Creating the future of dairy

Transcription

1 CONSOLIDATED HALF-YEAR REPORT Creating the future of dairy Arla Foods amba Sønderhøj 14 DK-8260 Viby J. Denmark CVR no.: Arla Foods UK plc 4 Savannah Way Leeds Valley Park Leeds, LS10 1 AB England Phone arla@arlafoods.com Phone arla@arlafoods.com

2 The global dairy industry has never been more competitive than it is today, and the best innovator wins. We are investing heavily in innovation to respond to the global demand for natural dairy products and to create better returns for our farmer owners. The work that will take place at our new Innovation Centre is crucial to our success. Peder Tuborgh, CEO Content Management review 04 performance at a glance 06 Message from the Chairman of the Board of Directors, Åke Hantoft 07 Message from the Chief Executive Officer, Peder Tuborgh 08 Enabling Good Growth Essential business priorities for 10 Highlights 12 Opening the door to our future 14 Market overview 15 Financial review 19 Financial outlook Consolidated financial statements 21 Income statement 22 Balance sheet 23 Cash flow statement 24 Revenue 25 Costs 26 Non-current assets 27 Net working capital 27 Cash flow 28 Equity 28 Net interest-bearing debt 30 Glossary 31 Corporate calendar The half-year report has not been audited or reviewed by the Group s auditors. Arla s new global Innovation Centre which opened in May. Refer to page 12. Project management: Corporate Finance, Arla. Copy, design and production: We Love People. Translation: Textminded. Photos: Jens Bangsbo and Arla.

3 4 ARLA FOODS HALF-YEAR REPORT MANAGEMENT REVIEW performance at a glance BILLION KG 7.1 HALF-YEAR Performance price % 4.9 Strategic branded volume driven revenue growth 1.0% OF REVENUE % ** 2.3% 2.1% 3.1% 6.1% 1.0% Target EUR billion Target % Target 1-3% Brand share International share* Trading share* 44.1% 20.1% 20.6% EUR-CENT/KG 7.2 Profit share*** BILLION EUR 5.1 Milk volume Revenue 41.5% 44.5% 22.9% 44.1% 18.1% 19.7% 20.1% 22.5% 20.6% HALF-YEAR HALF-YEAR 7.0 Target >45% Target >20% Target <20% Conversion cost Scalability Leverage > ** HALF-YEAR ** All targets are based on full-year results. Performance on track * Trend on track Target challenged International share is based on retail and foodservice revenue, excluding revenue from third party manufacturing (TPM), Arla Foods Ingredients and trading activities. Trading share is based on milk consumption. ** Excluding gain from sale of Rynkeby. *** Based on profit allocated to owners of Arla Foods amba. Target <100 >2.0 >2.0 >2.0 Target >2.0 Target

4 6 ARLA FOODS HALF-YEAR REPORT MANAGEMENT REVIEW 7 MESSAGE FROM THE CHAIRMAN OF THE BOARD OF DIRECTORS MESSAGE FROM THE CHIEF EXECUTIVE OFFICER Moving in the right direction The improvement in the milk price was much needed and, six months into the year, we have a reasonable and competitive milk price. However, more must come and the good times have to last longer than in recent years. Changing market dynamics present new opportunities Arla continues to develop according to our strategy, Good Growth 2020, as the Executive Management Team emphasises key activities to drive improved performance. Higher sales prices, continued brand growth and innovation have driven Arla s business in the first half of. Since 12 months ago, Arla has improved its prepaid milk price to its farmer owners by 33.7 per cent and delivered a performance price at 35.8 EUR-cent/kg in the first half of. This was an anticipated and much needed relief, coming from a very low level in. However, pressure remains on the business to further improve returns through the milk price. Recently we have seen fat prices increasing and they are outperforming protein prices for the first time. This development is being driven by a significant change in market demand. Investing in adding value In 2013 the Board of Directors made a major decision to invest in a state-of-the-art Innovation Centre which opened in May this year. However, great innovation is not achieved by simply building an Innovation Centre. Innovation comes from being open-minded and prepared to take risks. It is about doing things differently, stepping out of our comfort zone and having the confidence to try new things. Arla farmers do this and innovating for success is part of our history. Back in the 1880s, an open mindset led farmers to unite in local dairy cooperatives. Our ancestors trusted the cooperative s ability to innovate and sell products. At the same time, they studied and educated themselves in how to improve milk quality and yield. All of this increased the value of products and the returns from sales, and this continues to be the foundation of our business today. Documenting our high standards Consumers and customers are increasingly interested in the origin of our products, specifically what we feed our cows and how we treat them. In response to this, we are developing the certification of our milk, Arlagården Plus. It is a database capturing farm data that enables us to provide fact-based insights about the dedication of our farmers and our high on-farm standards. An evolving cooperative This spring we have seen the first concrete outcome of our Owner Strategy work. The Board of Representatives adopted the Articles of Association to reflect an aligned democratic structure across owner countries. Following this, the first elections in our new democratic structure took place. I am proud that more than 3,000 of our 11,281 owners participated in the local meetings and elections, and in doing so, exercised their opportunity to influence and support our Arla cooperative. Outlook towards year-end The next big step is to pave the way for direct membership for our owners in Central Europe and the UK. This will finalise the journey we embarked on several years ago, when we merged with companies outside Scandinavia. Looking ahead to the second half of the year, there are clear expectations that Arla will continue to embrace the market opportunities that are opening up and, as farmer owners, we are looking forward to following these developments in the coming months. ÅKE HANTOFT Chairman of the Board of Directors Performance price EUR-CENT/KG Arla entered into with an improving prepaid milk price to our farmer owners. While the global markets lost some momentum in March, which we had to reflect in our milk price, they stabilised during May and June, enabling a significant increase in the milk price to owners. Consequently, we concluded the first half of with a milk price on a strong level. Positive turn in the market The key driver of positive developments in the global market is that prices for fat are rising. For the first time ever, fat is more valuable than protein. The change is driven by low or non-existing butter stocks and an increasing consumer trend and demand for richer dairy products. If this continues, it will prompt a fundamental change in the dairy market and in turn our production and product management. As a result of the market development at the end of and the beginning of, we have reacted by trading more industry products in the first half of than was initially anticipated. Growing our brands While we have consciously focused on driving value rather than volume, we are continuing to grow our brands. We remain fully committed to developing our branded product portfolio in order to strengthen our market positions. An example is the launch of our campaign in the US, in which we are promoting Arla s core values, including health and naturalness. These messages are resonating with American consumers Innovation is in our DNA Another business milestone achieved during the first half of was the opening of our global Innovation Centre in May. This is a clear signal to our consumers, customers and business partners that we are leading the way in terms of taking dairy into the next era. The great work already coming out of the Innovation Centre supports our vision of creating the future of dairy, as well as our ability to generate good returns for our owners. Market developments In line with our strategy, Good Growth 2020, our International business continues to develop positively. In particular, I am pleased to report that the potential of South East Asia and Africa is starting to unfold. In Europe, the UK continues to be Arla s biggest market. It is a strong underlying business and we continue to develop our product portfolio and increase brand awareness. However, as a result of the Brexit referendum, the Group is being negatively affected by exchange rates. Brexit negotiations have now begun and we are engaging in dialogues with key stakeholders to ensure that our position as a European business is made clear. Free movement of people and goods are key to our business, as is ensuring a sustainable future for the British dairy industry and farmers. Expectations for the full year The improving market conditions, driven by increasing fat values, particularly in Europe over the recent months, are indeed good news. The second half of should be even stronger and we anticipate that both sales and consumer prices, as well as milk volumes will increase in the months to come. PEDER TUBORGH CEO

5 8 ARLA FOODS HALF-YEAR REPORT MANAGEMENT REVIEW 9 Enabling Good Growth 2020 Essential business priorities for Arla wants to develop our role as a global food company that adds value to peoples lives through natural nutrition and responsible operations. The Good Growth 2020 strategy is our response to the changing world around us where supply and demand for milk are increasingly geographically detached, combined with the occurrence of new demographic realities and fast developing consumer trends. By excelling in eight categories, focusing on six regions and winning as ONE Arla, we strive to achieve global growth and create value for our farmer owners towards To achieve our long-term strategy, we need a short-term action plan. The essential business priorities are an enabler for our strategy, Good Growth 2020, as they consist of critical areas that we should prioritise in the short-term on our journey to success. In order to continuously deliver strong results for our owners, the Executive Management Team determines our Essentials each year, subject to approval by the Board of Directors. The Essentials are a set of clear and aligned business priorities, aiming to support the growth agenda and direction for the business set out in our strategy. Our vision Create the future of dairy to bring health and inspiration to the world, naturally. EXCEL in eight categories FOCUS on six regions Our identity Healthy, natural, responsible and cooperative growth. WIN as ONE Arla Our mission To secure the highest value for our farmers milk while creating opportunities for their growth. Deliver price increases and drive margin focus During the first half of, we proactively managed prices across all European and International markets and categories, supported by improved price management analytics and processes. This was achieved through solid commercial and financial discipline, and ensured a competitive milk price for our owners. Make leadership matter in the milk, yogurt and powder category The first half of showed positive development for Arla in driving market leadership in our biggest product category MYPC, with satisfactory growth and successful product launches of specialty offerings such as organic, lactose-free, skyr, and protein. We also continued to improve our position with other innovations and non-genetically modified feed. Drive bold brand growth and bold innovation We maintained focus on growing brands to improve the overall profitability of the business. With 44.1 per cent of sales coming from Arla, Lurpak, Castello and Puck in the first half of, we are on track towards our goal of a brand share greater than 45 per cent by Our new global Innovation Centre will allow us to boost our innovation pipeline to support further branded growth. Partner for growth with leading customers In the first half of, we worked hard to deliver on the ambition to strengthen the customer-centricity of our business and win with leading customers. This required a special focus on growth, profitability, customer category collaboration, and delivery service, amongst others. Within foodservice we successfully launched a new organisation in Europe. 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. Analysing consumer needs and trends and matching these to our own strengths, we identified eight product categories that are the core focus for our efforts to shape the dairy market. By offering innovative products with natural ingredients, great taste and good nutrition, we are making it easier for consumers to live healthy lives. Our key categories are milk and powder; milk-based beverages; spreadable cheese; yogurt; butter and spreads; specialty cheeses; mozzarella and ingredients. FOCUS on six regions The 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 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-Saharan Africa, whilst further engaging in opportunities in the US and Nigeria. The six regions are Europe, Middle East and North Africa, Sub-Saharan Africa, China and South East Asia, USA, and Russia. WIN as ONE Arla Arla has grown significantly in Europe with mergers and acquisitions in Central Europe, the UK and Sweden. The past few years have been spent aligning the different companies into ONE, thereby harvesting the synergies that the mergers created. With Good Growth 2020, we will take this unity to the next level. Arla s ambition is that all our 18,751 employees work from ONE strong common platform. We want to create ONE global Arla where we actively use each other s different competencies and, in so doing, contribute to our success. Control costs, drive operational efficiencies and release cash Build leading market positions in International Our global categories and brands continued to grow in markets outside of Europe, and we expanded market shares across our focus regions. Across the Middle East and North Africa, Sub-Saharan Africa, the Americas, China and South-East Asia, and Russia and Others, this was driven by strengthened relevance with consumers, increased market investments, as well as local partnerships. Strengthen the important German market position The UHT business remained under significant pressure, hence the profitability was challenged. Our commercial bets in Germany focused on managing prices, strengthening our branded positions as well as improving our operational basics. Accelerating the value journey in Arla Foods Ingredients In, the Ingredients business continues to deliver growth in high-value added products. Focus is on continued transformation of existing products to higher-value specialties, through new investments and focused research and development efforts. Furthermore, Arla Foods Ingredients is working with potential partners to increase the supply of raw materials. While lower milk volumes and increasing mix complexity of our branded portfolio challenged conversion cost in supply chain, we delivered on scalability above 2.0. Financial leverage was delivered within the long-term target range of 2.8 to 3.4. As a consequence of the significantly increasing milk price, working capital was impacted by higher inventory and receivable positions. Performance on track Trend on track Target challenged

6 10 ARLA FOODS HALF-YEAR REPORT MANAGEMENT REVIEW Staying strong with Arla Protein Supporting consumers to live an active and healthy lifestyle, Arla Protein drinks launched into six new markets including Middle East and North Africa and Germany and are now available in 14 markets worldwide. In the first half of it delivered a strong volume driven revenue growth of 31.6 per cent. Highlights Grand opening of the Arla Innovation Centre Arla s new state-of-the-art Innovation Centre officially opened and will play a pivotal role in the pursuit of our strategy by adding more value-added products to the market. Chefs, scientists, consumers and customers collaborate at the centre to redefine trends and technologies that shape worldwide dairy. Read more on page 12. Arla improved the shape of our business in the first half of by growing our brands, pursuing innovation and making key investments. Strong efforts across all segments of our business contributed to new product launches, solid branded growth and exciting initiatives as we continue to fulfil our Good Growth 2020 strategy. You are not a cook until you cook The global Lurpak campaign Game on Cooks reminds sofa chefs in the UK, Sweden, Greece and Australia of the thrills to be had in the kitchen. This is Lurpak s most digital campaign ever and 350 million food lovers have seen our buttery digital content this half-year. OOK YOU RE NOT A C UNTIL YOU C OOK GOOD FOOD DESERVES LURPAK Arla enters new and FReSH initiative Arla teamed up with partners to launch the Food Reform for Sustainability and Health (FReSH) programme, which aims to define guidelines on sustainable diets, redefine food production, reshape food consumption and evaluate a sustainable footprint. Two new members appointed to the Board of Directors Two new members joined the Board for the period to 2019, Inger-Lise Sjöström and Simon Simonsen, replacing two members not seeking re-election. Following the election, the Board reappointed Åke Hantoft as Chairman and Jan Toft Nørgaard as Vice Chairman. Live unprocessed After identifying a huge growth opportunity in the US dairy aisle and in our pursuit of Good Growth 2020, Arla in launched the Live UnprocessedTM campaign across the US. The campaign advocates making cheese the simple way. It is about starting a conversation about what good food is. ONE quality model introduced A common set of milk quality standards for all Arla farmers was introduced, ensuring all owners work to the same quality parameters which ensures milk quality and milk production of the highest caliber. The big skyr adventure Skyr sales have grown more than 200 per cent since Following the introduction of skyr in the UK, Germany and the Netherlands, sales outside Denmark are now making up half of the skyr business. Boosting profitability with new investment plan Arla aims to invest EUR 335 million in production sites compared to EUR 263 million last year, thereby continuing the relentless pursuit of our strategy in producing branded high-quality product ranges for Europe and emerging markets. Puck launches Cheddar Cream Cheese Spread The new winning recipe launched in March in Middle East and North Africa is supported by a popular campaign honouring the everyday chef. Puck consulted with more than 400 consumers to develop the best tasting cheddar spread in the region, and succeeded! 12 MILLION EUR Invested in an upgrade of AKAFA site. Investing in high-quality child nutrition Arla aims to be among the world s leading dairy companies within the high-growth child nutrition category, investing EUR 12 million in an upgrade of our AKAFA production site in Denmark, which is essential in a category where quality is the key differentiator. Proudly farmer-owned Our farmer-owned campaign raises consumer awareness, differentiates us from competitors and instills higher consumer trust in our products. To date we have integrated the marque on 90 per cent of all Arla branded packaging, displayed on more than 900 different products. Farmer owned campaign is going strong Starbucks continues double digit growth streak The Starbucks brand is off to a strong start in, delivering 21.2 per cent branded volume driven revenue growth year to date. This was fueled by a lot of activities across all markets, including the successful launch of Skinny Latte lactose free with no added sugar, targeting millennial consumers. 11

7 12 ARLA FOODS HALF-YEAR REPORT MANAGEMENT REVIEW 13 Opening the door to our future Arla proudly opened the doors to its new Innovation Centre in May this year. The trends, technologies and products that will shape the global dairy category in the future will be created hand-in-hand with chefs, scientists, consumers and customers at Arla s new state-of-the-art global centre, built in the heart of one of the world s fastest growing food clusters. Our systematic approach to health is an integral part of our collaborations and in our product innovation. Everyone is focused on how we can help people live healthier lives and give as many people as possible access to natural, nourishing dairy products. Sven Thormahlen, Senior Vice President of Research and Development in Arla Innovation at Arla s core Arla has put innovation at the core of its growth plans for the next decade, aiming to be a collaborative innovator and kick-starting this ambition with our new global Innovation Centre in Aarhus, which was officially opened on the 16th May by Her Royal Highness Crown Princess Mary of Denmark. Arla s Innovation Centre will play a pivotal role in building strong brands with our consumers whilst also winning consumer preferences. It is a central part to our strategy, Good Growth 2020, by adding more value-added products to our markets around the world. Arla will also work with scientists and universities on research within a number of areas such as dairy farming, prevention of lifestyle diseases, innovative packaging and technologies that can make it easier to transport milk and fresh dairy products across continents. More than a building The Innovation Centre is much more than a building; it is a new way of looking at innovation. The centre allows us to elevate innovation to a new level, exciting and serving our consumers. A number of state-of-the-art features include: Customer Collaboration Lab The Customer Collaboration Lab s technology allows us to simulate shelf space and design store environments specific to key customers, providing a direct look into their aisles. This allows us to simulate what the future in the stores should look like. In this area we play a role as category champions. Pilot facility Modern, state-of-the art laboratories allow us to make all product prototypes that we can make in a dairy, for example cheese, fermented yogurt, mozzarella etc. The facility enables innovation processes to take place at a vastly accelerated pace, which can quickly incubate new ideas and flavours. A quicker road from idea to finished product is of high strategic value to many of Arla s customers, where innovative edge is a key differentiator. Consumer House A section of the building is dedicated to sensorial evaluation for continuous improvement of our products. Trained panels frequently visit to taste and evaluate products, to more objectively describe the properties of our products and determine what drives consumer preference and satisfaction, for example taste, texture and colour. Thereby, Arla can evaluate how our products are perceived by consumers and experts in the field. Sustainable build The Arla Innovation Centre is designed as a carbon neutral building. It also meets the requirements of the Low Energy Building Class 2020 stipulated in Danish building regulations. Furthermore, water saving fixtures are installed throughout, and it has a total of 525 m 2 solar cells on the roof for the production of renewable energy. Flexible work space The work environment is designed to support creativity and cross-functional projects, inspiring collaboration and new ways of working. No designated desks or office space in the building enhances flexibility. It houses 150 people, and has also attracted many other functions of the business for use of collaborative meetings and conferences. Situated in a world-leading food cluster The new Innovation Centre is situated in a cluster of food industry companies and research centres in Aarhus, Denmark, which has set out to become the Silicon Valley of food development and innovation in Europe. By securing a location in the midst of one of the world s strongest and most ambitious food clusters, Arla will gain much better opportunities to expand an open innovation network. The new global innovation centre will accelerate and drive the environment and become the beacon that will attract even more international companies and research institutes.

8 14 ARLA FOODS HALF-YEAR REPORT MANAGEMENT REVIEW 15 Market overview Financial review During the first half of, macroeconomic trends were mostly positive despite ongoing discussions about global political and economic instability. Worldwide milk production remained largely unchanged versus the prior year and a healthy demand for dairy products continued, especially in emerging markets. Following a significant increase in fat prices, milk prices continued to increase during most of the first half of. Strong commercial efforts to deliver higher sales prices and solid branded growth were the focus points this half-year, translating into a 19.3 per cent increase in milk prices delivered to farmer owners and a performance price of 35.8 EUR-cent/kg. Revenue grew to EUR 5.0 billion from EUR 4.9 billion last half-year, despite reduced volumes. There was a continued positive development of all key performance indicators, except conversion cost and profit share, which were negatively impacted by scale challenges in supply chain. Healthy macroeconomic environment Macroeconomic development was positive by nearly all measures during the first half of. Gross Domestic Product (GDP) increased in all major regions, with both Europe and the US increasing 2.1 per cent and China up 6.9 per cent. Stock markets also developed positively and interest rates remained negative to low, despite the first increases in US interest rates. Employment growth also continued at modest rates in most Western markets. In emerging markets, where indicators are less comprehensive, GDP also increased in Bangladesh, Ivory Coast, Senegal and China. The one negative macroeconomic trend during the first half of was oil prices which continued to fall, down 3.5 per cent at half-year compared to half-year. This had a direct negative impact on GDP development in the major economies of the Middle East and Sub-Saharan Africa, which grew more slowly than in recent years. GBP under pressure Despite positive macroeconomic indicators, exchange rates for the GBP suffered, declining 5.1 per cent compared to the first half of last year as discussion about increased protectionism and potential negative impacts on international trade from political events of the last 12 months, in particular the Brexit vote and the US elections, continued in the first half of. Substantial increases in fat prices Driven by the trend of a growing demand for richer dairy products, in conjunction with lower than expected milk production, the price of fat in Europe increased significantly in the first half of. This contributed to an imbalance and volatile prices, exemplified by a historical shift in value from protein to fat. This development sparked a reaction from the market, presenting a particular opportunity for fat, which is at its highest price level ever, having increased 93.7 per cent from last half-year. Milk production flat, market prices increasing In addition to the increase in fat prices, the first half of the year displayed a much needed recovery in the milk price after nearly three years of low prices for farmers. Global market milk prices increased approximately 43 per cent versus last half-year. The Global Dairy Trade (GDT) price for whole milk powder was an average of USD 3,083 per tonne in June this half-year, compared to 2,162 in June. The recovery of the milk price was a direct result of lower to unchanged milk production versus the prior year in most dairy-producing markets. Milk production decreased in Europe, New Zealand and the US in response to the extended period of low prices, as well as a drop in milk supply in main export regions. That said, there was improved domestic demand in Europe, the US and China, and demand for dairy products in emerging markets such as Nigeria and China continued to grow at modest rates. Global Dairy Trade development June to, Whole Milk Powder 2,318 USD/TONNE 2,162 3,083 Milk price to farmer owners increase due to major commercial focus During the first half of, Arla s choice to increase sales prices to customers to support increases in milk prices to farmers came to life through hard work and commitment on all levels of our business. This was evidenced by the significant increases in both the performance and prepaid prices during the period. Performance price is the most relevant KPI for Arla, measuring the value Arla creates per kg of owner milk, for example through proactive price management, innovation, brands, cost programmes, international growth and economies of scale. In the first half of, the performance price increased by 19.3 per cent over the period to 35.8 EUR-cent/kg, compared to 30.0* EUR-cent/kg during the first half of last year. The drivers of this increase were higher achieved sales prices, as well as improving geographical and product mix. The prepaid milk price represents the on-account payment owners receive per kilogram of milk delivered during the settlement period. The prepaid price increased to 33.3 EUR-cent/kg at the end of June this half-year, versus 24.9 EUR-cent/kg at the end of the same period last year, and represents a 33.7 per cent increase for our farmer owners. This increase was higher than our performance price increase, highlighting acceleration of the prepaid milk price towards the close of the period. Revenue increases due to higher market and sales prices In the first half of, revenue grew 3.0 per cent to EUR million, compared to EUR million in the first half of last year. The underlying revenue development, excluding foreign exchange effects and prior year divestments, was 6.6 per cent. The overall increase in revenue was negatively impacted by exchange rate developments, primarily as a result of the weakened GBP in the UK, as well as by EUR 23 million due to the sale of the Rynkeby juice business in, which was Arla s last remaining non-dairy business unit. For more detail on the development of revenue, refer to page 24. Retail and foodservice products represent 81.7 per cent of Arla s revenue. Volume-driven revenue in the first half of the year declined 0.9 per cent for this portion of our business, as a result of our strategic focus on branded product sales. In a largely branded business such as ours, when raw material prices rise, considerable effort is required to translate these into timely sales price increases, without loss of revenue due to adverse sales volume impacts. This is in contrast to our commodity-based competitors in Europe. Our strategic decision to focus on increasing sales prices to allow us to maximise owner milk prices on a timely basis led to over EUR 1.1 billion in sales price increases over the last 12 months. Prepaid milk price, 30 June to 30.2 EUR-CENT/KG

9 16 ARLA FOODS HALF-YEAR REPORT MANAGEMENT REVIEW 17 Europe 3,177 3,179 Trading Revenue split by commercial segment MILLION EUR 63% 5,016 16% 15% 6% International Ingredients intake. Trading sales increased 8.8 per cent in the first half of to EUR 677 million, versus EUR 622 million in the first half of last year, as a result of higher sales prices. However, the trading share of overall milk intake declined to 20.6 percent, compared to 22.5 per cent in the first half of last year. Scalability on target Costs for Arla include three major areas: production, sales and distribution, and administration. Operating expenses were EUR million in the first half of, compared to EUR million the first half of. Excluding the cost of milk from our owners, these operating expenses remained virtually unchanged. Read more on page 25. We believe it is important to measure costs in terms of scalability. Scalability measures the relationship between volume growth and capacity cost, and this efficiency is essential to our financial performance and a core value-driver for our farmer owners. In the first half of, we delivered scalability of greater than 2.0, which means Arla was able to reduce our capacity costs with a percentage higher than our reduction in retail and foodservice volumes. This is on target and exemplifies effective control of capacity costs and the positive rollout of the organisational restructure, Organise to Win, which took place last year. Lower volumes challenge supply chain scale opportunities To support our Good Growth 2020 strategy, Arla has embarked on an ambitious multi-year cost improvement program targeting EUR 400 million over four years. The vision is that over time, all zones and functions will contribute to these savings, with the primary focus being on cost improvements within supply chain. The efficiency programme commenced in and has delivered EUR 13 million savings during the first half of and EUR 111 million in total. As mentioned earlier, Arla took the strategic decision in to focus on substantially increasing sales prices to maximise milk prices for our owners. As a result, sales volumes declined. This negatively impacted supply chain costs, where improvements are largely driven by scale efficiencies, which are only possible with increasing volumes. In addition, increasing production complexity due to a growing range of milk types, e.g. organic and lactose-free etc, as well as a broader and more complex portfolio of branded products, led to increased supply chain production costs. As a result, our conversion cost index, which measures the total cost of supply chain per kg of milk processed, grew at an index of This development highlights a higher absolute expenditure for supply chain costs Inflow of raw milk from owners* United Kingdom 1,637 1,672 Belgium Luxembourg MKG Netherlands Germany Sweden Denmark 2,406 2,413 * Total owner milk was 6,253 million kg for the first half of and other milk was 771 million kg. Total weighed-in milk for half-year amounted to 7,024 million kg. Driving bold brand growth and innovation Brands drive the majority of Arla s profitability, which makes increasing branded sales critical for us to achieve stronger relative profitability on a medium- and long-term basis. We also know that branded revenue is less volatile and drives a fundamentally strong connection with consumers. For this reason, Arla continually focuses on growing our branded share of volume. Strategic-branded volume-driven revenue grew 1.0 per cent, led by Nigeria in Sub-Saharan Africa, as well as South East Asia for International, and the Netherlands and Belgium for Europe. Brand share for the first half of was 44.1 per cent. This is slightly below first half of with a brand share of 44.5 per cent. The reduction in brand share is, despite the positive growth in brands of 1 per cent, due to the significant raw material price increases. The relative raw material price impact of the non-branded revenue is significantly higher than the impact on the branded revenue. At constant prices the brand share has improved to 45.8 per cent and hence a satisfactory development. Our brands are at the heart of our business, and we are committed to further strengthen and grow them. In May, we opened the doors to our new Arla Innovation Centre which will serve as the home to many product and brand de-velopments going forward. For more detail refer to page 12. Sales grow in all commercial segments Europe Europe is our largest business segment, accounting for 63.3 per cent of total revenue during the first half of when excluding the European revenue from Ingredients and Trading below. Sales in the region amounted EUR 3.2 billion, in line with EUR 3.2 billion during the first half of last year, driven by higher sales prices and an improved product mix despite volume declines and adverse currency effects. Volume-driven revenue decreased 2.1 per cent versus the first half of last year. Strategic-branded volume-driven revenue was stable overall for this region, with the Netherlands and Belgium growing significantly, and Sweden and Finland declining slightly. International More than half of Arla s topline growth ambition in Good Growth 2020 comes from growing sales in our high-margin international commercial segment, where milk supply shortages, high population growth and an emerging middle class are expected to drive increased demand for high-quality dairy products. In the first half of, international sales grew 10.2 per cent to EUR 792 million, compared to EUR 719 million for the first half of last year. This development was a result of higher sales prices and volumes. Volume-driven revenue grew 3.3 per cent versus the first half of last year. Strategic-branded volume-driven revenue grew 3.7 per cent. International sales now represent 16 per cent of overall revenue, compared to 15 per cent in the first half of last year**. Ingredients Arla Foods Ingredients is our most profitable segment due to the high investment in innovation and the technology involved in producing whey-related products. We aim to be among the world s leading dairy companies within the child nutrition category, investing EUR 12 million in an upgrade of our production site in Denmark. Sales in this segment increased 24.2 per cent in the first half of to EUR 313 million, compared to EUR 252 million in the first half of last year. This development was driven by the sale of higher volumes in our third party manufacturing business, as well as strong price and volume growth in the value-added protein segment. Trading Trading encompasses our business-to-business sales to other companies for use in their production, as well as industry sales of cheese, butter or milk powder. Although this is not a core business segment, it is critical to our success by managing seasonal and geographical availability in milk * Logos used for visual purposes only. Brand share* 41.5% 44.5% 44.1% relative to a decline in milk intake and is below our target of delivering a conversion cost index below 100. Net profit below prior year level At Arla we have a mandated annual net profit share in the range of 2.8 to 3.2 per cent of revenue, as we continue to focus on paying out the largest possible share of our profit to our farmer owners via the prepaid milk price. As in previous years, seasonality in our operations impacts the half-year results while our net profit target range is a full-year target. Therefore, similarly to the first half of last year, the results for the first half of were below the annual target range. In addition, given the rapidly increasing milk price in, we prioritized further payouts to farmers, and consequently lowered the profit share to 2.1 per cent for the first half of, compared to the 2.5* per cent in the first half of last year. Financial position and cash flow impacted by positive price development Arla is considered and strives to be a robust investment grade credit company and this requires a strong balance sheet. Financial leverage is our most important balance sheet performance indicator, and we have therefore defined a long-term target range of 2.8 to 3.4 for this key ratio. Financial leverage is calculated as the ratio of net interest-bearing debt to profitability, i.e. EBITDA. The ratio measures Arla s ability to generate profit compared to our net

10 18 ARLA FOODS HALF-YEAR REPORT MANAGEMENT REVIEW 19 financial debt. In the first half of, financial leverage increased to 3.4 compared to 3.0* at the end of the first half of last year as a direct result of higher prices, which lowered overall profitability. It is important to note, however, that leverage during the period remained within our long-term target range. The increase in milk prices also had a negative effect on working capital. The increased value associated with our stock and receivables positions significantly reduced our cash position. Cash flow from operating activities decreased to EUR -60 million compared to EUR 340 million in the first half year of last year. Consequently, free operating cash flow for the first half of was EUR -200 million, compared to EUR 195 million for the first half of last year. Cash flow from financing activities was EUR 193 million, compared to EUR -293 million in the first half of last year, funded by the use of credit facilities. A supplementary payment of EUR 120 million was made in line with the Board of Representative s decision to pay out 1 EUR-cent/kg of member milk to our farmer owners. * Excluding gain from sale of Rynkeby. ** International sales exclude Arla Foods Ingredients and trading activities. Number of owners* Denmark Sweden 2,690 2,718 2,876 2,970 Germany UK 2,325 2,442 2,456 2,594 Belgium Luxembourg Netherlands Total 11,281 12,037 As the majority of our revenue is generated in the EU, it is Brexit important for Arla s product offering to customers and consumers that our products can move freely across the markets in which we operate to optimise the utilisation of our ONE milk pool. With 2,442 farmer owners based in the UK, the country is Arla s biggest single market, accounting for approximately 20 per cent of the total revenue. As a company, we are in favour of the free movement of goods and people. We want the final trade deal between the UK and EU to be free from tariff and non-tariff barriers in milk and dairy. Over the past six months, we have stepped up our engagement with the UK government and the EU to ensure our views are heard at the highest level. We have also collaborated with partners in the dairy industry and the wider food and farming community to build support for our position across Europe. As the negotiations progress, we will continue to deliver strong, evidencebased arguments to politicians and policy makers hand-in-hand with our farmer owners and peers in the dairy industry. And as the UK government begins developing its post BREXIT agricultural policy, we will work closely with them to protect the competitiveness of the UK dairy industry within the EU and the global dairy market. * The consolidation within dairy farming continues and we have seen a reduction in the number of owners of 6 per cent, compared to first half of last year. In the same period, milk volumes from owners decreased by 2 per cent. We believe the reduction of weighed-in milk volumes is a result of the previous periods low milk prices and expect future volumes to increase following the current improved market situation. Steady economic growth We enter the second half of with the expectation of steady GDP growth in most markets compared to prior year, which should present continued opportunities and demand for our products. Despite overall strong macro signals, there is some uncertainty across the Western markets where recent and pending elections, particularly in the UK and Germany, have the potential to impact trade, fiscal and monetary policies in European and global markets. We do not currently foresee significant changes in global consumption trends or big shifts in global trade patterns during the remaining part of. Continuous monitoring and ensuring that we quickly react to change are essential in the second half of, and beyond. Continued focus on increasing sales and milk price to our owners We expect the positive price trends to continue into the second half of, with prepaid milk Financial outlook The future of dairy will be based on bold choices. We will continue to commit our attention to the things that add the most value for our business, guided by our strategy Good Growth For the full-year, we expect further improvement in our performance compared to the first half of the year. External factors are expected to develop largely in line with the first half, however, there continues to be some uncertainty regarding milk volumes and prices in the remaining part of the year. Revenue BILLION EUR Brand share >45% Conversion cost >100 Target expected to be achieved Target expected to be challenged prices to continue to modestly improve. This will be the result of ongoing strategic emphasis within Arla, as well as improvements in the broader European marketplace due to lower milk volumes over the last 12 months. Whilst the continual increase in sales prices is a positive development, it will pressure our brands and retail and foodservice volumes. Furthermore, higher milk intake volumes are expected in the second half of across the industry and the short-term impact of these increases remains uncertain. Improved delivery of targets expected for full-year We expect to achieve our full-year financial targets across most key performance indicators. Important to mention are further gains in both the performance and prepaid milk prices, which will increase versus full-year. Group revenue is expected to grow by nearly EUR 1 billion to a level in the upper end of the range of EUR 10 to Expectations for full year Profit share % OF REVENUE International share >20% Scalability < billion for. Net profit is expected to be within our Board of Representatives-approved range of 2.8 to 3.2 per cent of revenue. Volumes of our strategic branded products will grow 1 to 3 per cent, and financial leverage will be within the long-term targeted range of 2.8 to 3.4. The shape of our business will continue to improve as evidenced in growing brand and international sales as a percent of total sales, and a lower share of trading sales as a percent of total milk intake. Cost areas will remain challenged from a full-year perspective. Scalability and conversion costs are expected to come in below the respective targeted ranges as a result of lower milk volumes and therefore the absence of scale opportunities. Nevertheless, we continue to prioritise a clear cost focus in the second half of the year. Strategic branded volume driven revenue growth 1-3% Trading share <20% Leverage

11 CONSOLIDATED FINANCIAL STATEMENTS 21 Consolidated financial statements Income statement Development Full-year Revenue 5,016 4,853 3% 9,567 Production costs -3,879-3,700 5% -7,177 Gross profit 1,137 1,153-1% 2,390 Sales and distribution costs % -1,642 Administration costs % -435 Other operating income % 91 Other operating costs % -29 Gain from sale of enterprise % 120 Share of results after tax in joint ventures and associates % 10 Earnings before interest and tax (EBIT) % 505 Specification: EBITDA excluding gain from sale of enterprise % 719 Gain from sale of enterprise % 120 Depreciation, amortisation and impairment losses % -334 Earnings before interest and tax (EBIT) % 505 Financial income % 7 Financial costs % -114 Profit before tax % 398 Tax % -42 Profit for the period % 356 Minority interests % -9 Arla Foods amba's share of profit for the period % 347 We deliver the natural power of milk in exciting ways that make it easier for you to live a healthy life. Arla s consolidated annual report is prepared in accordance with the International Financial Reporting Standards (IFRS) as adopted by the EU and additional disclosure requirements in the Danish Financial Statement Act. The consolidated half-year report is prepared according to the same principles.

12 22 ARLA FOODS HALF-YEAR REPORT CONSOLIDATED FINANCIAL STATEMENTS 23 Balance sheet Cash flow statement Development Full-year Full-year Assets Non-current assets: Intangible assets % 825 Property, plant and equipment 2,243 2,338-4% 2,310 Investments in associates % 434 Investments in joint ventures % 51 Deferred tax % 74 Other non-current assets % 20 Total non-current assets 3,632 3,733-3% 3,714 Current assets: Inventories 1, % 950 Trade receivables % 876 Derivatives % 31 Current tax % 1 Other receivables % 222 Securities % 504 Cash and cash equivalents % 84 Total current assets 2,866 2,757 4% 2,668 Total assets 6,498 6,490 0% 6,382 Equity and liabilites Equity Equity excluding proposed supplementary payment to owners 2,117 2,090 1% 2,033 Proposed supplementary payment to owners Equity attributable to the parent company's owners 2,117 2,090 1% 2,157 Minority interests % 35 Total equity 2,151 2,131 1% 2,192 Liabilities Non-current liabilities: Pension liabilities % 369 Provisions % 12 Deferred tax % 80 Loans 1,271 1,666-24% 1,281 Total non-current liabilities 1,719 2,077-17% 1,742 Current liabilities: Loans 1, % 947 Trade payables % 995 Provisions % 13 Derivatives % 168 Current tax % 18 Other current liabilities % 307 Total current liabilities 2,628 2,282 15% 2,448 EBITDA Gain from sale of enterprise EBITDA excluding gain from sale of enterprise Share of results in joint ventures and associates Change in working capital Change in other working capital Other operating items without cash impact Dividends received, joint ventures and associates Interest paid Interest received Tax 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 enterprises Financial investing activities Cash flow from investing activities Free cash flow 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 Net cash flow Cash and cash equivalents at 1 January Exchange rate adjustment of cash funds Transferred to asset held for sale Cash and cash equivalents at 30 June Total liabilities 4,347 4,359 0% 4,190 Total equity and liabilities 6,498 6,490 0% 6,382

13 24 ARLA FOODS HALF-YEAR REPORT CONSOLIDATED FINANCIAL STATEMENTS 25 Revenue Costs Strong increases in sales prices Improved cost base Revenue increased 3.4 per cent to EUR 5,016 million, compared to EUR 4,853 million in the first half of last year. The improvement was primarily driven by higher sales prices, as well as improved geographical and product mix, despite lower sales volume and negative currency effects. The positive sales price development increased revenue by EUR 383 million, corresponding to 7.9 per cent. Lower sales volumes, partially offset by a positive change in the mix of products sold, reduced revenue by EUR 62 million. Furthermore, adverse currency developments, primarily in the GBP, reduced revenue by EUR 135 million. The one-off divestment of Rynkeby in May accounted for a EUR 23 million reduction in revenue as compared to the first half of last year. Operational costs amounted to EUR 4,881 million compared to EUR 4,715 million in the first half of last year, representing an increase of 3.5 per cent. Excluding weighed-in raw milk, total costs decreased by 6.7 per cent, primarily due to currency effects. Scalability exceeded 2.0, which means Arla was able to reduce capacity costs with a percentage higher than our reduction in retail and foodservice volumes. The conversion cost index was impacted by increasing production complexity as well as lower than planned milk volumes, growing at an index of Weighed-in raw milk increased by EUR 342 million. The increase was driven by higher milk prices to our owners, amounting to EUR 396 million, partially offset by lower volumes of EUR 40 million, as well as currency effects and changes in costs for Other milk. Costs related to other production materials decreased by EUR 143 million, primarily due to price-driven changes in the value of inventory and currency effects. Staff costs decreased by 3.6 per cent to EUR 608 million, compared to EUR 631 million in the first half of last year, as a result of reduced capacity costs and currency effects, partially offset by increased variable staff costs. Revenue split by commercial segment, half-year 15% 14% Revenue split by commercial segment, half-year Revenue by category Cost split by type, half-year Cost split by type, half-year 12% 13% Operational costs split by function 6% 5% 63% 66% 5,016 4,853 15% 16% million EUR million EUR Milk, yogurt, powder and cooking (MYPC) 44% 46% 10% 4% 4,881 million EUR 4% 49% 11% 4,715 44% million EUR Production costs 3,879 3,700 Sales and distribution costs Administration costs Total 4,881 4,715 Europe 3,177 3,179 International Arla Foods Ingredients Milk trade and other Total 5,016 4,853 Cheese 26% 25% Butter, spreads and margarine (BSM) 14% 13% 13% 12% 15% Cost of raw milk Other production materials* Staff costs Transportation costs Depreciation, amortisation and impairment Other costs** 13% Specification: Weighed-in raw milk 2,436 2,094 Other production materials* Staff costs Transportation costs Depreciation, amortisation and impairment Other costs** Total 4,881 4,715 Average number of full-time employees 18,751 18,941 *Other production materials include packaging, additives, consumables and change in inventory. **Other costs mainly includes maintenance, utilities, marketing and IT. Development in revenue 5,200 5,100 5,000 4,900 4,800 4, ,016 Other 16% 16% Development in operational cost 5,000 4,900 4,800 4,700 4,600 4, ,881 Weighed-in raw milk Weighed in mkg EURm Weighed in mkg EURm Owner milk 6,253 2,167 6,370 1,811 Other milk Total 7,024 2,436 7,214 2,094 0 M&A and divestments Volume/mix Sales prices Currency 0 M&A and divestments Milk volume effect Milk price effect Other milk Change in cost base excluding milk Currency

14 26 ARLA FOODS HALF-YEAR REPORT CONSOLIDATED FINANCIAL STATEMENTS 27 Non-current assets Net working capital Investing for the future Net working capital affected by higher milk price The carrying value of non-current assets decreased by EUR 101 million to EUR 3,632 million, mainly driven by currency impacts and depreciation. Investment in property, plant and equipment was EUR 116 million, compared to EUR 136 million in the first half of last year. We expect to see increased investments in the second half of and in 2018 as a result of the approximately 50 per cent increase in the supply chain investment budget, announced in January. In addition to investment in production capacity, the new global Arla Innovation Centre, which is based in Denmark, officially opened in May. Intangible assets decreased primarily due to currency effects. No impairment was made in. Non-current assets also include investments in joint ventures and associates. The book value of China Mengniu Dairy Company Limited was EUR 295 million. The fair value of the shares, based on the listed stock price as at 30 June, amounted to EUR 357 million. Net working capital increased by EUR 9 million compared to the first half of last year. The change was due to increases in trade receivables and inventory, partly offset by trade payables and currency effects. Trade receivables and inventory increased due to the higher milk price. Furthermore, inventory increased as a result of higher volumes on hand, coupled with a change in product mix. We continuously aim to reduce net working capital by optimising our inventory position and payment terms, and expanding our supply chain financing programme. Currency effects reduced net working capital by EUR 34 million compared to the first half of last year, mainly caused by movements in the GBP and the SEK. Trade payables related to owner milk increased by EUR 36 million due to the higher milk price. Net working capital excluding owner milk increased by EUR 45 million and amounts to EUR 1,220 million. Non-current assets by type 4,000 3,500 3, Intangible assets Goodwill Licenses and trademarks IT and development projects Total intangible assets Net working capital year-on-year 1,500 1, ,258 1,024 1,456 1,155 1,342 1,053 Net working capital excluding owner milk Net working capital 1,175 1,052 1,220 1, Net working capital Inventories 1, Trade receivables Trade payables Net working capital 1,061 1,052 2,500 2,000 1,500 1, ,338 2, Other non-current assets Property, plant and equipment Intangible assets Property, plant and equipment Land and buildings Plant and machinery 1,111 1,136 Fixtures and fittings, tools and equipment Assets in the course of construction Total property, plant and equipment 2,243 2,338 Cash flow Higher milk price reduces cash flow Cash flow from operating activities decreased by EUR 400 million, closing at EUR -60 million compared to EUR 340 million in the first half of last year. The change is due to higher working capital, primary on account of the higher milk prices, and lower EBITDA. Free operating cash flow was EUR -200 million, compared to EUR 195 million in the first half of last year, due to the above mentioned increase in working capital, nonetheless, investment activities, driven by property, plant and equipment, remained largely unchanged. A supplementary payment of EUR 120 million was made in relation to the profit allocation. Further payments, representing EUR 26 million in individual capital, were paid out to owners who resigned or retired. Cash flow in the period was funded by the use of credit facilities, resulting in a NIBD at the same level as last half-year. Total cash and cash equivalents amounted to EUR 74 million, compared to EUR 84 million at end of last year. Development in cash flow Cash 1 January EBITDA NWC -127 Other Investing activities -140 Supplementary payment and leaving members -146 Loans obtained, including pensions Cash 30 June

15 28 ARLA FOODS HALF-YEAR REPORT CONSOLIDATED FINANCIAL STATEMENTS 29 Equity Solid equity position Equity amounted to EUR 2,151 million, which corresponds to a decrease of EUR 41 million compared to end of last year. Profit for the period, before minority interest, was EUR 112 million. A supplementary payment of EUR 120 million was made in relation to the profit allocation. Further payments, representing EUR 26 million in individual capital, were paid out to owners who resigned or retired. Other adjustments, including value adjustments due to changes in interest and foreign exchange rates, negatively impacted equity by EUR 7 million. The equity ratio, excluding the value of minority interest, amounted to 33 per cent compared to 32 per cent at the end of first half last year, and 34 per cent at the end of last year. Equity ratio, half-year 33% Equity ratio, half-year 32% Equity Full-year Common capital 1,701 1,640 1,595 Individual capital Other equity accounts Proposed supplementary payments to owners Equity before minority interests 2,117 2,090 2,157 Minority interests Total equity 2,151 2,131 2,192 Maturity of net interest-bearing debt, half-year Y 1-2Y 2-3Y 3-4Y 4-5Y 5-6Y 6-7Y 7-10Y 10Y> Unused committed facilities Debt Maturity of net interest-bearing debt, half-year Y 1-2Y 2-3Y 3-4Y 4-5Y 5-6Y 6-7Y 7-10Y 10Y> Liquidity reserves Net interest-bearing debt Cash and cash equivalents Securities (free cash flow) Unutilised committed loans facilities Unutilised other loan facilities Total Leverage within target range Pension liabilities The Group s financial leverage at half-year was 3.4, representing an increase of 0.4 compared to first half of last year, adjusted for the gain on the divestment of Rynkeby in. Net interest-bearing debt increased due to an increase in net working capital, as well as due to the supplementary payment. The net pension liability increased by EUR 11 million compared to the first half of last year, as a result of actuarial losses, offset by payments to the pension schemes and currency effects. Average interest costs, excluding pensions, was 2.6 per cent compared to 2.8 per cent in the first half of last year. Net financial cost improved by EUR 20 million compared to the same period last year. Interest cost is lower than in first half of last year and furthermore, both currency and value adjustments positively impacted the net financial cost. Leverage, half-year 3.4 Leverage, half-year 3.0 Net interest-bearing debt and leverage 3,500 3,000 2,500 2,000 1,500 1, , , , Leverage Net interest-bearing debt excluding pension liabilities Pension liabilities Target range leverage , , Sweden UK Others Total Sweden UK Others Total Present value of funded liabilities 208 1, , , ,595 Fair value of plan assets -11-1, , , ,265 Deficit of funded plans Present value of unfunded liabilities Net pension liabilities recognised in the balance sheet Assumptions - pension liabilities Discounting rate, Sweden 2.5% 2.8% Discounting rate, UK 2.6% 2.6% Expected payroll increase, Sweden 2.2% 2.4% Expected payroll increase, UK 4.0% 4.1% Inflation (CPI), Sweden 1.8% 1.6% Inflation (CPI), UK 2.2% 1.8%

16 30 ARLA FOODS HALF-YEAR REPORT CONSOLIDATED FINANCIAL STATEMENTS 31 Glossary Corporate calendar 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. Conversion cost refers to the total cost of production of finished and semi-finished goods, excluding the cost for milk, divided by the product volume. The conversion cost enables evaluation of efficiency improvements in the conversion of raw milk to production output over time. CPI is an abbreviation of Consumer Price Index. EBIT is an abbreviation of earnings before interest and tax, and a measure of earnings from operations. 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. Equity ratio is the ratio between equity excluding minority interests and total assets, and is a measure of the financial strength of Arla. Free cash flow is defined as cash flow from operating activities after deducting cash flow from investing activities. Food cluster is a group of geographically close and inter-connected companies and associated institutions in the food sector. 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. 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. 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. MYPC is an abbreviation for Arla s largest product category which contains milk, yoghurt, powder, and cooking. 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. 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. 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 share is defined as the ratio between profit for the period allocated to owners of Arla Foods, and total revenue. 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. Retail and foodservice volume driven revenue growth is defined as revenue growth associated with growth in retail and foodservice volumes while keeping prices constant. Scalability measures the relative cost efficiency of the business and is defined as the ratio between retail and foodservice volume driven revenue growth and growth in total capacity cost adjusted for special items. The strategic ambition for scalability is > 2.0. 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. 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. Financial reports and major events 25 August Publication of consolidated half-year report for October Board of Representatives meeting 21 February 2018 Announcement of annual results for 28 February 1 March 2018 Board of Representatives meeting 2 March 2018 Publication of consolidated annual report for