Transforming for the future

CONSOLIDATED ANNUAL REPORT

2018

Transforming for the future

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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

032018 Performance at a glance 04Message from the Chairman

of the Board of Directors 06Message from the

Chief Executive Officer 08Highlights 10Five year financial overview 11Essential business priorities for 2018

Our Strategy 13Who we are 14Our business model 15Good Growth 2020 16Embracing change 18Our risk landscape 20Preparing for Brexit 21Our transformation programme, Calcium 24Essential business priorities for 2019

Our Governance 38Governance framework 40Executive Management Team 42Board of Directors 43Management Remuneration

Our Responsibility 45Our Code of Conduct 46Our compliance activities 47Our tax affairs 48Leading the sustainability agenda 49Sustainable dairy farming 50Sustainability highlights 2018 51Arlag?rden? 52Diversity and inclusion

Our Financial Review 54Market overview 56Financial performance 62Financial outlook

Our Brands and Commercial Segments 26Arla? 27Lurpak? 28Castello? 29Puck? 30 Milk based beverages 31Europe 33International 35Arla Foods Ingredients 36Trading

Consolidated Financial Statements

66Primary financial statements 75Notes 121Statement by the Board of Directors

and the Executive Board

Endorsement 122Independent auditor's report

123Glossary 125Corporate calendar

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

2018 Performance at a glance

Revenue

BILLION EUR

10.4 2018

10.3 2017 9.6 2016

Performance price

EUR-CENT/KG

36.4

38.1 36.4

30.9 2016

2017 2018

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.

3 ARLA FOODS ANNUAL REPORT 2018

Milk volume

Profit share**

13.9 BILLION KG

2018

13.9

2017

13.9

2016

13.9

2.8% OF REVENUE

2018 2017 2016

2.8% 2.8%

3.6%

Target 2018 2.8 - 3.2%

114 MILLION EUR

2018

114

Target 2018: 30 million

Strategic branded volume driven revenue growth

3.1%

2018 2017 2016

3.1% 3.0%

5.2%

Target 2018 2.5 - 3.5%

Brand share

International share*

Leverage

45.2% 19.6% 2.4

2018 2017 2016

45.2% 44.6% 44.5%

Target 2018 >45%

2018 2017 2016

19.6% 20.2% 19.7%

Target 2018 >20%

2018 2017 2016

2.4 2.6

2.4

Target 2018 2.8 - 3.4

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.

4 ARLA FOODS ANNUAL REPORT 2018

MESSAGE FROM THE CHAIRMAN

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

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 ?ke 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 ?ke for the effort he put in to this and for all he has contributed to our company during his over thirty

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 Arlag?rden?.

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 N?rgaard 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

2018 2017 2016

36.4 38.1

30.9

5 ARLA FOODS ANNUAL REPORT 2018

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