Sale of enterprises
Financial investing activities

Cash flow from investing activities

Free cash flow

ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements Notes

Cash flow (continued)

Strong operational cash flow and increased investments

Development in cash ﬂow
(EURm)

Cash flow from operating activities improved by 68 per
cent to EUR 649 million compared with EUR 386 million
last year. Net working capital contributed with a positive
net cash release of EUR 90 million compared to last
year, where we saw an adverse development of EUR
200 million. Net position of other working capital items
increased mainly due to the repayment of a previously
held VAT loan. Non-cash items were mainly affected
by the revaluation gain from step-up acquisitions of
Arla Foods Ingredients S.A. and Svensk Mjölk
Ekonomisk förening.

After operating investments of EUR 425 million,
explained by higher CAPEX investments, compared with
EUR 286 million last year, the free operating cash flow
ended at EUR 224 million. Free operating cash flow is a
measure of the amount of cash generated by normal
business operations.

As a result of our investing activities, primarily related to
the purchase of Yeo Valley Dairies Ltd in UK and the
acquisition of the remaining shares of Arla Foods
Ingredients S.A. in Argentina, the free cash flow amounts
to EUR 217 million. Free cash flow is a measure of the
amount of cash generated after investing activities.

Cash flow from financing activities are changed with
EUR 36 million from 2017 to 2018. A supplementary
payment of EUR 121 million was made in relation to
the 2017 profit allocation and further payments,
representing EUR 38 million in individual capital, were
paid out to owners who resigned or retired.

Combined cash and cash equivalents as at 31 December
2018 were EUR 119 million, compared to EUR 91
million last year.

Accounting policies

The consolidated cash flow statement is presented
according to the indirect method, whereby the cash
flow from operating activities is determined by adjusting
EBITDA for the effects of non-cash items such as
undistributed results in joint ventures and associates,
changes in working capital items and other items
without cash impact.

1,000

800

600

400

200

-432

767

-159

-32

-206

Cash 1 january 2018

EBITDA

Net working capital

Investing activities
Loans obtained including pensions
Supplementary payment related to 2017
and payments to leaving members

119

Other

Cash 31 December 2018

ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements Notes
Introduction to notes

The following sections provide additional disclosures supplementing the primary financial statements.

Basis for preparation
The annual report is based on the Group’s
monthly reporting procedures. Group entities are
required to report using standard accounting
principles in accordance with the International
Financial Reporting Standards as adopted by EU
(IFRS).

The information in the annual report is presented
in classes of similar items in the financial
statements as required by IAS 1. For more detail
on the basis for preparation and accounting
policies applied. Refer to note 5.6 for more detail.

Alternative performance measures
The Group discloses a number of key performance
indicators (KPIs) supplementing the financial
figures calculated and presented in accordance
with IFRS. Some of these are classified as
alternative performance measures most
importantly the performance price.

Refer to Financial Review pages 53-63, Note 1.4
and the Glossary page 123-124 for more details
on performance price and other alternative
performance measures.

Applying materiality
When preparing the annual report, management
focuses on presenting information that is
considered of material importance for our
stakeholders.

Disclosures that are required by IFRS are included
in the annual report, unless the information is
considered of immaterial importance to the users
of the annual report. Materiality is not applied
for items where disclosures are required for
control purposes.

Currency exposure
The Group’s financial position is significantly
exposed to currencies, both due to transactions
conducted in currencies other than the EUR and
due to the translation of financial reporting from

entities not part of the Eurozone. The most
significant exposure relates to financial
reporting from entities operating in GBP and SEK,
and to transactions relating to sales in USD or
USD-related currencies. Refer to Note 4.3.2 for
more detail.

Significant accounting estimates
and assessments
Preparing the Group’s consolidated financial
statements requires management to make
accounting estimates and judgements that affect
the recognition and measurement of the Group’s
assets, liabilities, income and expenses. The
performed estimates and judgements are based
on historical experience and other factors. By
nature, these are associated with uncertainty and
unpredictability, which can have a significant
effect on the amounts recognised in the
consolidated financial statements. The most
significant accounting estimates relate to:

Assessing the level of influence
and classification of investments
Following the acquisition of Gefleortens last year
Arla was in 2018 allocated the majority of voting
rights in Svensk Mjölk, Sweden. Based on this,
management has concluded that the investment
in the association should be reclassified from an
associated company to a subsidiary. Furthermore
management has assessed that representatives
from the Group have significant influence in
COFCO Dairy Holdings Limited and Lantbrukarnas
Riksförbund. Based on this the investments have
been classified as associated companies. Refer to
Note 3.3 and 3.5 for more detail.

Measurement of revenue and rebates
Revenue, net of rebates, is recognised when
goods are transferred to customers. Estimates
are applied when measuring the accruals for
rebates and other sales incentives. The majority
of rebates are calculated using terms agreed with
the customer. For some customer relationships,
the final settlement of the rebate depends on
future volumes, prices and other incentives.
Thus, there is to some degree an element of
uncertainty relating to the exact value. Refer to
Note 1.1 for more detail.

Valuation of goodwill
Estimates are applied in assessing the value in
use of goodwill. Goodwill is not subject to
amortisation but is tested annually for
impairment. Significant estimates are performed
when assessing expected future cash flow and
setting discount rates. The majority of our
goodwill is allocated to activities in the UK.
Following Brexit, expected cash flows supporting
the carrying value of goodwill will be inherently
more uncertain. Refer to Note 3.1.1 for more
detail.

Valuation of inventory
Estimates are applied in assessing net realisable
inventory values. Most significantly, this includes
the assessment of expected future market prices
and the quality of certain products within the
cheese category, some of which need to mature
for up to two years. Refer to Note 2.1 for
more detail.

Valuation of pension liabilities
Judgements are performed when setting
actuarial assumptions such as discount rate,
expected future salary increases, inflation and
mortality. The actuarial assumptions vary from
country to country, based on national economic
and social conditions. They are set using
available market data and compared with
benchmarks to ensure that they are set
consistently from year to year and in compliance
with best practice. Refer to Note 4.7 for
more detail.

ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements NotesNote 1.1 Revenue

Stronger sales mix and improved brand positions

Development in revenue
(EURm)

Revenue increased by 0.8 per cent to EUR 10,425
million, compared to EUR 10,338 million last year. The
underlying development in revenue, excluding currency
effects and M&A activities, represents an increase of
2.0 per cent compared to last year. Improved product
mix was the key driver for sales growth. Milk intake was
13.9 billion kg, which was virtually unchanged compared
to the milk intake of 13.9 billion kg last year.

Revenue pertaining to strategic branded volume grew
by 3.1 per cent, compared to 3.0 per cent last year.
After a strong increase in sales prices last year, price
levels decreased by 0.5 per cent for the full year.

Europe is Arla’s largest commercial segment, comprising
62.4 per cent of total revenue, which represents a minor
decrease of 0.9 per cent compared to last year. The
revenue in Europe decreased by EUR 61 million,
primarily driven by the negative impact from currencies
of EUR 108 million, which was partially offset by the
acquisitions of Yeo Valley Dairies Ltd (UK) and
Gefleortens AB (Sweden). The strategic branded share
in Europe comprised 50.4 per cent of revenue which is
2.1 percentage points higher compared to last year.

The international segment accounted for 15.1 per cent
of total revenue, compared to 15.6 per cent last year.
The international share of retail and foodservice revenue
was 19.6 per cent compared to 20.2 per cent last year.
The strategic branded revenue in International
represented 85.0 per cent. The share of revenue for
International was negatively affected by currency

effects, primarily due to the development in the USD.
Excluding currency, International’s revenue increased
by 1.7 per cent.

Arla Foods Ingredients comprised 6.3 per cent of the
total revenue, which is unchanged compared with last
year. Revenue increased due to more sales of value
added products and the full consolidation of Arla Foods
Ingredients S.A., our joint venture in Argentina. The
increase was offset by a reduction in our third-party
manufacturing business in China.

The trading and other segment represented 16.2 per
cent of the total revenue and increased by 12.4 per cent
to EUR 1.690 million versus EUR 1,503 million last year.
This was a direct result of a strategic decision to increase
trading activities in high margin commodities, and with
less focus on milk trade.

The purchase of Yeo Valley Dairies Ltd (UK) and the
acquisition of the remaining shares in Arla Foods
Ingredients S.A. (Argentina) combined with
the full year revenue of Gefleortens AB (Sweden)
purchased last year, contributed to a revenue increase
of EUR 89 million.

Arla revenues were negatively impacted by exchange
rate developments of EUR 210 million, driven primarily
by the devaluation of the SEK, USD and GBP.

11,000

10,750

10,500

10,250

10,000

9,750

9,500

257

-210

10,425

10,338

-49

2017

Sales prices

Volume/mix

M&A

Currency

2018

Revenue split by commercial segment, 2018

Revenue split by commercial segment, 2017

Trading and
other sales

16%

Arla Foods
Ingredients

10,425

63%

Europe

15%

MILLION EUR

International

Trading and
other sales

15%

Arla Foods
Ingredients

16%

10,338

MILLION EUR

63%

Europe

International

ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements NotesNote 1.1 Revenue (continued)

Table 1.1.a Revenue split by country
(EURm)

2018

2017

Share of revenue in 2018

Accounting policies

All revenue is derived from contracts with customers
through the production and transfer of dairy products
across various product categories and within several
geographical regions. Revenue per commercial
segment or market is based on the Group’s internal
financial reporting practices.

Revenue is recognised in the income statement when
the performance obligation is satisfied, and when all
obligations stated in the contract are fulfilled. This is
defined as the point in time when control of the
products has been transferred to the buyer, the amount
of revenue can be measured reliably and collection is
probable. The transfer of control to customers takes
place according to the trade agreement terms, i.e. the
Incoterms and can vary depending on the customer or
specific trade.

Revenue comprises invoiced sales for the year less
customer-specific payments, such as sales rebates,
cash discounts, listing fees, promotions, VAT and duties.
Contracts with customers can contain various types of
discounts. Historical experience is used to estimate
discounts, in order to correctly recognise revenue.

Furthermore, revenue is only recognised when it is
highly probable that a significant reversal in the amount
of revenue will not occur. This is commonly the case
when the control of the product is transferred to the
customer also taking into consideration the level of
rebates.

The vast majority of all contracts have short payment
terms with an average of 35 days. Therefore, an
adjustment of the transaction price with regards to a
financing component in the contracts with customers is
not required.

Uncertainties and estimates

Revenue, net of rebates, is recognised when goods are
transferred to customers. Estimates are applied when
measuring the accruals for rebates and other sales
incentives. The majority of rebates are calculated based
on terms agreed with the customer. For some customer
relationships, the final settlement of the rebate depends
on sales volumes and prices, as well as other incentives.
Thus, there is an element of uncertainty in estimating
accruals and rebates.

Since Arla’s main line of business is the sale of fresh dairy
products, returns of goods do not occur on a regular
basis and therefore do not require specific accounting
disclosure.

Based on current milk price, Arla has contractually
secured approximately EUR 230 million revenue related
to raw milk sales for 2019 and approximately EUR 700
million for 2020 and later.

United Kingdom
Sweden
Germany
Denmark
Netherlands
Finland
China
Saudi Arabia
Belgium
USA
Other*
Total

2,725
1,481
1,447
1,094
507
320
276
244
240
171
1,920
10,425

2,614
1,522
1,525
1,031
460
304
302
261
215
179
1,923
10,338

26%

14%
14%

10%

3%
3%
2%
2%
2%

19%

*Other countries include, amongst others, Oman, Canada, UAE, Spain, France, Australia
Table 1.1.a represents the total revenue by country and includes all sales that occur in the countries, irrespective
of organisational structure. Therefore, the figures cannot be compared to our commercial segment review on
page 30 to 35.

2018

2017

3,034
180
561
352
248
375
652
5,023
10,425

3,026
182
528
339
225
367
651
5,020
10,338

Table 1.1.b Revenue split by brand
(EURm)

Arla®
Castello®
Lurpak®
Puck®
Milk based beverages
Other supported brands
Arla Foods Ingredients
Non-strategic brands and other
Total

ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements Notes
Note 1.2 Operational costs

Tight cost control challenged by higher production complexity

Owner milk
Costs related to owner milk decreased by EUR 192
million, representing a decrease of 4.3 per cent. Higher
volumes contributed to an increase of EUR 26 million
while a lower average prepaid milk price decreased the
costs by EUR 218 million.

Other milk
Costs of other milk decreased by EUR 49 million,
equivalent to 8.6 per cent, due to lower volumes and
lower market prices. Other milk consists of speciality
milk and other contract milk acquired to meet local
market demands.

Staff costs and FTE
Staff costs increased 2.3 per cent to EUR 1,246 million
compared to EUR 1,218 million last year. Staff costs
increased due to additional FTE’s from the acquisition of
new entities and due to inflation. Furthermore, staff
costs increased by EUR 8 million because of a general
court decision about Guaranteed Minimum Pensions
equalisation in the UK where Arla had to recognise a
onetime past service costs related to defined benefit
plans. The development was partially offset by currency
development.

Within sales and distribution, as well as administration,
staff costs increased 3.0 per cent. Staff cost related to
production increased 1.7 per cent.

Operational costs increased 0.6 per cent to EUR 10,125
million compared to EUR 10,066 million last year.

Cost of production increased 1.2 per cent to EUR 8,163
million from EUR 8,063 million last year. Excluding costs
relating to raw milk, production costs increased to EUR
3,356 million compared to EUR 3,015 million last year.
Despite Calcium initiatives that led to savings across all
functions, production costs increased. An increased
focus on sales of branded products, handling of
additional milk types and additional logistics costs to
optimize our trading sales led to higher costs of EUR
274 million. Production cost levels were also impacted
by higher market prices for energy and transportation.
Due to decreasing milk prices, inventory reevaluation
increased costs by EUR 77 million compared to last year.
Finally, cost increased by EUR 73 million as a result of
the acquisitions of new entities.

Sales and distribution costs decreased by 2.8 per cent,
mainly due to currency effects and lower marketing
spend. Research and development spend incurred
amounted to EUR 47 million, compared to EUR 37
million last year. Additionally, EUR 20 million related
to development activities was capitalised. Sales and
distribution costs from newly acquired entities was
EUR 10 million.

Administration costs increased by EUR 3 million,
primarily due to redundancy costs and other expenses
related to the transformation programme, Calcium.
Refer to pages 21-23 for more on Calcium.

Cost of raw milk
The cost of raw milk decreased 4.8 per cent to EUR
4,807 million compared to EUR 5,048 million. This was
primarily driven by lower commodity prices impacting
our milk price.

ARLA FOODS ANNUAL REPORT 2018

The total number of FTE’s increased by 217 as a result
of expansion in International and Arla Foods Ingredients.
The increase was partially offset by reductions in most
other markets as a result of Calcium.

of Lurpak softest® in the UK and fueling digital
customer engagement in the Middle East. Refer to
page 23 for more detail.

Depreciation, amortisation and impairment
Depreciation, amortisation and impairment increased
2.8 per cent to EUR 363 million compared to EUR 353
million last year. This was due to higher investments.

Marketing spend
Marketing spend decreased 12.3 per cent to EUR 263
million compared to EUR 300 million last year. Improved
efficiency including insourcing of key marketing
activities, enabled by the Calcium transformation
programme, allowed us to reduce spend. Major
marketing investments included vitalising the Arla b
rand through “inner strength” campaigns, the launch

Development in operational costs
(EURm)

10,500

10,000

9,500

9,000

274

-13

-123

10,125

10,066

-241

2017

Milk cost

Inventory revaluation

Volume/mix

Other changes in operational costs

M&A

Currency

2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements NotesNote 1.2 Operational costs (continued)

Table 1.2.a Operational costs split by functions
(EURm)

2018

2017

Table 1.2.b Weighed-in raw milk

Production costs
Sales and distribution costs
Administration costs
Total

Specification:
Weighed-in raw milk
Other production materials*
Staff costs
Transportation costs
Marketing costs
Depreciation, amortisation and impairment
Other costs**
Total

8,163
1,540
422
10,125

8,063
1,584
419
10,066

Owner milk
Other milk
Total

4,807
1,468
1,246
1,037
263
363
941
10,125

5,048
1,231
1,218
1,002
300
353
914
10,066

Table 1.2.c Staff costs
(EURm)

Wages, salaries and remuneration
Pensions - defined contribution plans
Pensions - defined benefit plans
Other social security costs
Total staff costs

*Other production materials includes packaging, additives, consumables and changes in inventory
**Other costs mainly includes maintenance, utilities and IT

Cost split by type, 2018

Cost split by type, 2017

Staff costs relate to:
Production costs
Sales and distribution costs
Administration costs
Total staff costs

2018

EURm

Weighed in
mio. kg

12,446 4,286
1,457 521
13,903 4,807

Weighed in
mio. kg
12,373
1,564
13,937

2017

EURm

4,478
570
5,048

2018

2017

1,055
74
11
106
1,246

703
331
212
1,246

1,034
72
4
108
1,218

691
336
191
1,218

Average number of full-time employees

19,190

18,973

Depreciation,
amortisation and
impairment

Other costs**

Marketing costs

Trans-
portation
costs

10,125

MILLION EUR

10%

12%

47%

Weighed-in
raw milk

Depreciation,
amortisation and
impairment

Other costs**

Marketing costs

Trans-
portation
costs

10,066

MILLION EUR

50%

10%

12%

Staff
costs

15%

Staff
costs

12%

Other production
materials*

Weighed-in
raw milk

Table 1.2.d Depreciation, amortisation and impairment
(EURm)

Intangible assets, amortisation
Property, plant and equipment, depreciation
Total depreciation, amortisation and impairment

Depreciation, amortisation and impairment relate to:
Production costs
Sales and distribution costs
Administration costs
Total depreciation, amortisation and impairment

2018

2017

57
306
363

277
40
46
363

54
299
353

280
36
37
353

ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements Notes

Note 1.2 Costs (continued)

Accounting policies

Production costs
Production costs include direct and indirect costs
related to production including movements in volumes
on inventory and related inventory reevaluation. Direct
costs comprise purchase of milk from owners, inbound
transportation costs, packaging, additives, consumables,
energy and variable salaries directly related to the
production. Indirect costs comprise other costs related
to the production of goods including depreciation and
impairment losses on production-related material and
other supply chain related costs. The purchase of milk
from cooperative owners is recognised at prepaid prices
for the accounting period and therefore does not
include the supplementary payment, which is classified
as distributions to owners and recognised directly
in equity.

Sales and distribution costs
Costs relating to sales staff, the write-down of
receivables, sponsorship, research and development,
depreciation and impairment losses, are recognised as
sales and distribution costs. Sales and distribution costs
include marketing expenses relating to investment in
the group’s brands and comprise the development of
marketing campaigns, advertisement, exhibits,
sponsorships and others.

Administration costs
Administration costs relate to management and
administration, including administrative staff, office
premises and office costs, as well as depreciation and
impairment losses.

Note 1.3 Other operating income and costs

Positive impact from non-recurring items

Accounting policies

Net other operating income amounted to EUR 75
million, compared to EUR 32 million last year. The
increase is attributable to the settlement of disputes,
revaluation gain from step acquisition of entities (see
note 3.5) and negative effect from hedging activities.
Other items include the net result from the sale of
surplus energy and effects from other items not part
of the regular dairy activities.

Other operating income and costs consist of items
outside the regular course of dairy business activities.
It includes items such as gains and losses relating to
settlement of disputes, revaluation gains from step
acquisition of entities (see note 3.5), the net result from
financial hedging activities and the net result from
production and sale of energy from our biogas plants.
Furthermore, it includes gains and losses from the
disposal of fixed assets no longer used within our
dairy operations.

ARLA FOODS ANNUAL REPORT 2018

Table 1.3 Other operating income, net
(EURm)

Other operating income
Other operating costs

Specification:
Income from settlement of disputes
Revaluation gain from step acquisition of entities
Effect from hedging activities, net
Other items, net
Total other operating income, net

Note 1.4 Performance price

2018

2017

118
-43
75

47
29
-5
4
75

71
-39
32

-
-
29
3
32

Lower market prices, partly countered by positive volume/mix and cost development,
have led to slightly lower performance price

A key measure expressing Arla’s overall performance is
the performance price. This measures the value added
to each kg of milk supplied by our farmer owners. The
performance price is calculated as the standardised
prepaid milk price, included in production costs, plus
Arla Foods amba’s share of profit for the year, divided by

the milk volume weighed in 2018. The performance
price was 36.4 EUR-cent/kg owner milk, compared to
38.1 EUR-cent/kg owner milk last year. Refer to page 56
for more detail.

Table 1.4 Performance price

Owner milk
Adjustment to standard milk
(4.2% fat, 3.4% protein)
Profit for the year
Total

EURm

2018
Volume
in mio. kg

EUR-cent/
kg

EURm

2017
Volume
in mio. kg

EUR-cent/
kg

4,286

12,446

34.4

4,478

12,373

36.2

290

12,446

-0.3
2.3
36.4

285

12,373

-0.4
2.3
38.1

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements Notes

Note 2.1 Net working capital, other receivables
and other current liabilities

Strong focus on inventories and payment terms improve working capital

Net working capital decreased by EUR 76 million to
EUR 894 million, which corresponds to a decrease of
7.8 per cent compared to last year. Adjusted for M&A
and currency exchange effects the cash release from
net working capital was EUR 101 million. This positive
development was a result of Arla’s continuous efforts
towards optimising net working capital, including
initiatives such as increased use of global procurement
agreements, optimisation of inventory levels, improved
payments terms, as well as utilization of supply finance
programmes with our customers and suppliers. Overall
the net working capital measured in days improved by
3.8 compared to last year. This is calculated as the
change in trade receivables, inventories and trade
payables relative to revenue respectively production
value measured in days.

Excluding payables relating to owner milk, net working
capital decreased by EUR 72 million.

Inventory
Inventory decreased by EUR 52 million to EUR 1,074
million, compared to EUR 1,126 million last year.
Excluding currency and M&A effects, inventory
decreased by EUR 63 million, mainly attributable to
optimised inventory positions and milk price
development.

Trade receivables
Trade receivables increased by EUR 47 million to EUR
989 million, compared to EUR 942 million last year.
The net movement, excluding currency and M&A
effects, was an increase of EUR 36 million. The increase
was a result of a decision to reduce utilization of
financing programmes offered by customers. This was
possible due to a strong cash position and resulted in
cost savings. Despite the increase in receivables, the
overdues reduced by EUR 8 million compared to last
year, due to strong focus on the collection process.

The implementation of IFRS 9 and the expected losses
model on 1 January 2018, had only a minor effect on
the valuation of trade receivables. Refer to note 5.6 for
more detail.

ARLA FOODS ANNUAL REPORT 2018

Exposure to credit risk on trade receivables is guided by
Group-wide policies. Credit limits are set based on the
customer’s financial position and current market
conditions. Generally, Arla does not hold collateral as
security for trade receivables. The customer portfolio is
diversified in terms of geography, industry sector and
customer size. The Group was not extraordinarily exposed
to credit risk related to significant individual customers,
but to the general credit risk in the retail sector.
Historically, amounts written off as irrecoverable have
been relatively low, which was also the case in 2018.
EUR 2 million was recognized in the income statement
as a loss arising on bad debt compared to EUR 4 million
last year.

Trade and other payables
Trade and other payables increased by EUR 71 million,
to EUR 1,169 million, compared to EUR 1,098 million
last year. The movement in trade and other payables,
excluding owner milk, currency and M&A effects,
was an increase of EUR 69 million. The increase was
driven by a Calcium initiative to further utilisation of
global contracts, improved payment terms and the use
of supply chain finance programmes. Payables related to
owner milk remained at the same level as last year.

At 31 December 2018, a number of Arla’s strategic
suppliers participated in supply chain finance
programmes, where the supply chain finance provider
and related financial institutions act as a funding partner.
When suppliers are participating in these programmes,
the supplier has the option, at their own discretion and
flexibility, to receive early payment from the funding
partner based on the invoices sent to Arla. There is also
a requirement that Arla has recognised and approved
delivery of the goods or services and irrevocably
accepted to pay the invoice at maturity date via the
funding partner. The arrangement of early payment is a
transaction that is exclusively between the supplier and
the supply chain finance provider.

The liability for Arla, which is in the form of the invoice,
is recognised within trade and other payables until
maturity. The programme, which provides extended
payment terms, is one of many components of the

overall relationship between strategic suppliers and Arla
in order to improve the cash position for both parties.
Should a supply chain finance programme be terminated,
the liquidity risk for Arla is limited, hence Arla will
continue to maintain the payment terms to each single
supplier. The payment terms for suppliers that are
participating in the programmes are no more than 180
days. These programmes have a positive effect on our
net working capital position.

Other receivables and other current liabilities
Other receivables increased EUR 72 million to EUR 254
million compared to EUR 182 million last year. Other

receivables include, but are not limited to, VAT
receivables, deposits and subsidies. The increase is
mainly attributable to repayment of a VAT loan that in
previous years was netted of against corresponding
VAT receivables.

Other current liabilities increased EUR 13 million to EUR
292 million compared to from EUR 279 million last year.
Other current liabilities include HR related payables of
EUR 170 million.

Development in net working capital
(EURm)

1,000

950

900

850

800

970

-63

-69

894

-5

1 January 2018

Inventory

Trade receivables
Trade and other payables
excluding milk

Owner milk

M&A

Currency

31 December 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements Notes
Note 2.1 Net working capital, other receivables
and other current liabilities (continued)

Table 2.1.a Net working capital
(EURm)

Inventory
Trade receivables
Trade and other payables
Net working capital

Net working capital
(EURm)

2018

2017

Table 2.1.b Inventory
(EURm)

1,074
989
-1,169
894

1,126
942
-1,098
970

Inventory before the write-downs
Write-downs
Total inventory

Raw materials and consumables
Work in progress
Finished goods and goods for resale
Total inventory

1,500

1,000

500

1,233

928

1,199

999

1,004

831

1,175

970

1,103

894

Table 2.1.c Trade receivables
(EURm)

Trade receivables before provision for expected losses
Provision for expected losses (incurred losses in 2017)
Total trade receivables

2014

2015

2016

2017

2018

Table 2.1.d Trade receivables overdue
(EURm)

Net working capital excluding payables related to owner milk
Net working capital

Not overdue
Overdue less than 30 days
Overdue between 30 & 89 days
Overdue more than 90 days
Total trade receivables

2018

2017

1,099
-25
1,074

260
332
482
1,074

1,153
-27
1,126

264
366
496
1,126

2018

2017

1,000
-11
989

954
-12
942

2018

2017

Gross
carrying
amount

Expected
loss rate

Gross
carrying
amount

Incurred
loss rate

808
131
33
28
1,000

0%
0%
3%
29%

755
145
33
22
954

0%
0%
3%
41%

Historically, experienced loss rates on balances not due or less than 30 days are below 1 per cent.

ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements Notes

Note 2.1 Net working capital, other receivables
and other current liabilities (continued)

Accounting policies

Uncertainties and estimates

Inventory
Inventories are measured at the lower of cost or net
realisable value, calculated on a first-in, first-out basis.
The net realisable value is established taking into
account inventory marketability and an estimate of the
selling price, less completion costs and costs incurred to
execute the sale.

The cost of raw materials, consumables as well as
commercial goods includes the purchase price plus
delivery costs. The prepaid price to Arla’s owners is
used as the purchase price for owner milk.

The cost of work in progress and manufactured goods
also includes an appropriate share of production
overheads, including depreciation, based on the normal
operating capacity of the production facilities.

Trade receivables
Trade receivables are recognised at the invoiced amount
less expected losses in accordance with the simplified
approach for amounts considered irrecoverable
(amortised cost). Expected losses are measured as the
difference between the carrying amount and the
present value of anticipated cash flow.

Expected losses are assessed on major individual
receivables or in groups at a portfolio level, based on the
receivables’ age and maturity profile as well as historical
records of losses. The calculated expected losses are
adjusted for specific significant negative developments
in geographical areas. In 2017 the loss on trade
receivables was based on the incurred loss model in
accordance with IAS 39.

Trade and other payables
Trade payables are measured at amortised cost, which
usually corresponds to the invoiced amounts.

Other receivables and other current liabilities
Other receivables and other current liabilities are
measured at amortized cost usually corresponding
to the nominal amount.

Inventory
The Group uses monthly standard costs to calculate
inventory and revises all indirect production costs at
least once a year. Standard costs are also revised if they
deviate materially from the actual cost of the individual
product. A key component in the standard cost
calculation is the cost of raw milk from farmers. This is
determined using the average prepaid milk price that
matches the production date of inventory.

Indirect production costs are calculated based
on relevant assumptions with respect to capacity
utilisation, production time and other factors,
characterising the individual product.

The assessment of the net realisable value requires
judgement, particularly in relation to the estimate of the
selling price of certain cheese stock with long maturities
and bulk products to be sold on European or global
commodity markets.

Receivables
Calculation of expected losses are based on a
mathematical computation, including several
parameters, for example, number of days overdue
adjusted for significant negative developments in
certain geographical areas.

The financial uncertainty associated with provision for
expected losses is usually considered to be limited.
However, if a customer’s ability to pay were to
deteriorate in the future, further write-downs may
be necessary.

Customer-specific bonuses are calculated based on
actual agreements with retailers, however, some
uncertainty exists when estimating exact amounts to
be settled and timing of these settlements.

ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements Notes
Note 3.1 Intangible assets

Intangible asset increased due to acquisitions

Intangible assets amounted to EUR 887 million,
representing an increase of EUR 76 million compared to
last year.

Goodwill
The carrying value of goodwill amounted to EUR 597
million, compared to EUR 596 million last year. Goodwill
increased due to the acquisition of Arla Foods
Ingredients S.A., Argentina, largely offset by currency
effects. Of the total carrying value of goodwill, EUR 463
million related to activities in the UK, compared to EUR
470 million last year. This decrease in goodwill was due
to exchange rate adjustments. Refer to Note 3.1.1 for
more detail.

Licences and trademarks
The carrying value of licences and trademarks
recognised amounted to EUR 96 million, compared to
EUR 26 million last year. The increase was due to
trademarks recognised in relation to the acquisition of
Yeo Valley and the consolidation of Svensk Mjölk. Other
major brands include Cocio®, Anchor® and Hansano®.

The strategic brands, Arla®, Lurpak®, Castello® and
Puck®, are internally generated trademarks and are
therefore not capitalised. Arla has the license to
manufacture, distribute, and market StarbucksTM
premium ready-to-drink coffee beverage under a
long-term strategic license agreement which is not
capitalised.

IT and other development projects
The carrying value of IT and other development projects
was EUR 194 million, compared to EUR 189 million last
year. The Group continued to invest in the development
of IT. In 2018 the Group continued strengthening
its SAP access controls, whilst also introducing
comprehensive solutions to support GDPR governance
and the product life cycle management process. Other
capitalised development costs include innovation
activities and the development of new products.

Intangible assets, 2018

Intangible assets, 2017

IT and other
development
projects

22%

11%

Licences
and
trademarks

IT and other
development
projects

23%

887

MILLION EUR

Goodwill

67%

Licences
and
trademarks

811

MILLION EUR

Goodwill

74%

ARLA FOODS ANNUAL REPORT 2018

Table 3.1.a Intangible assets
(EURm)

Licenses
and
trademarks

IT and other
development
projects

Goodwill

2018
Cost at 1 January
Exchange rate adjustments
Additions
Mergers and acquisitions
Reclassification
Disposals
Cost at 31 December
Amortisation and impairment at 1 January
Exchange rate adjustments
Amortisation and impairment for the year
Amortisation on disposals
Amortisation and impairment at 31 December
Carrying amount at 31 December

2017
Cost at 1 January
Exchange rate adjustments
Additions
Mergers and acquisitions
Reclassification
Disposals
Cost at 31 December
Amortisation and impairment at 1 January
Exchange rate adjustments
Amortisation and impairment for the year
Amortisation on disposals
Amortisation and impairment at 31 December
Carrying amount at 31 December

597
-8
-
9
-
-
598
-1
-
-
-
-1
597

615
-19
-
1
-
-
597
-
-
-1
-
-1
596

99
-2
-
74
-1
0
170
-73
4
-5
-
-74
96

100
-2
-
1
-
-
99
-70
2
-5
-
-73
26

380
-2
55
-
4
-6
431
-191
-
-52
6
-237
194

327
-2
50
-
7
-2
380
-147
2
-48
2
-191
189

Total

1,076
-12
55
83
3
-6
1,199
-265
4
-57
6
-312
887

1,042
-23
50
2
7
-2
1,076
-217
4
-54
2
-265
811

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements NotesNote 3.1 Intangible assets (continued)

Accounting policies

Note 3.1.1 Impairment test of goodwill

Goodwill
Goodwill represents the premium paid by The Group
above the fair value of the net assets of an acquired
company. On initial recognition, goodwill is recognised
at cost. Goodwill is subsequently measured at cost less
any accumulated impairment. The carrying amount of
goodwill is allocated to the Group’s cash-generating
units that follow the management structure and internal
financial reporting. Cash-generating units are the
smallest group of assets which can generate independent
cash inflows.

Licences and trademarks
Licences and trademarks are initially recognised at cost.
The cost is subsequently amortised on a straight-line
basis over their expected useful lives.

IT and other development projects
Costs incurred during the research or exploration phase
in carrying out general assessments of requirements
and available technologies are expensed as incurred.
Directly attributable costs incurred during the
development stage for IT and other development
projects relating to the design, programming, installation
and testing of projects before they are ready for
commercial use are capitalised as intangible assets.
Such costs are only capitalised provided the expenditure
can be measured reliably, the project is technically, and
commercially viable, future economic benefits are
probable, and the Group intends to and has sufficient
resources to complete and use the asset. IT and other
development projects are amortised on a straight-line
basis over five to eight years.

Table 3.1.b Goodwill split by commercial segment and country
(EURm)

Europe

Europe total
International
International total
Arla Foods Ingredients
Arla Foods Ingredients total
Total

UK
Finland
Sweden
Europe general

Russia

Agentina

2018

2017

470
463
40
40
23
23
60
60
593
586
3
2
2
3
9 -
9 -
596

597

Goodwill supported by positive market development despite Brexit uncertainty

Goodwill is allocated to the relevant activities within the
commercial segments, primarily to our activities in the UK
and Finland, within the Europe commercial segment
where it is monitored for internal management purposes.

of the impact from moving milk intake into value added
products and more profitable markets. Other key
assumptions are made around sustainability of various
cost reduction initiatives.

Basis for impairment test and applied estimates
Impairment tests are based on expected future cash flow
derived from forecasts and targets supporting the Good
Growth strategy. Revenue growth rates are projected for
individual markets, based on expected developments as
well as past experience. The impairment tests do not
include revenue growth in the terminal value.

Procedure for impairment tests
Impairment tests of goodwill are based on an assessment
of their value in use. Milk costs are recognised at a milk
price that corresponds to the price at the time the test is
performed. In the applied forecasts, the key operational
assumption is future profitability based on a combination

Test results
Impairment testing showed that there was no need for
impairment in 2018. In this regard, sensitivities to changes
in milk prices and discount rates were calculated.
Uncertainties relating to Brexit were reflected as risk
adjusted cash flow in the impairment test. The discount
rate could rise up to 3 percentage points, before the
goodwill in the UK would be at risk of being impaired. The
underlying performance in Finland has improved in 2018
compared to last year. The impairment test performed,
showed that expected future cash flow can support the
carrying value of our net assets, including goodwill.

Table 3.1.1 Impairment tests
(EURm)

2018
UK
Finland
Sweden
Europe general*

2017
UK
Finland
Sweden
Europe general*

*Europe general includes an immaterial amount of goodwill related to Russia

Applied key assumptions

Discount rate,
net of tax

Discount rate,
before tax

7.1%
6.3%
6.4%
6.3%

6.9%
6.3%
6.5%
6.4%

8.7%
7.8%
8.2%
7.1%

8.4%
7.6%
8.3%
7.1%

ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements NotesNote 3.1 Intangible assets (continued)

Accounting policies

Uncertainties and estimates

Impairment occurs when the carrying amount of an
asset is greater than its recoverable amount through
either use or sale. For impairment testing, assets are
grouped together into the smallest group of assets
that generates cash inflows from continuing use
(cash-generating unit) that are largely independent of
the cash inflows of other assets or cash-generating
units. For goodwill which does not generate largely
independent cash inflows, impairment tests are
prepared at the level where cash flows are considered
to be generated largely independently.

The group of cash-generating units are determined
based on the management structure and internal
financial reporting. The cash-generating units and
grouping are reassessed each year. The carrying amount
of goodwill is tested for impairment together with other
non-current assets in the cash-generating unit to which
the goodwill is allocated. The recoverable amount of
goodwill is recognised as the present value of the
expected future net cash flows from the group of
cash-generating units to which the goodwill is allocated,
discounted using a pre-tax discount rate that reflects the
current market assessment of the time value of money
and risks specific to the asset or cash-generating unit.

Any impairment of goodwill is recognised as a separate
line item in the income statement and cannot be
reversed. The carrying amount of other non-current

assets is assessed annually to determine whether there
is any indication of impairment. The assets are measured
on the balance sheet at the lower value of the
recoverable amount and the carrying amount.

The recoverable amount of other non-current assets is
the higher value of the asset’s value-in-use and its
market value, i.e. fair value, less expected disposal costs.
The value-in-use is calculated as the present value of
the estimated future net cash flows from the use of the
asset or the group of cash-generating unit of which the
asset is part of.

An impairment loss on other non-current assets is
recognised in the income statement under production
costs, sales and distribution costs or administration
costs, respectively. Impairment recognised can only be
reversed to the extent that the assumptions and
estimates that led to the impairment have changed.
An impairment loss is reversed only to the extent that
the asset’s carrying amount does not exceed the
carrying amount that would have been determined,
net of depreciation or amortisation, if no impairment loss
had been recognised.

The impairment test of goodwill is performed for the
group of cash-generating units to which goodwill is
allocated. The group of cash-generating units are
defined based on the management structure for
Commercial segments and are linked to individual
markets. The structure and groups of cash-generating
units are assessed on a yearly basis.

The impairment test of goodwill is performed at least
annually for each group of cash-generating units to
which goodwill is allocated.

To determine the value in use, the expected cash flow
approach is applied. The most important parameters in
the impairment test include expectations on future free
cash flow and assumptions on discount rates.

Anticipated future free cash flows
The anticipated future free cash flows are based on
current forecasts and targets set during the budget
period 2019-2020. To reflect uncertainties following
Brexit, the budget period for UK has been prolonged to
2023. These are determined at cash-generating units
level in the forecast and target planning process, and are
based on external sources of information and industry-
relevant observations such as macro economic and
market conditions. All applied assumptions are
challenged through the forecast and target planning
process based on management’s best estimates and

expectations, which are judgmental by nature. They
include expectations during the strategy period
regarding revenue growth, EBIT margins and capital
expenditures. The assumptions includes moving milk
intake into value-added products, more profitable
markets and cost reduction initiatives. The growth rate
beyond the strategy period has been set to the
expected inflation rate in the terminal period and
assume no nominal growth.

Following the Brexit process, expected cash flow
supporting the carrying value of goodwill in the UK is
inherently more uncertain. This was reflected in the
risk-adjusted cash flow used for the impairment test.
Refer to page 20 for more on Brexit.

Discounts rates
A discount rate, namely Weighted Average Cost of
Capital (WACC), is applied for the specific business areas
based on assumptions regarding interest rates, tax rates
and risk premiums. The WACC is recalculated to a
before-tax rate. Changes in the future cash flow or
discount rate estimates used may result in materially
different values.

ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements Notes

Note 3.2 Property, plant and equipment

Strategic capital expenditure supporting innovation

Table 3.2.a Property, plant and equipment
(EURm)

Arla’s main tangible assets are located in Denmark, the
UK, Germany and Sweden. The carrying value increased
by EUR 96 million to EUR 2,308 million in 2018, driven
by increased capital expenditure (CAPEX) investments in
property, plant and equipment.

CAPEX investments increased 54.4 per cent to EUR 383
million compared to EUR 248 million last year. This
reflects the significantly increased CAPEX investment
budget for 2018 as approved by the Board of Directors.
However, due to the scope and timing of projects, the
investments have not fully materialised to the level of
CAPEX expenditure. The increase is mainly seen within
assets in course of construction, reflecting increased

investments in 2018 that are not yet finalised and
capitalised in the other main asset categories.

Major investments in 2018 included a general
upgrade and expansion of production facilities with a
particular focus on our ingredients business, optimising
production capacity within the yoghurt and nutrition
categories as well as initial investments in powder
capacity expansion.

Property, plant and equipment
by country, 2018

Property, plant and equipment
by country, 2017

Other

Germany

12%

Germany

13%

2,308

MILLION EUR

Denmark

44%

2.212

MILLION EUR

Denmark

42%

26%

23%

12%

Sweden

12%

Sweden

2018
Cost at 1 January
Exchange rate adjustments
Additions
Mergers and acquisitions
Transferred from assets in course of construction
Disposals
Reclassification
Cost at 31 December
Depreciation and impairments at 1 January
Exchange rate adjustments
Depreciation and impairments for the year
Depreciation on disposals
Depreciations and impairment at 31 December
Carrying amount at 31 December
Of which assets held under finance lease

2017
Cost at 1 January
Exchange rate adjustments
Additions
Mergers and acquisitions
Transferred from assets in course of construction
Disposals
Reclassification
Cost at 31 December
Depreciation and impairments at 1 January
Exchange rate adjustments
Depreciation for the year
Depreciation on disposals
Reclassification
Depreciations and impairment at 31 December
Carrying amount at 31 December
Of which assets held under finance lease

Land
and
building

Plant
and
machinery

Fixture
and
fitting,
tools and
equipment

Asset in
course of
construc-
tion

1,442
-15
13
9
21
-9
-
1,461
-602
7
-53
3
-645
816
-

1,430
-28
5
2
43
-36
26
1,442
-573
9
-46
30
-22
-602
840
34

2,766
-29
73
-
103
-13
7
2,907
-1,658
17
-212
12
-1,841
1,066
1

2,664
-41
30
4
142
-19
-14
2,766
-1,499
23
-209
13
14
-1,658
1,108
18

502
-1
8
34
20
-10
-1
552
-390
7
-41
9
-415
137
1

500
-14
7
-
29
-13
-7
502
-376
10
-44
13
7
-390
112
2

152
-2
289
1
-144
-1
-6
289
-
-
-
-
-
289
-

164
-2
206
2
-214
-
-4
152
-
-
-
-
-
-
152
-

Total

4,862
-47
383
44
-
-33
-
5,209
-2,650
31
-306
24
-2,901
2,308
2

4,758
-85
248
8
-
-68
1
4,862
-2,448
42
-299
56
-1
-2,650
2,212
54

ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements Notes

Note 3.2 Property, plant and equipment (continued)

Investments and depreciation property, plant
and equipment
(EURm)

500

400

300

200

100

2014

2015

2016

2017

2018

Depreciation property, plant and equipment
Investments property, plant and equipment

Table 3.2.b Estimated useful life in years

Office buildings
Production buildings
Technical facilities
Other fixtures and fittings, tools and equipment

ARLA FOODS ANNUAL REPORT 2018

2018

2017

50
20-30
5-20
3-7

determined at the date of acquisition and is reviewed
annually. Depreciation ceases when the carrying value
of an item is lower than the residual value. Changes
during the depreciation period or in the residual value
are treated as changes to accounting estimates, the
effect of which is adjusted only in current and future
periods. Depreciation is recognised in the income
statement within production costs, sales and distribution
costs or administration costs.

Uncertainties and estimates

Estimates are made in assessing the useful lives of items
of property, plant and equipment that determine the
period over which the depreciable amount of the asset
is expensed to the income statement. The depreciable
amount of an item of property, plant and equipment is
a function of the asset’s cost or carrying amount and its
residual value. Estimates are made in assessing the
amount that the Group can recover at the end of the
useful life of an asset. An annual review is made with
respect to the appropriateness of the depreciation
method, useful life and residual values of items of
property, plant and equipment.

Accounting policies

Property, plant and equipment are measured at cost
less accumulated depreciation and impairment. Assets
under construction, land and decommissioned plants
are not depreciated.

Cost
Cost comprises the acquisition price as well as costs
directly associated with an asset until the asset is ready
for its intended use. For self-constructed assets, cost
comprises direct and indirect costs relating to materials,
components, payroll and the borrowing costs from
specific and general borrowing that directly concerns
the construction of assets. If significant parts of an item
of property, plant and equipment have different useful
lives, they are recognised as separate items (major
components) and depreciated separately. When
component parts are replaced, any remaining carrying
value of replaced parts is removed from the balance
sheet and recognised as an accelerated depreciation
charge in the income statement. Subsequent expenditure
items of property, plant and equipment are only
recognised as an addition to the carrying amount of the
item, when it is likely that incurring the cost will result in
financial benefits for the Group. Other costs such as
general repair and maintenance are recognised in the
income statement when incurred.

Depreciation
Depreciation aims to allocate the cost of the asset, less
any amounts estimated to be recoverable at the end of
its expected use, to the periods in which the Group
obtains benefits from its use. Property, plant and
equipment are depreciated on a straight-line basis from
the time of acquisition, or when the asset is available for
use based on an assessment of the estimated useful life.

The depreciation base is measured taking into account
the residual value of the asset, being the estimated
value, the asset can generate through sale or scrappage
at the balance sheet date if the asset was of the age and
in the condition expected at the end of its useful life, and
reduced by any impairment made. The residual value is

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements Notes

Note 3.3 Associates and Joint ventures

Financial comments

Share in result in joint ventures and associates decreased
22 pct to EUR 29 million compared with EUR 37 million
last year. This primarily consist of recognised results from
our investments in Mengniu and LRF. The lower result
follows the acquisition of the remaining shares in Arla
Foods Ingredients S.A., Argentina where after the result
from this is entity is no longer recognised as results from
joint ventures. The recognised value of associates
decreased to EUR 386 million compared to EUR 401
million due to the step acquisition of Svensk Mjölk. Refer
to Note 3.5 for more detail.

COFCO Dairy Holdings Limited (COFCO) and China
Mengniu Dairy Company Limited (Mengniu)
The Group’s proportionate share of the net asset value of
COFCO including the investment in Mengniu is EUR 311
million, compared to EUR 295 million last year. The
carrying amount of the investment in COFCO includes
goodwill amounting to EUR 147 million, compared to
EUR 140 million last year driven by the development in
USD and CNY.

The fair value of the indirect share in Mengniu equals EUR
567 million, compared to EUR 519 million last year based
on the official listed share price at 31 December 2018.

The investment in COFCO is part of the China business
unit and is currently managed in China, along with sales
activities with similar characteristics. A potential
impairment of the investment is tested at the China
business unit level, using expected future net cash flow.
Impairment risks include substantial and long-term
reductions in leading stock indexes in Asia, the issue of
import restrictions on dairy products in China, or an
adverse and permanent reduction in the expected
performance of Mengniu. As the fair value exceeds the
carrying value of the investment, there is no indication
of impairment.

Mengniu reported a group revenue of EUR 7,890 million
and a result of EUR 266 million in 2017. Consolidated
figures are not available for the COFCO group. See table
3.3.b for more details on COFCO.

Joint ventures
The carrying value of joint ventures decreased to EUR 32
million compared to EUR 53 million last year due to the
acquisition of the remaining shares in Arla Foods
Ingredients S.A., Argentina. The investment was previously
classified as a joint venture. In October 2017, the
investment in Vigor Alimentos S.A, Brazil was divested,
realising a gain on EUR 44 million. The carrying value does
not include goodwill. Refer to Note 3.5 for more detail.

Recognised value of associates, 2018

Recognised value of associates, 2017

Share of equity
in joint ventures

Share of
equity
in other
associates

17%

Share of
equity in
COFCO/
Mengniu

38%

12%

439

MILLION EUR

Share of equity
in joint ventures

12%

Share of
equity
in other
associates

23%

454

MILLION EUR

Share of
equity in
COFCO/
Mengniu

34%

Goodwill in
COFCO/Mengniu

33%

Goodwill in
COFCO/Mengniu

31%

ARLA FOODS ANNUAL REPORT 2018

Table 3.3.a Associates and Joint ventures
Reconciliation of recognised value of associates
(EURm)

Share of equity in COFCO/Mengniu
Goodwill in COFCO/Mengniu
Share of equity in other associates
Recognised value of associates
Share of equity of joint ventures
Recognised value of associates and joint ventures

2018

2017

165
147
74
386
53
439

155
140
106
401
53
454

Table 3.3.b Material associates
Financial information for associates that are considered material
to the Group*
(EURm)

COFCO
Dairy Holdings
Limited

Revenue
Results after tax
Non-current assets
Dividends received
Ownership share
Group share of result after tax
Recognised value

COFCO has no other significant assets or liabilities.
*Based on latest available financial reporting

2018

2017

5
5
683
3
30%
19
311

12
12
656
2
30%
16
295

Fair value based on listed share price

567

519

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements Notes
Note 3.3 Joint ventures and associates (continued)

Table 3.3.c Transactions with joint ventures and associates
(EURm)

Sales of goods to joint ventures
Sales of goods to associates
Total sale of goods to joint ventures and associates
Purchase of goods from joint ventures
Total purchase of goods from joint ventures and associates
Trade receivables joint ventures*
Trade receivables associates*
Total trade receivables joint ventures and associates
Trade payables joint ventures*
Total trade payables joint ventures and associates

* Included in other receivables and other payables

4
37
41
62
62
2
10
12
-2
-2

14
78
92
57
57
18
9
27
9
9

Accounting policies

Investments in which Arla exercises significant influence,
but not control, are classified as associates. Investments
in which Arla has joint control are classified as joint
ventures.

The proportionate share of results of associates and
joint ventures after tax is recognised in the consolidated
income statement, after elimination of the proportionate
share of unrealised intra-group profit or loss.

Investments in associates and joint ventures are
recognised according to the equity method and
measured at the proportionate share of the entities’
net asset values, calculated in accordance with Arla’s
accounting policies. The proportionate share of
unrealised intra-group profits and the carrying amount
of goodwill are added, whereas the proportionate share
of unrealised intra-group losses is deducted. Dividends
received from associates and joint ventures reduce the
value of the investment.

For investments held in listed companies, computation
of the Group’s share of profit and equity is based on the
latest published financial information of the company,
other publicly available information on the company’s
financial development, and the effect of reassessed
net assets.

ARLA FOODS ANNUAL REPORT 2018

Investments in associates and joint ventures with
negative net asset values are measured at EUR zero. If
the Group has a legal or constructive obligation to cover
a deficit in the associate or joint venture, the deficit is
recognised under provisions. Any amounts owed by
associates and joint ventures are written down to the
extent that the amount owed is deemed irrecoverable.

An impairment test is performed when there is
objective evidence of impairment, such as significant
adverse changes in the environment in which the
equity-accounted investee operates, or a significant or
prolonged decline in the fair value of the investment
below its carrying value.

Where the equity-accounted investment is considered
to be an integral part of a cash generating unit (CGU),
the impairment test is performed at the CGU level,
using expected future net cash flow of the CGU. An
impairment loss is recognised when the recoverable
amount of the equity-accounted investment (or CGU)
becomes lower than the carrying amount. The
recoverable amount is defined as the higher of
value in use, and fair value less costs to sell, of the
equity-accounted investment (or CGU).

2018

2017

Uncertainties and estimates

Significant influence is defined as the power to
participate in the financial and operating policy
decisions of the investee but does not constitute control
or joint control over those policies. Judgement is
necessary in determining when significant influence
exists. When determining significant influence, factors
such as representation on the Board of Directors,
participation in policy-making, material transactions
between the entities and interchange of managerial
personnel are considered.

COFCO and Mengniu
The Group has a 30 per cent investment in COFCO,
which is considered an associated company based on a
cooperation agreement extending significant influence,
including the right of Board representation. The
cooperation agreement with COFCO also entitles Arla to
representation on the Board of Mengniu, a Hong Kong
listed dairy company in which COFCO is a significant
shareholder. It was agreed that Arla and Mengniu
cooperate in relation to the exchange of technical dairy

knowledge and expertise, and that Arla grants
intellectual rights to Mengniu. Based on the underlying
agreements, it is our assessment that Arla has significant
influence in Mengniu.

Lantbrukarnas Riksförbund, Sweden (LRF)
Arla has an ownership interest of 24 per cent in LRF,
which is a politically independent professional
organisation for Swedish entrepreneurs involved in
agriculture, forestry and horticulture.

Based on a detailed analysis of the LRF arrangement,
Arla’s active ownership interest constitutes significant
influence over LRF. This includes, but is not limited to,
owner representation on the Board of Directors.
Furthermore, owners of Arla have represented the
Swedish dairy industry at the Board of Directors in LRF
and both Arla and our Swedish owners are individual
members of LRF.

Note 3.4 Provisions

Provisions

Uncertainties and estimates

Provisions amounted to EUR 28 million in 2018,
compared to EUR 23 million last year. Provisions
primarily relate to insurance provisions for insurance
incidents that occurred but have not been settled.

Insurance provisions primarily relate to occupational
injuries. No major occupational incidents occurred
during the year. A general provision for occupational
injuries of EUR 7 million is recorded as a long-term
provision.

Provisions are particularly associated with estimates on
insurance provisions. The scope and size of onerous
contracts are also estimated. Insurance provisions are
assessed based on historical records of, amongst other
things, the number of insurance events and related
costs considered.

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements NotesNote 3.5 Purchase and sale of business or activities

Acquisitions and divestments

Acquisitions during 2018
Arla acquired the remaining 50 per cent of the shares in
the joint venture, Arla Foods Ingredients S.A, acquired
100 per cent of the shares in Yeo Valley Dairies Ltd, and
gained control in Swedish Mjölk ek för.

The total purchase price for the aforementioned
transactions was EUR 127 million, of which EUR 51
million was paid in 2018. Net assets acquired amounted
to EUR 118 million, resulting in an addition to goodwill
of EUR 9 million.

Arla Foods Ingredients S.A., Argentina
In February 2018, Arla acquired 50 per cent of the
shares in Arla Foods Ingredients S.A located in Argentina.
As a result, the Group’s equity interest increased from a
50 per cent owned joint venture to a 100 per cent fully
owned subsidiary. The assets that were acquired as a
result of obtaining control of whey-based production
facilities and related working capital items. Goodwill
recognised amounts to EUR 9 million, which relates the
value of future synergies following full ownership. A fair
value assessment based on the original investment
holding was performed, which generated a EUR 11
million gain was recognised in the income statement as
other operating income. Refer to Note 1.3 for more detail.

Argentina has recently been classified as a country with
hyperinflation. The majority of the sales in Arla Foods
Ingredients S.A. are carried out in USD. Similarly, a
substantial part of both the operational costs,
investments and funding are in USD. Arla has assessed
that the functional currency of the Company is USD
and not ARS. Currency adjustments pertaining to local
transactions denoted in ARS are recognised within other
financial income and costs.

In 2018, the revenue contribution from the Arla Foods
Ingredients S.A. transaction was EUR 45 million.

Acquisitions during 2017

Yeo Valley Dairies Ltd., UK
In July 2018, Arla acquired 100 per cent of the shares in
Yeo Valley Dairies Ltd, a UK based Company. As part of
the transaction, Arla was provided a license to use the
Yeo Valley brand for products within the categories
of fresh milk, cheese butter and spreadable. The
acquisition is in line with Arla’s strategy on branded
organic products. The net assets acquired primarily
consist of the value of the license agreement that will be
amortised over 20 years. No goodwill was recognised
as part of the transaction. In 2018 the revenue
contribution from the Yeo Valley transaction was EUR
47 million. The effect on profit was insignificant due to
initial integration activities.

Svensk Mjölk ek för, Sweden
As a result of the acquisition of Gefleortens in 2017, Arla
was in 2018 allocated the majority of the voting rights in
both the Board of Directors and at the General Assembly
for Svensk Mjölk ek för, a Swedish dairy association,
whose activities include ownership of three Swedish
cheese brands. Following obtaining control, the
investment was reclassified from associate to a
subsidiary. The net assets recognised primarily consist of
trademarks, which will be amortised over 10 years. After
obtaining control of the entity, a fair value assessment of
the previous investment held was performed, which
generated a EUR 17 million gain that was recognised in
the income statement as other operating income. Refer
to Note 1.3.

Gefleortens Dairy, Sweden
In December 2017, Arla acquired Gefleortens Dairy in
Sweden, whereby 59 new owners with 30 million kg of
milk joined Arla. The acquisition is in line with Arla’s
strategy on branded local products. Net assets acquired
amounted to EUR 6 million. Consideration paid was EUR
8 million in cash and EUR 2 million was issued out of
common capital. Additionally, EUR 4 million was
received in cash as part of the acquisition. No goodwill
was recognised as part of the transaction.

Table 3.5.a Mergers and acquisitions
(EURm)

2018
Intangible assets
Property, plant and equipment
Inventory
Other assets
Liabilities
Total net assets acquired
Goodwill
Purchase price, net
Cash in acquired company
Fair value of previous held investments
Fair value of non-controlling interests
Deferred payment
Cash payment during the year

In 2017, the revenue contribution from the Gefleortens
transaction was EUR 2 million. The effect on profit was
insignificant.

Divestments during 2017
As a strategic choice to reduce our involvement in the
Brazilian market, Arla divested its shares in the Brazilian
based associate, Vigor Alimentos S.A, recognising a gain
of EUR 44 million in 2017. The investment had
previously been classified as an associated company.

74
44
12
36
-48
118
9
127
16
-57
-13
-22
51

ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements NotesNote 3.5 Purchase and sale of business or activities (continued)

Table 3.5.b Sale of business or activities in 2017
(EURm)

Selling price on divestment of enterprise
Cash transferred as part of the transaction
Net cash received
Other assets transferred
Liabilities transferred
Gain on divestment

74
-
74
-30
-
44

Accounting policies

Recognition date and considerations
Newly acquired companies are recognised in the
consolidated financial statements at the date when the
Group obtains control. The purchase consideration is
generally measured at fair value. If an agreement
relating to a business combination requires that the
purchase consideration be adjusted in connection with
future events or the performance of certain obligations
(contingent consideration), this portion of the purchase
consideration is recognised at fair value at the date of
acquisition. Changes in estimates relating to a contingent
consideration are recognised in the income statement.
Costs directly attributable to the acquisition are
recognised in the income statement as incurred.

The acquired assets, liabilities and contingent liabilities
are generally measured at their fair value at the date of
acquisition.

In a business combination achieved in stages (step
acquisition), the shareholding held immediately before
the step acquisition is remeasured at fair value at the
acquisition date. The resulting gain or loss is recognised
in the income statement as a gain or loss from the sale
of the enterprise. The total fair value of the shareholding
held immediately after the step acquisition is estimated
and recognised as the cost of the total shareholding in
the company.

Goodwill arises when the aggregate of the fair value of
consideration transferred, previously held interest and
the value assigned to non-controlling interest holders
exceeds the fair value of the identifiable net assets of the
acquired company. Any goodwill that arises, which is not
amortised, is tested annually for impairment. The
methodology outlined above also applies to mergers
with other cooperatives, where the owners of the
acquired company become owners of Arla Foods amba.
The purchase consideration is calculated at the

acquisition date when fair values of the assets
transferred and equity instruments issued. Positive
differences between the consideration and fair value
are recognised as goodwill.

Divestment
Changes in the Group’s interest in a subsidiary that do
not result in a loss of control are recognised as equity
transactions.

Enterprises divested are recognised in the consolidated
income statement up to the date of disposal. Compara-
tive figures are not restated to reflect disposals. Gains or
losses on divestment of subsidiaries and associates are
determined as the difference between the selling price
and the carrying amount of the net assets, including
goodwill, at the date of divestment and costs necessary
to make the sale.

Uncertainties and estimates

To determine the classification of investments, an
assessment of the level of influence is required.
Judgement is necessary to determine whether the
Group actually has control of a company, and then
timing considerations are needed as to when this
should be effective from.

For acquisitions where the Group acquires control of the
company in question, the purchase method is applied.
However, there can be uncertainty regarding the
identification of assets, liabilities and contingent
liabilities, as well as measuring the fair value of the
company at the time of acquisition.

ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements NotesNote 4.1 Financial items

Lower financial costs

Accounting policies

Net financial costs decreased by EUR 2 million, to EUR
62 million in 2018, mainly due to currency adjustments.

Net interest costs amounted to EUR 52 million,
representing a decrease of EUR 5 million compared to
last year due to a lower average level of net interest-bearing
debt, whilst average interest costs, excluding pension
liabilities, were 2.6 per cent and equal to last year.
Interest cover increased to 14.8 per cent compared
to 12.9 per cent last year.

Exchange rate losses were at a lower level compared to
last year. The exchange rate losses predominantly is a
result of converting liquidity from surplus currencies,
into currencies with funding needs.

Financial income and costs as well as capital gains
and losses, are recognised in the income statement at
amounts that can be attributed to the year. Financial
items comprise realised and unrealised value
adjustments of securities and currency adjustments on
financial assets and financial liabilities, as well as the
interest portion of financial lease payments. Additionally,
realised and unrealised gains and losses on derivative
financial instruments not classified as hedging
contracts were included. Borrowing costs from general
borrowing, or loans that directly relate to the acquisition,

construction or development of qualified assets are
attributed to the cost of such assets and were therefore
not included in financial cost.

Capitalisation of interest was performed by using an
interest rate, matching the Group’s average external
interest rate in 2018. Financial income and costs relating
to financial assets and financial liabilities were recognised
using the effective interest method.

Table 4.1 Financial income and financial costs
(EURm)

Financial income:
Interest securities, cash and cash equivalents
Fair value adjustments and other financial income
Total financial income

Financial costs:
Interest on financial instruments measured at amortised cost
Net exchange rate losses
Interest on pension liabilities
Interest transferred to property, plant and equipment
Fair value adjustments and other financial costs, net
Total financial costs

Net financial costs

2018

2017

1
1
2

-47
-13
-6
6
-4
-64

-62

5
8
13

-53
-18
-9
6
-3
-77

-64

ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements

Note 4.2 Net interest-bearing debt

Lower pension liabilities resulting in reduced net-interest bearing debt

Net interest-bearing debt
(EURm)

Net interest-bearing debt, excluding pension liabilities,
increased slightly to EUR 1,647 million compared to
EUR 1,636 million last year. A solid operational cash flow
from the underlying business and working capital was
offset by higher capital expenditure, acquisitions and the
supplementary payment for 2017.

Net pension liabilities decreased EUR 57 million to EUR
220 million mainly due to higher interest rate level,
contributions and currency effects. As a result, net
interest-bearing debt, including pension liabilities,
amount to EUR 1,867 million compared to EUR 1,913
million last year.

The leverage ratio was 2.4, a decrease of 0.2 compared
to last year and outperformed the long-term target
range of 2.8 and 3.4, underpinning a strong financial
position.

The average maturity of interest-bearing borrowings
decreased by 0.1 years to 5.6 years. The average
maturity is impacted by a lapse of time to maturity,
refinancing or obtaining new committed facilities
including bond issues, and the level of net
interest-bearing debt.

The equity ratio measured 37 per cent, compared to
36 per cent last year.

Funding
The Group applies a diversified funding strategy to
balance the liquidity and refinancing risk, with the desire
to achieve a low financing cost. Major acquisitions or
investments are funded separately.

A diverse funding strategy includes, diversification of
markets, currencies, instruments, banks, lenders and
maturities to secure broad access to funding and to
ensure that the Group is independent of one single
creditor or one single market. All funding opportunities
are benchmarked against EURIBOR 3 months and
derivatives are applied to match the currency of our
funding needs. The interest profile is managed with
interest rate swaps independent of the individual loan.

The credit facilities contain financial covenants on
equity/total assets and minimum equity, as well as
standard non-financial covenants. The Group did not
default on, or fail to fulfil any loan agreements in 2018.

During 2018 the Group raised the following mix
of funding:
A new five-year bond issue totalling
SEK 1.5 billion (EUR 146 million), to refinance a
SEK 1.5 billion bond issue that matured in 2018.
A EUR 100 million loan dedicated to fund R&D

activities.

Arla had a commercial paper program in Sweden
denominated in SEK and EUR. The average utilization
in 2018 was EUR 175 million. Arla obtained debt with
a negative interest, including the credit margin.
During the year, Arla entered into sale and repurchase

arrangements based on its holdings in listed
AAA-rated Danish Mortgage Bonds. Refer to Note 4.6
for more detail.

3,000

2,500

2,000

1,500

1,000

500

3
7
6

2
9
4

3
6
9

2
7
7

2
2
0

2
1
7
1

2014

2
2
0
3

2015

1
6
4
8

2016

1
6
3
6

2017

1
6
4
7

2018

Leverage

Net pension liabilities

Net interest-bearing debt excluding pension liabilities
Target range leverage 2.8 - 3.4

Table 4.2.a Net interest-bearing debt
(EURm)

Securities, cash and cash equivalents
Other interest-bearing assets
Long-term borrowings
Short-term borrowings
Net interest-bearing debt excluding pension liabilities
Net pension liabilities
Net interest-bearing debt including pension liabilities

Net interest-bearing debt consists of current and
non-current liabilities, less interest-bearing assets.
The definition of leverage is the ratio between net
interest-bearing debt including pension liabilities
and EBITDA, and expresses the Group’s capacity to
service the debt. The Group’s long-term target
range for leverage is between 2.8 and 3.4.

Leverage was in 2016 exstraordinary affected by
the divestment of Rynkeby. Adjusted for this
leverage would have been 2.8.

Leverage

2.4

2017: 2.6

2018

2017

-584
-10
1,369
872
1,647
220
1,867

-602
-8
1,206
1,040
1,636
277
1,913

ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements Notes

2018

2017

Table 4.2.c Cash flow, net interest-bearing debt
(EURm)

244
796
329
-
1,369

146
112
-
600
2
12
872

254
790
160
2
1,206

152
213
9
628
11
27
1,040

Cash flow

Non-cash changes

Included in
financing
activities

1 January

Acqui-
sitions Reclasses

Foreign
exchange
move-
ments

Fair value
changes

31
December

2018
Pension liabilities
Long-term borrowings
Short-term borrowings
Total interest-bearing debt

Pension assets
Securities and other
Interest-bearing assets
Cash
Net interest-bearing debt

2017
Pension liabilities
Long-term borrowings
Short-term borrowings
Total interest-bearing debt

Securities and other
Interest-bearing assets
Cash
Net interest-bearing debt

277
1,206
1,040
2,523

-519
-91
1,913

369
1,281
967
2,617

-516
-84
2,017

-37
247
-242
-32

42
-26
-16

-39
-19
58
-

11
-12
-1

1
6
-
7

-
-22
-15

2
-
-
2

-
2
4

-1
-78
77
-2

-4

1
22
17

-1
-26
26
-1

-
-2
-3

-7
3
-3
-7

1
-2
-8

-9
-18
-11
-38

3
5
-30

-9
-15
-
-24

-
-
-24

-45
-12
-
-57

-17
-
-74

224
1,369
872
2,465

-4

-475
-119
1,867

277
1,206
1,040
2,523

-519
-91
1,913

Note 4.2 Net interest-bearing debt (continued)

Table 4.2.b Borrowings
(EURm)

Long-term borrowings:
Issued bonds
Mortgage credit institutions
Bank borrowings
Finance lease liabilities
Total long-term borrowings

Short-term borrowings:
Issued bonds
Commercial papers
Mortgage credit institutions
Bank borrowings
Finance lease liabilities
Other current liabilities
Total short-term borrowings

Total interest-bearing borrowings

2,241

2,246

ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements NotesNote 4.2 Net interest-bearing debt (continued)

Maturity of net interest-bearing debt excluding
pension liabilities at December 2018
(EURm)

Maturity of net interest-bearing debt excluding
pension liabilities at December 2017
(EURm)

Interest proﬁle for net interest-bearing debt
excluding pension liabilities at 31 December 2018
(EURm)

Interest proﬁle for net interest-bearing debt
excluding pension liabilities at 31 December 2017
(EURm)

600

500

400

300

200

100

600

500

400

300

200

100

2,000

1,500

1,000

500

2,000

1,500

1,000

500

0-1Y 1-2Y 2-3Y 3-4Y 4-5Y 5-6Y 6-7Y 7-10Y >10Y

10Y

Unused committed facilities
Debt

Floating
Fixed via swap

Fixed debt

Floating
Fixed via swap

Fixed debt

Table 4.2.d Net interest-bearing debt excluding pension liabilities, maturity
(EURm)

2018
DKK
SEK
EUR
GBP
Other
Total

2017
DKK
SEK
EUR
GBP
Other
Total

Total
769
525
271
9
73
1,647

Total
815
639
136
16
30
1,636

2019
-12
277
53
1
-41
278

2018
35
361
-3
5
30
428

2020
2
4
90
3
3
102

2019
22
152
103
3
-
280

2021
18
98
6
2
3
127

2020
21
24
7
3
-
55

2022
21
-
3
3
-
27

2021
27
102
6
3
-
138

2023
20
146
100
-
-
266

2022
30
-
3
3
-
36

2024
20
-
-
-
108
128

2023
30
-
1
-1
-
30

2026-
2028
185
-
4
-
-
189

2025-
2027
186
-
3
-
-
189

2025
25
-
-
-
-
25

2024
29
-
-
-
-
29

After
2028
490
-
15
-
-
505

After
2027
435
-
16
-
-
451

ARLA FOODS ANNUAL REPORT 2018

Table 4.2.e Currency profile of net interest-bearing debt excluding pension liabilities
(EURm)
Disclosed before and after the effect of derivative financial instruments

2018
DKK
SEK
EUR
GBP
Other
Total

2017
DKK
SEK
EUR
GBP
Other
Total

Original
principal
769
525
271
9
73
1,647

815
639
136
16
30
1,636

Effect
of swap
-
-487
341
146
-
-

-
-457
254
203
-
-

After
swap
769
38
612
155
73
1,647

815
182
390
219
30
1,636

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements NotesNote 4.2 Net interest-bearing debt (continued)

Table 4.2.f Interest rate risk excluding effect of hedging
(EURm)

Interest
rate

Average
interest
rate

Fixed
for

Carrying
amount

Interest
rate risk

Interest
rate

Average
interest
rate

Fixed for

Carrying
amount

Interest
rate risk

2018
Issued bonds:
SEK 800m maturing 28.05.2019
SEK 500m maturing 31.05.2021
SEK 750m maturing 03.07.2023
SEK 700m maturing 28.05.2019
SEK 500m maturing 31.05.2021
SEK 750m maturing 03.07.2023
Commercial papers
Total issued bonds

Mortgages credit institutions:
Fixed-rate
Floating-rate
Total mortgage credit institutions

Bank borrowings:
Fixed-rate
Floating-rate
Total bank borrowings

Other borrowings:
Finance leases
Other borrowings
Total other borrowings

Fixed
Fixed
Fixed
Floating
Floating
Floating
Fixed

Fixed
Floating

Floating
Floating

2.63%
1.88%
1.51%
0.74%
1.31%
0.51%
-0.08%
1.09%

1,15%
0.65%
0.68%

-0.44%
1.25%
0.41%

2.15%
3.39%
3.21%

0-1 years
2-3 years
4-5 years
0-1 years
0-1 years
0-1 years
0-1 years

2-3 years
0-1 years

0-1 years
0-1 years

Fair value
Fair value
Fair value
Cash flow
Cash flow
Cash flow
Fair value

Fair value
Cash flow

Cash flow
Cash flow

78
49
74
68
48
73
112
502

44
752
796

460
469
929

2
12
14

2017
Issued bonds:
SEK 500m maturing 04.06.2018
SEK 800m maturing 28.05.2019
SEK 500m maturing 31.05.2021
SEK 1.000m maturing 04.06.2018
SEK 700m maturing 28.05.2019
SEK 500m maturing 31.05.2021
Commercial papers
Total issued bonds

Mortgages credit institutions:
Fixed-rate
Floating-rate
Total mortgage credit institutions

Bank borrowings:
Fixed-rate
Floating-rate
Total bank borrowings

Other borrowings:
Finance leases
Other borrowings
Total other borrowings

Fixed
Fixed
Fixed
Floating
Floating
Floating
Fixed

3.25%
2.63%
1.88%
1.05%
0.52%
1.07%
0.03%
1.10%

0-1 years
1-2 years
3-4 years
0-1 years
0-1 years
0-1 years
0-1 years

Fixed
Floating

1.15%
0.71%
0.73%

2-3 years
0-1 years

Fixed
Floating

Floating
Floating

-0.04%
1.25%
0.42%

2.15%
2.27%
2.23%

0-1 years
0-1 years

Fair value
Fair value
Fair value
Cash flow
Cash flow
Cash flow
Fair value

Fair value
Cash flow

Cash flow
Cash flow

51
82
51
101
71
50
213
619

44
755
799

506
282
788

13
27
40

ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements Notes

Note 4.2 Net interest-bearing debt (continued)

Accounting policies

Financial instruments
Financial instruments are recognised at the date of
trade. The Group ceases to recognise financial assets
when the contractual rights to the underlying cash
flows either cease to exist or are transferred to the
purchaser of the financial asset, and substantially all
risk and reward related to ownership are also transferred
to the purchaser.

Financial assets and liabilities are offset, and the net
amount is presented in the balance sheet when, and only
when, the Group obtains a legal right of offsetting and
either intends to offset or settle the financial asset and
the liability simultaneously.

The classification of financial assets at initial recognition
depends on the financial asset’s contractual cash flow
characteristics and how these are managed.

Financial assets where the group intends to collect the
contractual cashflow are classified and measured at
amortised costs.

Financial assets that are part of liquidity management
are classified and measured at fair value through other
comprehensive income.

All other financial assets are classified and measured at
fair value through the income statement.

Financial assets
Financial assets are classified, at initial recognition and
subsequently measured at: amortised cost, fair value
through other comprehensive income or fair value
through the income statement.

Financial assets measured at amortised costs
Financial assets measured at amortised costs consist of
readily available cash at bank and deposits, together with
exchange listed debt securities with an original maturity
of three months or less, which have an insignificant risk of
change in value and can be readily converted to cash or
cash equivalents.

Financial assets measured at fair value
through other comprehensive income
Financial assets measured at fair value through other
comprehensive income consist of mortgage credit
bonds, which correspond in part to raised mortgage debt.

They are measured on first-time recognition at fair value
plus transaction costs. The financial assets are
subsequently measured at fair value with adjustments
made in other comprehensive income and accumulated
in the fair value reserve in equity.

Interest income, impairment and foreign currency
translation adjustments of debt instruments are
recognised in the income statement on a continuous
basis, under financial income and financial costs. In
connection with the sale of financial assets classified as
fair value through other comprehensive income,
accumulated gains or losses, previously recognised in the
fair value reserve, are recycled to financial income and
financial costs.

Financial assets measured at fair value
through the income statement
Securities classified at fair value through the income
statement, consist primarily of listed securities, which are
monitored, measured and reported continuously, in
accordance with the Group’s treasury and funding policy.
Changes in fair value are recognised in the income
statement under financial income and financial costs.

Liabilities
Debts to mortgage and credit institutions, as well as
issued bonds, are measured at the trade date upon
first recognition at fair value plus transaction costs.
Subsequently, liabilities are measured at amortised cost
with the difference between loan proceeds and the
nominal value recognised in the income statement over
the expected life of the loan.

Capitalised residual lease obligations related to financial
lease agreements are recognised under liabilities,
measured at amortised cost.

Other financial liabilities are measured at amortised cost.

For details on pension liabilities, refer to Note 4.7.

ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements Notes
Note 4.3 Financial risks

Financial risk management

Note 4.3.1 Liquidity risk

Liquidity reserves, 2018

Liquidity reserves, 2017

Unutilised other
loan facilities

Cash and
cash equivalents

Unutilised other
loan facilities

21%

Cash and
cash equivalents

Securities
(free cash flow)

13%

19%

646

MILLION EUR

Securities
(free cash flow)

1,038

MILLION EUR

67%

69%

Unutilised committed
loans facilities

Adequate liquidity reserves

Liquidity reserves decreased by EUR 392 million, to EUR
646 million in 2018. Due to a strong balance sheet, the
Group reduced its liquidity reserves to an adequate
level, in order to reduce costs.

Ensuring availability of sufficient operating liquidity and
credit facilities for operations is the primary goal of
managing liquidity risk. Inspired by the liquidity models
suggested by the rating agencies, the liquidity reserves
are assessed as adequate for the coming 12 month.

More than 95 per cent of the day-to-day liquidity flow of
the Group is managed by the treasury department and
the internal bank, via cash pooling arrangements. This
secures a scalable and efficient operating model. As a
result, the Group achieves a cost-efficient utilisation of
credit facilities.

2018

2017

119
7
434
86
646

91
6
721
220
1,038

Financial risks are an inherent part of the Group’s
operating activities and as a result the Group’s profit, are
impacted by the development in currencies, interest
rates and certain types of commodities. The global
financial markets are volatile and thus it is critical for the
Group to have a properly implemented financial risk
management approach in place to mitigate short-term
market volatility, whilst simultaneously achieving the
highest possible milk price.

The Group’s comprehensive financial risk management
strategy and system builds on a thorough understanding
of the interaction between the Group’s operating
activities and the underlying financial risks. The overall
framework for managing financial risks, being the
treasury and funding policy, is approved by the Board of
Directors and managed centrally by the treasury
department. The policy outlines risk limits for each type
of financial risk, permitted financial instruments and
counterparties.

The Board of Directors receives on a monthly basis a
report on the Group’s financial risk exposure. Hedging
the volatility of milk prices is not within the scope of
financial risk management, but an inherent component
of the Group’s business model.

Table 4.3.1.a Liquidity reserves
(EURm)

Cash and cash equivalents
Securities (free cash flow)
Unutilised committed loan facilities
Unutilised other loan facilities
Total

ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements NotesNote 4.3 Financial risks (continued)

Table 4.3.1.b Contractual expected non-discounted cashflow on gross financial liabilities
(EURm)

2018
Issued bonds
Mortgage credit institutions
Credit institutions
Finance lease liabilities
Other non-current liabilities
Interest expense - interest bearing debt
Trade payable
Derivative instruments
Total

2017
Issued bonds
Mortgage credit institutions
Credit institutions
Finance lease liabilities
Other non-current liabilities
Interest expense - interest bearing debt
Trade payable
Derivative instruments
Total

Carrying
amount

390
796
1,041
3
13
-
1,169
85
3,497

Carrying
amount

406
799
1,001
13
27
-
1,098
87
3,431

Non-discounted contractual cash flow

Total

2019

2020

2021

2022

2023

2024

2025

2026-2028

After 2028

390
808
1,042
3
13
107
1,169
85
3,617

146
-
715
2
13
11
1,169
32
2,088

-
1
99
1
-
10
-
11
122

98
17
13
-
-
9
-
9
146

-
20
7
-
-
8
-
8
43

146
20
100
-
-
7
-
6
279

-
20
108
-
-
5
-
2
135

-
51
-
-
-
5
-
1
57

-
167
-
-
-
15
-
4
186

-
512
-
-
-
37
-
12
561

Non-discounted contractual cash flow

Total

2018

2019

2020

2021

2022

2023

2024

2025-2027

After 2027

406
815
1,002
13
27
112
1,098
87
3,560

152
9
821
11
26
12
1,098
23
2,152

152
18
107
2
1
10
-
17
307

-
19
56
-
-
8
-
9
92

102
27
10
-
-
7
-
8
154

-
29
7
-
-
7
-
7
50

-
29
1
-
-
6
-
5
41

-
30
-
-
-
6
-
2
38

-
193
-
-
-
17
-
3
213

-
461
-
-
-
39
-
13
513

Assumptions
Contractual cash flows are based on the earliest possible date at which the Group can be required to settle the financial liability and the interest rate cash flow is based on the contractual interest rate. Floating interest payments were
determined using the current floating rate for each item at the reporting date.

ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements NotesNote 4.3 Financial risks (continued)

Risk mitigation

Risk
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.

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.

Average maturity

Average maturity, gross debt
Maturity < 1 year, net debt
Maturity > 2 year, net debt

2018

2017

Minimum

Maximum

Policy

5.6 years
-
92%

5.7 years
-
97%

2 years
-
50%

-
25%
-

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.

exposed to translation of entities reporting in GBP, DKK,
SEK, CNY and USD. Due to translation effects, revenue
decreased by EUR 186 million compared to the revenue
reported last year. Correspondingly costs were reduced by
EUR 180 million in comparison 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 comprehensive income as
foreign exchange adjustments. In 2018 a net amount of
EUR -13 million was recognised in other comprehensive
income compared to EUR -73 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 SEK, USD
and GBP weakened by 6 per cent, 5 per cent and 1 per cent
respectively.

Despite the average rate for the USD and SAR being weaker
when compared with last year, the USD and SAR
strengthened by 4 per cent during 2018. This was the
primary reason that hedging activities delivered a loss
of EUR 14 million.

26 per cent of the Group’s revenue is in GBP. Due to
uncertainties surrounding Brexit Arla decided to hedge a
significant proportion of the 2019 export to the UK by
purchasing options. Consequently, the downside risk on
GBP is limited for the export flow in 2019.

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. These markets are mainly Nigeria, Dominican
Republic, Bangladesh, Ivory Coast, Senegal and Egypt.

Our business in Saudi Arabia is a large part of the Group’s
export to MENA. SAR has been pegged to the USD since
1986. However, given the uncertainty regarding the Saudi
Arabia economy, Arla monitors the currency situation
closely and is hedged for longer than it would normally be.

Note 4.3.2 Currency risk

Currency impact on revenue, cost and financial position

The Group is exposed to both transaction and translation
effects from currencies.

Transactions effects are 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 24 million compared to
last year due to 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 13 million was
recognised in financial costs compared to a net loss of EUR
18 million last year. To manage short term volatility from
currency fluctuations, derivatives are used to hedge
currency exposure. When settling the hedging instrument,
a positive or negative amount is recognised within other
income or other costs respectively. A net loss of EUR 14
million was recognised within other cost compared to a
gain of EUR 29 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

100 ARLA FOODS ANNUAL REPORT 2018

Revenue split by currency in 2018

Revenue split by currency in 2017

Other

SAR

USD

EUR

32%

Other

SAR

USD

EUR

32%

DKK

12%

10,425

MILLION EUR

DKK

13%

10,338

MILLION EUR

13%

SEK

26%

GBP

14%

SEK

25%

GBP

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements NotesNote 4.3 Financial risks (continued)

Table 4.3.2.a Exchange rates

Closing rate
2017

2018

Change

Average rate
2017

2018

Change

Table 4.3.2.b Currency exposure
(EURm)

EUR/DKK USD/DKK*

GBP/DKK

SEK/DKK

SAR/DKK

EUR/GBP
EUR/SEK
EUR/DKK
EUR/USD
EUR/SAR

0.901
10.261
7.467
1.145
4.293

0.888
9.848
7.445
1.194
4.479

-1.4%
-4.2%
-0.3%
4.2%
4.2%

0.885
10.253
7.453
1.180
4.426

0.876
9.632
7.439
1.128
4.229

-0.9%
-6,5%
-0.2%
-4.6%
-4.6%

Table 4.3.2.b Currency exposure
(EURm)

EUR/DKK USD/DKK*

GBP/DKK

SEK/DKK

SAR/DKK

2017
External exposure:
Financial liabilities
Financial assets
Derivatives
Net external exposure
Internal exposure:
Financial assets
Derivatives
Net internal exposure

-155
164
-367
-358

268
47
315

-15
218
-398
-195

3
-
3

-212
123
-803
-892

522
192
714

Net exposure

-43

-192

-178

The net exposure relates to:
Hedging of expected commercial cash flow
that qualify for hedge accounting
Hedging of expected commercial cash flow
where hedge accounting is not used
Exposure not hedged

Applied sensitivity
Impact on profit or loss
Impact on other comprehensive income

* Incl. AED

-235

-192

-43
-

1%
-
-

-
43

5%
2
-12

-
14

5%
1
-10

2018
External exposure:
Financial liabilities
Financial assets
Derivatives
Net external exposure
Internal exposure:
Financial assets
Derivatives
Net internal exposure

-250
255
-640
-635

130
47
177

-118
181
-296
-233

11
-
11

-89
164
-852
-777

342
217
559

-728
56
496
-176

7
202
209

-5
91
-252
-166

14
-
14

Net exposure

-458

-222

-218

-152

The net exposure relates to:
Hedging of expected commercial cash flow
that qualify for hedge accounting
Hedging of expected commercial cash flow
where hedge accounting is not used
Exposure not hedged

Applied sensitivity
Impact on profit or loss
Impact on other comprehensive income

* Incl. AED

101 ARLA FOODS ANNUAL REPORT 2018

-379

-279

-458
-

1%
-5
-

-
157

5%
8
-19

61
-

5%
3
-14

-
33

5%
2
-

-152
-

5%
-8
-

-844
34
592
-218

8
210
218

-
-

5%
-
-

-2
76
-153
-79

13
-
13

-66

-58

-8
-
-
5%
-
-3

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements NotesNote 4.3 Financial risks (continued)

Risk mitigation

Note 4.3.3 Interest rate risk

The currency exposure is continuously managed by
the treasury department. Individual currency exposures
are hedged in accordance with the treasury and
funding policy.

Financial instruments used to hedge currency exposure
do not necessarily need to qualify for hedge accounting,
and hence some of the applied financial instruments, i.e.
some option strategies, are accounted for at fair value
through the income statement.

Arla Foods amba’s functional currency is DKK. However,
the risk in relation to the EUR currency is assessed in the
same manner as for DKK.

The Executive Management Team has the discretion to
decide, if and when investments in foreign operations
should be hedged (translation risks) with an obligation
to inform the Board of Directors at the next meeting.

The Group’s net external exposure is calculated as
external financial assets and liabilities denominated in
currencies different from the functional currency of
each legal entity, plus any external derivatives converted
on Group level into currency risk against DKK, i.e. EUR/
DKK, USD/DKK etc. The same also applies to the Group’s
net internal exposure. The aggregate of the Group’s
external and internal currency exposure, represents the
net exposure, which is outlined in Table 4.3.2.

Net foreign currency investments in subsidiaries, as well
as instruments hedging those investments, are excluded.

Assumptions for sensitivity analysis

Risk
The Group operates in many different countries and has
significant investments in operations outside of
Denmark, of which the UK, Germany and Sweden,
represent the largest part of the business by net
revenue, profit and assets. A major part of the currency
risk from net revenue denominated in foreign currencies
is offset by sourcing in the same currency.

Policy
According to the treasury and funding policy, the
treasury department can hedge:
Up to 15 months of the net forecasted cash
receipts and payables.
Up to 100 per cent of net recognised trade
receivables and trade payables.

Limited hedging activities due to decreased debt levels

The average duration of the Group’s interest on
interest-bearing debt, including derivatives, but
excluding pension liabilities, has decreased by
0.6 to 3.2. The duration is reduced due to matured
interest rate hedges and a reduction in time to
maturity on the remaining hedges.

Even though interest rates were low in 2018, our
hedging activity was limited due to the low level of
net interest-bearing debt.

Table 4.3.3 Sensitivity based on a 1 percentage point increase in interest rate
(EURm)

2018
Financial assets
Derivatives
Financial liabilities
Net interest-bearing debt
excluding pension liabilities

2017
Financial assets
Derivatives
Financial liabilities
Net interest-bearing debt
excluding pension liabilities

Carrying value

Sensitivity

Potential
accounting impact

Income
statement

Other
comprehensive
income

-594
-
2,241

1,647

-610
-
2,246

1,636

1%
1%
1%

4
7
-18

-7

4
7
-18

-7

-2
38
-

-2
49
-

102 ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements Notes

Note 4.3 Financial risks (continued)

Risk mitigation

Note 4.3.4 Commodity price risk

Difficult hedging conditions in a volatile marked

Supply contracts are predominately related to a floating
official price index. The treasury department uses
financial derivatives hedge commodity price risk. This
secures full flexibility to change suppliers without having
to take future hedging into consideration.

The purpose of hedging is to reduce volatility in costs
related to energy. In 2018, hedging activities have
resulted in gains of EUR 9 million. The result of hedging
activities, classified as hedge accounting, is recognised in
other income and costs

Hedging activities concentrate on the most significant
risks, including electricity, natural gas and diesel, in
Denmark, Germany, Sweden and the UK. The total
energy commodity spend, excluding taxes and
distribution costs, amounts to approximately EUR 100
million per year.

In 2018, approximately 41 per cent of our energy spend
was hedged. At the end of 2018, 42 per cent of the
energy spend for 2019 was hedged. A 25 per cent
increase in commodity prices would negatively impact
profit by approximately EUR 16 million. Conversely,
other comprehensive income would be positively
impacted by EUR 18 million.

Table 4.3.4 Hedged commodities
(EURm)

2018
Diesel / natural gas
Electricity

2017
Diesel / natural gas
Electricity

Potential
accounting impact

Income
statement

Other
compre hen-
sive income

Sensitivity Contract value

25%
25%

-3
4

1
-

-8
-8

- 10
-5

12
6

5
2

Risk
The Group is exposed to interest rate risk on interest-
bearing borrowings, pension liabilities, interest-bearing
assets and the impairment test of non-current assets.
The risk is divided between profit exposure and exposure
to other comprehensive income. Profit exposure relates
to net interest paid, valuation of marketable securities
and the potential impairment of fixed assets. Exposure to
other comprehensive income relates to revaluation of
net pension liabilities and interest hedging of future
cash flow.

increase in interest rates. A decrease in the interest rate
would have the adverse effect.

Cash flow sensitivity
A change in interest rates will impact interest rate
payments on the Group’s unhedged floating rate debt.
Table 4.3.3 shows the one-year cash flow sensitivity,
depicting a 1 per cent increase in interest rates on the
unhedged floating rate for instruments recognised as at
31 December 2018. A decrease in the interest rate
would have an opposite effect.

Fair value sensitivity
A change in interest rates will impact the fair value of the
Group’s interest-bearing assets, interest rate derivative
instruments and debt instruments measured at either
fair value through the income statement, or through
other comprehensive income. Table 4.3.3 shows the fair
value sensitivity. The sensitivity is based on a 1 per cent

Policy
Interest rate risk must be managed according to the
treasury and funding policy. Interest rate risk is
measured as the duration of the debt portfolio, including
hedging instruments, but excluding pension liabilities.

Duration

3.2

3.8

2018

2017

Minimum

Maximum

Policy

How we act and operate
The purpose of interest rate hedging is to mitigate risk
and secure relatively stable and predictable financing
costs. The interest rate risk from net borrowing is
managed by having an appropriate split between fixed
and floating interest rates.

The Group actively uses derivative financial instruments
to reduce risks related to fluctuations in the interest rate,
and to manage the interest profile of the interest-bearing
debt. By having a portfolio approach and using
derivatives, the Group can independently manage and
optimise interest rate risk, as the interest rate profile can

be changed without having to change the funding itself.
Thereby, the Group can operate in a fast, flexible and
cost-efficient manner without changing underlying loan
agreements.

The mandate from the Board of Directors provides the
Group with the opportunity to use derivatives, like
interest rate swaps and options, in addition to interest
conditions embedded in the loan agreements. To date,
the Group has not traded in any options contracts.

103 ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements Notes

Note 4.3 Financial risks (continued)

Risk mitigation

Risk
The Group is exposed to commodity risks related to the
production and distribution of dairy products.
Increased commodity prices negatively impact the costs
of production and distribution.

Fair value sensitivity
A change in commodity prices will impact the fair value
of the Group’s hedged commodity derivative instru-
ments, measured through other comprehensive income
and the unhedged energy consumption through the
income statement. The table shows the sensitivity of
a 25 per cent increase in commodity prices for both
hedged and unhedged commodity purchases. A decrease
in commodity prices would have the reverse effect.

Policy
According to the treasury policy, the forecasted
consumption on electricity, natural gas and diesel can
be hedged for up to 36 months, of which 100 per cent
can be hedged for the first 18 months, with a limited
proportion thereafter.

How we act and operate
Energy commodity price risks are managed by the
treasury department. Commodity price risks are mainly
hedged by entering into financial derivative contracts,
independent of the physical supplier contracts. Arla is
also exploring other commodities relevant for financial
risk management.

Arla’s energy exposure and hedging are managed as a
portfolio across energy type and country. Not all energy
commodities can effectively be hedged by matching the
underlying costs, but Arla aims to minimise the base risk.

Dairy derivative market in EU and New Zealand remain
small but are evolving quickly and the group has
engaged in insignificant hedging price risk on selected
commodity products. As the dairy derivative market
develops, we expect this to play a role in managing fixed
price contracts with customers, in the coming years.

Note 4.3.5 Credit risk

Limited losses

In 2018 the Group continued to experience very limited
losses from defaulting counterparties such as custom-
ers, suppliers and financial counterparties.

For financial counterparties, the credit risk is minimised
by only entering into new derivative transactions with
those that have a credit rating of at least A-/A-/A3 from
either S&P, Fitch or Moody’s. All financial counterparties
had satisfactory credit ratings at year-end. In a small
number of geographies which are not serviced by our
relationship banks and where financial counterparties
with a satisfying credit rating do not operate, the Group
deviated from the rating requirement.

Other counterparties, customers and suppliers, are
subject to continuous monitoring of fulfilment of their
contractual obligations and credit quality. Outside the
Group’s core markets, credit insurance and trade finance
instruments are widely used to reduce the risks.

Further information on trade receivables is provided in
Note 2.1.c.

The maximum exposure to credit risk is approximately
equal to the carrying amount.

The Group has, like in previous years, continuously
worked with credit exposure and experienced a very low
level of losses arising from customers.

Netting of credit risk
To manage the financial counterparty risk, the Group
uses master netting agreements when entering into
derivative contracts.

Table 4.3.5 shows the counterparty exposure for
those agreements covered by entering into netting
agreements that qualifies for netting in case of default.

104 ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements Notes

Note 4.3 Financial risks (continued)

Table 4.3.5 External rating of financial counterparties
(EURm)

2018
AA-
A+
A
A-
Total

2017
AA-
A+
A
A-
Total

Assets,
carrying
amount

Qualifying
for netting

Net assets
exposure

Liabilities,
carrying
amount

Qualifying
for netting

Net
liabilities
exposure

8
4
20
5
37

3
4
7
5
19

8
4
18
5
35

3
4
7
1
15

-
-
2
-
2

-
-
-
4
4

41
11
27
6
85

39
11
36
1
87

8
4
18
5
35

3
4
7
1
15

33
7
9
1
50

36
7
29
-
72

In addition, the Group has entered into sales and repurchase agreements on mortgage bonds. Refer to Note 4.6 for
more detail.

Risk mitigation

Risk
Credit risks arise from operating activities and
engagement with financial counterparties. Furthermore,
a weak counterparty credit quality can reduce their
ability to support the Group going forward, thereby
jeopardising the fulfilment of our Group’s strategy.

Policy
Financial counterparties must be approved by the
Executive Director and the CFO of Arla Foods amba, and
have a credit rating of a least A-/A-/A3 by S&P, Fitch or
Moody’s for the financial counterparty to have a liability
towards Arla. A credit assessment is performed of all
new customers, and existing customers are subject to
ongoing monitoring of their credit worthiness. The same
process is applied to important suppliers, both for
ongoing supply and capital expenditures.

How we act and operate
The Group has an extensive credit risk policy and uses
credit insurance and other trade financing products
extensively in connection with exports. In certain
emerging markets, it is not always possible to obtain
credit coverage with the required rating, however, the
Group then applies for the best coverage available. The
Group has determined that this is an acceptable risk as
the Group has decided to grow and invest in emerging
markets.

If a customer payment is late, internal procedures are
followed to mitigate losses. The Group uses a limited
number of financial counterparties where credit ratings
are monitored on an ongoing basis.

105 ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements NotesNote 4.4 Derivative financial instruments

Hedging of future cash flows
The Group uses forward currency to hedge currency
risks on expected future net revenue and costs. Interest
rate swaps are used to hedge risks against movements
in expected future interest payments and commodity
swaps are used for energy hedging.

Hedging of net investments
The Group hedged an insignificant part of currency
exposure relating to investments in subsidiaries, joint
ventures and associated companies, using loans and
derivatives.

Fair value of hedge instruments not qualifying for
hedge accounting (financial hedge)
The Group uses currency options which hedge
forecasted sales and purchases. Some of these options
do not qualify for hedge accounting and hence, the fair
value adjustment is recognised directly in the income
statement.

Currency swaps are used as part of the daily liquidity
management. The objective of the currency swaps is to
match the timing of in- and outflow of foreign currency
cash flows.

Table 4.4.b Value adjustment of hedging instruments
(EURm)

Deferred gains and losses on cash flow hedges arising during the period
Value adjustments of hedging instruments reclassified to other operating income and costs
Value adjustments of hedging instruments reclassified to financial items
Value adjustments of hedging instruments reclassified to production costs
Total value adjustment of hedging instruments recognised in
other comprehensive income during the year

2018

2017

-7
-5
15
-

11
29
11
-3

Accounting policies

Derivative financial instruments are recognised from the
trade date and measured in the financial statement at
fair value. Positive and negative fair values of derivative
financial instruments are recognised as separate line
items in the balance sheet.

Fair value hedging
Changes in the fair value of derivative financial
instruments, which meet the criteria for hedging the fair
value of recognised assets and liabilities, are recognised
alongside changes in the value of the hedged asset or
the hedged liability for the portion that is hedged.

Cash flow hedging
Changes in the fair value of derivative financial
instruments, that are classified as hedges of future cash
flows and effectively hedge changes in future cash
flows, are recognised in other comprehensive income as

a reserve for hedging transactions under equity, until
the hedged cash flows impact the income statement.
The reserve for hedging instruments under equity is
presented net of tax. The cumulative gains or losses
from hedging transactions that are retained in equity are
reclassified and recognised under the same line item as
the basic adjustment for the hedged item. The
accumulated change in value recognised in other
comprehensive income is recycled to the income
statement once the hedged cash flows affect the
income statement, or are no longer likely to be realised.
For derivative financial instruments that do not meet the
criteria for classification as hedging instruments,
changes in fair value are recognised on a continuous
basis in the income statement, under financial income
and costs.

Table 4.4.a Hedging of future cash flow from highly probable forecast transactions
(EURm)

Expected recognition

Fair value
recognised
in other
comprehensive
income

2019

2020

2021

2022

-3
-67
1
-69

-3
-15
1
-17

-
-10
-
-10

-
-9
-
-9

-
-8
-
-8

Expected recognition

Fair value
recognised
in other
comprehensive
income

2018

2019

2020

2021

4
-77
1
-72

4
-17
1
-12

-
-14
-
-14

-
-9
-
-9

-
-7
-
-7

Later
than
2022

-
-25
-
-25

Later
than
2021

-
-30
-
-30

Carrying
value

-3
-67
1
-69

Carrying
value

4
-77
1
-72

2018
Currency contracts
Interest rate contracts
Commodity contracts
Hedging of future cash flow

2017
Currency contracts
Interest rate contracts
Commodity contracts
Hedging of future cash flow

106 ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements NotesNote 4.5 Financial instruments disclosed

Table 4.5.a Categories of financial instruments
(EURm)

Derivatives
Shares
Financial assets measured at fair value through the income statement

Securities
Financial assets measured at fair value through other comprehensive income

Currency instruments
Interest rate instruments
Commodity instruments
Derivative assets used as hedging instruments

Trade receivables
Other receivable
Financial assets measured at amortised cost

Derivatives
Financial liabilities measured at fair value through the income statement

Currency instruments
Interest rate instruments
Commodity instruments
Derivative liabilities used as hedging instruments

Long term borrowings
Short term borrowings
Trade payables and other payables
Financial liabilities measured at amortised cost

2018

2017

28
10
38

465
465

4
-
5
9

12
12
24

511
511

5
-
2
7

989
254
1,243

942
182
1,124

7
7

7
67
4
78

8
8

1
77
1
79

1,369
872
1,169
3,410

1,206
1,040
1,098
3,344

Table 4.5.b Fair value hierarchy - carrying amount
(EURm)
2018
Financial assets:
Bonds
Shares
Derivatives
Total financial assets

Financial liabilities:
Issued bonds
Mortgage credit institutions
Derivatives
Total financial liabilities

2017
Financial assets:
Bonds
Shares
Derivatives
Total financial assets

Financial liabilities:
Issued bonds
Mortgage credit institutions
Derivatives
Total financial liabilities

Level 1

Level 2

Level 3

Total

466
10

476

796

511
12

523

799

37
37

390

85
475

19
19

406

87
493

466
10
37
513

390
796
85
1,271

511
12
19
542

406
799
87
1,292

107 ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements Notes

Note 4.5 Financial instruments disclosed (continued)

Note 4.6 Sale and repurchase agreements

Risk mitigation

Attractive funding arrangement

Methods and assumptions applied when measuring fair
values of financial instruments:

Bonds and shares
The fair value is determined using quoted prices in an
active market.

Non-option derivatives
The fair value is calculated using discounted cash flow
models and observable market data. The fair value is
determined as a termination price and consequently,
the value is not adjusted for credit risks.

Option instruments
The fair value is calculated using option models and
observable market data, such as option volatilities.
The fair value is determined as a termination price and
consequently, the value is not adjusted for credit risks.

Fair value hierarchy
Level 1: Fair values measured using unadjusted quoted
prices in an active market
Level 2: Fair values measured using valuation
techniques and observable market data
Level 3: Fair values measured using valuation
techniques and observable as well as significant
non-observable market data

The Group has invested in listed Danish mortgage bonds
underlying its mortgage debt. The reason for investing in
mortgage bonds is that the Group is able to achieve a
lower interest rate, compared with current market
interest rates on mortgage debt, by entering into a sale
and repurchase agreement on the mortgage bonds. The

aforementioned mortgage bonds have been
classified as fair value through other comprehensive
income.

The receipt of proceeds from these bonds create a
repurchase obligation which has been recognised
within short-term loans.

Table 4.6 Transfer of financial assets
(EURm)

2018
Mortgage bonds
Repurchase liability
Net position

2017
Mortgage bonds
Repurchase liability
Net position

Carrying
value

Notional
amount

461
-461
-

504
-498
6

455
-454
1

499
-497
2

Fair
value

461
-461
-

504
-498
6

108 ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements Notes

Note 4.7 Pension liabilities

Reduced pension liabilities

Pension liabilities consist primarily of defined benefit
plans in the UK and Sweden. The defined benefit plans
provide pension disbursements to participating
employees based on seniority and final salary. Net
pension liabilities were EUR 220 million, which
represents a decrease of EUR 57 million compared to
last year. The carrying value of defined benefit plans
improved in the UK primarily due to actuarial gains.

Pension plans in Sweden
The defined benefit plan in Sweden does not currently
require the Group to make cash contributions. The
recognised net liability was EUR 199 million, a decrease
of EUR 1 million compared to last year. An actuarial loss
of EUR 9 million was offset by currency translation.

These pension plans are contribution-based plans,
guaranteeing a defined benefit pension at retirement.
Contributions are paid by the Group. The schemes do
not provide any insured disability benefits. The plan
assets are legally structured as a trust and the Group
has control over the operation of the plans and their
investments.

These pension plans do not include a risk-sharing
element between the Group and the plan participants.

Pension plans in the UK
The recognised net pension asset in the UK was EUR
4 million, representing an improvement of EUR 51
million compared to last year. The improvement is
primarily related to actuarial gains of EUR 76 million,
due to a higher discount rate applied in assumptions
(+0.4%), and payments to the plans of EUR 15 million
while adverse movement in the value of plan assets
reduced the improvement of the overall position by
EUR 38 million. The Trustee agreed to sell all investments
in diversified growth funds due to relatively high
investment manager fees as well as the fact that
diversification can be obtained through individual
investments in different asset classes. Following a ruling
in the High Court in October 2018 regarding guaranteed
minimum pensions in the UK EUR 8 million was
recognized as an additional service cost.

109 ARLA FOODS ANNUAL REPORT 2018

Table 4.7.a Pension liabilities recognised on the balance sheet
(EURm)

2018
Present value of funded liabilities
Fair value of plan assets
Deficit of funded plans
Present value of unfunded liabilities
Net pension liabilities recognised on the balance sheet

Specification of total liabilities:
Present value of funded liabilities
Present value of unfunded liabilities
Total liabilities

Presented as:
Pension assets
Pension liabilities
Net pension liabilities

2017
Present value of funded liabilities
Fair value of plan assets
Deficit of funded plans
Present value of unfunded liabilities
Net pension liabilities recognised on the balance sheet

Specification of total liabilities:
Present value of funded liabilities
Present value of unfunded liabilities
Total liabilities

Sweden

Other

Total

208
-12
196
3
199

208
3
211

-
199
199

210
-11
199
1
200

210
1
211

1,231
-1,235
-4
-
-4

1,231
-
1,231

-4
-
-4

1,336
-1,289
47
-
47

1,336
-
1,336

36
-18
18
7
25

36
7
43

-
25
25

38
-20
18
12
30

38
12
50

1,475
-1,265
210
10
220

1,475
10
1,485

-4
224
220

1,584
-1,320
264
13
277

1,584
13
1,597

The defined benefit plans in the UK are administered
by an independent pension trust that invests deposited
amounts to cover future pension payments. The assets
under management amounts to EUR -1,235 million by
end of 2018 vs. EUR -1,289 million by end of 2017.

These pension plans are defined benefit final salary
schemes. The schemes are closed to both new entrants
and future accrual. Defined contribution schemes are in
place for other employees. Employer contributions are
determined with the advice of independent qualified
actuaries on the basis of tri-annual valuations. The
schemes do not provide any insured disability benefits.

The schemes are legally structured as trust-based
statutory sectionalized pension schemes. The Group has
limited control over the operation of the plans and their
investments. The trustees of the schemes (of which Arla
appoints the majority) set the investment strategy and
have established a policy on asset allocation to best
match the assets to the liabilities of the schemes.
The trustees appoint an independent external advisor
to the schemes who is responsible for advising on the
investment strategy and investing the assets. The
scheme is managed under a risk-controlled investment
strategy, which includes a liability driven investment
approach that seeks to match, where appropriate, the
profile of the liabilities. During 2018 the investment
portfolio has been significantly adjusted to improve the
asset/liability match, increase flexibility and at the
same time save investment manager fee’s without
jeopardising the expected return. By the end of 2018
the interest hedging of the liabilities was 57% (33% by
end of 2017) and the inflation hedge inflation linked
assets was 61% (59% by end of 2017), thereby reducing
the overall risk.

The pension plans do not include a risk-sharing element
between the Group and the plan participants.

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements NotesNote 4.7 Pension liabilities (continued)

Table 4.7.b Development in pension liabilities
(EURm)

2018

2017

Maturity of pension liability, at 31 December 2018
(EURm)

Maturity of pension liability, at 31 December 2017
(EURm)

Present value of liability at 1 January
Reclassification
New pension liability from acquired companies
Paid in by employees
Current service cost
Interest cost
Actuarial gains and losses from changes in financial assumptions (OCI)
Actuarial gains and losses from changes in demografic assumptions (OCI)
Benefits paid
Exchange rate adjustment
Present value of pension liability at 31 December

Table 4.7.c Development in fair value of plan assets
(EURm)

Fair value of plan assets at 1 January
Reclassification
Interest income
Return on plan assets, excluding amounts included in net interest
on the net defined benefit liability
Contributions to plans
Benefits paid
Administration expenses
Exchange rate adjustments
Fair value of plan assets at 31 December

The Group expects to contribute EUR 26 million to the plan assets in 2019 and
EUR 96 million in 2020-2023.

Actual return on plan assets:
Calculated interest income
Return excluding calculated interest
Actual return

110 ARLA FOODS ANNUAL REPORT 2018

1,597
-6
1
-
10
38
-69
4
-65
-25
1,485

1,679
-3
2
1
3
42
-4
0
-60
-63
1,597

600

500

400

300

200

100

600

500

400

300

200

100

2018

2017

0-1Y

1-5Y

5-10Y 10-20Y 20-30Y 30-40Y >40Y

0 -1Y

1-5Y

5-10Y 10-20Y 20-30Y 30-40Y >40Y

Sweden

Other

Sweden

Other

Table 4.7.d Sensitivity of pension liabilities
to key assumptions (EURm)

Impact on pension liabilities at 31 December
Discount rate +/- 10bps
Expected salary increases +/- 10bps
Life expectancy +/- 1 year
Inflation +/- 10 bps

2018
+
-14
2
59
15

2018
-
16
-2
-58
-14

2017
+
-19
2
64
17

2017
-
20
-2
-64
-17

1,320
-
32

-40
27
-55
-1
-18
1,265

1,310
-2
33

54
30
-50
-1
-54
1,320

32
-40
-8

33
54
87

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements NotesNote 4.7 Pension liabilities (continued)

Table 4.7.e Pension assets recognised
(EURm)

2018

2017

Table 4.7.g Recognised in other comprehensive income
(EURm)

Liability hedge portfolio
Debt vehicles
Bonds
Equity instruments
Properties
Infrastructure
Diversified growth funds
Other assets
Total assets

364
274
200
166
117
59
-
85
1,265

29%
21%
16%
13%
9%
5%
0%
7%
100%

163
224
154
165
100
70
355
89
1,320

12%
17%
12%
12%
8%
5%
27%
7%
100%

Table 4.7.f Recognised in the income statement for the year
(EURm)

2018

2017

Current service cost
Administration cost
Curtailments and settlements
Recognised as staff costs

Interest cost on pension liability
Interest income on plan assets
Recognised as financial cost

Total amount recognised in the income statement

10
1
-
11

38
-32
6

3
1
-
4

42
-33
9

Actuarial gains and losses on liabilities from changes in financial assumptions (OCI)
Actuarial gains and losses on liabilities from changes in
demographic assumptions (OCI)
Return on plan assets, excluding amounts included in net interest
on the net defined benefit liability
Re-measurements of defined benefit schemes

Table 4.7.h Assumptions for the actuarial calculations
(EURm)

Discount rate, Sweden
Discount rate, UK
Expected payroll increase, Sweden
Expected payroll increase, UK
Inflation (CPI), Sweden
Inflation (CPI), UK

2018

2017

-4

-40
25

54
58

2018

2017

2.4%
2.9%
2.3%
2.5%
1.9%
3.1%

2.5%
2.5%
2.3%
2.5%
1.9%
3.1%

111 ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements Notes
Note 4.7 Pension liabilities (continued)

Accounting policies

Uncertainties and estimates

The carrying amount related to defined benefit
pension plans is assessed based on a number of
assumptions, including discount rates, inflation rates,
salary growth and mortality. A small difference in actual
variables compared to assumptions and any changes
in assumptions can have a significant impact on the
carrying amount of the net liability.

earned at the balance sheet date) discounted to a
present value (the defined benefit liability), less the fair
value of assets held separately from the Group in
a plan fund.

The Group uses qualified actuaries to annually calculate
the defined benefit liability using the projected unit
credit method.

The balance sheet amount of the net obligation is
impacted by remeasurement, which includes the
effect of changes in assumptions used to calculate the
future liability (actuarial gain and losses) and the
return generated on plan assets (excluding interest).
Remeasurements are recognised in other
comprehensive income.

Interest cost for the period is calculated using the
discounted rate used to measure the defined benefit
liability at the start of the reporting period applied
to the carrying amount of the net liability, taking into
account changes arising from contributions and benefit
payments. The net interest cost and other costs
relating to defined benefit plans are recognised in the
income statement.

The provision primarily covers defined benefit plans in
the UK and Sweden.

Pension liabilities and similar non-current liabilities
The Group has entered post-employment pension plan
agreements with a significant number of current and
former employees. The post-employment pension plan
agreements take the form of defined benefit plans and
defined contribution plans.

Defined contribution plans
For defined contribution plans, the Group pays fixed
contributions to independent pension companies.
The Group has no obligation to make supplementary
payments beyond those fixed payments, and the risk
and reward of the value of the pension plan therefore
rests with the plan members, and not the Group.
Amounts payable for contributions to defined
contribution plans are expensed in the income
statement as incurred.

Defined benefit plans
Defined benefit plans are characterised by the Group’s
pension liabilities to make specific payments from the
date the plan member is retired, depending on, for
example, the member’s seniority and final salary. The
Group is subject to the risks and rewards associated with
the uncertainty that the return generated by the assets
are able to meet the pension liability, which are affected
by assumptions concerning mortality and inflation.

The Group’s net liability is the amount presented on the
balance sheet as pension liability.

The net liability is calculated separately for each defined
benefit plan. The net liability is the amount of future
pension benefits that employees have earned in current
and prior periods (i.e. the liability for pension payments
for the portion of the employee’s estimated final salary

112 ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements NotesTable 5.1.a Tax recognised in the income statement
(EURm)

2018

2017

Net deferred tax liabilities for 2018 comprise of gross
deferred tax liabilities of EUR 84 million mainly relate to
taxable temporary differences on intangible fixed assets,
property, plant and equipment and other temporary
differences. These are offset by deferred tax assets of
EUR 30 million on deductible temporary differences
pertaining to property, plant and equipment, tax losses
carried forward, and pension liabilities.

Current income tax
Current income tax on result for the year relating to:
Cooperative tax
Corporate income tax
Adjustment for current tax of previous years
Total current income tax costs

Deferred tax
Change in deferred tax for the year
Adjustment for deferred tax of previous years
Impact of changes in tax rates and laws
Total deferred tax costs/income

Total tax costs in the income statement

7
17
-2
22

20
1
-2
19

Table 5.1.b Calculation of effective tax rate
(EURm)

2018

2017

Profit before tax
Tax applying the statutory Danish corporate income tax rate
Effect of tax rates in other jurisdictions
Effect of companies subject to Cooperative taxation
Tax-exempt income, less non-deductible costs
Impact of changes in tax rates and laws
Adjustment for tax cost of previous years
Other adjustments
Total

22.0%
-2.7%
-15.5%
-2.4%
-0.6%
-0.3%
11.3%
11.8%

348
76
-9
-54
-8
-2
-1
39
41

22.0%
-4.7%
-18.8%
-2.6%
-
-1.9%
12.9%
6.9%

7
19
-3
23

2
-3
-
-1

321
71
-15
-61
-8
-
-6
41
22

Note 5.1 Tax

Current and deferred tax

Tax in the income statement
Tax costs increased to EUR 41 million, compared to
EUR 22 million last year. The underlying driver for the
increase in tax costs was changes in deferred tax for
the year arising in the UK and Finland

Current income tax
Current income taxes paid during 2018 totaled
EUR 29 million, which is similar to last year.

Deferred tax
Net deferred tax liabilities amounted to EUR 54 million,
which represents an increase of EUR 38 million
compared to last year. The movement in the year is
driven by the tax costs reported in the income
statement of EUR 20 million, an increase in deferred tax
liabilities totaling EUR 12 million, as a result of the full
consolidation of Svensk Mjölk ek för and Arla Foods
Ingredients S.A. and an increase in tax recognised in
other comprehensive income of EUR 7 million due to
a decrease in pension liabilities.

113 ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements Notes

Note 5.1 Tax (continued)

Table 5.1.c. Deferred tax
(EURm)

Deferred tax liabilities at 1 January
Deferred tax recognised in income statement
Deferred tax recognised in other comprehensive income
Acquisitions in connection with business combinations
Impact of change in tax rates
Exchange rate adjustments
Deferred tax liabilities at 31 December

Deferred tax, by gross temporary difference
Intangible assets
Property, plant & equipment
Provisions, pension liabilities and other assets
Tax losses carried forward
Other
Total deferred tax, by gross temporary difference

Recognised in the balance sheet as:
Deferred tax assets
Deferred tax liabilities
Total

The Group recognises deferred tax assets, including the
value of tax losses carried forward, where Management
assesses that the tax assets may be utilised in the
foreseeable future by offset against taxable income.
The assessment is performed on an annual basis and is
based on the budgets and business plans for future years.

The Group has recognised deferred tax assets in respect
of tax losses carried forward totaling EUR 8 million.
Temporary differences on which deferred tax assets have
not been recognised totaled EUR 51 million, of which
EUR 38 million related to tax losses carried forward.

114 ARLA FOODS ANNUAL REPORT 2018

2018

2017

Accounting policies

-16
-21
-7
-12
2
0
-54

-10
3
-7
8
-48
-54

30
-84
-54

-6
1
-11
0
-1
1
-16

-3
9
15
8
-45
-16

43
-59
-16

Tax in the income statement
Tax in the income statement comprises current tax and
adjustments to deferred tax. Tax is recognised in the
income statement, except to the extent that it relates to
a business combination or items (income or costs)
recognised directly in other comprehensive income.

Current tax
Current tax is assessed based on tax legislation for
entities in the Group subject to cooperative or corporate
income taxation. Cooperative taxation is based on the
capital of the cooperative, while corporate income tax is
assessed based on the company’s taxable income for
the year. Current tax comprises the expected tax
payable/receivable on the taxable income or loss for the
year, any adjustment to the tax payable or receivable in
respect of previous years, and for tax paid on account.

Deferred tax
Deferred tax is measured in accordance with the balance
sheet liability method on all temporary differences
between the tax base of assets and liabilities and their
carrying amounts in the consolidated financial
statements. However, deferred tax is not recognised on
temporary differences on initial recognition of goodwill,
or arising at the acquisition date of an asset or liability
without affecting either the profit or loss for the year or
taxable income, except for those arising from business
combinations.

Deferred tax is determined applying tax rates (and laws)
that have been enacted or substantially enacted by the
end of the reporting period and are expected to apply
when the related deferred tax asset is realised or
deferred tax liability is settled. Changes in deferred tax
assets and liabilities due to changes in the tax rate are
recognised in the income statement except for items
recognised in other comprehensive income.

Deferred tax assets, including the value of tax losses
carried forward, are recognised under other non-current
assets at the value at which they are expected to be
used, either by elimination in the tax of future earnings
or by offsetting against deferred tax payable in
companies within the same legal tax entity or
jurisdiction.

Deferred tax assets and liabilities are offset when there is
a legally enforceable right to offset current tax assets
and liabilities and when the deferred tax balances relate
to the same taxation authority. Current tax assets and tax
liabilities are offset where the entity has a legally
enforceable right to offset and intends either to settle on
a net basis, or to realise the asset and settle the liability
simultaneously.

Uncertainties and estimates

Deferred tax
Deferred tax reflects assessments of actual future tax
due on items in the financial statements, considering
timing and probability. These estimates also reflect
expectations about future taxable profits and the
Group’s tax planning. Actual future taxes may deviate
from these estimates due to changes to expectations
relating to future taxable income, future statutory
changes in income taxation or the outcome of tax
authorities’ final review of the Group’s tax returns.
Recognition of a deferred tax asset also depends on
an assessment of the future use of the asset.

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements NotesNote 5.2 Fees to auditors appointed by
the Board of Representatives

Note 5.3 Management remuneration
and transactions

Fees paid to EY

The fees to auditors are attributable to EY.

Table 5.2 Fees to auditors appointed by the Board of Representatives
(EURm)

2018

2017

Statutory audit
Other assurance engagements
Tax assistance
Other services
Total fees to auditors

1.4
0.1
0.8
0.5
2.8

1.4
-
1.3
0.7
3.4

Remuneration paid to management

The BoD’s remuneration is assessed and adjusted on
a bi-annual basis and approved by the Board of
Representatives. The last adjustment made was in 2017
and therefore the BoD’s remuneration was unchanged
in 2018. Principles applied to the remuneration of the
Board of Directors are described on page 43. Members
of the Board of Directors are paid for milk supplies to Arla
Foods amba, in accordance with the terms for the other
owners of the Company. Similarly, individual capital
instruments are issued the Board of Directors on the
same terms as to other owners.

Following the retirement of Executive Vice President
and Vice CEO, Povl Krogsgaard, in January 2018, the
Executive Board was in 2018 represented by the
Executive Director in solitary. The Executive Board
assumes the authority and responsibility for planning,
directing and controlling the Group’s activities. Principles
applied for the remuneration of the Executive Board,
Executive Management Team and other senior leaders
are described on page 43.

Table 5.3.a Management remuneration
(EURm)

Board of Directors
Wages, salaries and remuneration
Total

Executive Board/CEO
Fixed compensation
Pension
Other benefits
Short-term variable incentives
Long-term variable incentives
Total

2018

2017

1.3
1.3

1.5
0.2
-
0.1
0.3
2.1

1.3
1.3

2.2
0.2
0.1
0.6
0.2
3.3

115 ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements NotesNote 5.3 Management remuneration
and transactions (continued)

Table 5.3.b Transactions with the Board of Directors
(EURm)

2018

2017

Table 5.4 Contractual commitments and contingent liabilities
(EURm)

Purchase of raw milk
Supplementary payment regarding previous years
Total

Unsettled milk deliveries in trade and other payables
Individual capital instruments
Total

14.9
0.5
15.4

0.7
1.8
2.5

14.0
0.4
14.4

1.2
1.4
2.6

Guarantee commitments

0-1 years
1-5 years
Over 5 years
Operating rent and lease commitments

2018

2017

61
113
23
197

53
108
43
204

Note 5.4 Contractual commitments,
contingent assets and liabilities

Financial comment

The Group is party to a small number of lawsuits,
disputes and other claims. Management believes that
the outcome of these will not have a material impact on
the Group’s financial position beyond what is already
recognised in the financial statements.

As security for mortgage debt based on the Danish
Mortgage Act with a nominal value of EUR 815 million,
compared with EUR 817 million last year, the Group
provided security in property.

Commitments in relation to IT licenses and agreements on the purchase of property, plant and equipment was
EUR 148 million 31 December compared to EUR 132 million 31 December last year..

Uncertainties and estimates

The Group has entered into a number of lease agreements.
Management regularly assesses the substance of the
agreements in order to classify the lease agreements as
either financial or operating leases. The Group mainly
entered into lease agreements for standardised assets
that are short-term in relation to the asset’s useful lives.

As such, the lease agreements have been classified as
operating leases. Effective 1 January 2019 IFRS 16
Leasing standard will be applicable. Arla is currently
preparing for implementation of this standard. Refer to
note 5.6 for more detail.

Note 5.5 Subsequent events
after the balance sheet date

In December 2018, Arla signed an agreement with
Mondeléz International to acquire their Bahrain based
processed cheese business. The planned acquisition will
significantly strengthen Arla’s footprint in the Middle
East complimenting the existing activities with a local
state-of-the-art production site and a branded business
within the cheese category. Closing is dependent on

certain conditions to be fulfilled and is expected to take
place during the first half of 2019.

No other subsequent events with a material impact on
the financial statements occurred after the balance
sheet date.

116 ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements Notes

Note 5.6 General accounting policies

Consolidated financial statements
The consolidated financial statements included in this
annual report are prepared in accordance with
International Financial Reporting Standards (IFRS),
as adopted by the EU, and additional disclosure
requirements in the Danish Financial Statement Act for
class C large companies. Arla is not an EU public interest
entity as the Group has no debt instruments traded on a
regulated EU market place. The consolidated financial
statements were authorised for issue by the company’s
Board of Directors on 19 February 2019 and presented
for approval by the Board of Representatives on 27
February 2019.

The consolidated financial statements are prepared as a
compilation of the parent company’s and the individual
subsidiaries’ financial statements, prepared under the
Group’s accounting policies. Revenue, costs, assets
and liabilities, along with items included in equity of
subsidiaries are aggregated and presented on a
line-by-line basis. Intra-group shareholdings, balances
and transactions, as well as any unrealised income
and expenses arising from intra-group transactions
are eliminated.

The consolidated financial statements comprise Arla
Foods amba (parent company) and the subsidiaries in
which the parent company directly or indirectly holds
more than 50 per cent of the voting rights, or otherwise
maintains control to obtain benefits from its activities.
Entities in which the Group exercises joint control
through a contractual arrangement are considered to be
joint ventures. Entities in which the Group exercises a
significant but not a controlling influence, are considered
as associates. A significant influence is typically obtained
by holding or having at the Group’s disposal, directly or
indirectly, more than 20 per cent, but less than 50 per
cent, of the voting rights in an entity.

Unrealised gains arising from transactions with joint
ventures and associates, i.e. profits from sales to joint
ventures or associates and whereby the customer pays
with funds partly owned by the Group, are eliminated
against the carrying amount of the investment in
proportion to the Group’s interest in the company.
Unrealised losses are eliminated in the same manner,

but only to the extent that there is no evidence of
impairment.

The consolidated financial statements are prepared on
a historical cost basis, except for certain items with
alternative measurement bases, which are identified in
these accounting policies.

Translation of transactions and
monetary items in foreign currencies
For each reporting entity in the Group, a functional
currency is determined, being the currency used in the
primary economic environment where the entity
operates. Where a reporting entity transacts in a foreign
currency, it will record the transaction in its functional
currency using the transaction date rate. Monetary assets
and liabilities denominated in foreign currencies are
translated into the functional currency using the
exchange rate applicable at the reporting date.
Exchange differences are recognised in the income
statement under financial items. Non-monetary items,
for example property, plant and equipment which are
measured based on historical cost in a foreign
currency, are translated into the functional currency
upon initial recognition.

Translation of foreign operations
The assets and liabilities of consolidated entities,
including the share of net assets and goodwill of joint
ventures and associates with a functional currency other
than EUR, are translated into EUR using the year-end
exchange rate. The revenue, costs and share of the
results for the year are translated into EUR using the
average monthly exchange rate if this does not differ
materially from the transaction date rate. Foreign currency
differences are recognised in other comprehensive
income and accumulated in the translation reserve.

On partial divestment of associates and joint ventures,
the relevant proportional amount of the cumulative
foreign currency translation adjustment reserve is
transferred to the results for the year, along with any
gains or losses related to the divestment. Any repayment
of outstanding balance considered part of the net
investment is not in itself considered to be a partial
divestment of the subsidiary.

Adoption of new or amended IFRS
The Group implemented all new standards and
interpretations effective in the EU from 2018. None of
these newly adopted standards and interpretations had
an impact on the consolidated financial statements of
Arla. IASB issued a number of new or amended and
revised accounting standards and interpretations that
have not yet come into effect. Arla expects to incorporate
the new standards when they become mandatory.

IFRS 9 – Financial instruments
In November 2016, the EU endorsed IFRS 9 “Financial
Instruments”, which is effective for annual periods
beginning on or after 1 January 2018. IFRS 9 replaces IAS
39 and changes the classification and measurement of
financial assets and liabilities.

IFRS 9 introduces a logical classification of financial
assets based on the Group’s business model and its
underlying cash flow. Furthermore, a new “expected
loss”-model is introduced, as opposed to an incurred
credit loss model under IAS 39. The expected loss model
requires an entity to account for expected credit losses
and changes in those expected credit losses at each
reporting date to reflect changes in credit risk.

Furthermore, new requirements for hedge accounting
will be more closely aligned to the Group’s business risk
management policies. An assessment of the Group’s
current hedging relation- ships confirms that they will
qualify as continuing hedging relationships upon
application of IFRS 9.

The Group has applied IFRS 9 prospectively with the
initial application date of 1 January 2018. This means that
2018 figures are reported using IFRS 9 principles while
the comparative figures for 2017 are reported applying
IAS 39. Our analysis confirms that application of the new
standard did not have a material impact on recognition,
measurement and classification on financial assets and
liabilities. Due to immateriality no impacts on opening
balance are reported and no details on the previous
accounting policy applied was disclosed.

IFRS 15 – Revenue
IFRS 15 was issued in May 2014 and amended in April
2016 and establishes a five-step model to account for
revenue arising from contracts with customers. Under
IFRS 15, revenue is recognised at an amount that
reflects the consideration which an entity expects to be
entitled to, in exchange for transferring goods or services
to a customer.

Arla applies IFRS 15 Revenue from Contracts with
Customers with the start of the financial year 2018.
Implementation of the standard is finalized. Arla has
decided to apply the modified retrospective approach.

Arla sells consumer dairy products, ingredients and raw
milk to customers. The goods are sold based on the
respective contracts with customers.

Arla Foods has performed a detailed analysis on IFRS 15
and current accounting procedures. The analysis shows
that accounting policies within Arla Foods are compliant
with the new IFRS standard “Revenue from Contracts
with Customers”.

In preparing to adopt IFRS 15, Arla took the variable
considerations into account. Some contracts with
customers provide trade discounts, listing fees or volume
rebates. Arla recognises revenue from the sale of goods
measured at the fair value of the consideration received
or receivable, net of returns and allowances, trade
discounts and volume rebates. Such provisions give rise
to variable consideration under IFRS 15 and will be
required to be estimated at contract inception and
updated thereafter.

IFRS 15 requires the estimated variable consideration to
be constrained to prevent over-recognition of revenue.
Arla concluded that application of the constraint has no
significant effect on the revenue being deferred
compared to the previous standard.

The presentation and disclosure requirements in IFRS 15
are more detailed compared to the previous standard,
whereby several disclosure requirements in IFRS 15 are
new. Arla implemented the disclosures required
according to IFRS 15.

117 ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements Notes
Note 5.6 General accounting policies (continued)

Due to immateriality no impacts on the opening balance
are reported and no details on the previous accounting
policy applied were disclosed.

IFRS 16 Leases
IFRS 16 was issued in January 2016 and replaces IAS 17
Leases, IFRIC 4 Determining whether an Arrangement
contains a Lease, SIC-15 Operating Leases-Incentives
and SIC-27 Evaluating the Substance of Transactions
Involving the Legal Form of a Lease. IFRS 16 sets out the
principles for the recognition, measurement, presentation
and disclosure of leases and requires lessees to account
for all leases on-balance, similar to the accounting
treatment for finance leases under IAS 17. The standard,
which is effective on 1 January 2019 for Arla, will
significantly change the accounting treatment for lease
contracts that are currently treated as operational leases.

The standard requires that all lease contracts regardless
of type, with some exemptions, need to be capitalised as
an asset, representing the right to use the underlying
asset, with a matching lease liability, representing the
lease payments. The standard includes two recognition
exemptions for lessees – leases of ’low-value’ assets, for
example personal computers, and short-term leases, i.e.,
leases with a lease term of 12 months or less.

Annual leasing costs will be divided into two elements,
depreciation and interest costs, as opposed to the
current treatment whereby the annual costs relating to
operational lease agreements are expensed solely as
operating costs. This will have a positive impact on the
Group’s EBITDA and to a lesser extent on EBIT.

Furthermore, it is expected that the cash flow statement
will be impacted due to the current operational lease
payments. Operational lease payments are presently
disclosed as cash flow from operating activities and will
be disclosed as financing activities.

Arla will be required to remeasure the lease liability upon
the occurrence of certain events, for example a change in
the lease term or a change in future lease payments
resulting from a change in an index or rate used to
determine those payments. Arla will generally recognise
the amount relating to the remeasurement of the lease
liability as an adjustment to the right-of-use asset.
Furthermore, IFRS 16 requires more extensive disclosures
than its predecessor, IAS 17.

In 2018 Arla finalised the implementation of a new tool
to support Arla in accounting for leases from 2019.
Furthermore, procedures are implemented to secure the
completeness of the leasing obligations. Arla has done a
proper investigation of its existing leasing contracts to
estimate the expected impact from IFRS 16, therefore
the impact on the 2019 financial statements can be
estimated. According to expectation the majority of the
leasing portfolio, in amount of contracts, relates to
vehicles. Most the leasing contracts within Arla are
identified in the Denmark, the UK, Germany and Sweden.

Arla assessed the impact on the 2019 financial
statements of the adoption related to the new standard
based on a detailed analysis. The analysis indicates an
increase in total assets of approximately EUR 200 million.

Arla’s 2019 income statement will show a shift from
operating expenses to depreciation and interest at
approximately EUR 60 million. This will have an expected
increase of around 8 per cent on EBITDA and 1 per cent
on EBIT. It is expected that the net result will not be
significantly affected.

In accordance with IFRS 16, the annual operational lease
payment of approximately EUR 60 million in 2018 needs
to be presented as cash flow from financing activities, as
opposed to the current treatment as cash flow from
operating activities. This change in disclosure will
improve the cash flow from operating activities by
approximately 9 per cent.

Within the estimated effects on the 2019 financial
statements, Arla makes several assumptions and
judgements. The discount rates used for calculating
the present value of the lease assets is based on the
currencies of the leasing contract and the length of
a leasing contract. In addition, Arla uses their internal
mark-up on the discount rate. Extension options on
contracts will be assessed contract by contract and
will only be taken into account when it is reasonable
certain that they will be exercised.

Arla uses the practical expedient in accordance with IFRS
16 with respect to the recognition exemptions for low
value leases. Examples of low value leases include
printers, laptops etc. Short-term leases are those
identified as contracts with an initial term of less than
12 months. Arla also uses the practical expedient, in
accordance with IFRS 16:15, for vehicles, such that the

fixed service costs from the leasing amount are not
disclosed separately. Arla also uses the practical
transition expedient according to para-graph C3 of IFRS
16, such that Arla has not reassessed those contracts
with an initial date of application before 31 December
2018, as to whether a contract is, or contains, a lease at
the date of initial application.

The difference between the minimum lease payments
disclosed, in accordance with IAS 17 and IFRS, mainly
relate to the low value and short-term rents.

118 ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements Notes

Note 5.7 Group chart

Arla Foods amba

Arla Foods Ingredients Group P/S

Arla Foods Ingredients Energy A/S
Arla Foods Ingredients KK
Arla Foods Ingredients Inc.
Arla Foods Ingredients Korea, Co. Ltd.
Arla Foods Ingredients Trading (Beijing) Co. Ltd.
Arla Foods Ingredients S.A.

Country
Denmark
Denmark
Denmark
Japan
USA
Korea
China
Argentina

Arla Foods Ingredients Comércio de Produtos Alimentícios Ltda. Brazil

Arla Foods Ingredients Singapore Pte. Ltd.
Arla Foods Ingredients S.A. de C.V.

Arla Foods Holding A/S

Arla Foods Distribution A/S

Cocio Chokolademælk A/S

Arla Foods International A/S

Arla Foods UK Holding Ltd.
Arla Foods UK plc

Arla Foods GP Ltd.
Arla Foods Finance Ltd.
Arla Foods Holding Co. Ltd.

Arla Foods UK Services Ltd.
Arla Foods Nairn Ltd.

Arla Foods Ltd.

Arla Foods limited Partnership
Milk Link Holdings Ltd.

Milk Link Processing Ltd.

Singapore
Mexico
Denmark
Denmark
Denmark
Denmark
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
The Cheese Company Investments Ltd. UK
UK
UK

The Cheese Company Holdings Ltd.
The Cheese Company Ltd.

Milk Link (Crediton No 2) Ltd.

Cornish Country Larder Ltd.

Yeo Valley Dairies limited
Westbury Dairies Ltd.

Milk Link Investments Ltd.

119 ARLA FOODS ANNUAL REPORT 2018

Group
Equity
interest
(%)

100
100
100
100
100
100
100
100
100
100
100
100
50
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100

Currency
DKK
DKK
DKK
JPY
USD
KRW
CNY
USD
BRL
SGD
MZN
DKK
DKK
DKK
DKK
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP
GBP

Arla Foods (Westbury) Ltd.
Arla Foods Cheese Company Ltd.
Arla Foods Ingredients UK Ltd.
MV Ingredients Ltd. *

Arla Foods UK Property Co. Ltd.

Arla Foods B.V.
Arla Foods Comércio, Importacâo e Exportacão de
Productos Alimenticios Ltda.
Danya Foods Ltd.

AF A/S

Arla Foods Finance A/S

Kingdom Food Products ApS
Ejendomsanpartsselskabet St. Ravnsbjerg

Arla Insurance Company (Guernsey) Ltd.
Arla Foods Energy A/S
Arla Foods Trading A/S

Arla DP Holding A/S
Arla Foods Investment A/S

Arla Senegal SA.
Tholstrup Cheese A/S

Tholstrup Cheese USA Inc.

Arla Foods Belgium A.G.

Walhorn Verwaltungs GmbH (Under liquidation)

Arla Foods Ingredients (Deutschland) GmbH

Arla CoAr Holding GmbH

ArNoCo GmbH & Co. KG *

Arla Biolac Holding GmbH
Biolac GmbH & Co. KG *
Biolac Verwaltungs GmbH *

Arla Foods Kuwait Company LLC
Arla Kallassi Foods Lebanon S.A.L.
Arla Foods Qatar WLL
AFIQ WLL **
Arla Foods Trading and Procurement Ltd.
Arla Foods Sdn. Bhd.

Country
UK
UK
UK
UK
UK
Netherlands

Brazil
Saudi Arabia
Denmark
Denmark
Denmark
Denmark
Guernsey
Denmark
Denmark
Denmark
Denmark
Senegal
Denmark
USA
Belgium
Germany
Germany
Germany
Germany
Germany
Germany
Germany
Kuwait
Lebanon
Qatar
Bahrain
Hong Kong
Malaysia

Group
Equity
interest
(%)
100
100
100
50
100
100

Currency
GBP
GBP
GBP
GBP
GBP
EUR

BRL
SAR
DKK
DKK
DKK
DKK
DKK
DKK
DKK
DKK
DKK
XOF
DKK
USD
EUR
EUR
EUR
EUR
EUR
EUR
EUR
EUR
KWD
USD
QAR
BHD
HKD
MYR

100
75
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
50
100
50
50
49
50
40
51
100
100

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements Notes
Note 5.7 Group chart (continued)

Arla Foods Panama S.A.
Arla Foods Corporation
Arla Foods Ltd.
Arla Global Dairy Products Ltd.
TG Arla Dairy Products LFTZ Enterprise

TG Arla Dairy Products Ltd.

Arla Foods AB

Arla Gefleortens AB
Arla Oy

Massby Facility & Services Oy
Osuuskunta MS tuottajapalvelu **
Restaurang akademien Aktiebolag **
Vardagspuls AB
Arla Foods Russia Holding AB

Arla Foods LLC

Arla Foods Inc.

WNY Cheese Enterprise LLC **
Arla Foods Production LLC
Arla Foods Transport LLC
Arla Foods Deutschland GmbH

Arla Foods Verwaltungs GmbH
Arla Foods Agrar Service GmbH

Arla Foods Agrar Service Luxemburg GmbH
Arla Foods Agrar Service Belgien AG

Arla Foods LLC
Martin Sengele Produits Laitiers SAS
Team-Pack GmbH
Arla Foods France, S.a.r.l
Dofo Cheese Eksport K/S °

Dofo Inc.

Aktieselskabet J. Hansen

J.P. Hansen USA Incorporated

AFI Partner ApS
Arju For Food Industries S.A.E.

120 ARLA FOODS ANNUAL REPORT 2018

Group
Equity
interest
(%)
100
100
100
100
50
100
100
100
100
60
37
50
100
100
80
100
20
100
100
100
100
100
100
100
20
100
100
100
100
100
100
100
100
49

Currency
USD
PHP
GHS
NGN
NGN
NGN
SEK
SEK
EUR
EUR
EUR
SEK
SEK
SEK
RUB
USD
USD
USD
USD
EUR
EUR
EUR
EUR
EUR
RUB
EUR
EUR
EUR
DKK
USD
DKK
USD
DKK
EGP

Andelssmør A.m.b.a.
Arla Côte d’lvoire
Arla Foods AS
Arla Foods Bangladesh Ltd.
Arla Foods Dairy Products Technical Service (Beijing) Co. Ltd.
Arla Foods FZE
Arla Foods Hellas S.A.
Arla Foods Inc.
Arla Foods Logistics GmbH
Arla Foods Mayer Australia Pty, Ltd.
Arla Foods Mexico S.A. de C.V.
Arla Foods S.A.
Arla Foods S.a.r.l.
Arla Foods S.R.L.
Arla Foods SA
Arla Foods Srl
Arla Foods UK Farmers Joint Venture Co. Ltd.
Arla Global Financial Services Centre Sp. Z.o.o.
Arla Milk Link Limited
Arla National Foods Products LLC
Cocio Chokolademælk A/S
Hansa Verwaltungs und Vertriebs GmbH (Under liquidation)
Marygold Trading K/S °
Mejeriforeningen
PT Arla Indofood Makmur Dairy Import PMA.
COFCO Dairy Holdings Limited **
Svensk Mjölk Ekonomisk förening
Lantbrukarnas Riksförbund upa **

Country
Denmark
Ivory Coast
Norway
Bangladesh
China
UAE
Greece
Canada
Germany
Australia
Mexico
Spain
France
Dominican Republic
Poland
Italy
UK
Poland
UK
UAE
Denmark
Germany
Denmark
Denmark
Indonesia
British Virgin Irlands
Sweden
Sweden

Currency
DKK
XOF
NOK
BDT
CNY
AED
EUR
CAD
EUR
AUD
MXN
EUR
EUR
DOP
PLN
EUR
GBP
PLN
GBP
AED
DKK
EUR
DKK
DKK
IDR
HKD
SEK
SEK

Group
Equity
interest
(%)
98
51
100
51
100
100
100
100
100
51
100
100
100
100
100
100
100
100
100
40
50
100
100
91
50
30
75
24

* Joint ventures ** Associates
° According to Danish Act §5 the company does not make a statutory report
The Group also owns a number of entities without material commercial activities.

Country
Panama
Philippines
Ghana
Nigeria
Nigeria
Nigeria
Sweden
Sweden
Finland
Finland
Finland
Sweden
Sweden
Sweden
Russia
USA
USA
USA
USA
Germany
Germany
Germany
Luxembourg
Belgium
Russia
France
Germany
France
Denmark
USA
Denmark
USA
Denmark
Egypt

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements NotesStatement by the
Board of Directors and
the Executive Board

Peder Tuborgh
CEO

Peter Giørtz-Carlsen
Executive Board Member

Jan Toft Nørgaard
Chairman

Heléne Gunnarson
Vice Chairman

Viggo Ø. Bloch

Jonas Carlgren

Arthur Fearnall

Manfred Graff

Jan-Erik Hansson

Markus Hübers

Bjørn Jepsen

Steen Nørgaard Madsen

Torben Myrup

Johnnie Russell

Manfred Sievers

Simon Simonsen

Inger-Lise Sjöstrom

Håkan Gillström
Employee representative

Ib Bjerglund Nielsen
Employee representative

Harry Shaw
Employee representative

Today, the Board of Directors and the Executive Director
discussed and approved the annual report of Arla Foods
amba for the financial year 2018. The annual report
was prepared in accordance with International Financial
Reporting Standards as adopted by the EU and
additional disclosure requirements in the Danish
Financial Statements Act.

It is our opinion, that the consolidated financial
statements and the parent company financial
statements give a true and fair view of the Group’s
and the parent company’s financial position as at
31 December 2018 and of the results of the Group’s
and the parent company’s activities and cash flows for
the financial year 1 January to 31 December 2018.

In our opinion, management’s review of the annual
report includes a true and fair view of the developments
of the Group’s and the parent company’s financial
position, activities, financial matters, results for the year
and cash flow, as well as a description of the most
significant risks and uncertainties that may affect the
Group and the parent company.

We hereby recommend the annual report for adoption
by the Board of Representatives.

Aarhus, 19 February 2019

121 ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements Notes

Independent auditor’s report

To the owners of Arla Foods amba

Opinion
We have audited the consolidated financial statements
and the parent company financial statements of Arla Foods
amba for the financial year 1 January – 31 December 2018,
which comprise income statement, statement of
comprehensive income, balance sheet, statement of
changes in equity, cash flow statement and notes,
including accounting policies, for the Group and the
Parent Company. The consolidated financial statements
and the parent company financial statements are
prepared in accordance with International Financial
Reporting Standards as adopted by the EU and additional
requirements of the Danish Financial Statements Act.

In our opinion, the consolidated financial statements and
the parent company financial statements give a true and
fair view of the financial position of the Group and the
Parent Company at 31 December 2018 and of the results
of the Group’s and the Parent Company’s operations and
cash flows for the financial year 1 January – 31 December
2018 in accordance with International Financial
Reporting Standards as adopted by the EU and additional
requirements of the Danish Financial Statements Act.

Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (ISAs) and additional requirements
applicable in Denmark. Our responsibilities under those
standards and requirements are further described in the
“Auditor’s responsibilities for the audit of the consolidated
financial statements and the parent company financial
statements” (hereinafter collectively referred to as “the
financial statements”) section of our report. We believe
that the audit evidence we have obtained is sufficient
and appropriate to provide a basis for our opinion.

Independence
We are independent of the Group in accordance with the
International Ethics Standards Board for Accountants’
Code of Ethics for Professional Accountants (IESBA Code)
and additional requirements applicable in Denmark, and
we have fulfilled our other ethical responsibilities in
accordance with these rules and requirements.

122 ARLA FOODS ANNUAL REPORT 2018

Statement on the Management’s review
Management is responsible for the Management’s
review.

either intends to liquidate the Group or the Parent
Company or to cease operations, or has no realistic
alternative but to do so.

Our opinion on the financial statements does not cover
the Management’s review, and we do not express any
assurance conclusion thereon.

In connection with our audit of the financial statements,
our responsibility is to read the Management’s review
and, in doing so, consider whether the Management’s
review is materially inconsistent with the financial
statements or our knowledge obtained during the audit,
or otherwise appears to be materially misstated.

Moreover, it is our responsibility to consider whether the
Management’s review provides the information required
under the Danish Financial Statements Act.

Based on our procedures, we conclude that the
Management’s review is in accordance with the financial
statements and has been prepared in accordance with
the requirements of the Danish Financial Statements Act.
We did not identify any material misstatement of the
Management’s review.

Management’s responsibilities
for the financial statements
Management is responsible for the preparation of
consolidated financial statements and parent company
financial statements that give a true and fair view in
accordance with International Financial Reporting
Standards as adopted by the EU and additional
requirements of the Danish Financial Statements Act
and for such internal control as Management determines
is necessary to enable the preparation of financial
statements that are free from material misstatement,
whether due to fraud or error.

In preparing the financial statements, Management is
responsible for assessing the Group’s and the Parent
Company’s ability to continue as a going concern,
disclosing, as applicable, matters related to going
concern and using the going concern basis of accounting
in preparing the financial statements unless Management

Auditor’s responsibilities for the audit
of the financial statements
Our objectives are to obtain reasonable assurance as to
whether the financial statements as a whole are free
from material misstatement, whether due to fraud or
error, and to issue an auditor’s report that includes our
opinion. Reasonable assurance is a high level of
assurance, but is not a guarantee that an audit conducted
in accordance with ISAs and additional requirements
applicable in Denmark will always detect a material
misstatement when it exists. Misstatements can arise
from fraud or error and are considered material if,
individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users
taken on the basis of the financial statements.

As part of an audit conducted in accordance with ISAs
and additional requirements applicable in Denmark,
we exercise professional judgement and maintain
professional scepticism throughout the audit. We also:
Identify and assess the risks of material misstatement
of the financial statements, whether due to fraud or
error, design and perform audit procedures responsive
to those risks and obtain audit evidence that is
sufficient and appropriate to provide a basis for
our opinion. The risk of not detecting a material
misstatement resulting from fraud is higher than for
one resulting from error, as fraud may involve
collusion, forgery, intentional omissions,
misrepresentations or the override of internal control.
Obtain an understanding of internal control relevant
to the audit in order to design audit procedures that
are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness
of the Group’s and the Parent Company’s internal control.
Evaluate the appropriateness of accounting policies
used and the reasonableness of accounting estimates
and related disclosures made by Management.

Conclude on the appropriateness of Management’s
use of the going concern basis of accounting in
preparing the financial statements and, based on the
audit evidence obtained, whether a material
uncertainty exists related to events or conditions that
may cast significant doubt on the Group’s and the
Parent Company’s ability to continue as a going
concern. If we conclude that a material uncertainty
exists, we are required to draw attention in our
auditor’s report to the related disclosures in the
financial statements or, if such disclosures are
inadequate, to modify our opinion. Our conclusions are
based on the audit evidence obtained up to the date
of our auditor’s report. However, future events or
conditions may cause the Group and the Parent
Company to cease to continue as a going concern.
Evaluate the overall presentation, structure and
contents of the financial statements, including the
note disclosures, and whether the financial statements
represent the underlying transactions and events in a
manner that gives a true and fair view.
Obtain sufficient appropriate audit evidence regarding
the financial information of the entities or business
activities within the Group to express an opinion on the
consolidated financial statements. We are responsible
for the direction, supervision and performance of
the group audit. We remain solely responsible for our
audit opinion.

We communicate with those charged with governance
regarding, among other matters, the planned scope and
timing of the audit and significant audit findings,
including any significant deficiencies in internal control
that we identify during our audit.

Aarhus, 19 February 2019
ERNST & YOUNG
Godkendt Revisionspartnerselskab
CVR no. 30 70 02 28

Jesper Koefoed
State Authorised
Public Accountant
MNE no. 11689

Jens Weiersøe Jakobsen
State Authorised
Public Accountant
MNE no. 30152

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Primary Statements NotesGlossary

Arlagarden is the name of our quality assurance
programme.

EBIT is an abbreviation of earnings before interest and
tax, and a measure of earnings from operations.

Innovation pipeline is defined as the net incremental
revenue generated from innovation projects up to
36 months from their launch.

MYPC is an abbreviation for Arla’s largest product
category which contains’ milk, yoghurt, powder,
and cooking.

BEPS is an acronym referring to base erosion and profit
shifting. These are tax avoidance strategies that exploit
gaps and mismatches in tax rules to artificially shift profits
to low or no-tax locations.

Brand share measures the revenue from
strategic brands as a proportion of total revenue, and is
defined as the ratio of revenue from strategic branded
products and total revenue.

BSM is an abbreviation of the product category
containing butter, spreads, and margarine.

CAPEX is an abbreviation of capital expenditure.

Capacity cost is defined as the cost for running
the general business, and includes staff cost,
maintenance, energy, cleaning, IT, travelling and
consultancy etc.

Carbon sequestration refers to a natural or artificial
process by which carbon dioxide is removed from the
atmosphere and held in solid or liquid form.

CPI is an abbreviation of Consumer Price Index.

Digital engagement is defined as the number of
interactions consumers have across digital channels The
interaction is measured in a number of different ways, for
example, by viewing a video on all media channels for
more than 10 seconds, visiting a webpage, commenting,
liking or sharing on our social media channels.

EBITDA is an abbreviation of earnings before interest,
tax, depreciation and amortisation from ordinary
operations.

EBIT margin measures EBIT as a percentage of total
revenue.

Effie-awards are known by advertisers and agencies as
the pre-eminent award in the industry, and recognize any
and all forms of marketing communication that
contribute to a brand’s success.

EMEA is an acronym referring to Europe, Middle-East
and Africa.

Equity ratio is the ratio between equity excluding
minority interests and total assets, and is a measure of
the financial strength of Arla.

FMCG is an acronym for fast-moving consumer goods.

Free cash flow is defined as cash flow from operating
activities after deducting cash flow from investing
activities.

HDPE-plastic is a thermoplastic polymer produced
from the monomer ethylene. With a high
strength-to-density ratio, HDPE is used in the
production of plastic bottles, corrosion-resistant piping,
geomembranes and plastic lumber.

Interest cover is the ratio between EBITDA and
net interest costs.

International share of business is defined as the
revenue from the zone International as a percentage
of the revenue from the zones International and Europe.

Lactalbumin, also known as “whey protein”, is the
albumin contained in milk and obtained from whey.

Leverage is the ratio between net interest-bearing debt
inclusive of pension liabilities and EBITDA. It enables
evaluation of the ability to support future debt and
obligations; the long-term target range for leverage is
between 2.8 and 3.4.

MENA is an acronym referring to the Middle East and
North Africa.

MFGM refers to milk fat globule membrane, which is a
complex and unique structure composed primarily of
lipids and proteins that surrounds milk fat globule
secreted from the milk producing cells of humans and
other mammals.

Milk volume is defined as total intake of raw milk
in kg from owners and contractors.

M&A is an abbreviation of mergers and acquisitions.

Net interest-bearing debt is defined as current and
non-current interest-bearing liabilities less securities,
cash and cash equivalents, and other interest-bearing
assets.

Net interest-bearing debt inclusive of pension
liabilities is defined as current and non-current
interest-bearing liabilities less securities, cash and cash
equivalents, and other interest-bearing assets plus
pension liabilities.

OECD refers to the Organisation for Economic
Cooperation and Development.

On-the-go refers to food consumed while on the go, and
also to packaging solutions supporting this trend of food
consumption.

Performance price for Arla Foods is defined as the
prepaid milk price plus net profit divided by total
member milk volume intake. It measures value creation
per kg of owner milk including retained earnings and
supplementary payments.

PET is an acronym for Polyethylene Terephthalate
and it is best known as the clear plastic used for water
and soda bottle containers. As a raw material, PET is a
petroleum-based product that is globally recognized as
a safe, lightweight, and flexile material that is also 100%
recyclable.

123 ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements
Trading share is a measure for the total milk
consumption for producing commodity products relative
to the total milk consumption, i.e. based on volumes.
Commodity products are sold with lower or no value
added, typically via business-to-business sales for other
companies to use in their production as well as via
industry sales of cheese, butter, or
milk powder.

UHT is an abbreviation for ultra-high temperature (UHT)
processing, which is a food processing technology that
sterilises liquid food, for example milk, by heating it above
135 °C.

Value-added protein segment contains products with
special functionality and compounds, compared to
standard protein concentrates with a protein content of
approximately 80 per cent.

Volume driven revenue growth is defined as revenue
growth associated with growth in volumes while keeping
prices constant.

Whey protein hydrolysate is a concentrate or isolate in
which some of the amino bonds have been broken by
exposure of the proteins to heat, acids or enzymes. This
pre-digestion makes hydrolysed proteins more rapidly
absorbed in the gut than either whey concentrates or
isolates.

Whey protein isolate is a dietary supplement and food
ingredient created by separating components from whey.

WMP is an abbreviation referring to whole
milk powder.

Glossary (continued)

Prepaid milk price describes the cash payment farmers
receive per kg milk delivered during the settlement
period.

Private label refers to retail brands, which are owned by
retailers but produced by Arla based on contract
manufacturing agreements.

Profit margin is a measure of profitability. It is the
amount by which revenue from sales exceeds costs in
a business.

Profit share is defined as the ratio between profit for
the period allocated to owners of Arla Foods, and total
revenue.

SEA is an acronym referring to South-East Asia.

SMP is an abbreviation of skimmed milk powder.

Net working capital is the capital tied up in inventories,
receivables, and payables including payables for owner
milk.

Net working capital excluding owner milk
is defined as capital that is tied up in inventories,
receivables, and payables excluding payables for owner
milk.

SEA is an acronym for South East Asia.

Strategic brands are defined as products sold under
branded products such as Arla®, Lurpak®, Castello® and
Puck®.

Strategic branded volume driven revenue growth is
defined as revenue growth associated with growth in
volumes from strategic branded products while keeping
prices constant.

124 ARLA FOODS ANNUAL REPORT 2018

Project management: Corporate external reporting, Arla. Copy, design and production: We Love People. Translation:Semantix.
Photos: Jens Bangsbo, Hans-Henrik Hoeg and Arla. The annual report is published in English, Danish, Swedish, German and French.
Only the original English text is legally binding. The translation has been prepared for practical purposes.

Financial statements of the parent company
Under section 149 of the Danish Financial Statements Act, these consolidated financial statements represent an extract of Arla’s
complete annual report. In order to make this report more manageable and user-friendly, we publish Group consolidated financial
statements without the financial statements of the parent company, Arla Foods amba. The annual report of the parent company is an
integrated part of the full annual report and available on www. arlafoods.com. Profit sharing and supplementary payment from the
parent company are set out in the equity section of the consolidated financial statements. The full annual report contains the
statement from the Board of Directors and the Executive Board as well as the independent auditor’s report.

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements Corporate calendar

Financial reports and major events

125 ARLA FOODS ANNUAL REPORT 2018

27-28 February
Board of Representatives meeting

1 March
Publication of the consolidated annual report for 2018

15 May
Board of representatives meeting – Election

29 August
Publication of the consolidated half-year report for 2019

8-9 October
Board of Representatives meeting

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements Arla Foods amba
Sønderhøj 14
DK-8260 Viby J.
Denmark
CVR no.: 25 31 37 63

Arla Foods UK plc
4 Savannah Way
Leeds Valley Park
Leeds, LS10 1 AB
England

Phone +45 89 38 10 00
E-mail arla@arlafoods.com

Phone +44 113 382 7000
E-mail arla@arlafoods.com

www.arla.com

www.arlafoods.co.uk

126 ARLA FOODS ANNUAL REPORT 2018

Management Review Our Strategy Our Brands and Commercial Segments Our Governance Our Responsibility Our Financial Review Consolidated Financial Statements