Axfood — Earnings Release 2018

Feb 5, 2019

Year-end Report 1 Jan.–31 Dec. 2018

Strong fourth quarter sums up a successful 2018

Fourth quarter summary

• Consolidated net sales amounted to SEK 12,370 m (11,826), an increase of 4.6%.
• Operating profit totalled SEK 425 m (398), an increase of 7.0%. The operating margin was 3.4% (3.4%).
• Net profit for the period totalled SEK 328 m (310), and earnings per share before dilution were SEK 1.54 (1.46).
• Axfood increased its ownership in Urban Deli from 50% to 90.7%.

Summary of January–December

• Consolidated net sales amounted to SEK 48,085 m (45,968), an increase of 4.6%.
• Operating profit totalled SEK 2,025 m (1,886), an increase of 7.4%. The operating margin was 4.2% (4.1%).

• Net profit for the period totalled SEK 1,577 m (1,467), and earnings per share before dilution were SEK 7.41 (6.98).

Significant events after the balance sheet date

• The Board of Directors proposes an unchanged ordinary dividend of SEK 7.00 per share (7.00).
• As a consequence of adoption of IFRS 16, Axfood's equity ratio target has been adjusted to an equity ratio of at least 20% at year-end.
• Capital expenditures by Axfood are expected to amount to SEK 1,500–1,600 m excluding acquisitions and lease assets.
• Axfood plans to establish five to ten new stores.
• Monica Längbo took office as Head of Human Resources and member of the Executive Committee on 1 February 2019.

Key ratios

	Q4	Q4		12 mos	12 mos
SEK m	2018	2017	Change	2018	2017	Change
Net sales	12,370	11,826	4.6%	48,085	45,968	4.6%
Operating profit	425	398	7.0%	2,025	1,886	7.4%
Operating margin, %	3.4	3.4	0.0	4.2	4.1	0.1
Profit for the period	328	310	5.8%	1,577	1,467	7.5%
Earnings per share before dilution, SEK	1.54	1.46	5.5%	7.41	6.98	6.2%
Cash flow from operating activities per share, SEK	3.90	3.97	-1.8%	12.89	12.08	6.7%
Return on capital employed, %1)	40.4	39.4	1.0	40.4	39.4	1.0
Return on shareholders' equity, %1)	36.2	34.9	1.3	36.2	34.9	1.3
Shareholders' equity per share, SEK	-	-	-	20.54	20.35	0.9%
Equity ratio, %	-	-	-	37.0	39.0	-2.0

1) Moving 12-month figures.

All segmental data for 2017 are reported pro forma. For detailed information, see p. 10.

For further information, please contact:

Cecilia Ketels, Head of Investor Relations, mobile +45 72 236 06 43.

The information herein is such that Axfood AB (publ) is required to make public in accordance with the EU Market Abuse Regulation. The information was submitted for publication, through the agency of the contact person listed above, at 7 a.m. CET on 5 February 2019.

This interim report is an English translation of the Swedish original. In the event of any discrepancies, the Swedish version shall govern.

Invitation to presentation of year-end report for 2018

Axfood will present the year-end report in a conference call today at 9.30 a.m. CET. The report will be presented by Klas Balkow, President and CEO, and Anders Lexmon, CFO. To follow the conference visit www.axfood.se or ring: Sweden: +46 8 566 42705, UK: +44 3333 009 274, USA: +1 646 722 4956.

Successful 2018 with high energy going forward

2018 was a successful year for Axfood. We grew more than the market, achieved an operating profit of more than SEK 2 billion and took important steps in the development of our logistics, including the inauguration of our first automated warehouse. We strengthened our position in the market, where above all Willys and Axfood Snabbgross performed strongly both during the quarter and the full year.

Willys paved the way for strong sales and earnings

Willys continued to deliver with strength and ended the year with good Christmas sales. During the year Willys intensified its customer communication and continued its work on developing the stores and rolling out ecommerce. More and more customers have come to appreciate Willys' distinct price offering, with strong like-for-like sales growth as a result. This growth, combined with higher efficiency, led to improved profitability. It is gratifying to see that Eurocash also performed strongly during the year. The business has been integrated well and contributed to the segment's fine performance.

Great year for Axfood Snabbgross

2018 was Axfood Snabbgross's first year as its own segment. During the year, the chain broadened its customer base and increased its sales. The year's warm summer drew many new customers to the stores, but also contributed to an unfavourable sales mix. With strong earnings during the fourth quarter, we can sum up a positive full year for Axfood Snabbgross, with strongly higher market shares.

Hemköp growing with the market

Despite sales growth on par with the market, Hemköp did not achieve the earnings we would have preferred to see in 2018. For the fourth quarter we reported relatively weak earnings, resulting in a full-year profit that was slightly lower than a year ago. Especially during the fourth quarter we did not receive the desired effect of the intensified marketing campaigns. We are also in the midst of an investment phase to strengthen Hemköp's position over the long term. We continue to refurbish and upgrade our stores, we are more clearly communicating our customer offering, and we are investing to strengthen our customer interface.

Stable Dagab ends year on strong note

Following a challenging summer with sharply higher logistics costs as a consequence of the warm and dry weather, Dagab reported a good fourth quarter. The favourable sales to our food concepts, combined with good cost control, generated good earnings performance. Owing to the favourable fourth quarter, we ended the year with earnings in line with the preceding year.

Continued growth and high pace of development on the agenda

In 2019 we will continue to develop and strengthen the assortment of good and sustainable food. We will move at full throttle with the rollout of our upgraded store concepts and expect to expand the store network by five to ten new stores as well as increase our presence online. Our new members of Axfood's house of brands are contributing with new opportunities to develop our offering and customer interface. During the year we increased our ownership in Urban Deli and took the step into the pharmacy market with Apohem, which complements our offering at the same time that the integration of mat.se has strengthened our digital customer interface. In 2019 we will continue to develop our future logistics structure to increase efficiency and quality across the entire chain. Among the top priorities are the implementation of our joint dark store for e-commerce orders and development of an automated warehouse for fulfilment of store and e-commerce orders in Stockholm, which will be ready in 2023. The investments we are pursuing to develop our business give rise to capex need of approximately SEK 1.5-1.6 billion for 2019, which includes the year's planned investments coupled to automation of the new warehouse in Stockholm. Despite major investments, we stand financially strong, and the Board proposes an unchanged dividend of SEK 7.00 per share, corresponding to 94% of profit of the year. We have entered 2019 with great confidence and are well equipped to move forward with our plans for continued growth.

Klas Balkow President and CEO, Axfood AB 4.7% Growth in the Axfood Group's stores sales during the fourth quarter of 2018.

425SEKm

Operating profit during the fourth quarter of 2018.

The Swedish food retail market

According to Statistics Sweden's (SCB) preliminary retail trade index for January to December 2018, accumulated sales for the food retail segment (excl. alcoholic beverages) grew 3.2% in current prices compared with 2017. In fixed prices, volume increased by 0.8%.

On 5 February the Swedish Food Retailers Federation (SvDH) launched a new index. SvDH's food retail index monitors development for both physical stores and online. According to SvDH the food retail index in 2018 was 3.0 in current prices.

Axfood's stores sales growth1) compared with the food retail market2)

1) Willys including Eurocash and Hemköp (Group-owned and franchises). 2) Sales for the Swedish food retail market excl. alcoholic beverages, based on the SCB retail trade index (Dagligvaruhandel, Mest livsmedel). Preliminary data may be revised in accordance with SCB's revision policy.

Sales – Axfood Group

Fourth quarter

Net sales for the Axfood Group amounted to SEK 12,370 m (11,826) during the fourth quarter, an increase of 4.6%. All segments showed good growth. Axfood Snabbgross continued to grow strongly and expand its customer base. Willys including Eurocash further strengthened its position in the market. Store sales for the Axfood Group (Group-owned stores and Hemköp franchises) amounted to SEK 10,567 m (10,092), an increase of 4.7%. Growth in like-for-like sales was 4.6%. Sales for Group-owned retail operations increased by 5.2% during the fourth quarter, with a 4.7% rise in like-for-like sales.

January–December

Net sales for the Axfood Group amounted to SEK 48,085 m (45,968) during the period, an increase of 4.6%. Sales for Group-owned retail operations increased by 5.9%, with a 3.7% rise in like-for-like sales. Store sales for the Axfood Group (Group-owned stores and Hemköp franchises) grew by 5.3%, while like-for-like sales increased by 3.7%.

Sales of private label products accounted for 29.2% (28.2%) of total sales in 2018.

Net sales per segment

	Q4	Q4		12 mos	12 mos
SEK m	2018	2017	%1)	2018	2017	%1)
Willys	7,033	6,633	6.0	27,066	25,415	6.5
Hemköp	1,667	1,638	1.8	6,403	6,199	3.3
Axfood Snabbgross	795	727	9.4	3,241	2,984	8.6
Dagab	11,066	10,527	5.1	42,456	41,128	3.2
Joint-Group	210	198	6.1	830	770	7.8
Internal sales between segments that are eliminated
Dagab	-8,203	-7,710	6.4	-31,130	-29,802	4.5
Axfood Snabbgross	-2	-2	-23.3	-5	-7	-25.0
Joint-Group	-196	-185	5.9	-775	-720	7.7
Net sales, total	12,370	11,826	4.6	48,085	45,968	4.6

1) Percentage change compared with corresponding period a year ago.

Store sales – Group-owned and Hemköp franchise stores2)

SEK m	Q4 2018	%1)	Like-for-like sales, %1)	12 mos 2018	%1)	Like-for-like sales, %1)
Willys	7,033	6.0	5.4	27,066	6.5	4.3
Hemköp, Group-owned	1,634	1.8	2.0	6,268	3.2	1.1
Hemköp franchises	1,900	2.6	3.8	7,423	2.8	3.8
Hemköp total	3,534	2.2	2.9	13,691	3.0	2.6
Group-owned retail operations	8,667	5.2	4.7	33,334	5.9	3.7
Axfood Group store sales	10,567	4.7	4.6	40,757	5.3	3.7
Axfood Snabbgross	795	9.4	10.4	3,241	8.6	7.6

1) Percentage change compared with corresponding period a year ago.

2) See also the table "Store sales – Group-owned and franchise stores" on p. 23.

Change in store structure

Number of stores	Dec. 2017	New establish ments	Acquisi tions	Sales/ closures	Conversions to/from	Dec. 2018
Willys1)	207	1	−	-2	2	208
Hemköp	67	1	4	−	-2	70
Axfood Snabbgross	24	−	−	−	−	24
Total, Group-owned	298	2	4	-2	0	302
Hemköp franchises	120	−	−	-3	−	117
Axfood Group total	418	2	4	-5	0	419
1) Of which, Willys Hemma	48	1	−	−	−	49
Of which, Eurocash	8	−	−	−	−	8

Earnings – Axfood Group

Fourth quarter

Operating profit for the fourth quarter was SEK 425 m (398), with an operating margin of 3.4% (3.4%). Operating profit was positively affected by like-for-like sales performance and improved profitability in e-commerce. At the same time, marketing costs for long-term positioning and the increased level of campaign activity at Hemköp weighed down earnings.

Profit after financial items was SEK 422 m (397). Profit after tax was SEK 328 m (310).

January–December

Operating profit for the period totalled SEK 2,025 m (1,866). The operating margin was 4.2% (4.1%). Net financial items for the period totalled SEK -9 m (-5), and profit after financial items was SEK 2,016 m (1,881). Profit after tax was SEK 1,577 m (1,467). The corporate tax rate has been lowered effective 1 January 2019, which has affected reporting of deferred tax. The entire effect is reported in the second quarter, where net profit for the period was affected positively by SEK 5 m.

Operating profit per segment

SEK m	Q4 2018	Q4 2017	%1)	12 mos 2018	12 mos 2017	%1)
Willys	264	242	9.3	1,197	1,059	13.1
Hemköp	38	58	-34.8	227	234	-2.8
Axfood Snabbgross	25	14	79.0	121	110	9.9
Dagab	170	143	18.3	685	699	-2.0
Joint-Group	-72	-59	22.0	-206	-216	-4.6
Operating profit for the period	425	398	7.0	2,025	1,886	7.4
Net financial items	-3	-1		-9	-5
Profit for the period after financial items	422	397		2,016	1,881

1) Percentage change compared with the corresponding period a year ago.

Capital expenditures

Total capital expenditures during the period January–December amounted to SEK 1,021 m (1,934), of which SEK 116 m (1,106) pertained to acquisitions of operations. Acquisitions in 2018 pertain to the increased ownership in Urban Deli. Acquisitions in the preceding year consisted of Matse Holding AB, Eurocash Food AB, Saba's warehouse operation and Middagsfrid AB. In addition to business acquisitions, capital expenditures included SEK 439 m (479) in noncurrent assets in retail operations, SEK 237 m (138) in non-current assets in wholesale operations, and SEK 221 m (203) in IT.

Capital expenditures, depreciation/amortization, SEK m

Financial position and cash flow

Cash flow from operating activities before paid tax amounted to SEK 3,136 m (2,916) during 2018. Paid tax totalled SEK -434 m (-382). Payment of the shareholder dividend affected cash flow by SEK -1,485 m (-1,259), and net capital expenditures affected cash flow by SEK -992 m (-1,500). Net capital expenditures were lower than in the preceding year, as the comparison period included considerably more acquisitions.

Cash and cash equivalents held by the Group amounted to SEK 1,571 m, compared with SEK 1,376 m in December 2017. Interest-bearing liabilities and provisions totalled SEK 524 m, compared with SEK 528 m in December 2017. The Group had an interest-bearing net debt receivable of SEK 1,047 m at year-end, compared with SEK 871 m in December 2017. The change is mainly attributable to lower acquisition activity.

The equity ratio was 37.0%, compared with 39.0% in December 2017.

Derivation of total investments and net capital expenditures in cash flow

SEK m	12 mos 2018	12 mos 2017
Total investments	-1,021	-1,934
Investments in finance leases	59	63
Divestment of tangible/intangible assets	12	17
Acquisition of financial assets	-17	-6
Acquisition of mat.se	-	55
Acquisitions of other operations	77	305
Divested operations	2	0
Acquisition of assets held for sale	-104	-
Cash flow from investing activities	-992	-1,500

Results per operating segment

Willys

Fourth quarter

Willys posted sales growth of 6% during the fourth quarter compared with the same period a year ago. Sales totalled SEK 7,033 m (6,633) and were positively affected primarily by more customer visits, a higher average ticket value and growth in e-commerce. Sales growth was good both for Willys and Eurocash, and the year was concluded with strong Christmas and New Year's sales. Like-for-like sales increased by 5.4%.

Operating profit totalled SEK 264 m (242), an increase of 9.3%. Earnings were positively affected by strong like-for-like sales and higher efficiency in e-commerce. This contributed to higher profitability, and the operating margin was 3.8% (3.6%).

During the fourth quarter another nine Willys stores offered online shopping. At year-end 2018 a total of 56 stores in 30 cities offered online shopping, which is 22 more stores and 11 more cities than at year-end 2017. During 2019 a continued e-commerce roll-out is planned in an additional some ten cities.

During the quarter Willys opened a store in Södermalm, Stockholm. The store is in premises that were taken over from Hemköp. In Halmstad, Willys chose to close its store in the Hallarna shopping centre in December. Willys thereby continued to have 208 stores at year-end, of which 200 were Willys and eight were Eurocash.

January–December

Willys' sales during 2018 totalled SEK 27,066 m (25,415), an increase of 6.5% compared with the preceding year. The strong performance is mainly attributable to good like-for-like sale growth driven by a higher number of customer visits and a higher average ticket value. Likefor-like sales increased by 4.3%.

Operating profit was SEK 1,197 m (1,059), an increase of 13.1%. Owing to strong sales growth, improved efficiency in e-commerce and controlled cost development, the operating margin increased to 4.4% (4.2%).

During 2018 Willys' private label share was 30.8% (29.9%).

SEK m	Q4 2018	Q4 2017	Change	12 mos 2018	12 mos 2017	Change
Net sales	7,033	6,633	6.0%	27,066	25,415	6.5%
Change in like-for-like sales, %	5.4	4.3	1.1	4.3	4.3	0.0
Operating profit	264	242	9.3%	1,197	1,059	13.1%
Operating margin, %	3.8	3.6	0.1	4.4	4.2	0.3
Number of Group-owned stores	-	-	-	208	207	1
Average number of employees during the period	-	-	-	5,337	5,070	5.3%
Private label share, %	-	-	-	30.8	29.9	0.9

1) Only 2017 figures are pro forma.

Net sales, SEK bn, and operating margin, %1)

Hemköp

Fourth quarter

Hemköp's store sales including Hemköp franchises showed growth of 2.2% during the fourth quarter.

Sales for Group-owned Hemköp stores totalled SEK 1,634 m (1,606), an increase of 1.8%. Despite higher campaign activity, sales were not affected to the extent intended. Like-for-like sales for Group-owned stores increased by 2.0%. The higher like-for-like growth for Groupowned stores is partly attributable to the closure of Hemköp Södermalm store in Stockholm (see Willys above). Net sales for Group-owned Hemköp stores (including franchise fees1 ) increased by 1.8%.

Sales for franchise stores (Hemköp) totalled SEK 1,900 m (1,853), an increase of 2.6%, while like-for-like sales increased by 3.8%.

Operating profit for the fourth quarter totalled SEK 38 m (58), corresponding to an operating margin of 2.3% (3.5%). The lower profitability is mainly due to weak like-for-like sales growth and increased campaign activity without full effect. To strengthen the chain's position, Hemköp is investing in both the store concept and its offering. This includes, among other things, the opening of more in-store service counters, store-prepared food, sushi bars and other meal solutions. The operating margin for the quarter was also weighed down by the decision to increase Hemköp's profiling. Marketing activity is a long-term measure that is expected to have a positive effect over time. E-commerce continues to weigh down earnings, albeit to a lower extent than previously.

At the end of the fourth quarter Hemköp offered online shopping at 18 stores in eight cities, which is one store and one city less than at year-end 2017 due to the conversion of the Hemköp in Eskilstuna to Willys during the first quarter. During 2019 Hemköp's focus will be on developing e-commerce at existing locations.

During the fourth quarter Hemköp established a new store in Helsingborg. Compared with at year-end 2017, Hemköp has closed two stores and opened five, of which three were conversions from franchise stores, one was a conversion from Tempo, and one was the newly established store during the fourth quarter.

January–December

Hemköp's store sales including franchise stores showed growth of 3.0% in 2018.

Sales for Group-owned stores totalled SEK 6,268 m (6,071), an increase of 3.2%. Likefor-like sales for Group-owned stores increased by 1.1% during the period. Sales for franchise stores totalled SEK 7,423 m (7,220), an increase of 2.8%, while like-for-like sales increased by 3.8%.

Operating profit for 2018 was SEK 227 m (234). The decrease is attributable to performance during the fourth quarter. The operating margin for the period was 3.5% (3.8%). During 2018 Hemköp's private label share was 25.1% (24.0%).

Q4 2018	Q4 2017	Change	12 mos 2018	12 mos 2017	Change
1,667	1,638	1.8%	6,403	6,199	3.3%
2.0	1.1	0.9	1.1	2.1	-1.0
38	58	-34.8%	227	234	-2.8%
2.3	3.5	-1.3	3.5	3.8	-0.2
-	-	-	70	67	3
-	-	-	1,798	1,800	-0.1%
-	-	-	25.1	24.0	1.1

2) Only 2017 figures are pro forma.

Net sales, SEK bn, and operating margin, %2)

1) As a result of the reorganization in January 2018, franchise fees include both Hemköp and Tempo.

Axfood Snabbgross

Fourth quarter

Axfood Snabbgross's sales totalled SEK 795 m (727) during the fourth quarter, representing growth of 9.4% compared with the same period a year ago. Axfood Snabbgross succeeded in retaining many of the new customers it attracted during the strong summer period. Apart from the increase in customers, sales grew through a higher average ticket value. The private market for wholesalers grew by 3.0% during the fourth quarter, which indicates that Axfood Snabbgross strengthened its position in the market.

Operating profit for the fourth quarter was SEK 25 m (14), an increase of 79%, which boosted the operating margin to 3.1% (1.9%). Earnings were positively affected by strong likefor-like sales with favourable performance in the newer stores and good cost control. No changes were made in the store structure during the quarter. Axfood Snabbgross had 24 (24) stores throughout Sweden at the end of December.

January–December

Axfood Snabbgross's sales totalled SEK 3,241 m (2,984) during the period January–December, an increase of 8.6%. Operating profit for the period was SEK 121 m (110), and the operating margin was 3.7% (3.7%).

SEK m	Q4 2018	Q4 2017	Change	12 mos 2018	12 mos 2017	Change
Net sales	795	727	9.4%	3,241	2,984	8.6%
Operating profit	25	14	79.0%	121	110	9.9%
Operating margin, %	3.1	1.9	1.2	3.7	3.7	0.0
Number of stores	-	-	-	24	24	0
Average number of employees during the period	-	-	-	401	384	4.4%

1) Due to a reorganization in January 2015, there are no comparison figures for 2014.

Since the comparative figures for 2015 and 2016 are not recalculated, these figures are not reported. 2) 2017 figures are pro forma.

Dagab

Fourth quarter

Sales totalled SEK 11,066 m (10,527), an increase of 5.1%. Growth for the support company Dagab was positively affected by favourable sales to the Group's own food concepts – mainly Willys and Axfood Snabbgross – but also by e-commerce sales via mat.se.

Operating profit was SEK 170 m (143), entailing a margin of 1.5% (1.4%). The higher operating profit is mainly attributable to higher sales, good warehousing efficiency and good performance for private label products. Continued high fuel costs, costs for the changeover to SAP in the fruits and vegetables operation and development in e-commerce had a negative impact on operating profit.

Axfood has been a part-owner of Urban Deli since its start in 2009. Urban Deli is a mix of restaurant, bar, market hall and grocery store in Stockholm. In December Axfood increased its holding in Urban Deli and owned 90.7% of the company at year-end. Urban Deli is a trendsetter in the development of innovative products. Going forward Axfood and Urban Deli will collaborate even more closely on development of the Group's assortment, not least in the area of meal solutions.

Towards the end of 2018 the new, automated cold storage warehouse in Jönköping began operating. The new warehouse, which supplies perishables to all of Axfood's stores in Sweden, is twice as large as the former one, which creates greater future opportunities for the Group's perishables assortment. Half of the warehouse is automated with robots that pick orders 24 hours a day. The automated warehouse will be in full operation during the first quarter of 2019, when it will deliver some 28,000 cases every day. The other half of the warehouse is stocked with products that cannot be automated with the current solution.

The cold storage warehouse in Jönköping is the first step in a long-term strategy to develop the product flow, among other things by automating large parts of traditional warehousing. The second step is the highly automated warehouse in Stockholm that is planned to be operational in 2023. This warehouse will support deliveries both to stores and e-commerce customers. The aim is to strengthen the customer offering and improve delivery quality and service through modern and more efficient warehouse processes. The facility will also create coordination gains for the Group, boost productivity and enhance flexibility between the fulfilment of orders to stores and directly to customers. Dagab is currently in negotiations

Net sales, SEK bn, and operating margin, %1) 2)

with a few automation vendors. Over a four-year period the investment need for this automation will amount to approximately SEK 400–600 m annually.

January–December

Dagab's sales during the period totalled SEK 42,456 m (41,128), an increase of 3.2%. Operating profit was SEK 685 m (699), corresponding to an operating margin of 1.6% (1.7%).

SEK m	Q4 2018	Q4 2017	Change	12 mos 2018	12 mos 2017	Change
Net sales	11,066	10,527	5.1%	42,456	41,128	3.2%
Operating profit	170	143	18.3%	685	699	-2.0%
Operating margin, %	1.5	1.4	0.2	1.6	1.7	-0.1
Average number of employees during the period	-	-	-	2,301	2,278	1.0%
Delivery reliability, %	-	-	-	96.1	96.9	-0.8

1) No comparison figures are available for 2014–2015 due to the acquisition of the fruit & vegetables warehouse operations in 2017 and a reorganization in 2015.

2) Figures for 2016 and 2017 are pro forma. 2016 pertains to the acquisition of the fruit & vegetable warehouse operations.

Parent Company

Other operating revenue for the Parent Company amounted to SEK 248 m (241) during 2018. After selling and administrative expenses of SEK 376 m (364) and net financial items of SEK 21 m (3), profit after financial items was SEK -104 m (-119). Capital expenditures during the year totalled SEK 7 m (3).

The Parent Company had an interest-bearing net debt receivable of SEK 246 m at the end of the period, compared with SEK 241 m in December 2017. The Parent Company has no significant transactions with related parties, other than transactions with subsidiaries.

Pro forma

Effective 1 January 2018 Axfood carried out a reorganization of Axfood Närlivs, entailing that the operations of Axfood Snabbgross are reported as a new segment. Customer responsibility for Tempo was transferred to Hemköp, and other operations in Axfood Närlivs were transferred to Dagab. In connection with the reorganization, Dagab carried out a price adjustment based on its updated cost structure. This entailed a change in net sales and operating profit for the segment. All historical segmental data for 2017 are reported pro forma.

SEK m	Q1 2017	Q2 2017	Q3 2017	Q4 2017	12 mos 2017
Willys
Net sales	5,764	6,601	6,417	6,633	25,415
Operating profit	212	273	332	242	1,059
Operating margin, %	3.7	4.1	5.2	3.6	4.2
Hemköp
Net sales	1,547	1,544	1,470	1,638	6,199
Operating profit	66	56	54	58	234
Operating margin, %	4.3	3.6	3.7	3.5	3.8
Axfood Snabbgross
Net sales	655	789	813	727	2,984
Operating profit	10	39	47	14	110
Operating margin, %	1.6	4.9	5.8	1.9	3.7
Dagab
Net sales	9,746	10,677	10,178	10,527	41,128
Operating profit	171	177	208	143	699
Operating margin, %	1.8	1.7	2.0	1.4	1.7

Net sales, SEK bn, and operating margin, %1) 2)

Sustainable development

Key ratios, Group

	Q4	Q4
	2018	2017	2018	2017
Organic products as % of total food sales
Axfood incl. Eurocash 2018	6.5	6.7	6.6	6.8
Willys incl. Eurocash 2018	5.7	5.9	5.9	6.0
Hemköp	9.1	9.3	9.3	9.5
Growth in plant-based protein substitutes, 1) %
Axfood incl. Eurocash 2018	18	31	22	29
Willys incl. Eurocash 2018	21	36	25	33
Hemköp	11	23	16	23
KRAV-certified meat as % of total meat sales
Axfood incl. Eurocash 2018	3.6	3.7	3.9	3.9
Willys incl. Eurocash 2018	2.3	2.6	2.5	2.7
Hemköp	8.1	7.5	9.0	8.5
Combustible waste2) (tonnes), share of total net sales (SEK m), %
Willys	35	37	35	37
Hemköp	n.a.	n.a.	n.a.	n.a.
Axfood Snabbgross	24	18	24	18
Private label product recalls from stores	5	7	32	29
Product recalls from stores, other brands	19	29	78	107
Number of social audits3)	18	8	95	77
Electricity consumption, kWh/m2 (stores and warehouses)4)	322.2	319.9	322.2	319.9
Electricity consumption (kWh) as share of net sales (SEK), %5)	0.57	0.59	0.57	0.59
CO2, kg/tonne goods6)	16.6	7.3	16.6	7.3
Work attendance rate, %	93.9	94.2	94.4	94.3

1) Compared with same period a year ago. 2) Moving 12-month figures, with 1 quarter delay. 4) Moving 12-month figures. Pertains to Group-owned stores and warehouses under joint electricity contracts.

5) Inflation-adjusted net sales.

3) Both under own management and via the organization Amfori BSCI.

6) Moving 12-month figures. Pertains to total volume for transports from warehouses to stores using own delivery fleet.

Sales of organic and vegetarian products

Sales of organic products accounted for 6.6% (6.8%) of Axfood's total food sales in 2018. The organic product share during the year includes Eurocash. Axfood has set a target for organic products to account for 10% of total food sales by 2020.

Axfood's customers showed continued demand for vegetarian products, i.e., refrigerated and frozen plant-based protein substitutes. Sales of vegetarian alternatives grew 22% in 2018.

Updated sustainability programme

Axfood has high ambitions in sustainability and aspires to be the industry leader in this area. During the fourth quarter Axfood carried out its annual update of the sustainability programme, which is a business-driven programme affecting daily work in the operations. Following are some of the new sustainability targets.

Sustainable products

One of Axfood's strategic sustainability targets has been to have a 10% share of organic product sales by 2020 in order to reduce negative environmental impacts. This target has been expanded to also include sustainability certified products, i.e., sustainability labelling of products that point to improvements for the environment, animal care and/or social conditions. The share of sustainability certified products shall amount to at least 25% by 2025. The share of organic product sales remains as a target in the sustainability programme and is included as part of the new target.

For a number of years Axfood has worked to ensure that suppliers of fruits and vegetables outside of the EU do not use pesticides that are banned for production in the EU. Toward this end, Axfood has prepared its own list of banned substances that suppliers are urged to phase out. Axfood estimates that its most important suppliers were in compliance with the list in

1. Axfood's new target is to advocate for this list of banned substances to become an industry standard by 2020 at the latest.

Sustainable products pertain not only to food, but also to its packaging. Plastic is a good packaging material for extending a product's shelf life, but often not quite so good from an environmental standpoint. For Axfood's private label products, plastic packaging shall be made of renewable or recycled material by 2030 at the latest. For all packaging material, including plastic, Axfood shall strive to use environmentally adapted packaging, and by 2022 all packaging shall be recyclable.

Transports

Since Axfood currently does not see which technical solution will be the most climateeffective or which fuels will be available on the market going forward, the Group is investing in a more diversified delivery fleet with several different transport and fuel solutions. By 2025 no single type of vehicle will account for more than half of the vehicle fleet.

Axfood's carbon footprint from transports is calculated based on deliveries from warehouses to stores. The updated sustainability programme entails that by 2022 the Group shall also include deliveries to warehouses in its carbon emission reporting.

Climate and energy

In connection with new establishment of stores and warehouses it is important to incorporate sustainability aspects from the very start. By choosing forms of energy and materials with high commercially available sustainability performance, the goal is to cut electricity consumption per square metre in stores by at least half.

Even though Axfood uses green electricity, i.e., electricity from the sun, wind and water that does not have any carbon emissions, the Group wants to contribute to more green electricity in society. Toward this end Axfood plans to install solar panels on 25% of store and warehouse rooftops deemed as suitable.

Food accounts for a large share of the world's carbon footprint. The largest impact is from production, but all subsequent steps expand the footprint. If the food is not eaten, this carbon footprint has been for nought. It is therefore important to limit food waste. Axfood has been working to reduce food waste for a number of years and today has a low level of food waste in stores of 1.5%. With 2015 as the base year, when food waste was 1.7%, the goal is to cut food waste in half by 2025.

Responsible suppliers

Several goals concerning social conditions for suppliers' employees were updated in the previous revision, of which the most long-term one entailed ensuring as far as possible that the people working in production and growing earn a wage that is higher than the UN's poverty level by 2030.

Employees

The food retail industry has a relatively high number of part-time workers. System support will be created to enable more employees in stores and warehouses to increase their working hours.

Long-term sharebased incentive

programme

The Board of Directors has decided to recommend that the Annual General Meeting vote in favour of implementation of a long-term share-based incentive programme (LTIP 2019). The programme corresponds in all essential respects to LTIP 2018. The programme is proposed to include approximately 75 employees, consisting of the members of Axfood's Executive Committee, members of the management teams of Axfood's subsidiaries, and certain other persons in management functions. The incentive programme entails the following, in brief:

• Participation in LTIP 2019 requires a personal shareholding in Axfood that is allocated to LTIP 2019. Depending on their participant category, the participants will be given the opportunity to allocate a maximum of 4,700, 850 or 250 shares to the programme.
• After the set vesting period, the participants will be granted shares in Axfood free of charge provided that certain conditions are met. For a participant to receive shares in Axfood under so-called matching share rights requires continued employment by the Axfood Group during the vesting period, that the individual continues to own shares in Axfood during the same period of time, and that the total shareholder return ("TSR") on the Company's shares during the period 2019–2021 exceeds zero per cent. Grants of shares with the support of socalled performance share rights requires continued employment by the Axfood Group and that the individual continues to own shares in Axfood, and are based in part on the Company's TSR in relation to the SIX Return Index and in part on the Axfood Group's total average sales growth, contingent upon achievement of a certain average EBIT margin. The Board proposes that a new condition be added, which is based on the share of sustainability-certified products in relation to total sales.
• The maximum number of shares in Axfood that may be granted under LTIP 2019 shall be limited to 240,000.
• Based on an unchanged share price during the term of the programme, a three-year vesting period and certain additional assumptions, the total cost of LTIP 2019 including social security costs is estimated to be maximum SEK 42 m.

The main motives for establishing LTIP 2019 are to align the shareholders' interests with those of the members of the Executive Committee and other key persons in ensuring maximum longterm value creation and to encourage personal shareholding in Axfood. Further, it has been determined that LTIP 2019 will facilitate Axfood in recruiting and retaining persons for company management and other key persons.

The Board of Directors will issue a notice of the Annual General Meeting shortly, and in connection with this, the Board's complete recommendation for decision will be made public.

Annual General Meeting

The Annual General Meeting will be held at 5 p.m. on 21 March 2019 at Konserthuset (Stora Salen), Hötorget (main entrance), in Stockholm. The 2018 Annual and Sustainability Report will be published on 28 February 2019 on Axfood's website, on which date copies will be available at Axfood's head offices in Stockholm. In addition, annual reports will be distributed by post to shareholders, upon request, approximately one week before the Annual General Meeting.

This year-end report has not been reviewed by the Company's auditors.

Stockholm, 5 February 2019

Klas Balkow President and CEO

Future reports

• The Annual and Sustainability Report will be published on 28 February 2019.
• The interim report for Jan.–March 2019 will be presented on 25 April 2019, at 7 a.m. CET.
• The interim report for Jan.–June 2019 will be presented on 15 July 2019, at 1 p.m. CET.
• The interim report for Jan.–Sept. 2019 will be presented on 24 October 2019, at 7 a.m. CET.

Press releases during the fourth quarter

• 27 Dec. 2018 Axfood's new sustainability target: halving of food waste by 2025
• 14 Dec. 2018 Axfood increases ownership in Urban Deli
• 13 Dec. 2018 Dagab's new automated warehouse in Jönköping inaugurated
• 12 Dec. 2018 Eurocash opens store at new shopping area in Storlien
• 6 Dec. 2018 Mat.se foresees future with artificial intelligence
• 5 Dec. 2018 Gustav Hasselgren new President of Apohem
• 5 Nov. 2018 Axfood Snabbgross and Delivery Hero in new partnership
• 10 Oct. 2018 Dan Jacobson new Managing Director of Urban Deli

Financial statements, Group

Condensed statement of profit or loss and other comprehensive income, Group

SEK m	Q4 2018	Q4 2017	12 mos 2018	12 mos 2017
Net sales	12,370	11,826	48,085	45,968
Cost of goods sold	-10,604	-10,165	-40,904	-39,306
Gross profit	1,766	1,661	7,181	6,662
Selling and administrative expenses, etc.	-1,341	-1,263	-5,156	-4,776
Operating profit	425	398	2,025	1,886
Interest income and similar profit/loss items	0	2	5	8
Interest expense and similar profit/loss items	-3	-3	-14	-13
Profit after financial items	422	397	2,016	1,881
Tax	-94	-87	-439	-414
Profit for the period	328	310	1,577	1,467
Other comprehensive income Items that cannot be reclassified to profit or loss for the period
Revaluation of defined benefit pension plans	-15	2	-21	-15
Tax attributable to items that cannot be reclassified to profit or loss for the period	3	-1	3	3
Items that will be reclassified to profit or loss for the period
Translation differences in calculation of foreign operations	0	0	0	0
Change in fair value of forward exchange contracts	2	1	1	0
Change in fair value of available-for-sale financial assets Tax attributable to items that have been reclassified or can be reclassified to profit or loss for the period	- 0	-6 1	- 0	-6 1
Other comprehensive income for the period	-10	-3	-17	-17
Total comprehensive income for the period	318	307	1,560	1,450
Operating profit includes depreciation/amortization of	193	192	760	744
Earnings per share before dilution, SEK	1.54	1.46	7.41	6.98
Earnings per share after dilution, SEK	1.54	1.46	7.40	6.98
Profit for the period attributable to
Owners of the parent	323	307	1,553	1,463
Non-controlling interests	5	3	24	4
Total comprehensive income for the period attributable to
Owners of the parent	313	304	1,536	1,446
Non-controlling interests	5	3	24	4

Condensed statement of financial position, Group

SEK m	31/12/2018	31/12/2017
Assets
Goodwill	2,767	2,671
Other intangible assets	682	717
Property, plant and equipment	2,202	2,032
Financial assets1)	27	84
Deferred tax assets	141	131
Total non-current assets	5,819	5,635
Inventories	2,340	2,263
Accounts receivable – trade	1,102	954
Other current assets	1,308	1,241
Cash and bank balances	1,571	1,376
Assets held for sale	104	-
Total current assets	6,425	5,834
Total assets	12,244	11,469
Shareholders' equity and liabilities
Equity attributable to owners of the parent	4,304	4,266
Equity attributable to non-controlling interests	224	212
Total shareholders' equity	4,528	4,478
Non-current interest-bearing liabilities	472	479
Deferred tax liabilities	832	784
Other noninterest-bearing non-current liabilities	50	29
Total non-current liabilities	1,354	1,292
Current interest-bearing liabilities	52	49
Accounts payable – trade	3,836	3,458
Other current noninterest-bearing liabilities	2,474	2,192
Total current liabilities	6,362	5,699
Total shareholders' equity and liabilities	12,244	11,469
1) Of which, interest-bearing assets	-	23

Condensed statement of cash flows, Group

SEK m	12 mos 2018	12 mos 2017
Operating activities
Operating profit	2,025	1,886
Adjustments for non-cash items	758	707
Interest paid	-17	-5
Interest received	5	6
Paid tax	-434	-382
Changes in working capital	365	322
Cash flow from operating activities	2,702	2,534
Investing activities
Acquisitions of operations	-45	-746
Acquisitions of intangible assets	-129	-114
Acquisitions of property, plant and equipment	-711	-651
Other changes in investing activities	-107	11
Cash flow from investing activities	-992	-1,500
Financing activities
Amortization of debt	-	-97
Share repurchases	-30	-28
Dividend payout	-1,485	-1,259
Cash flow from financing activities	-1,515	-1,384
Cash flow for the period	195	-350

Condensed statement of changes in equity, Group

SEK m	31/12/2018	31/12/2017
Amount at start of year	4,478	4,118
Changed accounting policy (IFRS 9)	-5	-
Total comprehensive income for the period	1,560	1,450
Change in non-controlling interests	0	193
Share repurchases	-30	-28
Share-based payments	10	4
Dividend to shareholders	-1,485	-1,259
Amount at end of period 1)	4,528	4,478

1) Of shareholders' equity, SEK 4,304 m (4,266) is attributable to owners of the parent and SEK 224 m (212) to non-controlling interests.

Key ratios and other data, Group

	12 mos 2018	12 mos 2017
Operating margin, %	4.2	4.1
Margin after financial items, %	4.2	4.1
Equity ratio, %	37.0	39.0
Net debt (+)/net receivable (-), SEK m	-1,047	-871
Net debt-equity ratio (+)/Net receivable-equity ratio (-), multiple	-0.2	-0.2
Debt-equity ratio, multiple	0.1	0.1
Capital employed, SEK m	5,052	5,006
Return on capital employed, %	40.4	39.4
Return on shareholders' equity, %	36.2	34.9
Average number of employees during the year	10,215	9,903
Capital expenditures, SEK m	1,021	1,934
Number of shares outstanding at the end of the period	209,494,712	209,676,712
Average number of shares outstanding before dilution	209,563,072	209,748,468
Average number of shares outstanding after dilution	209,867,642	209,872,801
Key data per share
Earnings per share before dilution, SEK	7.41	6.98
Earnings per share after dilution, SEK	7.40	6.98
Ordinary dividend per share, SEK	7.001)	7.00
Shareholders' equity per share, SEK	20.54	20.35
Cash flow per share, SEK	0.93	-1.67

1) Proposed by the Board of Directors.

Quarterly overview

	Q1 2017	Q2 2017	Q3 2017	Q4 2017	Q1 2018	Q2 2018	Q3 2018	Q4 2018
Net sales	10,639	11,925	11,578	11,826	11,444	12,221	12,050	12,370
Operating profit	397	487	604	398	435	545	620	425
Operating margin, %	3.7	4.1	5.2	3.4	3.8	4.5	5.1	3.4
Earnings per share before dilution, SEK	1.47	1.81	2.23	1.46	1.61	2.01	2.24	1.54
Shareholders' equity per share, SEK	15.10	16.74	18.89	20.35	14.95	16.83	19.06	20.54
Return on shareholders' equity, %	47.9	42.7	37.8	34.9	47.3	43.8	38.7	36.2
Cash flow from operating activities per share, SEK	0.18	5.09	2.85	3.97	3.06	2.39	3.54	3.90
Capital expenditures	788	632	204	310	189	232	178	422
Net debt (+)/net receivable (-)	712	267	-327	-871	122	-6	-581	-1,047
Share price, SEK	134.60	140.60	139.70	158.10	142.75	172.30	166.40	151.70

Financial statements, Parent Company

Condensed income statement, Parent Company

SEK m	Q4 2018	Q4 2017	12 mos 2018	12 mos 2017
Net sales	1	0	3	1
Selling/administrative expenses, etc.	-43	-34	-128	-123
Operating profit	-42	-34	-125	-122
Other net financial items	0	0	21	3
Profit after financial items	-42	-34	-104	-119
Appropriations, net	1,681	1,737	1,681	1,737
Profit before tax	1,639	1,703	1,577	1,618
Tax	-365	-377	-353	-359
Net profit for the period	1,274	1,326	1,224	1,259
Operating profit includes depreciation/amortization totalling	3	2	11	10

Profit for the period corresponds to total comprehensive income for the period.

Condensed balance sheet, Parent Company

SEK m	31/12/2018	31/12/2017
Assets
Property, plant and equipment	5	12
Participations in Group companies	3,386	3,338
Other financial non-current assets	-	9
Deferred tax assets	8	7
Total non-current assets	3,399	3,366
Receivables from Group companies 1)	2,854	3,076
Other current assets	12	13
Cash and bank balances	848	804
Total current assets	3,714	3,893
Total assets	7,113	7,259
Shareholders' equity and liabilities
Restricted shareholders' equity	287	287
Unrestricted shareholders' equity	2,531	2,795
Total shareholders' equity	2,818	3,082
Untaxed reserves	2,639	2,400
Non-current interest-bearing liabilities	24	28
Noninterest-bearing non-current liabilities	2	2
Total non-current liabilities	26	30
Accounts payable – trade	19	20
Liabilities to Group companies 2)	1,512	1,594
Other current noninterest-bearing liabilities	99	133
Total current liabilities	1,630	1,747
Total shareholders' equity and liabilities	7,113	7,259
1) Of which, interest-bearing liabilities	920	1,019
2) Of which, interest-bearing liabilities	1,498	1,554

Notes

Note 1 Accounting policies

Axfood applies International Financial Reporting Standards (IFRS) as endorsed by the European Union. This interim report has been prepared for the Group in accordance with IAS 34 Interim Financial Reporting and applicable provisions of the Swedish Annual Accounts Act. Disclosures in accordance with IAS 34 Interim Financial Reporting are presented in notes as well as in other parts of the interim report. For the Parent Company, the interim report has been prepared in accordance with recommendation RFR 2 – Reporting for Legal Entities, issued by the Swedish Financial Reporting Board (RFR), and Ch. 9 – Interim Financial Reporting, of the Swedish Annual Accounts Act.

Preparation of the financial statements in accordance with IFRS requires the Board and company management to make estimations and assumptions that affect the Company's result and position as well as other disclosures in general. These estimations and assumptions are based on historical experience and are reviewed on a regular basis.

The same accounting policies and calculation methods have been used in this interim report as in the most recent annual report, apart from what is stated below. During the period Axfood applied the accounting policies for non-current assets held for sale. A non-current asset is classified as held for sale when its carrying amount will be recovered mainly through a sale and not through use. An asset is classified as held for sale when it is available for immediate sale in existing condition and according to normal terms, and it is highly probable that the sale will be carried out. Such assets are reported on a separate line as a current asset in the statement of financial position. Non-current assets are reported at the lower of their carrying amount and fair value less costs to sell.

New accounting policies 2018

The Group has begun applying IFRS 9 Financial Instruments as from 1 January 2018. The effect of the changeover to IFRS 9 on the consolidated financial statements is shown in the table below.

SEK m	Closing balance 31 Dec. 2017 before changeover to IFRS 9	Adjustments for changeover to IFRS 9	Adjusted opening balance 1 January 2018
Reserves	4	(4)	-
Profit brought forward	3,621	(1)	3,620

The combined effect (after tax) on the opening balance of the Group's shareholders' equity at 1 January 2018 is SEK 5 m. The effects consist of the following:

• A decrease of SEK 1 m attributable to profit brought forward owing to expected future credit losses on financial assets (according to the expected credit loss model). Axfood applies a simplified method for recognition of impairment.
• A decrease in the fair value reserve of SEK 4 m attributable to reclassification of financial assets.

Application of IFRS 15 Revenue from Contracts with Customers has not had any effects on opening balances. For further information, see Axfood's 2017 Annual Report.

New accounting policies effective in 2019 and later

To the extent that anticipated effects on the financial statements of application of new or amended standards and interpretations are not described below, Axfood has concluded that they will not have any material effect on the consolidated financial statements.

The Group will apply IFRS 16 Leases starting on 1 January 2019. IFRS 16 replaces the existing standard IAS 17 Leases.

During 2018 a project team was composed to work together with external accounting specialists with preparations ahead of adoption of the new standard. The project has involved compiling and reviewing the Group's leases, system updates, and workshops and training for employees affected by IFRS 16.

The Group plans to apply the modified retrospective approach. This entails that the accumulated effect of adoption of IFRS 16 will be recognized in retained earnings in the opening balance as per 1 January 2019 without recalculation of comparative figures. Right-ofuse assets attributable to previous operating leases will be recognized at their depreciated

value from the commencement of the lease with the addition of advance payments recognized on the balance sheet as per 31 December 2018.

Leases with a low value will not be included in the lease liability but will continue to be reported with a linear expensing over the lease term. The existence of leases with a maximum lease term of 12 months, so-called short-term leases, is considered to be insignificant in the Group.

Reconciliation operating leases (SEK bn) Assumptions for operating leases, 31 December 2018 6.3 Discounting using the Group's incremental borrowing rate -0.4 Liabilities for finance leases, 31 December 2018 0.1 Contracts pertaining to short-term leases that are expensed -0.0 Contracts pertaining to leases of assets with a low value that are expensed -0.0 Adjustment for extension options or termination clauses 0.2 Lease liability on 1 January 2019 6.2

Estimated effects on balance sheet 1 January 2019 (SEK bn)

Right-of-use asset	5.9
Prepaid expense	-0.2
Deferred tax asset	0.1
Shareholders' equity	0.4
Provision	0.0
Lease liability – current	-1.5
Lease liability – non-current	-4.7

The Group expects that operating profit for 2019 will increase compared with the use of the previous accounting policies on account of the fact that part of the lease expenses will be recognized as an interest expense. Cash flow from operating activities is expected to increase, and cash flow from financing activities is expected to decrease on account of the fact that the amortization portion of lease payments will be recognized as payments in the financing activities.

Note 2 Operating segments

Axfood's operating segments have been determined based on the information considered by the Group's Executive Committee and which is used to evaluate the result of operations and allocate resources to the segments. The Executive Committee monitors sales and operating profit for each of the business areas, which make up the Group's operating segments. The operating segments that have been identified are Willys, Hemköp, Dagab and Axfood Snabbgross. For information about Axfood's operating segments, see pages 7–10 of this yearend report. For a more detailed description of the segments, please refer to the 2017 Annual Report.

Axfood has no significant transactions with related parties other than transactions with subsidiaries.

Note 3 Significant risks and uncertainties

In the course of their business the Axfood Group and Parent Company are exposed to operational, strategic and financial risks. Operational and strategic risks include business and liability risks, among others, while financial risks include liquidity risk, interest rate risk and currency risk. Axfood works continuously with risk identification and assessment. One of the most significant business risks that Axfood has identified in its safety analysis work is of a total loss, such as from a fire at one of the central warehouses in Stockholm, Gothenburg or Örebro. Major emphasis is put on preventive work, and the organization for this is well developed, as is the Company's planning to maintain operating continuity in the event of unforeseen events.

For a thorough account of the risks that affect the Group, please refer to the 2017 Annual Report.

Note 4 Seasonal effects

Axfood's sales are affected to some degree by seasonal variations. Sales increase in the quarter in which Easter falls, which is either the first or second quarter. Sales also increase ahead of Midsummer during the second quarter, as well as ahead of the major holiday season during the fourth quarter.

Note 5 Acquired operations

During 2018 Axfood acquired four stores as well as shares in Urban Deli Holding AB. Since 2014 Axfood's holding in Urban Deli Holding AB has amounted to 50% of the shares and has been reported as a joint venture holding. On 27 December 2018 control was obtained in connection with the acquisition of an additional 36% of the shares. Axfood's share of ownership in Urban Deli Holding AB amounts to 90.7% as per 31 December 2018. The increase is attributable to a directed new issue after control was obtained. Axfood's share of ownership in the stores acquired in 2018 amounts to 100% after the acquisitions. All of the stores have been converted to Hemköp.

Acquired assets and liabilities are reported in Axfood's statement of financial position at fair value. None of the acquisitions are individually significant, which is why all of them are reported together in the compilation below.

The following assets and liabilities were acquired in 2018 1)	Fair value reported in Group
Intangible assets	39
Property, plant and equipment	26
Deferred tax assets	14
Current assets	27
Interest-bearing non-current assets	-20
Interest-bearing current liabilities	-6
Other current liabilities	-70
Total identified assets	10
Previously owned share	23
Non-controlling interests	0
Goodwill	57
Purchase price	90
Cash and cash equivalents in acquired operations	-1
Contingent consideration	-15
Consideration paid in preceding year	-29
Impact on cash and cash equivalents of acquisition of operations since start of year	45

1) The table is based on preliminary purchase price allocation calculations since the integration of Urban Deli will not be completed until 2019.

Acquired goodwill amounted to SEK 96 m (807) in 2018, of which approximately SEK 4 m (81) is expected to be tax-deductible.

During the months that followed the business acquisitions, the acquired operations contributed approximately SEK 130 m (1,462) to consolidated net sales. If the acquisitions had been made as per 1 January 2018, Axfood estimates that consolidated sales would have been approximately SEK 315 m (395) higher, i.e., approximately SEK 48,400 m (46,363). The earnings effect is difficult to determine as the operations have initially been charged with oneoff costs.

Part of the purchase consideration for Urban Deli is contingent and can amount to a maximum of SEK 15 m and is dependent on, among other things, future sales and earnings performance for the Urban Deli Group. A provision has been made for the maximum outcome. The Axfood Group has chosen to report non-controlling interests at their proportional shares of the acquired, identified net assets.

No amounts remain to be paid for previous years' acquisitions.

Acquisition-related expenses attributable to the year's acquisitions amount to SEK 0 m (8.3).

Note 6 Disclosures about financial assets and liabilities

In addition to contingent consideration payable according to Note 5, no significant changes have taken place in financial assets and liabilities regarding fair value measurement since the publication of the 2017 Annual Report. Fair value corresponds in all essential respects to book value.

Note 7 Pledged assets and contingent liabilities

Group, SEK m	31/12/2018	31/12/2017
Pledged assets	6	6
Contingent liabilities	21	17
Parent Company, SEK m	31/12/2018	31/12/2017
Pledged assets	0	0
Contingent liabilities	309	287

Note 8 Long-term share-based incentive

programmes

During the second quarter of 2018 the long-term share-based incentive programme LTIP 2018 was implemented pursuant to a resolution by the 2018 Annual General Meeting. The programme has the same terms as LTIP 2017. At the start of the programme, LTIP 2018 included 59 participants who together held 23,700 savings shares. According to the calculation model based on Monte Carlo simulations, the total cost for LTIP 2018 is estimated to be approximately SEK 33 m assuming a maximum outcome of approximately SEK 56 m.

To secure the Company's undertaking regarding conditional matching and performance shares under LTIP 2018, during the second quarter of 2018 Axfood repurchased 182,000 shares for a total of SEK 30 m at an average price of SEK 162.89 per share. The holding of treasury shares thereby amounts to 376,000 shares and ensures delivery of shares to LTIP 2017 and LTIP 2018.

Note 9 Events after the balance sheet date

• The Board of Directors proposes an unchanged ordinary dividend of SEK 7.00 per share (7.00).
• As a consequence of adoption of IFRS 16, Axfood's equity ratio target has been adjusted to an equity ratio of at least 20% at year-end.
• Capital expenditures by Axfood in 2019 are expected to amount to SEK 1,500–1,600 m excluding acquisitions and lease assets.
• Axfood plans to establish five to ten new stores in 2019.
• Monica Längbo took office as Head of Human Resources and member of the Executive Committee on 1 February 2019.

Financial key ratios

The Axfood Group uses various financial measures in its interim reports that are not defined in IFRS. Axfood believes that these key ratios are relevant for readers of Axfood's financial reports as a complement in assessing Axfood's performance. Since not all companies calculate financial measures in the same way, these are not always comparable with measures used by other companies. These financial measures are therefore not to be regarded as a substitute for measures defined in IFRS. The table below includes measures not defined in IFRS, unless indicated otherwise, as well as a reconciliation of these measures. Definitions of the key ratios are provided below.

Derivation and reconciliation

Store sales – Group-owned and franchise stores, quarterly data

				Like-for-like	Like-for-like
SEK m	Q4 2018	Q4 2017	%1)	sales Q4 2018	sales Q4 2017	%1)
Net sales, Willys	7,033	6,633	6.0	-	-	-
Of which, sales for Group-owned stores2)	7,033	6,633	6.0	6,965	6,608	5.4
Net sales, Hemköp	1,667	1,638	1.8	-	-	-
Of which, sales for Group-owned stores2)	1,634	1,606	1.8	1,580	1,550	2.0
Store sales, Hemköp franchises	1,900	1,853	2.6	1,880	1,812	3.8
Store sales, Hemköp Group-owned and franchise stores	3,534	3,459	2.2	3,460	3,362	2.9
Retail sales, Group-owned stores2)	8,667	8,239	5.2	8,545	8,158	4.7
Axfood Group, store sales	10,567	10,092	4.7	10,425	9,970	4.6
Axfood Snabbgross	795	727	9.4	791	716	10.4

Derivation and reconciliation

Store sales – Group-owned and franchise stores, 12-month data

				Like-for-like	Like-for-like
SEK m	Q4 2018	Q4 2017	%1)	sales Q4 2018	sales Q4 2017	%1)
Net sales, Willys	27,066	25,415	6.5	-	-	-
Of which, sales for Group-owned stores2)	27,066	25,415	6.5	26,420	25,334	4.3
Net sales, Hemköp	6,403	6,199	3.3	-	-	-
Of which, sales for Group-owned stores2)	6,268	6,071	3.2	5,934	5,871	1.1
Store sales, Hemköp franchises	7,423	7,220	2.8	7,323	7,054	3.8
Store sales, Hemköp Group-owned and franchise stores	13,691	13,291	3.0	13,257	12,925	2.6
Retail sales, Group-owned stores2)	33,334	31,486	5.9	32,354	31,205	3.7
Axfood Group, store sales	40,757	38,706	5.3	39,677	38,259	3.7
Axfood Snabbgross	3,241	2,984	8.6	3,185	2,960	7.6

1) Percentage change compared with corresponding period a year ago.

2) Summation of sales for Group-owned stores.

Operating key ratio definitions and glossary

Axfood Group: Group-owned stores and Hemköp franchise stores.

Average number of employees during the year: Total number of hours worked divided by the number of annual full-time equivalents (1,920 hours).

Delivery reliability: The share of delivered goods in relation to the share of ordered goods.

LTIP: Long-Term Incentive Programme (share-based).

Financial key ratio definitions

Capital employed: Total assets less noninterest-bearing liabilities and noninterest-bearing provisions. Average capital employed is calculated as capital employed at end of the period plus capital employed at the same point in time in the preceding year, divided by two.

Cash flow from operating activities per share: Cash flow from operating activities for the period divided by the weighted average number of shares outstanding.

Cash flow per share: Cash flow for the period divided by the weighted average number of shares outstanding before dilution.

Debt-equity ratio: Interest-bearing liabilities divided by shareholders' equity including non-controlling interests.

Earnings per share: Net profit for the period attributable to owners of the parent divided by a weighted average number of shares outstanding.

Equity ratio: Shareholders' equity including noncontrolling interests as a percentage of total assets.

Interest-bearing net debt receivable/liability: Interestbearing non-current and current receivables and liabilities, including cash and bank balances, and the interestbearing portion of financial assets.

Interest cover ratio: Profit after financial items plus financial expenses, divided by financial expenses.

Joint-Group: Includes head office support functions, such as the Executive Committee, Finance/Accounting, Communications, Business Development, HR and IT.

Like-for-like sales: Sales for stores that existed and generated sales in the comparison period, broken down into Group-owned and franchise stores.

Margin after financial items: Profit after financial items as a percentage of net sales for the period.

Net capital expenditures in cash flow: Total capital expenditures excluding investments pertaining to leasing, less divestments.

Net debt-equity ratio/net receivable-equity ratio: Interest-bearing liabilities and provisions less cash and cash equivalents and interest-bearing receivables, divided by shareholders' equity including non-controlling interests.

Operating margin: Operating profit as a percentage of net sales for the period.

Pro forma: Pro forma is a method for reporting changed historical figures that describe financial effects after a change in order to be able to compare with current figures.

Return on capital employed: Profit after financial items, plus financial expenses, as a percentage of average capital employed.

Return on shareholders' equity: Net profit for the period attributable to owners of the parent as a percentage of average equity attributable to owners of the parent. Average equity is calculated as shareholders' equity at the end of the period plus shareholders' equity at the same point in time in the preceding year, divided by two.

Sales, Group-owned retail operations: Sales for Hemköp and Willys stores owned by Axfood.

Sales growth: Percentage increase in sales between two periods.

Sales of private label products: Sales of private label products, excluding meats and fruits & vegetables, as a percentage of store sales including Hemköp franchise stores. The private label share is based on statistical data from external suppliers. Data from a selection of Axfood's stores are calculated statistically to a total sum based on the stores' annual sales. In this selection, sales for Groupowned and franchise stores are weighted according to the actual historical sales.

Shareholders' equity per share: Equity attributable to owners of the parent divided by the number of shares before dilution.

Store sales, Axfood Group: Sales for Hemköp and Willys stores, including Hemköp franchise.

Total capital expenditures: Investments in intangible and tangible non-current assets, including finance leases.

About Axfood

At Axfood we work with passion for food and people. Food that is good and sustainable. Axfood includes the Willys and Hemköp chains as well as the Tempo, Handlar'n and Direkten chains, comprising retailer-owned stores. B2B sales are made through the Axfood Snabbgross chain, and wholesaling is conducted through Dagab. Axfood is also the owner of mat.se and Middagsfrid, and a part-owner of Apohem, Eurocash and Urban Deli. The number of Group-owned stores is 302. In all, Axfood collaborates with approximately 900 retailer-owned stores. Axfood is listed on Nasdaq Stockholm (Large Cap), and the principal owner is Axel Johnson AB.

Vision

Axfood will be the leader in good and sustainable food.

Mission

Axfood enables a better day where everyone can enjoy affordable, good and sustainable food.

Business concept

A family of successful and distinctive food concepts in close collaboration.

Business model

Axfood's business model is built upon three processes, where every detail in the process is important for the Company's success. It begins with the choice of suppliers by Axfood's joint-Group assortment and purchasing function for all of the Group's concepts (choice of suppliers, price negotiations, and purchasing). Efficient logistics then create conditions for favourable and profitable growth together with sustainable transports and efficient use of energy (logistics). A distinct sustainability profile, attentive customer service and smart store layout are key aspects in creating an inspiring in-store experience (stores, customers and passion for food).

Strategy

Axfood's strategy is built upon six strategic areas: the customer offering, the customer meeting, expansion, the product's path, our way of working, and our people. Axfood will offer an affordable and wide product range of good and sustainable food that is a mix of own and popular brands. With sustainable and efficient product supply, customers will be served wherever they may be at any time of the day or night – both in physical stores and via e-commerce. Through new sales channels featuring new and innovative services and segments we will meet our customers' needs. Aside from these areas it is essential that we attract and develop the industry's top talent as part of our efforts to also have a customer-centric and dynamic organization in which efficiency and cost control are in focus. For Axfood it goes without saying that sustainability and community engagement run like a common thread through all our operations.

Investment case – value drivers

Axfood emphasizes four factors that it believes are important regarding an investment in Axfood:

• The Swedish food retail industry is relatively insensitive to economic swings, with stable growth that is mainly driven by population growth and inflation.
• Historically Axfood has delivered favourable returns. The dividend policy is to distribute at least 50% of profit after tax.
• Axfood's concepts have strong positions in their respective segments. An attractive and sustainable assortment is central to all of the concepts, and the affordability and distinct profiles of the Group's private label products – including sustainability aspects – play an important role.
• Through a focus on profitable growth, Axfood has the opportunity to deliver favourable growth in value over time. Axfood's distinct sustainability profile is a competitive advantage.

Long-term financial targets and investments 2019

• Axfood's long-term financial targets:
• Grow more than the market

assets.

• Long-term operating margin of at least 4%
• An equity ratio of at least 20% by year-end
• Axfood's dividend policy sets the goal that the shareholder dividend shall be at least 50% of profit after tax. • Axfood's capital expenditures in 2019 are expected to amount to SEK 1,500–1,600 m, excluding acquisitions and lease
• Axfood AB, SE-107 69 Stockholm Norra Stationsgatan 80 C Tel. +46-8-553 990 00 info@axfood.se, axfood.se Reg. no. 556542-0824