Bakkafrost P/f

Annual Report (ESEF) • Mar 31, 2023

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by the Management and the Board of Directors 4 Outlook 8 Bakkafrost at a Glance 12 Key Figures 15 Main Events 16  STRATEGY 17 Business Objectives and Strategy 18 Business Model 20 Differentiators 21 Outline of Bakkafrost’s History 23 The Value Chain 24  PERFORMANCE 30 Operational Review 31 Financial Review 35 Farming Segment – Faroe Islands (FO) 38 Farming Segment – Scotland (SCT) 40 VAP Segment 42 FOF Segment 44 Market Review 47  RISKS 58 Risk Management 59  GOVERNANCE 68 Corporate Governance 69 Corporate Responsibility and Sustainability 71 Shareholder Information 73 Directors and Management 74 Directors’ Profiles 75 Group Management’s Profiles 77 Statement by the Management and the Board of Directors on the Annual Report 78 Independent Auditor’s Report 79 2 ANNUAL REPORT 2022 Contents FINANCIAL STATEMENTS AND NOTES – BAKKAFROST GROUP 84 Consolidated Income Statement 88 Consolidated Statement of Other Comprehensive Income 89 Consolidated Statement of Financial Position 90 Consolidated Cash Flow Statement 92 Consolidated Statement of Changes in Equity 93 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS – BAKKAFROST GROUP 94 NOTES – SECTION 1 Basis of Preparation 95 NOTES – SECTION 2 Results for the Year 98 NOTES – SECTION 3 Assets and Liabilities 109 NOTES – SECTION 4 Capital Structure and Financing Items 134 NOTES – SECTION 5 Other Disclosures 141 FINANCIAL STATEMENTS – P/F BAKKAFROST 149 P/F BAKKAFROST – Income Statement 151 P/F BAKKAFROST – Statement of Financial Position 152 P/F BAKKAFROST – Cash Flow Statement 154 P/F BAKKAFROST – Statement of Changes in Equity 155 P/F BAKKAFROST – NOTES TO THE FINANCIAL STATEMENTS 156 APPENDIX 164 Quarterly financial figures 2020-2022 164 Market Announcements Published in 2022 167 Financial Calendar for 2023 168 Glossary 169 3 ANNUAL REPORT 2022 RÚNI M. HANSEN Chairman of the Board A TURBULENT YEAR Bakkafrost has managed to navigate well through 2022 which was a year with great market turbulence and uncer- tainties in the global economy. Overall we are satisfied with the results – especially in the operation in the Faroe Islands. The turbulent year can be caracterized as a year of two halves with highly volatile salmon prices. Volatile market At the beginning of the year, the market outlook was positive as the global market was increasingly unwound from Cov- id. The reopening of the food service industries increased the demand for salmon. Combined with the negative supply growth of salmon in the first half of 2022, this led to sub- stantially higher salmon prices, reaching all-time high levels of 126.22 NOK/kg 1 in the last week of April 2022. Howev- er, following Russia’s invasion of Ukraine in February, global supply chains were again disrupted, and the world econo- my faced significant challenges and increased uncertainties. Bakkafrost stopped all trade with Russia following the inva- sion of Ukraine and managed to divert the affected sales vol- umes into other markets and find new suppliers and raw ma- terials that could no longer be sourced from Ukraine. In the second half of 2022, spot prices fell as low as 57.45 NOK/ kg 1 in August to increase into Q4 and reach 85.97 NOK/kg 1 at year-end. The global volume of salmon sold was reduced by 2.1% in 2022 compared to 2021. Most notably, the sale to Russia and Ukraine was reduced 43% each. Global sales to the EU and China declined by 1% and 2%, respectively, while sales to the US increased by 3%. Hence, the US market was one of the strongest in 2022, just as during 2021 when the global sales to the US market grew 13%. In 2022, Bakkafrost sold 67% of the volume to the EU mar- ket, compared to 61% in 2021. Sales to the US and Asia were 1 NASDAQ superior 4-5kg (HOG) 18% and 9%, respectively, compared to 19% and 11%, in 2021. Bakkafrost sold 40% of the harvested volume from the Faroe Islands to the retail market, compared to 33% in 2021. Bakkafrost has an excellent capacity to produce retail products in the VAP segment and has a strategy of selling around 35-40% of the harvest volume to the retail market. However, the food service market is important to Bakkafrost as we usually achieve a higher price premium. The high inflation and uncertain supply chains in 2022 were unforeseen, but Bakkafrost has managed to navigate well through this through careful procurement planning. Raw material prices for feed production have been impacted the most, but the effect of this has been more than offset by the increased salmon price, which is believed to have left the level of around 60 NOK/kg, it has fluctuated since 2016. With general inflation and a tight salmon market outlook taken into account, it is likely that the salmon price will remain at a higher level in the coming years. Bakkafrost harvested 90.6 thousand tonnes of salmon head- on gutted weight in 2022, of which 66.7 thousand tonnes were harvested in the Faroe Islands, and 23.9 thousand tonnes in Scotland. In comparison, Bakkafrost harvested 96.9 thou- sand tonnes in 2021. Bakkafrost had all-time high revenues of 7,130 mDKK in 2022, compared to 5,554 mDKK in 2021. Operational EBIT was also all-time high at 1,705 mDKK, com- pared to 821 mDKK in 2021. The results from the operation in the Faroe Islands were satisfactory, while the results from Scotland were weak and negatively affected by exceptional mortality costs. Scotland improving When Bakkafrost acquired Bakkafrost Scotland (previously named “The Scottish Salmon Company”) in Q4 2019, it was fully known that this was a turnaround case, requiring sig- nificant investments to be made over 5 years. This also was Statement by the Management and the Board of Directors STATEMENT BY THE MANAGEMENT AND THE BOARD OF DIRECTORS 4 ANNUAL REPORT 2022 detailed at our 2021 Capital Markets Day, where a 6.2bn DKK was announced, whereof 2.8bn DKK is planned for Scotland. The first years during the turnaround period were expected to be difficult, however less challenging than experienced in 2021 and 2022. During these two years, farming conditions have been more difficult than usual. Bakkafrost suffered sig- nificant biological challenges leading to high mortality costs for our fish. Significant challenges in Scotland are poor qual- ity smolt and gill challenges in marine farming. The turnaround of the Scottish operation is mainly driven by the same kind of investments as Bakkafrost has made in the Faroe Islands, where we have successfully demonstrated that biological risk can be reduced and efficiency improved. In Scotland, the most important investments are the replace- ment of the old obsolete hatcheries acquired with three new state-of-the-art hatcheries based on the same technology and experience from the Faroe Islands. Now, three years into the process, we see some early in- dications of improvements. However, the real test being in the autumn when sea water temperature and biological risks peak. The first of the new hatcheries, Applecross, is expect- ed to deliver the first batch of large smolt in Q2 2023, and the second hatchery is expected to start construction in H2 2023. We have also seen good results from our increased treatment vessel capacity in Scotland, most recently in late Q3 2022 with the arrival of our second Farming Service Vessel for freshwater treatment. The vessel is uniquely equipped with dual treatment systems, treating gill health issues with fresh water and removing sea lice. At the beginning of 2023, we have seen the benefit of this on the sales value of our fish by being able to adapt harvest to the improved biological situation, thereby growing the fish larger to achieve higher value in the market. We have already made several improvements in Scotland besides building hatcheries and treatment vessel capacity. This includes substantial investments in processing capaci- ty, technology and marine farming operations. In addition, best practices have been shared across the Faroe Islands and Scotland to extract and implement the best of two worlds. We have focused on collaboration and knowledge transfer, supported by new organisational structures and simplicity via our strategic focus, “One Company“. One important mile- stone was passed in May 2022 when we renamed the Scot- tish Salmon Company “Bakkafrost Scotland”. Strong development in the Faroe Islands Bakkafrost’s operation in the Faroe Islands is robust. Dur- ing 2022 the biological performance has continued to im- prove with strong growth, all-time low sea lice, historically STATEMENT BY THE MANAGEMENT AND THE BOARD OF DIRECTORS 5 ANNUAL REPORT 2022 low mortality and biological feed conversion ratio. This is partly due to efficient treatment strategy and improvements to the large smolt production method. This has been adjust- ed and improved continuously, resulting in more robust and better-performing smolt. Significant investments have been made in increased hatch- ery capacity to produce large smolt of around 500 g. In Q4 2022, the expanded capacity at the Norðtoftir hatchery was commissioned and started production. In Q1 2023, the same applies to the expanded hatchery at Glyvradal, which will be followed by the commissioning of the expansion of the Viðareiði hatchery. Combined, these hatcheries provide an additional annual production capacity of 6.5 million smolt of 500 g. In addition, we expect to start the construction of a new hatchery at Ónavík in H1 2023, which will expand the annual smolt production capacity to more than 23 million smolt of 500 g. Production capacity is also increased throughout the value chain. In coming years, we expect actual harvest volumes to grow towards the guidance target for 2026, which is 100,000 tonnes of head-on gutted weight. This is only the beginning, as the full effect of the large smolt strategy has yet to materialise, but this will gradually reveal itself in the coming years. Fishmeal, Oil and Feed scaling up for the future One of the expected synergies following the acquisition of Bakkafrost Scotland was increased efficiency at our fishmeal, -oil and feed plant, Havsbrún. In 2022, 83% of the feed in Scotland was supplied from Havsbrún, and the operational efficiency has improved noticeably. To prepare for future growth, Havsbrún has in 2022 started expanding its feed production capacity with a new feed line. Feeding our Scottish salmon with the same feed from Havs- brún used to feed our salmon in the Faroe Islands is an essential step towards harmonizing the quality and custom- er perception of our salmon. This increases the flexibility in sales and helps us develop further the value proposition to our customers. Sustainability Bakkafrost is uniquely located in one of the best natural envi- ronments for salmon farming, with excellent and sustainable access to marine raw material for fish feed production. Given our location in the North Atlantic Ocean and the challenge of ensuring enough healthy and sustainably produced food for the world’s growing population, we see it as our obliga- tion to increase our supply of salmon to the world. Salmon is amongst the most sustainable and resource-efficient sources of healthy animal protein. Over the following years, we will increase our supply significantly, reaching 150,000 tonnes STATEMENT BY THE MANAGEMENT AND THE BOARD OF DIRECTORS 6 ANNUAL REPORT 2022 of head-on gutted weight in 2026. Hence, it is vital that we firmly address the sustainability challenges. Bakkafrost is committed to contributing to UN SGDs and is being evaluat- ed by increasing sustainability-focused analysts and rating organisations. We provide comprehensive and transparent sustainability reporting and demonstrate that Bakkafrost is at the forefront of sustainable food production. We have committed ourselves to reducing scope 1 & 2 car- bon emissions by 50% and scope 3 carbon emissions by 52% in 2030. We have also committed ourselves to net-zero in 2050. These targets are science-based, in line with the Paris Treaty, and scheduled for SBTi approval in 2023. The details on our progress and achievements towards our sustainability targets are disclosed in our 2022 Healty Living Sustainability Report. Bakkafrost has a long value chain, which gives us more au- tonomy to seek opportunities to reduce our environmental footprint. For example, we rely on air cargo to overseas mar- kets. To reduce our carbon emissions from air freight, we have decided to acquire our own cargo plane to set up direct transport to the US market. We expect this to be operational in H1 2023, and it will enable us to shorten the flown dis- tance and omit the weight of ice transported. The result is a reduced carbon emission for the fresh salmon sold to the US by around 40-50% for each kg of edible product. Investments In September 2021, Bakkafrost held its biennial Capital Markets Day in the Faroe Islands, where the Group’s invest- ment plan for 2022-2026 and strategy were disclosed. The large smolt strategy is the main game changer for opera- tion in Scotland, reducing biological risk, improving efficien- cy, reducing cost, and providing an opportunity for further sustainable growth. Another strategic priority is the “One Company” pillar of the strategy, whereby the Faroese and Scottish operations gradually evolve into one, building on the strengths and best practices of both. With the disclosed investment plan, Bakkafrost expects to grow harvest volumes to 150,000 tonnes of head-on gutted weight in 2026 while simultaneously building production ca- pacity for 180,000 tonnes and preparing for further growth. Bakkafrost will host the next Capital Markets Day on 6-7 June 2023. The Capital Markets Day will be held in Scotland. Tax uncertainties In September 2022, the Norwegian Government proposed a new resource tax for the Norwegian salmon industry. This caused great uncertainty to the Norwegian salmon and the financial market with interests in this industry. As Bakkafrost has no operation in Norway, Bakkafrost is not subject to Nor- wegian tax. However, since 2014 there has been a special revenue tax on salmon farming in the Faroes. The Faroese Government is expected to make adjustments to the revenue tax. These adjustments are expected to increase the revenue tax at very high salmon prices while giving improved down- side protection when salmon prices are low. In Scotland, there is no special tax on the salmon industry. Strong financial position In December 2021, Bakkafrost entered a term sheet for a sustainability-linked revolving multicurrency financing agreement of 700 mEUR. With this agreement, we have en- sured the funding of our investment program for 2022-2026. The applicable interest margin depends on Bakkafrost’s per- formance against several sustainability KPIs. These include increasing the survivability rate of the fish, decreasing the biological feed conversion ratio and generating our own pro- duction of renewable energy. The Bakkafrost Group’s interest-bearing debt was DKK 2,664 million at the end of 2022, compared with DKK 2,126 million at the year-end 2021. The Group had undrawn committed credit facilities of DKK 2,542 million at the end of 2022. The Bakkafrost Group made a profit of DKK 1,344 million in 2022, compared with DKK 964 million in 2021. Bakkafrost’s equity ratio was 62% at the end of 2022, compared to 64% at the end of 2021. Return to shareholders The Board of Directors will propose a dividend of DKK 10.00 per share at the Annual General Meeting convened on 28 April 2023. This corresponds to a total dividend of DKK 591,430 million. Thank you to our employees On behalf of the Board of Directors and Management, we thank all employees in the Bakkafrost Group for their com- mitment and hard work in 2022. STATEMENT BY THE MANAGEMENT AND THE BOARD OF DIRECTORS 7 ANNUAL REPORT 2022 Outlook Market Supply decreased in 2022 The supply of salmon decreased by 2% in 2022 compared to 2021, incl. inventory movements. 44% higher salmon prices Salmon spot prices were 44% higher this year compared to 2021. Strong demand for salmon, low supply increase and general inflation have contributed to high salmon prices this year. Low growth in 2023 In H1 2023, the global supply is expected to be on the same level as in H1 2022. In H2 2023, the global supply is expect- ed to grow around 4-5%. For the full year 2023, the global supply growth is expected to be around 2%, excluding inven- tory movements. Bakkafrost has a strong focus on ensuring a well-balanced flow to the different markets to increase diversification and mitigate market risk. Bakkafrost operates in the main salmon markets, Europe, the USA, and the Far East. Since the begin- ning of the war in Ukraine, Bakkafrost has stopped all trading with Russia. Farming The strong biological performance in the Faroese farming op- eration seen in previous years has continued this year. Sea lice levels have been maintained at all-time low this year, and the low mortality rates have continued. Bakkafrost’s new 10,000 m 3 Live Fish Carrier, Bakkafossur, arrived in the Faroe Islands at the beginning of January 2023 and will play an important role in strengthening Bakkafrost’s capabilities to maintain low biological risk in the Faroe Is- lands. Also, the vessel is designed to support future off-shore farming in the Faroe Islands. The Norðtoftir hatchery is now in operation and has success- fully released the first batch of large smolt since the expan- sion. The hatchery expansion at Glyvradal is about to be fin- ished and will start operation in Q1 2023. Combined, these capacity expansions will increase the smolt production ca- pacity in the Faroe Islands with around 6.5 million smolts of 500 g. These are important milestones to fulfil Bakkafrost’s goal to build an annual smolt production capacity in the Far- oe Islands of over 23 million smolts of 500 g in 2026. In Scotland, farming conditions in 2022 have followed the normal seasonal pattern with more biological challenges in the second half of the year, compared to the first half. How- ever, the biological situation improved considerably in the second half of Q4, and Bakkafrost decided to slow down har- vest to let the fish continue growing and gain weight. This re- duced the harvest volume in Q4 2022 but will increase value with harvesting larger fish in Q1 2023. Overall, the mortality in Q4 2022 was lower than the same quarter the year before, and from the beginning of December 2022, mortality levels have been at the same level as normally found in the first half of the year. One contributing factor to the improved biological devel- opment in late Q4 in Scotland was the arrival of the new 4,000 m 3 Live Fish Carrier in late September 2022. Equipped with freshwater treatment capacity as well as an innovative in-line freshwater-based sea lice removal system this vessel can efficiently do dual treatments for gill-related issues as well as sea lice removal in one operation. The operation has proven to be efficient and Bakkafrost has decided to imple- ment the same systems on the second Live Fish Carrier in Scotland as well as on the new Live Fish Carrier in the Faroe Islands, Bakkafossur. The biological risk in Scotland is still higher than in the Faroe Islands but is expected to be transformed with the implemen- tation of Bakkafrost’s large-smolt strategy. As demonstrated in the Faroe Islands, large high-quality and robust smolt will have a lower risk exposure in the marine environment due to shorter production cycles in the sea. This is expected to significantly reduce the biological risk in Scotland and is fun- damental to the turnaround of the farming operation. There- fore, it is Bakkafrost’s topmost priority in Scotland to build new modern hatcheries. The ongoing expansion of the Ap- plecross hatchery is progressing well, and the Applecross 4 expansion is expected to be operational with fish in the tanks in March 2023. The first batch of large smolt delivered from Applecross 4 is planned for Q2 2023 and will contribute to increasing the mean weights and quality of the smolt stocked in Scotland in 2023. OUTLOOK 8 ANNUAL REPORT 2022 The full capacity of the Applecross hatchery, including the next expansions, will be in operation in mid-2024, bringing the overall annual production capacity from Applecross to around 10 million high-quality smolts of around 500 g. In 2022, the average weight of released smolt in Scotland was 107 g, which is 12% higher than in 2021. Bakkafrost plans to build 3 large hatcheries in Scotland, which will increase the total annual production capacity to around 18 million smolts of around 500 g in 2026. Smolt release Bakkafrost expects to release around 16 million large smolts in 2023 in the Faroe Islands and around 9.6 million smolts in Scotland. The number and the average weight of smolts released are key elements of predicting Bakkafrost’s future production. The average weight of the smolt released in Scotland in 2023 is expected to increase to around 150-175 g. In 2023, the number of released smolt will be lower than in previous years as the focus is on stabilising the operation before in- creasing the volume. In this respect, smolt quality is more important than the released volume. Harvest volumes for 2022 in the Faroe Islands were 66.7 thousand tonnes gutted weight and 23.9 thousand tonnes gutted weight in Scotland, giving a total of 90.6 thou- sand tonnes gutted weight. In 2023, Bakkafrost expects to harvest around 68,000 tonnes gutted weight in the Faroe Islands and 30,000 tonnes gutted weight in Scotland, giving a total of around 98,000 tonnes gutted weight. The estimates for harvest volumes and smolt releases in both geographies are dependent on biological development. VAP (Value added products) Bakkafrost’s highly fl exible value chain includes a state- of-the-art VAP factory with high capacity. This enables Bakkafrost to adapt well to the rapidly changing market sit- uations. Bakkafrost’s long-term strategy is to sell around 40% of the harvested volumes of salmon as VAP products on contracts. The contracts are at fi xed prices with a duration of 6 to 12 months. For 2023, Bakkafrost has signed contracts covering around 23% of the expected harvest volumes in the Faroe Islands and Scotland combined. FOF (Fishmeal, oil and feed) The outlook of fi shmeal and fi sh oil production is dependent on the availability of raw materials. The ICES 2023 recommendation for blue whit ing is 1,360 thousand tonnes, which is an 81% increase from the recom- mendation for 2022. In 2023 Bakkafrost expects similar production volumes of fi shmeal and fi sh oil as in 2022. Havsbrún’s sales of fi sh feed in 2022 was 128,000 tonnes and is expected to increase up to around 130,000 tonnes in 2023. The major market for Havsbrún’s fi sh feed are the internal Faroese and Scottish Farming segments. Lately, the prices on vegetable raw materials have increased signifi cantly. This affects the whole animal protein market as well as other food producers. Bakkafrost is in a relatively good competitive position due to the low inclusion of vegeta- ble ingredients in the feed combined with a low feed conver- sion ratio and good access to marine raw materials. Investments On the Capital Markets Day on 14-15 September 2021, Bakkafrost announced a 6.2bn DKK investment plan for 2022-2026. The investments will enable a transformation of the operation in Scotland and provide sustainable growth in the Faroe Islands as well as Scotland. The main purpose of the investments in Scotland is to rep- licate Bakkafrost’s successful operation in the Faroe Islands. Bakkafrost plans to build 3 large energy-effi cient hatcher- ies in Scotland, enabling the implementation of Bakkafrost’s large smolt strategy and giving an annual production capac- ity above 18 million smolts at 500 g. Having large smolt in Scotland will transform the performance, lower the biological risk and increase harvest volumes. In addition to building hatchery capacity, Bakkafrost plans to build a new process- ing plant to strengthen processing capabilities and increase fl exibility in operation. Bakkafrost will also invest in more service vessel capacity to improve the mitigation of biologi- cal risk. Further, Bakkafrost will make investments in marine site development. The investments in the Faroe Islands include increasing annu- al hatchery production capacity to around 23 million smolts at 500 g, investments in a brood stock facility and expansion of feed production capacity. With the investment plan, Bakkafrost expects to sustainably grow the total annual harvest volumes to 150,000 tonnes in 2026. Over the same period, the total annual production capacity in Bakkafrost’s value chain will reach 180,000 tonnes gutted weight. Million smolt released '23e '22 '21 '20 '19 '18 FO 16.0 14.4 14.4 14.3 12.7 12.6 SCT 9.6 11.0 11.1 10.4 12.4 8.6 OUTLOOK 9 ANNUAL REPORT 2022 Capital Market Day in Scotland in 2023 Bakkafrost’s next Capital Markets Day will be on 6-7 June 2023 and will be held in Scotland. Financial The long-term market balance in the global market for salmon products will most likely remain favourable for Bakkafrost. Bakkafrost has a long val ue chain and a cost-efficient pro- duction of high-qual ity salmon products and will likely main- tain finan cial flexibility going forward. In March 2022, Bakkafrost finalized a new sustainability- linked 700 mEUR multicurrency revolving credit facility agreement with an additional accordion option of 150 mEUR. The facility has a tenor of five years plus an extension of one year. In combination with Bakkafrost’s high equity ratio, the facility gives the necessary financial strength and flexibility for the Group’s investment plans aimed at significant organic growth and structural cost reductions in Scotland. It will also enable M&A’s and further organic growth opportunities as well as support an un changed dividend policy in the future. Fig. 1 6.2BN DKK INVESTMENT PROGRAMME 2022-2026 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2022 2023 2024 2025 2026 Marine FOF Processing Freshwater&Broodstock Other FSV mDKK OUTLOOK 10 ANNUAL REPORT 2022 11 FAROE ISLANDS SCOTLAND DENMARK FRANCE UNITED STATES OF AMERICA LEGEND TO MAP SYMBOLS Headquarters, Sales Fishmeal, Fish oil & Fish feed Broodstock, Hatcheries & Farming Harvest & Processing Farming Service Vessels, Packaging & Biogas BIOGAS FISHMEAL FISH OIL FARMING FISH FEED HATCHERIES SALES/LOGISTICS PACKAGING FSV (FARMING SERVICE VESSELS) HARVESTING PROCESSING Sales Processing Sales Processing Sales BROODSTOCK Sales Broodstock, Hatcheries & Farming Harvest & Processing Farming Service Vessels BAKKAFROST Salmon, packaging, fishmeal, fish oil and fish feed producer Location: Faroe Islands Headquarters: Glyvrar, Eysturoy Production and business-to-business sale: salmon, fishmeal, fish oil and fish feed Longest integrated value chain in the industry Listed on: Oslo Børs with ticker code BAKKA Bakkafrost at a Glance BAKKAFROST AT A GLANCE 12 ANNUAL REPORT 2022 CONSTRUCTION/EXPANSION Faroe Islands Scotland FAROE ISLANDS SCOTLAND HARRIS AND LEWIS SOUTH UIST NORTH UIST GLYVRAR FUGLAFJØRÐUR KLAKSVÍK TÓRSHAVN VÁGUR LOCH CARRON APPLECROSS LOCH FYNE LOCH STRIVEN LOCH TORRIDON CAIRNDOW MARYBANK STORNOWAY (SMOKEHOUSE) LOCH ROAG SKYE MULL JURA ISLAY GIGHA ARRAN EDINBURGH FISHMEAL/OIL & FEED FACTORY HATCHERIES FARMING SITES BROODSTOCK HARVEST FACTORIES PROCESSING PLANT PACKAGING FACTORY HEADQUARTERS SALES OFFICES BIOGAS LEGEND TO MAP SYMBOLS I N N E R H E B R I D E S O U T E R H E B R I D E S BAKKAFROST AT A GLANCE 13 ANNUAL REPORT 2022 14 Key Figures (DKK 1,000) Income Statement 2022 2021 2020 2019 2018 Operating revenues 7,129,967 5,553,849 4,651,892 4,511,107 3,177,422 Operational EBIT * 1,705,165 821,194 621,158 1,325,100 1,074,912 Operational EBITDA * 2,242,645 1,351,628 1,067,923 1,635,215 1,273,810 Earnings before interest and taxes (EBIT) 1,826,153 1,144,685 691,123 1,019,217 1,184,233 Earnings before taxes (EBT) 1,690,335 1,137,662 625,984 981,916 1,172,066 Net earnings 1,344,330 964,036 462,845 801,885 960,292 Earnings per share before fair value adjustments of biomass and provision for onerous contracts (DKK) 19.02 10.28 6.20 19.04 16.44 Earnings per share after fair value adjustments of biomass and provision for onerous contracts (DKK) 22.75 16.32 7.83 15.53 19.74 Statement of Financial Position Total non-current assets 11,164,639 10,059,184 9,224,680 8,670,109 3,396,036 Total current assets 5,716,933 4,568,984 3,983,644 4,431,296 2,406,487 TOTAL ASSETS 16,881,572 14,628,168 13,208,324 13,101,405 5,802,523 Total equity 10,395,813 9,347,545 8,729,487 8,496,875 4,077,029 Total liabilities 6,485,759 5,280,623 4,478,837 4,604,530 1,725,494 TOTAL EQUITY AND LIABILITIES 16,881,572 14,628,168 13,208,324 13,101,405 5,802,523 Net interest-bearing debt 2,663,686 2,125,811 1,752,751 1,018,686 495,479 Equity share 62% 64% 66% 65% 70% Aligned for fair value adjustments of biomass, onerous contracts provision, income from associates Operating revenues 7,129,967 5,553,849 4,651,892 4,511,107 3,177,422 Operational EBIT * 1,705,165 821,194 621,158 1,325,100 1,074,912 Operational EBITDA * 2,242,645 1,351,628 1,067,923 1,635,215 1,273,810 Earnings before interest and taxes (EBIT) 1,826,153 1,144,685 691,123 1,019,217 1,184,233 Earnings before taxes (EBT) 1,690,335 1,137,662 625,984 981,916 1,172,066 Net earnings 1,344,330 964,036 462,845 801,885 960,292 of biomass and provision for onerous contracts (DKK) 19.02 10.28 6.20 19.04 16.44 of biomass and provision for onerous contracts (DKK) 22.75 16.32 7.83 15.53 19.74 Total non-current assets 11,164,639 10,059,184 9,224,680 8,670,109 3,396,036 Total current assets 5,716,933 4,568,984 3,983,644 4,431,296 2,406,487 TOTAL ASSETS 16,881,572 14,628,168 13,208,324 13,101,405 5,802,523 Total equity 10,395,813 9,347,545 8,729,487 8,496,875 4,077,029 Total liabilities 6,485,759 5,280,623 4,478,837 4,604,530 1,725,494 TOTAL EQUITY AND LIABILITIES 16,881,572 14,628,168 13,208,324 13,101,405 5,802,523 Net interest-bearing debt 2,663,686 2,125,811 1,752,751 1,018,686 495,479 Equity share 62% 64% 66% 65% 70% Fig. 2 KEY FIGURES 15 ANNUAL REPORT 2022 November • Arranged our first Bakkafrost Supplier Day to engage with our most significant suppliers in the Faroe Islands to drive car- bon reduction and general ESG reporting • Open day for key stakeholders, our communities and em ploy- ees on our new hybrid 4,000 m 3 well boat in Storno- way, Isle of Lewis equipped with flushing technology and reverse osmosis to increase freshwater treat ment capacity. July • Bakkafrost contributes to annual local Salmon Market, opening our HQ to the public and serving salmon to participants September • Bakkafrost takes delivery of our first 100% electric catamaran workboat ‘Grønarók’ • Bakkafrost Scotland receives a second wellboat with a capacity of 4,000 m 3 . • Position Green (formerly The Governance Group) appoints Bakkafrost among top performers in Scandinavia in sustainability reporting • Launched our first Summary Sustainability Report • Bakkafrost announces the acquistion of P/F Faroe Seafood 2011 and it’s subsidiary Faroe France which is renamed “Bakkafrost France” January • Bakkafrost announces the acquisition of 90% of the shares in Munkebo Seafood A/S, a seafood canning busi- ness in Munkebo, Denmark. Bakkafrost has been one of the largest suppliers of raw materials for the company in recent years. April • Native Hebridean smoked salmon awarded 2 star in UK Great Taste Awards February • Bakkafrost subsidiary Munkebo launches vegan soup May • The Scottish Salmon Company is formally renamed to Bakkafrost Scotland and introduces the brand “Bakka Salmon” to be used for salmon from the Faroe Islands and Scotland December • Bakkafrost receives the new 10,000 m 3 wellboat, Bakkafossur, planned for operation in the Faroe Islands • Bakkafrost is ranked “B” against the CDP Climate Change index. This was also the first time Bakkafrost disclosed against the CDP Water Security index • Bakkafrost Smoked Salmon ‘Heimland’ voted ‘best product in test’ in the renowned Danish food magazine ‘Gastro’ • The University of Faroe Islands and Bakkafrost extend research col- laboration to support research in aquaculture. The new agreement will partially fund a new Faroese Centre for Ocean Modelling • The Norðtoftir hatchery in the Faroe Islands release the first batch of large smolt from the expanded part of the hatchery June • Bakkafrost rated amongst top-performing sustainable companies as Oslo Stock exchange includes Bakkafrost in their new ESG index • Key stakeholder event at opening of Office in central Edinburgh, fo- cussed on 5 pillars of our Healthy Living Plan August • Bakkafrost signs contract to expand the hatchery at Viðareiði in the Faroe Islands October • Native Hebridean salmon winning top overall award at Scotland Food & Drink Awards and sustainability prize and Highland Food and Drink Awards March • Native Hebride- an Smoked Salm- on wins coveted International Food Award • Bakkafrost launches its fifth Healthy Living Sustainability Report alongside the 2021 Annual Report Main Events MAIN EVENTS 16 ANNUAL REPORT 2022 STRATEGYSTRATEGY MAIN EVENTS STRATEGY 17 STRATEGY Business Objectives and Strategy VISION To be a significant contributor in fulfilling the world’s growing demand for healthy and sustainably produced protein MISSION To produce the best salmon in the world! VALUES Provenance, Passion and Respect Bakkafrost’s vision is to be a significant contributor in fulfill- ing the world’s growing demand for healthy and sustainably produced protein. Our mission is to produce the best salmon in the world. We are proud of our Provenance, bringing together our cul- tural differences to raise sustainable, nutritional salmon, with full value chain integrity. We celebrate our Passion for our business and our people, who go above and beyond to accomplish our shared purpose, together. This is our competitive advantage. We Respect and care for our natural environment, each oth- er, our employees and our local communities in which we live and work – sustainability is at the heart of everything we do. Bakkafrost’s experience within the seafood industry dates back to 1968, and since then, our priority has been to run a healthy, attractive and competitive cost-conscious salmon farming group. Our strategy is focused on sustainable value creation. This extends beyond healthy financial returns, to the strength, capability and reputation of the business, the quality of our workforce, and collective social and environmental well- being. We recognize that by investing in the health of our business, our people, our salmon, the environment and the communities in which we operate, we will be in a better po- sition to achieve this. Today, our five business objectives are: • Growth We strive for a continuous market driven growth of harvest volumes as well as of the value of our products, while build- ing strategic strongholds in selected markets. • One Company We will be one united company where our employees share values, identity and culture and operate efficiently “as one” according to best practices and within simple organisational and governance structures. • Differentiation We differentiate ourselves by increasing brand awareness, based upon the provenance, superior quality, taste and nutri- tional profile of our salmon with full traceability. • SSC Turnaround We will transform the performance of our Scottish opera- tion through targeted investments and applied best practic- es, which will reduce biological risks, reduce costs, improve product quality, enable simpler processes and release syn- ergies. BUSINESS OBJECTIVES AND STRATEGY 18 ANNUAL REPORT 2022 STRATEGYSTRATEGY • Sustainability We embed sustainability deeply in our decision-making pro- cesses and demonstrate our commitment to sustainability through our actions and achievements for which we aspire to be acknowledged as industry leading. See our sustainability report www.bakkafrost.com/sustainability for more informa- tion on our progress in 2022. Our core values, which support our performance and guide our behaviour, reflect our commitment to creating long-term value for our customers, shareholders and the society by act- ing responsibly, showing respect, and being persistent, effi- cient and ambitious. In 2021, we reviewed our corporate strategy and aligned our strategic objectives with our Healthy Living Plan, outlined in our sustainability report. BUSINESS OBJECTIVES AND STRATEGY 19 ANNUAL REPORT 2022 STRATEGY RESOURCES VALUES CREATED CORPORATE STRATEGY DIFFERENTIATORS BRANDINGENABLERSVALUE CHAIN Shareholders returns Tax contributions Community investments Shareholder Capital Skilled Workforce Licences Natural Resources Pristine Waters Growth ambition One Company Best practice processes Embedded Sustainability Provenance Longest integrated value chain in the salmon industry Optimal farming conditions in the Faroe Islands High levels of Omega 3 Healthy Omega 3-6 Ratio High quality Sustainable fishmeal, fish oil and fish feed Lower than average feed conversion ratio FISHMEAL FISH OIL FISH FEED BROODSTOCK HATCHERIES BIOGAS FARMING FSV HARVESTING PROCESSING PACKAGING SALES & LOGISTICS Business Model Bakkafrost is probably the most vertically integrated salmon farming company in the world, which gives Bakkafrost full control and responsibility over all aspects of production. This enables Bakkafrost to have optimal control over the quality of its salmon and the costs of production. Fig. 3 BUSINESS MODEL 20 ANNUAL REPORT 2022 STRATEGY Differentiators Bakkafrost is committed to producing; tasty, healthy, sustain- able, and quality salmon, truly creating value for customers. This ensures a price premium can be achieved which in turn reflects positively in the Group’s results. The Bakkafrost Group plans to further strengthen this posi- tion by investing in differentiation and the following USPs (unique selling points). PROVENANCE The natural conditions and cold waters in the North Atlan- tic around the Faroe Islands as well in Scotland are very good for raising salmon. Bakkafrost will further promote this unique provenance as producing exceptional quality salmon. Both salmon from The Faroe Islands and Scotland is recog- nized globally as top quality, but as the Faroe Islands only produce about 3.5% (3.0%) and Scotland 5.8% (6.0%) of the world’s salmon, the salmon from these two origins is in high demand. Bakkafrost salmon is sought after around the world with accepted premium positioning and is preferred by select customers. LONGEST INTEGRATED VALUE CHAIN Bakkafrost is one of the most vertically integrated salmon farming companies in the world and uniquely produces its own fishmeal and fish oil. This ensures that Bakkafrost has full control and responsibility over all aspects of production and gives clients unparalleled traceability. LARGE SALMON OF HIGH QUALITY RICH ON OMEGA-3 LEVELS The Faroe Islands aquaculture industry is recognized as pro- ducing the largest Atlantic salmon in the world. In recent years, a significant price difference has been evident be- tween the different sizes of salmon. Due to lack of supply, salmon over 6 kg achieved a considerable price premium. With good supply of larger sizes, Bakkafrost is well placed to capitalize on this position. Farming large salmon requires good biology. The longer the salmon is at sea, the more it is exposed to different risks as in any natural environment. Bakkafrost’s salmon are raised on a diet rich in marine con- tent. This is also the most important factor for the quality of Bakkafrost Salmon, as the marine content ensures the opti- mum fat content, rich in healthy Omega 3 fatty acids DHA and EPA. The natural diet also ensures enjoyment in the exceptional taste of Bakkafrost Salmon and contributes to the high quality. FEED RICH IN MARINE CONTENT Bakkafrost has an integrated value chain that includes own production of fish meal, oil and feed. With its rich access to marine raw material from the waters surrounding the Faroe Islands, Bakkafrost is uniquely positioned to maintain a sub- stantially higher marine inclusion in the salmon feed, com- pared to peers in the industry. The natural diet for wild salm- on is rich in marine resources. By keeping the Bakkafrost diet close to this, the Bakkafrost Group is able to have one of the industry’s best Feed Conversion Ratios (FCR) which is a key indicator of fish welfare and low production costs. SALES AND GEOGRAPHICAL DIVERSIFICATION The Sales and Marketing Department at Bakkafrost is respon- sible for the worldwide sales of Bakkafrost Salmon, wheth- er it is farmed in the Faroe Islands or Scotland. The Group focusses on direct sales into channels, where the quality attributes of Bakkafrost Salmon are recognised, and a price premium is achieved. The strategy continues to ensure geo- graphical sales diversification thereby minimizing the risk of market fluctuations. WORLDWIDE REACH Bakkafrost uses ship transport and trucking whenever pos- sible, such as for all frozen products and fresh products to nearby markets. Fresh salmon delivered to long-distance markets such as US and Asia are transported by air. Fast reliable logistics with global reach is vital for the distribu- tion of fresh perishable produce which is sought after around the world. To maintain the leading position, Bakkafrost works closely with key freight forwarders to ensure effective logis- tics and first-class customer service worldwide, ensuring that Bakkafrost´s salmon is always delivered as fresh as possible by freight carriers to major airports and then linking with DIFFERENTIATORS 21 ANNUAL REPORT 2022 STRATEGY further passenger airlines to diverse worldwide locations. Bakkafrost expects to have it’s own airplane in operation in H1 2023, primarily serving the US market. This will strength- en Bakkafrost’s position as a supplier of superior quality fresh salmon. SEGMENTATION The Bakkafrost brand is particularly strong in USA, where demand for salmon over 6 kg is strong, predominantly in the sushi segment. The market share in China is also strong. The strong sustainability profi le of Bakkafrost Salmon is par- ticularly important to clients in the premium sushi segment. Bakkafrost does not use any antibiotics and uses only non- GMO ingredients in feed. VAP Bakkafrost holds a leading position in frozen salmon por- tions, the main markets are leading European and US retail- ers. Bakkafrost adds value to VAP production by producing the highest quality product and is recognized as a reliable and responsible supplier. The diversifi cation of the Bakkafrost product mix brings ad- ditional benefi ts for the Group; it ensures increased revenue stability with 6- and 12-months contracts being negotiated and offers an outlet for whole fresh fi sh in adverse market conditions. SUSTAINABILITY Bakkafrost is committed to sustainability and care for the environment in which it operates, this is fundamental for dis- cerning customers. Sustainability is deeply embedded in the business strategy and drives and shapes the business and operations. Bakkafrost relies on certifi cations, such as the MSC, ASC and BAP certifi cations. 100% of Bakkafrost’s sites in the Faroe Islands and many of the sites in Scotland are ASC certifi ed and the Scottish operation is 4-star BAP certifi ed. FAROE ISLANDS DIFFERENTIATORS 22 ANNUAL REPORT 2022 STRATEGYSTRATEGY Outline of Bakkafrost’s History For more details on Bakkafrost’s history, please visit www. Bakkafrost.com/about/history 1968 The Bakkafrost business is established by the two brothers Hans and Róland Jacobsen. The first processing plant is built the same year. The third brother, Martin Jakobsen, joins the company in 1971. 1979 Bakkafrost starts fish farming activities – one of the first companies in the Faroe Islands to do so. 1995 Bakkafrost builds a factory for value adding salmon at Glyvrar. Although the investment is limited and the capac- ity is low, this is Bakkafrost’s starting point of value-added salmon production. 2006 The Bakkafrost Group grows through acquisitions and merg- ers with several farming companies. Bakkafrost’s farming op- eration increases significantly, both on land and at sea. 2010 The shareholders of Bakkafrost and Vestlax agree to merge the companies. Vestlax Group’s shareholders agree to be remunerated in Bakkafrost shares. The Vestlax Group is a farming company with a harvest factory in Kollafjørður. The Bakkafrost Group is an integrated farming company, ranging from smolt production, fish farming, production of packaging materials to finished VAP products and Sales. Bakkafrost is listed on Oslo Børs and broadens its sharehold- er base. In addition to local Faroese investors, the company is now owned by international investors from all over Eu- rope and the USA. 2011 Bakkafrost acquires P/F Havsbrún, a modern, internationally renowned producer of fishmeal, fish oil and fish feed, situat- ed in the Faroe Islands. 2015 In July, Bakkafrost’s new live fish carrier M/S Hans á Bakka was delivered. 2017 Bakkafrost’s new harvest/VAP factory and the headquarters in Glyvrar are finished. 2018 Bakkafrost starts the integration of the Faroese broodstock programme. Bakkafrost’s new hatchery at Strond starts oper- ation. Bakkafrost closes the acquisition of the business and assets in the US salmon importer North Landing. 2019 Bakkafrost acquired The Scottish Salmon Company PLC, an integrated salmon farming business in Scotland with focus on traceability and total supply chain integrity. Bakkafrost issued new shares for the first time since listing on Oslo Børs to finance the acquisition. 2020 First biogas produced at the new biogas plant and sold the first KWh’s of renewable electricity. Received ASC certification for the last farming site and is now 100% ASC certified in the Faroe Islands. 2021 Bakkafrost and 10 other business in the Faroe Islands join forces to work together on a three-year corporate sustaina- bility initiative. Bakkafrost announced an updated new five-year investment plan for 2022-2026. OUTLINE OF BAKKAFROST’S HISTORY 23 ANNUAL REPORT 2022 STRATEGY FISH FEED HATCHERIESFISH OILFISHMEAL BROODSTOCK BIOGAS SALES & LOGISTICS FSV HARVESTING PROCESSINGFARMING PACKAGING FAROE ISLANDS SCOTLAND The Value Chain The Bakkafrost Group controls the entire value chain from own production of fishmeal, fish oil and fish feed to sales and marketing of finished VAP products. Control of the entire value chain is considered important to ensure availability, traceability and to be able to control the product flow daily. Both customers and processing facilities depend on a daily availability of salmon and depend entirely on a steady flow of harvested fish. The quality of the salmon is the result of the whole opera- tion, from production of fishmeal and fish oil to the process- ing of the salmon. The documentation and traceability from the finished product back to the raw material in the feed and the salmon eggs is important for the customers and therefore important to Bakkafrost. The control of the entire value chain enables Bakkafrost to make long-term delivery contracts and long-term customer relationships without being dependent on any third party to ensure the quality and predictability of the deliveries. It further enables better utilization of the facilities throughout the value chain and prevents sub-optimization between cost centres. In January 2022, Bakkafrost acquired Munkebo Seafood, a danish canned seafood producer supplementing Bakkafrost’s other consumer packaged products. The acquisition is an ad- dition to the Processing part of the value chain. Fig. 4 THE VALUE CHAIN 24 ANNUAL REPORT 2022 STRATEGY Fig. 5 FISHMEAL, FISH OIL AND FISH FEED Bakkafrost sources fish materials to produce fishmeal and fish oil. This is mainly based on var- ious pelagic species. In addition to whole fish, we also utilize co-products of fish destined for direct human consumption, such as fish trimmings and fish silage. The demands to high quality fish -material combined with our processing technology enable us to manufacture top-quality fishmeal, fish oil and fish feed. Fishmeal is rich in protein with a balanced amino acid profile which makes it an ideal ingredient in fish feed. Fish oil is a great source of energy and contains the essential and health beneficial long-chain omega-3 fatty acids. The fish material comes mainly from Faroese vessels and fish processing factories, as well as foreign vessels operating in the North Atlantic. As producers of our own high-quality fish feed ingredients, we are uniquely positioned to select the very best fishmeal and fish oil for our feed production. The fish species which we transform to fishmeal and fish oil constitutes a part of the natural food sources which wild salmon eats. Thus, the main ingredients in our dietary feed composition provides a foundation for healthy and efficient growth for our farmed salmon. BROODSTOCK Native Faroese broodstock programme The broodstock programme in the Faroe Islands is part of our strategy to maximize biosecuri- ty, breeding and genetics, and to have the longest integrated value chain in the industry. The programme enables accelerated development of more resilient roe – reducing risks of disease in farmed salmon – but also protect the intellectual capital in the Faroe Islands, which has been built up over the years with the programme. The selective breeding programme uses targeted mating to concentrate the following impor- tant traits: growth, quality and disease resistance. A new broodstock facility will be built in Skálavík and finalised in 2026. Native Hebridean broodstock programme In Scotland, the Group operates a unique Native Hebridean broodstock programme producing pure Scottish Island salmon, originally bred from wild stock and farmed only in Hebridean waters, which results in a strong, lean and noticeably firmer salmon than other Atlantic salmon. Fig. 6 FISHMEAL FISH OIL FISH FEED BROODSTOCK THE VALUE CHAIN 25 ANNUAL REPORT 2022 STRATEGY Fig. 7 Fig. 8 HATCHERIES BIOGAS HATCHERIES Bakkafrost aims at producing all smolts for release at an average weight of 500 grams by 2024 in the Faroe Islands and by 2026 in Scotland. The benefits are a shorter production time at sea and reduced biological risk. Hatcheries in the Faroe Islands Bakkafrost operates six hatcheries in the Faroe Islands. The hatcheries are in environments with large quantities of clean fresh water, where no villages or industries are competing for the water. This is important, as there is no ground water available in the Faroe Islands. The hatcheries are equipped with closed water circulation systems with biofilters, and the fish tanks are inside buildings to limit the effect of external factors, such as weather, birds, and other pollution. In September 2021, Bakkafrost announced the plan to increase the capacity of the hatcheries to a total of 85,600m 3 . This will be achieved by increasing the capacity of our current hatcher- ies in Norðtoftir, Glyvradalur and Viðareiði and building a new hatchery in Ónavík. Hatcheries in Scotland In Scotland, the Bakkafrost Group intends to replace the current hatcheries with three large and modern hatcheries with RAS technology over the next years. These hatcheries will be around the same size as the hatchery at Strond in the Faroe Islands. The Applecross hatchery will have a capacity of 10 million smolts at 500 grams and will start production in 2023 and will be in full operation in 2025. The other two new hatcheries will be in the northern part and in the southern part of operations in Scotland. BIOGAS The biogas plant uses waste products from our farms and other fish and dairy farmers to pro- duce renewable energy and fertilizer. The process works by breaking down the organic matter in the biomass into smaller molecules through anaerobic digestion. Upon completion of this process, the biomass is converted into biogas, namely carbon dioxide and methane (the latter which is used for renewable energy production), and digestate (which is used as fertilizer). • 2.4 % of Faroe Island’s renewable electricity production in 2022 came from our biogas plant • Capacity to convert up to 45-50,000 tonnes annually of waste • Providing heat for 400 homes and electricity for 1,900 homes • 30,345 tonnes of natural liquid fertilizer produced in 2022 THE VALUE CHAIN 26 ANNUAL REPORT 2022 STRATEGYSTRATEGY Fig. 9 Fig. 10 FARMING FSV FARMING The main goal of the farming operation is to produce salmon at a low feed conversion rate and with low mortality. To reach this goal, Bakkafrost believes the environment is important and therefore does its utmost to create and maintain a healthy environment for the fish. Fol- lowing national regulations, external agencies undertake environmental investigations at each farming location each year. The result of each survey becomes input data used in the tactical planning to achieve the best environmental and sustainable farming results possible. The fish are fed several times a day, and the feed consumption is monitored continuously. Bakkafrost’s salmon farming sites benefit from excellent water quality and circulation due to strong currents and cool, steady sea temperatures in the Faroe Islands. The operations in Scot- land, are in the unique natural environment of the West Coast of Scotland and the Hebridean Islands. The fish are kept, fed, and nurtured in large sea pens, providing the fish with abundant space to grow for 14–16 months in the Faroe Islands and for around 16-22 months in Scotland. Dur- ing this period, the fish grows to a target weight of aprox. 6.3 kg LW in the Faroe Islands and aprox. 5.9 kg LW in Scotland. • 19 farming sites in operation across 17 fjords in the Faroe Islands • 44 farming sites in operation across the West Coast of Scotland and the Hebridean Islands FARMING SERVICE VESSELS (FSV) Bakkafrost continually seeks to improve methods for delousing without using any chemicals and creating lowest possible stress on the salmon. Bakkafrost uses a combination of owned and leased vessels. FSV in the Faroe Islands consists of a fleet of seven. Two vessels for smolt transport, two ves- sels for transportation of fish to harvest and two service vessels are equipped with various non-medical systems for lice-treatment, systems for net-cleaning and are also equipped to do other operations. The new well boat Bakkafossur is 109 meters long and 22 meters wide. It has a capacity of 10,000 m 3 , where the four wells have a total capacity of 7,000 m 3 of seawater, and the fresh- water tanks have a total capacity of 3,000 m 3 . The vessel can carry 1,000 tons of salmon but is also equipped with non-medical systems for lice-treatment. FSV in Scotland consists of a fleet of eight. One vessel for smolt transport, two vessels for transportation of fish to harvest and five service vessels are equipped with various non-med- ical systems for freshwater- and lice-treatment and other services. The fleet is leased whereof one of the farming service vessels is leased from the operation in the Faroes. THE VALUE CHAIN 27 ANNUAL REPORT 2022 STRATEGY Fig. 11 Fig. 12 HARVESTING PROCESSING HARVESTING Harvesting in the Faroe Islands In the Faroe Islands, all Bakkafrost´s fish is harvested at the harvest factories in Glyvrar and Vágur. The harvest factory in Glyvrar has a daily capacity of around 375 tonnes HOG and the harvest factory in Vágur has a daily capacity of around 110 tonnes HOG. The fish is transported from the farming sites to the harvest factory in live fish carriers with closed seawater systems. Harvesting in Scotland The Bakkafrost Group operates two harvest stations, Arnish Point in the North of Scotland, and Ardyne in the South. The total daily capacity is 206 tonnes HOG and 103 tonnes HOG in each factory. Fish are transported from the farming sites to the harvest sites in live fish carriers. PROCESSING Processing in the Faroe Islands The 4,000m 2 VAP factory at Glyvrar has a production capacity of 160 tonnes HOG of val- ue-added products a day. The VAP factory also has a daily capacity of 4 tonnes for smoked salmon. Processing in Scotland The Bakkafrost Group operates two processing plants, Marybank in the North of Scotland, Cairndow in the South, and a Smokehouse in Stornoway. The daily production capacity is 51 tonnes HOG of value-added products, and 1 tonsne smoked of products. As part of the investment plan 2022-2026, Bakkafrost plans to build a new state-of-the art processing facility in Scotland. Processing in US A modern filleting facility in New Jersey which offers a wide range of fresh value-added products. Processing in Denmark A modern canning facility at Munkebo which offers a wide range of products, of which a larger share is based on salmon and other seafood. THE VALUE CHAIN 28 ANNUAL REPORT 2022 STRATEGYSTRATEGY Fig. 13 Fig. 14 PACKAGING SALES & LOGISTICS PACKAGING Bakkafrost has a packaging plant, which is located and integrated into the Glyvrar processing facility. The packaging plant has a capacity to produce polystyrene boxes for the fresh salmon, both for sea and air freight equivalent to 70,000 tonnes of salmon. SALES AND DISTRIBUTION The most important markets are the European, US, and Chinese markets. As a rule, the whole fish from the Faroe Islands is sold on the spot market, while the whole fish from Scotland is sold both on the spot market and on long-term contracts. The distribution network is based on transportation by ship, truck and/or train to Europe and by plane to the US and China. Bakkafrost can distribute both fresh and frozen fish to the var- ious markets. With the existing distribution network, Bakkafrost can ship products from the Faroe Islands to the UK within 20 hours by ship and to Denmark within 36 hours. From the UK and Denmark, the products are distributed by plane to major airports in the US and China within 24 hours. Bakkafrost is in the process of acquiring a cargo plane, which will be used to transport fresh salmon directly from the Faroe Islands to the US market within 24 hours. This will reduce car- bon emission per kg by 40-50% for fresh salmon sold to the US market. THE VALUE CHAIN 29 ANNUAL REPORT 2022 PERFORMANCE THE VALUE CHAIN PERFORMANCE 30 PERFORMANCE Operational Review FARMING Bakkafrost holds sea farming licenses in the north-east and south parts of the Faroe Islands and licenses in the north- west of Scotland. The licenses give exclusive right to utilise a given area of fjords for farming fish. Farming authorities focus on veterinary and environmental key performing indi- cators. Yearly reports and plans, approved by the authorities, are requested to certify the operation. The Gulf Stream provides stable farming conditions in the Faroe Islands and Scotland and excellent water quality throughout the year. The water temperature in the Faroe Is- lands is steady, with a fluctuation of only 4-5 °C during the year. The lowest temperatures, approximately 6 °C, are usu- ally reached in February, and the highest temperatures of around 10.5 °C are reached in the late summer months. The water temperature is slightly higher in Scotland, between 7 °C and 14.5 °C. All farm sites in the Faroe Islands and Scotland are environ- mentally certified and yearly audited by agencies. Salmon farming in Scotland is one of the most transparent and highly regulated farming sectors in the UK. Our sites are regularly audited by various bodies, including Marine Scotland, Scot- tish Environmental Protection Agency (SEPA), Fish Health In- spectorate and Scottish Natural Heritage. Bakkafrost is com- mitted to operating transparently and sharing data on both a compulsory and voluntary basis through various channels, including the Scottish Salmon Producers’ Organisation (SSPO) and Marine Scotland. Production plans in the Faroe Islands are approved on a year- ly basis by both veterinary and environmental authorities. The biological situation and regulatory system in the Faroe Islands provide the opportunity to grow salmon with a high- er-than-average weight, which minimises unit costs, biologi- cal feed conversion rate and gives best in class performance. The ideal biological situation is crucial for maintaining low production costs and maximising returns on invested capital. COST-CONSCIOUS PRODUCER AND VETERINARY MODEL Our farming operation in the Faroe Islands has delivered strong results in production costs compared to peers. The objective of the Bakkafrost farming method in the Faroe Islands is to increase biological and veterinary security and to support a sustainable and healthy operation by total sep- aration of salmon generations, vaccination against different diseases (ISA among others), strict regulation of movement of equipment and fish and other regulations. This method is critical to improve fish health and reduce costs. The farming in Scotland differs in biology and legislation from the farming in the Faroe Islands. Bakkafrost is adapting the farming methods in Scotland based on the best practices from the farming operation in the Faroe Islands combined with key insights into the specific farming conditions in Scot- land. The process will take some time to complete. Also, sig- nificant investments across the value chain are needed. The farming costs have increased in recent years, partly be- cause of increased feed and health costs but especially due to higher costs of large smolt. Following the significant invest- ments made in the Faroe Islands to enable Bakkafrost’s large smolt strategy, smolt costs have increased and transcended into increased total farming costs. Bakkafrost expects the to- tal farming costs to reduce as the benefits from the larger smolts and the increased capacity utilisation will fully mate- rialise. In the Faroe Islands, farming sites have been moved further out the fjords to more exposed areas, where more expensive equipment is needed. The plan is also to do so in Scotland where possible. OPERATIONAL REVIEW 31 ANNUAL REPORT 2022 PERFORMANCE Fig. 15 MORTALITY % OF OUTPUT FARMING Fig. 16 BIOLOGICAL FEED FACTOR FARMING Fig. 17 AVERAGE HARVEST WEIGHT FARMING (KG LW) Salmon feed with high marine content, like the diet in the wild, is used in both the Faroes and Scotland; this results in relatively high feed costs. However, benefi ts are evident in higher production effi ciency; this is also impacted by the high animal welfare standards, which positively impact non- feed cost elements. The health costs mainly relate to treatments against sea lice. Since 2015, Bakkafrost has mainly used non-medical treat- ments, including freshwater, lukewarm seawater and fl ushing with clean seawater with ambient temperature. These me- chanical treatments resulted in elevated mortality, but after a start-up phase and more experience and better knowledge of the equipment and the treatment methods, the mortality level has improved, but Bakkafrost is continuously improving these mechanical treatment methods. In addition to this, Bakkafrost is using lumpfi sh and wrasse to reduce the number of sea lice in the Faroe Islands and Scotland. These initiatives aim to maintain a sustainable, cost-conscious farming operation. INVESTMENTS TO REDUCE BIOLOGICAL RISK, ENABLE ORGANIC GROWTH AND TURNAROUND SCOTTISH OPERATION Bakkafrost has invested more than DKK 6.0 billion since 2015 in all parts of its value chain. The fi ve-year investment plan from August 2018 amounted to around DKK 3 billion. Around DKK 2.4 billion has been invested in the last two years. Bakkafrost has announced a DKK 6.2 billion investment plan for 2022-2026 for the Group. The goals for the investment plan are to reduce the biological risk, enable organic growth and turn around the operation in Scotland. With these in- vestments, Bakkafrost will build production capacity of 180,000 tonnes head-on gutted weight and an actual harvest volume in 2026 of 150,000 tonnes. Also, the investment plan enables turnaround of the operation in Scotland. A signifi cant part of the investment plan is dedicated to build hatchery capacity for large smolt in the Faroe Islands and Scotland. The operation in the Faroes is self-supplied with smolt and aims to have an average weight of 500 g for all smolts re- leased into the sea. Expansions of the hatcheries at Glyvradal and Norðtoftir are in progress and the expansion in Viðareiði and a new hatchery at Ónavík will start soon. Once complet- ed, Bakkafrost will be able to produce more than 23 million smolts with an average weight of 500 g. The average release size of smolt in the Faroe Islands has in- creased from around 120 g in 2014 to around 345 g in 2022, corresponding to a 188% increase in size. The investment plan 2022-2026 includes three large hatch- eries for Scotland, the fi rst being the Applecross hatchery. Once completed, these hatcheries will enable the production of more than 18 million smolts of 500 g. Signifi cant amounts have been invested in new equipment at Bakkafrost’s farming sites, e.g., new feeding barges, catama- rans and larger pens. Bakkafrost has over the years acquired and leased several vessels, and in 2022 operates 14 vessels, fully capable of servicing the groups farming operation. FO SCT 1 0% 2 0% 3 0% 40% 20192018 2020 2021 2022 1.40 1.30 1.20 1.10 1.00 FO SCT 20192018 2020 2021 2022 6.00 5.00 4.00 3.00 SCT FO 20192018 2020 2021 2022 OPERATIONAL REVIEW 32 ANNUAL REPORT 2022 PERFORMANCE CERTIFICATES To ensure prime quality, Bakkafrost has implemented a se- ries of procedures and quality control systems, not only at our salmon farms and processing plants, but also for our suppliers. All stages of our Faroese production chain are Global g.A.P. compliant. Other certifications include ASC, BAP, HACCP, IFS, GMP+, MSC, ISO9001:2008 and BRC. Bakkafrost is a member of the Global Salmon Initiative (GSI). GSI focus- es on three pillars of sustainability: Reducing environmental impact, increasing social contribution, and maintaining eco- nomic growth. Bakkafrost was proud to reach its goal to have all of its farm- ing sites in the Faroe Islands ASC certified by 2020. The ASC standard was developed in cooperation with WWF and is seen as the most stringent standard in the aquaculture indus- try with requirements regarding fish welfare, sea lice, smolt production, feed production and the environment. Farming Scotland holds national and international accredi- tations and certifications across the value chain, including Global g.A.P. Farming Scotland, was the first salmon producer in the EU to be awarded 4-star Best Aquaculture Practice (BAP) certification for all its marine and processing sites, as well as the feed suppliers. This is the highest designation in the BAP third-party certification programme. The processing facilities have been awarded the highest level of British Re- tail Consortium (BRC) Accreditation for food safety, process- ing, and supply chain management. GEOGRAPHICAL LOCATION Salmon farms in the Faroe Islands and Scotland are in areas with attractive qualities for salmon farming in terms of wa- ter quality, water temperature and circulation. The Faroese fjords provide separation between locations, which improves biological control and area management. Relatively short dis- tances between farming areas and processing facilities and well-developed infrastructure offer cost-efficient transporta- tion of both feed and fish on land and at sea. STRONG CUSTOMER BASE IN ALL MAJOR MARKETS By focusing on meeting existing customers’ demands, Bak- kafrost benefits from its long-term relationships with many customers. Customer relationships have proven a competi- tive advantage through product development and marketing. Over the past many years, Bakkafrost has developed a dif- ferentiated market strategy. This has ensured Bakkafrost a good market position in the EU, Asia, US, and Eastern Europe. VAP Bakkafrost has long-term experience producing and selling value added products (VAP). Bakkafrost’s long-term strategy is that VAP products shall represent around 40% of the Far- oese harvested volumes. The sales of VAP products stabilise the Group’s earnings, as the deals are based on fixed-price contracts. The contract prices are not as volatile as the spot market prices for fresh salmon. There is a time lag between the increase in the spot prices and a subsequent increase in the contract prices for VAP products. On the other hand, when the spot prices decrease, there is a time lag until the contract prices drop. In 2022 40% of the Faroese harvest volumes was used in the VAP segment. The demand from retail was strong driven by the disruption by Covid-19 pandemic. The VAP segment pro- duced 26,747 tonnes in 2022, compared to 22,180 tonnes in 2021. Higher spot prices in 2022 compared to 2021 had a negative effect on the margins in the VAP segment. PRODUCTION OF FISHMEAL, OIL AND FEED Havsbrún – FOF segment – performed very well in 2022, with both higher raw material sourcing and higher external sale of fish meal and feed. Havsbrún received 297,814 tonnes of raw materials in 2022, compared to 152,383 tonnes in 2021. The production of fishmeal and fish oil depends on sourcing raw materials. The availability is highly related to the quotas for the pelagic fishery in the North Atlantic. The raw material situation will be volatile in the future. However, quotas for fishing blue whiting have decreased over the last years, but have increased for 2023. Besides sourcing wild-caught pelagic fish, Havsbrún also sourced offcuts from pelagic fish factories in the Faroe Is- lands. In recent years, processing plants for pelagic species have been built in the Faroe Islands, increasing access to off- cuts from this production. Havsbrún sold 34,667 tonnes of fishmeal externally in 2022, compared with 16,376 tonnes in 2021. External sale of fish oil in 2022 was 5,285 tonnes, compared to 41 tonnes in 2021. Havsbrún sold 127,840 tonnes of feed in 2022, of which 96% was used internally. In 2021, Havsbrún sold 128,489 tonnes of feed. Fig. 18 Smolt – FO Average size – FO Smolt – SCT Average size – SCT Million smolt Average size gram 2016 2017 2018 2019 2020 2021 2022 0 5 10 15 0 100 200 300 400 operational review 33 ANNUAL REPORT 2022 PERFORMANCE The world’s total fi sh oil production has been relatively sta- ble for many decades, while the demand for fi sh oil has in- creased. Therefore, fi sh oil is expected to be a scarce resource in the future, but decreasing fi sh oil content in the salmon feed, led by the major producers, will reduce some demand. Bakkafrost’s strategy is to have a high fi sh oil content in the feed, resulting in salmon with a high content of omega 3. PEOPLE Our most important resource is our employees. For Bakka- frost to remain a high-performing organisation and expand our leading market position, it is vital to attract and retain employees with the right competencies and knowledge. Therefore, we shall maintain and further strengthen the focus on HR, work satisfaction, and developing employees’ competencies. The foundations of our human resource development are the company culture and the fundamental values of Bakkaf- rost to be a reliable and responsible partner. Many excellent results have been achieved during the past years, and we strive continuously to nurture our company culture. One of our strategic priorities is to merge the acquired busi- ness in Scotland with Bakkafrost into “One Company”. Sever- al workstreams are set up to facilitate collaboration, knowl- edge sharing, and synthesis of best practices, drawing upon both organisations' strengths and unique insights. Over time, company culture and values will also merge, hence becoming truly “One Company”. We aim to continuously strengthen our employees' compe- tencies on all levels in the Group by implementing relevant training schemes to meet current and future demands for a qualifi ed workforce. Supporting Bakkafrost’s strategy and se- curing high standards in our business conduct and creating the best possible value for our customers is essential for all training efforts. Bakkafrost’s training is performed as work-related training, in-house and external courses, and other forms of training. It is an ongoing process to develop professional competen- cies further and develop leadership skills at all levels in the Group. We engage and form partnerships with local educational in- stitutions and experts focusing on health, safety, business, and commerce education for work-related training, in-house and external courses, and other forms of training. In 2022, the number of full-time equivalent employees in the Bakkafrost Group was 1,778 employees (FO: 1.076, SCT/UK: 600, US: 63, DK: 38 and FR: 1), compared to 1,653 employees in 2021. For further information, see our Sustainability Report 2022. Extruded feed for smolt Size: 3mm Size: 4mm Size: 6mm Size: 9-12mm OPERATIONAL REVIEW 34 ANNUAL REPORT 2022 PERFORMANCE Financial Review The supply of salmon to the world market decreased by around 2% in 2022 (2021: 9% increase). The average salmon spot price in 2022 was DKK 61.29, compared to DKK 42.69 in 2021, an increase of 44%. The prices for value added products (VAP) have increased during 2022 and are on a higher level than in 2021. Impor- tant for the result for the VAP segment are also the raw ma- terial prices, as the VAP segment purchases its raw material based on the salmon spot market every week. In 2022, the average price was higher compared to 2021. Therefore, the VAP segment made a lower profi t in 2022. The value-added products are typically sold on fi xed-price contracts with a duration of 6-12 months, where the prices for value added products follow the trend on the spot market with a time lag. The average feed price during 2022 was higher than the av- erage feed price in 2021. The reason for the fl uctuations in the feed price is the market situation for fi sh oil and fi sh- meal, which are the main ingredients in Bakkafrost’s salm- on feed. The market situation for salmon feed ingredients is negatively affected by the war in Ukraine. The fl uctuations in the feed prices will be refl ected in the production costs for salmon. The Bakkafrost Group generated gross operating revenues of DKK 7,130 million in 2022, compared to DKK 5,554 million in 2021. The increase in revenue is mainly due to higher prices in 2022. Harvested volumes of salmon decreased 6% in 2022, compared to 2021, mostly coming from lower har- vested volumes in Scotland. The volumes sold as value added products increased 21% in 2022. The Group harvested a total of 90,603 tonnes gutted weight, compared to 96,889 tonnes in 2021. The external revenue from sales of fi shmeal and fi sh oil increased in 2022, compared to 2021. The external sales of fi shmeal and fi sh oil increased 143%. Income statement DKK 1,000 2022 2021 Operating revenue 7,129,967 5,553,849 Purchase of goods -2,756,273 -1,692,501 Change in inventory and bio-logical assets (at cost) 666,550 -178,060 Salary and personnel expenses -831,679 -728,423 Other operation expenses -1,990,299 -1,632,114 Depreciation -537,480 -530,434 Other income 24,379 28,877 Operational EBIT 1,705,165 821,194 Fair value adjustments of biological assets 278,392 434,868 Income from associates 57,597 30,112 Revenue tax -215,001 -141,489 EBIT 1,826,153 1,144,685 EBT 1,690,335 1,137,662 Taxes -346,005 -173,626 Profi t or loss for the period 1,344,330 964,036 Operating revenue 7,129,967 5,553,849 Purchase of goods -2,756,273 -1,692,501 Change in inventory and bio-logical assets (at cost) 666,550 -178,060 Salary and personnel expenses -831,679 -728,423 Other operation expenses -1,990,299 -1,632,114 Depreciation -537,480 -530,434 Other income 24,379 28,877 Operational EBIT 1,705,165 821,194 Fair value adjustments of biological assets 278,392 434,868 Income from associates 57,597 30,112 Revenue tax -215,001 -141,489 EBIT 1,826,153 1,144,685 EBT 1,690,335 1,137,662 Taxes -346,005 -173,626 Profi t or loss for the period 1,344,330 964,036 FINANCIAL REVIEW 35 ANNUAL REPORT 2022 PERFORMANCE Operational EBIT was DKK 1,705 million in 2022, compared to DKK 821 million in 2021. A positive fair value adjustment of the Group’s biological assets has been recognized in 2022, amounting to DKK 278 million, compared to an adjustment of DKK 435 million in 2021. The positive fair value adjustment mostly relates to higher forward prices. In 2022, the Group’s associated companies made a net result to Bakkafrost of DKK 58 million, compared to DKK 30 million in 2021. Net interest expenses amounted to DKK -65 million, com- pared to DKK -41 million in 2021. Net currency effects amounted to DKK -69 million, compared to DKK 39 million in 2021. Net taxes amounted to DKK -346 million, compared to DKK -174 million in 2021. The consolidated net profit totalled DKK 1,344 million in 2022, compared to DKK 964 million in 2021. Earnings per share totalled DKK 22.75 in 2022, compared to DKK 16.32 in 2021. STATEMENT OF FINANCIAL POSITION The Group’s total assets as at end 2022 amounted to DKK 16,882 million, compared to DKK 14,628 million at the end of 2021. The Group’s intangible assets amounted to DKK 4,509 mil- lion at the end of 2022, compared to DKK 4,496 million at the end of 2021. Intangible assets comprise primarily of the acquisition of Bakkafrost Scotland Ltd., the fair value of ac- quired farming licences in Scotland and the Faroe Islands. Property, plant, and equipment amounted to DKK 5,647 mil- lion at the end of 2022, compared to DKK 4,889 million at the end of 2021. In 2022, Bakkafrost made investments in PP&E amounting to DKK 1,236 million, compared to DKK 1,116 million in 2021. The most significant investments, Bakkafrost carried out in 2022, were in hatcheries, a new FSV and a new feed line. Other investments relate mainly to maintenance investments. Right of use assets amounted to DKK 439 million at the end of 2022, compared to DKK 302 million at the end of 2021. Investments in associated companies and stocks and shares amounted to DKK 234 million at the end of 2022, compared to DKK 149 million at the end of 2021. The increase in finan- cial assets relates to the result from the associated compa- nies and FF Skagen A/S changing classification to an associ- ated company during 2022. Bakkafrost had DKK 0 million in long-term receivables at the end of 2022, compared to DKK 8 million at the end of 2021. Deferred tax assets amounted to DKK 336 million at the end of 2022, compared to DKK 215 million at the end of 2021. The Group’s carrying amount (fair value) of biological assets amounted to DKK 2,938 million at the end of 2022, com- pared to DKK 2,448 million at the end of 2021. Included in the carrying amount of the biological assets is a fair value adjustment amounting to DKK 883 million, compared to DKK 605 million at the end of 2021. The Group’s total inventories amounted to DKK 1,074 mil- lion as at year-end 2022, compared to DKK 709 million as at year-end 2021. The inventory primarily represents Havs- brún’s inventory of fishmeal, fish oil and fish feed in addition to finished VAP products, packing materials and other raw materials. The Group’s total receivables amounted to DKK 985 million as at year-end 2022, compared to DKK 902 million as at year-end 2021. Cash and cash equivalents at year-end 2022 amounted to DKK 720 million, compared to DKK 509 million at year-end 2021. The Group’s equity at the end of 2022 was DKK 10,396 mil- lion, compared to DKK 9,348 million at the end of 2021. The increase in equity is primarily due to the increase of the positive result for 2022. FINANCIAL REVIEW 36 ANNUAL REPORT 2022 PERFORMANCE Cash fl ow The total cash fl ow from operations in 2022 was DKK 1,202 million, compared to DKK 1,125 million in 2021. The cash fl ow from operations in 2022 is primarily due to posi- tive results. Paid taxes and change in inventory and receiva- bles had a negative effect on the cash fl ow from operations in 2022. Cash fl ow from investment activities amounted to DKK -1,255 million, compared to DKK -1,112 million in 2021. For 2022, cash fl ow from fi nancing amounted to DKK 263 million, compared to DKK 30 million for 2021. The change in long-term interest-bearing debt of DKK 735 mil- lion had a positive effect on the cash fl ow from fi nancing in 2022. Other 2022 fi gures include dividend paid of DKK -303, lease payments of DKK -117 and fi nancial expenses of DKK -68 million. With the established credit facilities, the Group’s liquidity and fi nancial strength is considered good. Bakkafrost had undrawn credit facilities of approximately DKK 2,542 million at the end of 2022. DKK 1,000 2022 2021 Cash fl ow from operations 1,201,856 1,124,554 Cash fl ow from investments -1,254,597 -1,112,239 Cash fl ow from fi nancing 263,187 29,903 Cash and cash equivalents – opening balance 509,157 466,939 Cash and cash equivalents – closing balance total 719,603 509,157 Cash fl ow from operations 1,201,856 1,124,554 Cash fl ow from investments -1,254,597 -1,112,239 Cash fl ow from fi nancing 263,187 29,903 Cash and cash equivalents – opening balance 509,157 466,939 Cash and cash equivalents – closing balance total 719,603 509,157 DKK 1,000 2022 2021 Intangible assets 4,508,704 4,495,726 Property, plant and equipment 6,085,706 5,190,883 Financial assets 570,229 372,575 NON-CURRENT ASSETS 11,164,639 10,059,184 Inventory 4,012,829 3,157,596 Receivables 984,501 902,231 Cash and cash equivalents 719,603 509,157 CURRENT ASSETS 5,716,933 4,568,984 ASSETS 16,881,572 14,628,168 Equity 10,395,813 9,347,545 Deferred taxes 1,825,873 1,590,034 Long-term interest-bearing debt 3,383,289 2,634,968 Long-term leasing debt 353,355 245,753 Derivatives 0 3,207 Non-current liabilities 5,562,517 4,473,962 Derivatives 0 4,602 Trade payables 478,750 510,357 Current tax liabilities 237,780 170,997 Short-term leasing debt 106,215 87,668 Other current liabilities 100,497 33,037 Current liabilities 923,242 806,661 Total liabilities 6,485,759 5,280,623 EQUITY AND LIABILITIES 16,881,572 14,628,168 Intangible assets 4,508,704 4,495,726 Property, plant and equipment 6,085,706 5,190,883 Financial assets 570,229 372,575 NON-CURRENT ASSETS 11,164,639 10,059,184 Inventory 4,012,829 3,157,596 Receivables 984,501 902,231 Cash and cash equivalents 719,603 509,157 CURRENT ASSETS 5,716,933 4,568,984 ASSETS 16,881,572 14,628,168 Equity 10,395,813 9,347,545 Deferred taxes 1,825,873 1,590,034 Long-term interest-bearing debt 3,383,289 2,634,968 Long-term leasing debt 353,355 245,753 Derivatives 0 3,207 Non-current liabilities 5,562,517 4,473,962 Derivatives 0 4,602 Trade payables 478,750 510,357 Current tax liabilities 237,780 170,997 Short-term leasing debt 106,215 87,668 Other current liabilities 100,497 33,037 Current liabilities 923,242 806,661 Total liabilities 6,485,759 5,280,623 EQUITY AND LIABILITIES 16,881,572 14,628,168 The Group’s total non-current liabilities amounted to DKK 5,563 million at the end of 2022, compared to DKK 4,474 million at the end of 2021. Deferred taxes amounted to DKK 1,826 million, compared to DKK 1,590 million at the end of 2021. Long-term debt was DKK 3,383 million at the end of 2022, compared to DKK 2,635 million at the end of 2021. At the end of 2021, the Group’s total current liabilities were DKK 923 million, compared to DKK 807 million at the end of 2021. Trade payable amounted to DKK 479 million, compared to DKK 510 million at the beginning of the year. Long- and short-term leasing debt amounted to DKK 460 mil- lion at the end of 2022, compared to DKK 333 million at the end of 2021. Bakkafrost’s equity ratio was 62% at the end of 2022, com- pared to 64% at the end of 2021. FINANCIAL REVIEW 37 ANNUAL REPORT 2022 PERFORMANCE Farming Segment – Faroe Islands (FO) The farming FO segment produces high-quality Atlantic salmon from roe to harvest size salmon. The salmon is sold to fresh fi sh markets globally and to the internal VAP production. The farming sites are in the Faroe Islands. VOLUMES The FO farming segment harvested 66,686 tonnes gut- ted weight in 2022, compared to 67,217 tonnes gutted weight in 2021. The expectation for 2023 is the same as for 2022 - 68,000 tonnes gutted weight. The FO farming segment released 14.4 million smolts into the sea in 2022. The smolt release in 2021 was 14.4 mil- lion smolts. The expectation for 2023 is higher than for 2022 - 16 million smolts. FINANCIAL PERFORMANCE For 2022, costs of DKK 0 million were related to inci- dent-based mortality compared to DKK 45 million for 2021. Total revenues for FO farming segment in 2022 amounted to DKK 4,633 million, compared to DKK 3,477 million in 2021, a change of 33%. Gross external operating revenues for FO farming segment increased to DKK 3,242 million in 2022, from DKK 2,665 million in 2021 even though the external volumes decreased in 2022, compared to 2021. Because of both higher prices and higher volumes to the VAP segment the internal revenue increased in 2022 from DKK 811 million in 2021 to DKK 1,391 million in 2022. In 2022, operational EBIT totalled DKK 1,913 million, com- pared to DKK 904 million in 2021. This corresponds to an operational EBIT of DKK 28.68 (NOK 38.47) per kg gutted weight in 2022, compared to DKK 13.45 (NOK 18.37) per kg gutted weight in 2021. YTD YTD DKK 1,000 2022 2021 Change Financial Total revenue 4,632,581 3,476,725 33% EBIT 1,872,176 1,302,738 44% Operational EBIT 1,912,534 903,820 112% Operational EBIT/kg (DKK) 28.68 13.45 113% Operational EBIT margin 41% 26% Volumes Harvested volumes (tgw) 66,686 67,217 -1% Smolts released (thousand) 14,417 14,427 0% Total revenue 4,632,581 3,476,725 33% EBIT 1,872,176 1,302,738 44% Operational EBIT 1,912,534 903,820 112% Operational EBIT/kg (DKK) 28.68 13.45 113% Operational EBIT margin 41% 26% Harvested volumes (tgw) 66,686 67,217 -1% Smolts released (thousand) 14,417 14,427 0% FARMING SEGMENT – FAROE ISLANDS (FO) 38 ANNUAL REPORT 2022 PERFORMANCE Fig. 22 SMOLT RELEASE – THOUSAND SMOLTS Fig. 21 HARVESTED VOLUME (TGW) PER QUARTER Fig. 23 HARVEST VOLUMES (TGW) Fig. 19 TOTAL REVENUE (DKK 1,000) PER QUARTER 1,500,000 1,000,000 500,000 20192018 2020 2021 2022 2 018 2 019 2 020 2 021 2 022 12,500 12,700 14,400 14,400 14,300 2 018 2 019 2 020 2 021 2 022 44,600 57,200 50,700 66,686 67,200 Fig. 20 OPERTIONAL EBIT/KG (DKK) PER QUARTER 50.00 40.00 30.00 20.00 10.00 20192018 2020 2021 2022 25,000 5000 10,000 15,000 20,000 20192018 2020 2021 2022 farMing SegMent – faroe iSlanDS (fo) 39 ANNUAL REPORT 2022 PERFORMANCE Farming Segment – Scotland (SCT) Bakkafrost’s farming segment in Scotland is com- mitted to producing the fi nest quality Scottish Salmon with Scottish Provenance and full trace- ability. The Scottish farming segment has sites across the West Coast of Scotland and Hebridean Islands and is exporting globally. VOLUMES The SCT farming segment harvested 23,917 in 2022, com- pared to 29,672 tonnes gutted weight for the full year 2021. The expectation for 2023 is higher than for 2022 – 30,000 tonnes gutted weight. 11,0 million smolts were transferred in 2022, compared to 11,1 million smolts for 2021. The expectation for 2023 is lower than for 2022 – 9.6 million smolts. FINANCIAL PERFORMANCE For 2022, costs of DKK 283 million relate to incident-based mortality, compared to DKK 262 million for 2021. In 2022, the operating revenue for the SCT farm ing segment was DKK 1,442 million, compared to DKK 1,455 million in 2021. Operational EBIT amounted to DKK -298 million, compared to DKK -249 million in 2021. This corresponds to an opera- tional EBIT of DKK -12.44 (NOK -16.88) per kg gutted weight, compared to DKK -8.41 (NOK -11.49) per kg gutted weight in 2021. YTD YTD DKK 1,000 2022 2021 Change Financial Total revenue 1,441,566 1,455,391 -1% EBIT -189,442 -353,669 46% Operational EBIT -297,606 -249,497 -19% Operational EBIT/kg (DKK) -12.44 -8.41 -48% Operational EBIT margin -21% -17% Volumes Harvested volumes (tgw) 23,917 29,672 -19% Smolts released (thousand pcs) 11,008 11,108 -1% Total revenue 1,441,566 1,455,391 -1% EBIT -189,442 -353,669 46% Operational EBIT -297,606 -249,497 -19% Operational EBIT/kg (DKK) -12.44 -8.41 -48% Operational EBIT margin -21% -17% Harvested volumes (tgw) 23,917 29,672 -19% Smolts released (thousand pcs) 11,008 11,108 -1% FARMING SEGMENT – SCOTLAND (SCT) 40 ANNUAL REPORT 2022 PERFORMANCE Fig. 24 TOTAL REVENUE (DKK 1,000) PER QUARTER Fig. 26 HARVEST VOLUME (TGW) PER QUARTER Fig. 25 OPERATIONAL EBIT/KG (DKK) PER QUARTER 600,000 400,000 200,000 2020 2021 2022 2020 2021 2022 -5.00 5.00 10.00 0.00 -10.00 -15.00 -20.00 -25.00 -30.00 -35.00 -40.00 -45.00 12,000 10,000 8,000 6,000 4,000 2,000 2020 2021 2022 Fig. 28 HARVEST VOLUMES (TGW) Fig. 27 SMOLT RELEASE – THOUSAND SMOLTS 2 019 2 020 2 021 2 022 5,700 10,400 11,008 11,100 2 019 2 020 2 021 2 022 7,900 35,000 23,917 29,700 FARMING SEGMENT – SCOTLAND (SCT) 41 ANNUAL REPORT 2022 PERFORMANCE VAP Segment The VAP (value added products) segment produc- es skinless and boneless portions of salmon in the Faroe Islands. The main market for the VAP products is Europe with increasing sales in other markets. The VAP products are sold on long-term fi xed-price contracts. YTD YTD DKK 1,000 2022 2021 Change Financial Total revenue 1,703,637 1,195,195 44% EBIT -50,824 119,521 -143% Operational EBIT -50,824 119,521 -143% VAP - Operational EBIT/kg (DKK) -1.90 5.39 -135% Operational EBIT margin -3% 10% Volumes Farming FO transferred to VAP (tgw) 26,401 21,974 20% VAP produced (tgw) 26,747 22,180 21% Harvested volumes used in VAP production 40% 33% Harvested volumes sold fresh/frozen 60% 67% Total revenue 1,703,637 1,195,195 44% EBIT -50,824 119,521 -143% Operational EBIT -50,824 119,521 -143% VAP - Operational EBIT/kg (DKK) -1.90 5.39 -135% Operational EBIT margin -3% 10% Farming FO transferred to VAP (tgw) 26,401 21,974 20% VAP produced (tgw) 26,747 22,180 21% Harvested volumes used in VAP production 40% 33% Harvested volumes sold fresh/frozen 60% 67% VOLUMES Bakkafrost has a long-term strategy of producing 40% of its harvested salmon in the Faroe Islands as value added prod- ucts. The output is predominantly portions for the retail mar- ket in Europe, but some sales are also to the US retail market. The strategy with value added products is – in addition to increasing the Group’s earnings – to reduce the volatility in Bakkafrost Group’s net earnings, as these products are sold under different fi xed-price contracts for a period of up to 12 months. As there is a time lag between the movement in fresh salmon prices and the contract prices, Bakkafrost normally makes a profi t in the VAP segment, when the spot prices are decreasing and vice versa, when the spot prices increase during a period. In 2022, 40% of the total Faroese harvested volumes went to the production of VAP products, compared to 33% in 2021. The VAP production in 2022 was 26,747 tonnes gutted weight, compared to 22,180 tonnes gutted weight in 2021. FINANCIAL PERFORMANCE The contract prices in 2022 have increased at the same rate as the spot prices but were achieved with a time delay com- pared to spot prices. The contract prices were on a higher level than in 2021. The VAP segment’s operating revenue amounted to DKK 1,704 million in 2022, compared to DKK 1,195 million in 2021, an increase of 44%. Operational EBIT in 2022, which is EBIT adjusted for pro- vision for onerous contracts etc., totalled DKK -51 million, compared to DKK 120 million in 2021. This corresponds to an operational EBIT of DKK -1.90 (NOK -2.58) per kg gut- ted weight, compared to DKK 5.39 (NOK 7.36) per kg gutted weight in 2021. VAP SEGMENT 42 ANNUAL REPORT 2022 PERFORMANCE Fig. 33 DISTRIBUTION OF HARVESTED VOLUMES (%) Fig. 32 PRODUCT WEIGHT OF VAP (TGW) Fig. 29 TOTAL REVENUE (DKK 1,000) PER QUARTER Fig.31 VAP VOLUME (TGW) PER QUARTER Fig. 30 OPERATIONAL EBIT/KG (DKK) PER QUARTER 600,000 400,000 200,000 20192018 2020 2021 2022 0.00 -5.00 -10.00 -15.00 -20.00 5.00 10.00 15.00 20192018 2020 2021 2022 4,000 3,000 2,000 1,000 5,000 6,000 7,000 20192018 2020 2021 2022 2 018 2 019 2 020 2 021 2 022 8,400 16,700 23,900 26,747 22,000 Harvested volumes used in Vap production Harvested volumes sold fresh/frozen 100% 75% 50% 25% 2017 2018 2020 2021 2022 VAP SEGMENT 43 ANNUAL REPORT 2022 PERFORMANCE FOF Segment The FOF (fi shmeal, -oil and feed) segment pro- duces fi shmeal, fi sh oil and fi sh feed. Most of the production is used for fi sh feed, which is used internally in the farming segment. The quality of the fi sh feed is important to the quality of the salmon from Bakkafrost. Fishmeal, fi sh oil and fi sh feed are also sold externally. DKK 1,000 2022 2021 Change Financial Total revenue 2,433,494 1,659,351 47% EBIT 463,450 305,988 51% EBITDA 436,150 306,227 42% FOF - EBITDA margin 18% 18% Volumes (tonnes) Total Feed sold 127,840 128,489 -1% - Feed internal sale FO 79,262 94,163 -16% - Feed internal sale SCT 43,856 30,096 46% - Feed external sale 4,722 4,230 12% Total Feed sold 127,840 128,489 -1% Fishmeal external sale 34,667 16,376 112% Fish oil external sale 5,285 41 12790% Received raw material 297,814 152,383 95% Fishmeal production 65,395 34,962 87% Fish oil production 23,862 8,124 194% Financial Total revenue 2,433,494 1,659,351 47% EBIT 463,450 305,988 51% EBITDA 436,150 306,227 42% FOF - EBITDA margin 18% 18% Volumes (tonnes) Total Feed sold 127,840 128,489 -1% - Feed internal sale FO 79,262 94,163 -16% - Feed internal sale SCT 43,856 30,096 46% - Feed external sale 4,722 4,230 12% Total Feed sold 127,840 128,489 -1% Fishmeal external sale 34,667 16,376 112% Fish oil external sale 5,285 41 12790% Received raw material 297,814 152,383 95% Fishmeal production 65,395 34,962 87% Fish oil production 23,862 8,124 194% VOLUMES The FOF segment, has over the last couple of years had a sta- ble raw material intake for fi shmeal and fi sh oil production, but in 2021 there was a decline in the raw material intake. In 2022 the raw material intake has increased to the same level again. The produced fi shmeal and oil were partly used internally for feed production, and partly exported. In 2022, the FOF segment sourced 297,814 tonnes of raw material, compared to 152,383 tonnes in 2021, which corresponds to an increase of 95%. The raw material intake depends on off- cuts from the pelagic industry as well as fi shery in the North Atlantic and available species of fi sh. The production of fi shmeal in 2022 was 65,395 tonnes, com- pared to 34,962 tonnes in 2021, an increase of 87%. The pro- duction of fi sh oil in 2022 was 23,862 tonnes, compared to 8,124 tonnes in 2021, an increase of 194%. The production of fi sh oil varies, depending on the species of fi sh available for production and the timing of catches. The expectation for 2023 is the same as for 2022. The FOF segment sold 127,840 tonnes of feed in 2022, compared to 128,489 tonnes in 2021. Bakkafrost used 123,118 tonnes of sold feed in 2022 internally, correspond- ing to 96%. The internal use in 2021 was 124,259 tonnes, corresponding to 97%. The expectation for 2023 is the same as for 2022 130,000 tonnes. FINANCIAL PERFORMANCE Total revenues for the FOF segment in 2022 amounted to DKK 2,433 million, compared to DKK 1,659 million in 2021, an increase of 47%. The external operating revenue for the FOF segment amount- ed to DKK 743 million in 2022, compared to DKK 238 mil- lion in 2021. The increase in external revenue from 2021 to 2022 was mainly due to higher external sale of fi sh feed and fi shmeal. The internal revenue in 2022 amounted to DKK 1,691 mil- lion, compared to DKK 1,421 million in 2021. The internal revenue comprises the sales of feed to Bakkafrost’s farming activities, both in Scotland and the Faroe Islands EBITDA was DKK 436 million in 2022, compared to DKK 306 million in 2021, and the EBITDA margin was 17,9% in 2022, compared to 18,5% in 2021. FOF SEGMENT 44 ANNUAL REPORT 2022 PERFORMANCE Fig. 37 FISH FEED PRODUCTION VOLUMES (TONNES) Fig. 38 SOURCING OF RAW MATERIAL (TONNES) Fig. 34 TOTAL EBITDA (DKK 1,000) PER QUARTER Fig. 35 SOLD FEED TONNES PER QUARTER Fig. 36 EBITDA MARGIN (%) PER QUARTER 140,000 40,000 20,000 60,000 80,000 100,000 120,000 20192018 2020 2021 2022 50,000 10,000 20,000 30,000 40,000 20192018 2020 2021 2022 30% 10% 20% 20192018 2020 2021 2022 2 018 2 019 2 020 2 021 2 022 80,100 99,200 113,700 127,830 128,090 2 018 2 019 2 020 2 021 2 022 302,465 278,665 283,307 297,814 152,383 FOF SEGMENT 45 ANNUAL REPORT 2022 PERFORMANCE FOF SEGMENT 46 ANNUAL REPORT 2022 PERFORMANCE Market Review SEAFOOD CONSUMPTION In 2020, capture fisheries and aquaculture are estimated to be about 178 million tons, of which roughly 157 million tons were utilized as food. This corresponds to a per capita con- sumption of seafood close to 20 kg (live weight equivalent). The drop in both catch, more limited production growth and consumption must be seen in relation to and a direct result of the contraction of demand caused by the Covid-19 pan- demic. While estimates suggest an increase in consumption in 2021, the high price of fish products in 2022, compromis- es future growth for the aquaculture segment. Salmon and trout became the most important commodity traded in value terms in 2013, and in 2022 the specie ac- counted for about 17 per cent of the total value of interna- tionally traded fish products – with a total export value close to 21 bn EUR. Shrimps and prawns came at a close 2nd place, just above 20 bn EUR, followed by groundfish (hake, cod, haddock and Alaska pollock) and tuna. Fig. 39 WORLD SEAFOOD PRODUCTION (FOR HUMAN CONSUMPTION) AND CONSUMPTION PER CAPITA. - 5 10 15 20 120 125 130 135 140 145 150 155 160 165 kilo/capita million tonnes 2013 2014 2015 2016 2017 2018 2019 2020 2021E 2022E World seafood for human consumption Per capita - From Fisheries Per capita - From Aquaculture Source: Kontali, FAO MARKET REVIEW 47 ANNUAL REPORT 2022 PERFORMANCE MARKET TRENDS IN 2022 – ATLANTIC SALMON Worldwide, the supply of farmed Atlantic salmon fell by 2% in 2022 to 2,83 million tons wfe following strong supply growth the previous year and demand recovering following the COVID-19 pandemic. Russia's attack on Ukraine and its continued warfare and occupation have had far-reaching so- cial and global economic consequences. Major disruptions to logistics and logistic costs, price shocks to most major protein resources, a prolonging of the pan- demic-driven supply shortage for major categories of com- modities, spare parts, and not least - a European energy cri- sis, with ripple effects also into other continents. Probably, energy shortage is an issue that we would have seen coming but expedited and escalated by the war. This has led to the most significant increase in salmon production costs seen in at least a decade. Coupled with increases in interest rates, and food and hous- ing inflation, these effects of both the pandemic and the war have impacted - and will continue to impact consumer be- havior and choices in the seafood segment. For salmon, there are both drivers suggesting strong reliance versus competing categories, but also certain threats of downtrading to cheap- er proteins - in times such as we are facing. Despite significant uncertainty, the good, old, universal driv- ers for supply, demand and price development on salmon - are fully operating. 2022 has been characterized by two distinct periods; January-July, with a decline in market sup- ply of close to 6 %, and August-December, for which supply growth is estimated to be slightly higher than 4 %. These two periods had quite different pricing situations. In 2022 most salmon-producing regions experienced issues that af- fect growth and growth opportunities, being of a biological kind - or the regulatory eye of the needle getting tighter and tighter. European spot prices (Nasdaq 3-6 kg) for Atlantic salmon in 2022 ended on average just above 8,1 EUR per kg (+40%). Ad- justed for inflation of 8,3 % in the Euro area – price achieve- ment in real terms is on a similar level as peak during 2016. Fig. 40 PER CAPITA CONSUMPTION OF FARMED ATLANTIC SALMON FOR SELECTED MARKETS. Fig. 41 RELATIVE CHANGE IN GLOBAL SUPPLY OF ATLANTIC SALMON AND EUROPEAN SPOT PRICES FOR FRESH ATLANTIC SALMON 2013 2014 2015 2016 2017 2018 2019 2020 2022E2021E 0,5 1,0 1,5 2,0 2,5 3.0 EU & UK USA Russia Japan Change in global market supply of farmed Atlantic salmon from the previous year Change in European spot prices - fresh Atlantic salmon (Nasdaq 3-6 kg in NOK) from the previous year 100% 80% 60% 40% 20% 0% -20% -40% -60% 2018 2019 2020 20212017 2022 Source: Kontali, FAO MARKET REVIEW 48 ANNUAL REPORT 2022 PERFORMANCE Source: Kontali, FAO US MARKET Despite the US being heavily affected by the COVID-19 pan- demic, both in 2020 and 2021, the supply and consumption of Atlantic salmon have continued to grow at an impressive rate – both measured in volume and value. For the first time, 2022 represents a market size exceeding 650 thousand tons wfe for Atlantic salmon only. A US population of 332 million and consumption of 652,000 tons wfe in 2022 correspond to a per capita con- sumption of approx. 2.0 kg wfe, indicating about 6-7 meals per capita yearly. Salmon was the second most consumed seafood specie by US consumers, while shrimp still firmly holds the top spot. Average export prices for Chilean salmon fillets (approx- imately 35-40% of the total US market) increased from 10,30 USD/kilogram in 2021 to 12,10 USD/kilogram in 2022 - corresponding to an increase of 17%. This illustrates the strong demand growth in the US market. Fig. 42 SUPPLY OF ATLANTIC SALMON TO US MARKET Tonnes WFE Other USA United Kingdom Faroe Islands Norway Canada Chile 100 , 00 0 4 00 , 00 0 3 00 , 00 0 2 00 , 00 0 6 00 , 00 0 7 00 , 00 0 5 00 , 00 0 202 1E 202 2E 201 3 201 4 201 5 201 6 201 7 201 8 201 9 2020 Fig 42 SUPPLY OF ATLANTIC SALMON IN THE US MARKET Country 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022E Chile 191,600 214,700 224,100 217,300 220,400 267,200 284,300 325,100 349,600 362,000 Canada 77,400 55,000 92,900 100,900 92,100 93,800 94,300 92,900 104,300 88,800 Norway 27,000 39,900 51,200 55,700 68,400 67,300 68,300 69,100 82,900 99,300 Faroe Islands 16,400 17,100 14,700 16,900 14,800 12,800 18,500 14,400 20,800 23,300 United Kingdom 16,100 20,400 16,300 12,700 18,000 16,100 20,300 11,500 17,100 9,200 USA 10,100 16,200 13,800 7,700 13,100 7,300 8,100 8,800 6,200 3,500 Other 11,000 10,400 14,600 16,100 19,200 22,300 29,400 40,500 54,300 65,600 Total 349,600 373,700 427,600 427,300 446,000 486,800 523,200 562,300 635,200 651,700 MARKET REVIEW 49 ANNUAL REPORT 2022 PERFORMANCE EUROPEAN MARKET In 2022, the EU market (including the United Kingdom) for farmed Atlantic salmon declined by 1 %, or 15,000 tons wfe, to a total supply of 1,27 million tonnes wfe. Norway account- ed for approx. 85 % of the total supply volume. With a com- bined population of 513 million, this corresponds to a per capita consumption of 2,5 kg wfe per year, indicating 8-9 meals per capita per year. Within Europe, Germany, France, and the United Kingdom accounted for approx. 50 % of the total consumption, mak- ing them the largest market for salmon. Trade flow is also characterized by large salmon processing hubs (e.g. Poland, Denmark, Netherlands). Supply growth was notable both in Italy and Spain (Southern Europe) in recent years. During 2022, demand from high-value segments (food ser- vice) has continued to recover following the Covid-19 pan- demic in combination with limited growth in terms of vol- ume. Re-allocation of Russian volume had a marginal impact, with the European market share of global supply increasing from 44,5% to 44,9% in 2022. Source: Kontali Fig. 44 SUPPLY OF ATLANTIC SALMON TO THE EUROPEAN (EU+UK) MARKET Other/Re-export Faroe Islands Chile United Kingdom Norway 200,000 400,000 600,000 800,000 1000,000 1,200,000 1,400,000 2021E 2022E2013 2014 2015 2016 2017 2018 2019 2020 Fig. 43 SUPPLY OF ATLANTIC SALMON TO EU+UK MARKET Country 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022E Norway 755,500 834,600 912,200 860,200 841,400 910,800 944,500 995,600 1,085,500 1,071,200 United Kingdom 110,300 117,800 121,100 115,400 124,900 108,100 142,300 152,500 162,800 143,800 Chile 50,200 50,500 44,900 53,900 42,500 40,700 36,200 40,900 28,400 32,800 Faroe Islands 34,300 32,300 20,400 28,400 27,800 20,600 30,800 34,400 50,600 59,000 Other/ Re-export -18,800 -30,100 -27,700 -16,900 -17,100 -25,700 -23,200 -31,500 -40,600 -37,100 Total 931,500 1,005,100 1,070,900 1,041,000 1,019,500 1,054,500 1,130,600 1,191,900 1,286,700 1,269,700 MARKET REVIEW 50 ANNUAL REPORT 2022 PERFORMANCE Source: Kontali CHINA AND HONG KONG From 2015 to 2019 supply of Atlantic salmon to China and Hong Kong almost doubled, reaching nearly 125,000 tons wfe (pre-pandemic). Historically, supply to China has main- ly been large-sized fresh whole salmon (6+ kg), with the food service segment covering a high consumption share. Following a steep fall in 2020 (83,000 tons, -33%) due to the COVID-19 pandemic, market supply has since re- covered somewhat. In terms of volume, supply in 2022 was just above 93,000 tons wfe. Market value, however, reached a new all-time high in 2022 of 933 million USD - exceeding pre-pandemic levels. In December 2022, the Chinese government unveiled a broad easing of its strict "Zero Covid" policy. Fig. 45 SUPPLY OF ATLANTIC SALMON TO CHINESE MARKET (INKL. HONG KONG) Country 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022E Norway 32,190 34,140 31,110 16,480 17,860 30,920 42,990 32,550 44,770 42,990 Chile 10,750 19,960 18,270 29,280 27,790 44,770 45,540 28,580 15,110 23,920 United Kingdom 12,200 16,430 14,920 12,250 12,660 12,370 10,900 3,300 7,100 3,830 Denmark 300 350 130 80 340 330 320 230 60 30 Australia 230 940 6,420 1,360 9,630 6,770 7,590 10,700 13,990 14,290 Faroe Islands 9,710 11,050 9,520 10,410 8,730 10,620 14,690 6,200 6,580 6,670 Canada 410 280 2,430 5,790 2,120 5,090 1,110 640 320 500 Others 10,090 3,240 2,570 12,220 18,590 800 970 880 1,390 1,430 Total 75,880 86,390 85,370 87,870 97,720 111,670 124,110 83,080 89,320 93,660 Fig. 46 SUPPLY OF ATLANTIC SALMON TO CHINA AND HONG KONG 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022E 140,000 12 0,000 1 00,000 80,000 60,000 40,000 40,000 Other Canada Faroe Islands Australia Denmark United Kingdom Chile Norway MARKET REVIEW 51 ANNUAL REPORT 2022 PERFORMANCE SUPPLY OF FARMED ATLANTIC SALMON FROM THE FAROE ISLANDS The biological performance of the Faroese salmon has, over the last decade, been the best in the world, with low loss rates and high average harvest weights. This has led to the highest smolt yield in the industry. The Faroese industry has faced biological challenges with fi sh health and higher levels of sea lice in combination with stricter regulations and extraordinary events due to bad weather - which have periodically affected production. Fol- lowing a record year in 2021, the harvest volume of Atlantic salmon was just below 100,000 tons wfe (-6%) last year. The increased production on the Faroe Islands is driven by major investments on land (large smolt strategy) – allowing for in- creased stocking and turnover of biomass in the sea. Faroese exports saw a major shift in trade fl ow last year due to Russia's invasion of Ukraine. With sales to Russia suspend- ed, the European and US market accounted for more than 80% of the total supply volume – a level of market shares not seen since 2011. However, regarding the market value, Faroe exports saw new records, totaling 765 million (+24%) measured in Euro. Source: Kontali Fig. 48 SUPPLY OF ATLANTIC SALMON FROM THE FAROE ISLANDS TO TOP 5 MARKETS All other markets China / Hong Kong Japan USA EU & UK Russia 120,000 10 0,000 80,000 60,000 40,000 20,000 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Fig 47 SUPPLY OF ATLANTIC SALMON FROM THE FAROE ISLANDS TO TOP 5 MARKETS Country 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Russia 2,613 15,465 25,660 19,798 24,096 23,812 18,276 19,465 23,665 2,468 EU+UK 34,271 32,255 20,372 28,384 27,793 20,629 30,773 34,354 50,576 58,967 USA 16,394 17,105 14,671 16,908 14,820 12,829 18,469 14,392 20,812 23,305 China / Hong Kong 9,648 11,055 9,522 10,401 8,722 10,625 14,690 6,204 6,584 6,346 Japan 964 750 830 452 690 582 870 658 525 501 All other markets 7,795 4,731 3,706 2,138 3,191 2,314 3,368 4,243 4,261 7,020 Total 71,685 81,361 74,761 78,081 79,312 70,791 86,446 79,316 106,423 98,607 MARKET REVIEW 52 ANNUAL REPORT 2022 PERFORMANCE GLOBAL SUPPLY OF ALL SALMONIDS Source: Kontali Fig. 49 HISTORICAL SUPPLY OF ALL SALMONIDS 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022E Atlantic salmon 2,041,250 2,229,000 2,317,900 2,161,100 2,293,100 2,402,650 2,577,850 2,712,500 2,896,600 2,865,700 Small trout 570,000 550,600 565,600 610,600 626,500 660,400 685,100 718,400 741,800 765,000 Chum 338,300 321,900 338,100 280,900 261,100 268,600 229,000 164,800 167,200 233,200 Pink 579,300 307,100 398,300 353,200 447,900 591,400 525,100 279,400 648,000 250,500 Large trout 300,100 300,100 300,100 300,100 300,100 300,100 300,100 300,100 300,100 300,100 Sockeye 133,200 173,700 190,300 183,000 173,700 171,600 178,500 138,900 154,200 211,300 Coho 176,800 200,400 190,600 151,800 194,900 211,100 234,700 231,700 239,100 263,600 Chinook 20,300 18,800 20,900 19,200 19,900 19,800 20,300 21,500 21,600 19,500 Total 4,159,250 4,101,600 4,321,800 4,059,900 4,317,200 4,625,650 4,750,650 4,567,300 5,168,600 4,908,900 Fig. 50 GLOBAL SUPPLY OF ALL FARMED AND WILD SALMONIDS 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022E 6, 000,000 5, 000,000 4, 000,000 3, 000,000 2, 000,000 1, 000,000 Chinook Coho Sockeye Large trout Pink Chum Small trout Atlantic salmon MARKET REVIEW 53 ANNUAL REPORT 2022 PERFORMANCE Source: Kontali Fig. 52 THE GLOBAL HARVEST QUANTITY OF ATLANTIC SALMON Fig. 51 THE GLOBAL HARVEST QUANTITY OF ATLANTIC SALMON 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022E 2023E Norway 1,143,600 1,199,000 1,234,200 1,171,100 1,207,800 1,253,400 1,333,400 1,370,000 1,533,400 1,517,100 1,548,000 Chile 468,100 582,900 598,200 504,400 564,200 660,100 690,300 778,500 718,300 751,600 759,800 UK 157,800 170,500 166,300 157,400 177,200 152,100 190,500 178,300 199,200 165,000 180,100 North America 135,400 119,000 155,400 168,500 158,700 165,000 158,300 156,800 161,000 151,000 146,500 Faroe Island 72,600 82,700 75,600 77,300 80,300 71,700 86,600 80,600 105,500 99,600 103,600 Ireland 10,600 12,300 15,700 15,800 17,000 14,300 15,500 15,800 15,900 18,700 16,500 Australia 39,000 42,000 53,600 49,600 63,100 62,300 60,900 82,800 87,800 88,500 89,700 Iceland 3,350 4,400 3,600 8,100 11,600 13,600 24,500 31,200 41,500 42,900 40,100 Russia 10,000 14,500 13,600 5,000 8,600 5,400 11,400 10,500 23,000 18,500 17,000 Others 300 300 300 300 300 350 350 500 600 1,000 2,500 Landbased RAS 300 1,500 1,400 3,500 4,200 4,400 6,100 7,500 10,300 12,100 21,500 Total 2,041,050 2,229,100 2,317,900 2,161,000 2,293,000 2,402,650 2,577,850 2,712,500 2,896,500 2,866,000 2,925,300 Landbased RAS Others Russia Iceland Australia Ireland Faroe Island North America UK Chile Norway 3,500,000 3,000,000 2,500,000 2,200,000 1,500,000 1,000,000 500,000 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022E 2023E MARKET REVIEW 54 ANNUAL REPORT 2022 GLOBAL HARVEST OF FARMED ATLANTIC SALMON Norway is the world's largest producing country of Atlantic salmon, accounting for 53 % of global production in 2022. During the past few years, increased MAB capacity through the traffic light system and new development licenses have allowed increased stocking and growth. However, during the same period, sea lice regulation and high sea lice treatment frequency have limited productivity (lost feeding days im- pacting the smolt yield potential). The second largest producing country of Atlantic salmon, Chile, accounted for 25 % of the global production in 2022. Following the heavy losses caused by the algae bloom cri- sis in 2016, the Chilean industry has continued to show im- provements in key production parameters. In other European farming regions, the total harvest volume decreased by 5 % last year, while production in North Amer- ica (Canada) dropped by 6%. Harvest volume in Australia was just above 90,000 tons wfe, while Russian production is estimated to be just below 20,000 tons wfe. In addition, the global harvest volume from land-based (grow-out) is es- timated to be approximately 12,000 tons wfe in 2022 (sum of estimates for approx. 20 production plants). The best estimate for FY 2023 corresponds to a global growth rate of 1,5 – 2,0 %. PERFORMANCE TOP 15 - FARMING COMPANIES (SALMONIDS) In 2021, the world's largest 15 salmon farming companies harvested approximately 2.1 million tonnes wfe of salmo- nids (Atlantic Salmon, Coho Salmon, Chinook, Large Trout), representing 62 % of the total harvest quantity. In Norway, these companies comprised 62 % of the total harvest and 67 % in Chile. Fig. 53 TOP 15 SALMON FARMING COMPANIES IN 2021 (HARVEST VOLUME, ALL FARMED SALMON SPECIES) Group Head off. Total Norway UK Chile North Am. Faroe Isl. Australia Other MOWI NO 517,800 303,300 71,700 73,300 50,600 11,100 7,800 CERMAQ NO 223,400 99,100 101,400 22,900 LERØY SEAFOOD GROUP * NO 207,800 207,800 SALMAR * NO 202,100 189,400 12,700 AQUACHILE CL 202,000 202,000 COOKE AQUACULTURE CA 130,000 31,000 28,000 71,000 BAKKAFROST ** FO 107,700 33,000 74,700 MULTIEXPORT CL 97,800 97,800 AUSTRALIS SEAFOOD NO 84,300 84,300 GRIEG SEAFOOD *** NO 84,000 68,000 16,000 SALMONES BLUMAR CL 69,500 69,500 NORWAY ROYAL SALMON * CL 55,000 42,300 12,700 NTS ASA NO 50,100 37,300 12,800 NOVA SEA * NO 48,400 48,400 TASSAL NO 45,000 45,000 Top 15 2,124,900 995,600 135,700 656,300 160,500 85,800 45,000 46,000 Global harvest -Farmed Salmonids 3,426,700 1,616,400 204,700 984,400 170,700 105,500 92,800 252,200 Share 62% 62% 66% 67% 94% 81% 48% 18% * Volumes from Scottish Sea Farms (50% stake) not included. Owned 50/50 by Lerøy Seafood and Salmar ** Bakkafrost acquired The Scottish Salmon Company in 2019 *** Excluding UK operations, acquired by Scottish Sea Farms NTS ASA has 68,1% ownership in Norway Royal Salmon * Including Salmonor and Arctic Fish Mowi has 48% ownership in Nova Sea. All farmed salmonids (Atlantic salmon, Large Trout, Coho and Chinook). Figures rounded to nearest 100 tonnes WFE (round bled weight) Source: Kontali MARKET REVIEW 55 ANNUAL REPORT 2022 PERFORMANCE BUSINESS REVIEW – FISH FEED The total feed consumption of ocean-farmed salmonids was just below 4.7 million tons in 2022. Furthermore, this is mar- ginally lower than 2021, -1%, and must be seen in relation to a challenging biological second half in Europe last year. Norway and Chile account for approximately 75 % of fi sh feed consumption. Limited granting of new license capacity or rights to produce is the main barrier to further growth in salmonid fi sh feed demand. Other developed farming re- gions such as Australia, North America, and Iceland highly utilize existing capacity – considering biological constraints and issues. Over the last decade, the share of marine ingredients in feed for farmed salmonids has shown a decreasing trend. Howev- er, fi shmeal and fi sh oil prices still impact salmon farmers' feed prices. In 2022, we saw a slight decrease in global fi shmeal produc- tion due to the delayed second fi shing season in Peru, though with stable output the season as a whole. In northern Eu- rope, production was lifted by the large capelin quota, which increased Icelandic production to the highest level seen in many years. Unusual low oil yield in Peruvian anchoveta landings tightened the fi sh oil market further, lifted prices to record heights in the second half of 2022 and continues throughout the fi rst weeks of this year. Prices for fi shmeal have remained high throughout the last year and during the latest Peruvian production season. In Europe, prices have ranged between USD 1,700 and 1,800 since the beginning of December last year. In Peru, prices have climbed up to USD 1,700/ton after the fi nishing of a quite satisfying production season as regards fi shmeal out- put. Continued high prices on vegetable substitutes, particu- larly soy, will probably maintain the demand for fi shmeal and, thus price level. China is fully back in the market after the COVID-19 pandem- ic, and imports reached 1,8 million tons last year whereof 48% from Peru. Fig. 55 DEVELOPMENT IN FISH FEED (RAW MATERIAL PRICES LAST 5 YEARS. USD/TONS) 2017 2018 2019 2020 2021 2022 3,000 2,500 2,000 1,500 1,000 1,000 3,500 Fishmeal Fishoil Soyameal Rape oil Wheat Maize Fig. 54 ESTIMATED FEED CONSUMPTION/SALE TO SALMONIDS 5,000 4,000 3,000 2,000 1,000 2014 2015 2016 2017 2018 2019 2020 2021 2022E Others Faroe Island North America UK Chile Norway MARKET REVIEW 56 ANNUAL REPORT 2022 PERFORMANCE MARKET REVIEW 57 ANNUAL REPORT 2022 RISKS RISKS 58 RISKS The Bakkafrost Group is exposed to several risks, which will always be a natural part of our business activities. Therefore, risk management is crucial so that the risks Bakkafrost is exposed to and the potential financial impact is reduced to an acceptable level. Bakkafrost has general operational and business risks arising from normal business activities in the value chain. In addi- tion to the operational risks, Bakkafrost is exposed to mar- kets and financial risks arising from normal business activi- ties in the value chain. RISK MANAGEMENT STRUCTURE AND PROCESS The Board of Directors has the final responsibility for the risk management of the Group. The Board of Directors de- termines the framework for identifying and mitigating risks. The Audit Committee supervises risk management. The Group Management is responsible for daily compliance with the risk management framework and the Group’s day- to-day risk management. The Group Management assesses the Group’s principal risks on an ongoing basis, based on weekly or monthly reporting from the organisation on busi- ness activities, market development, technology etc. The continuous risk assessment is followed yearly with an exten- sive risk analysis for the whole Group. The risks are assessed and quantified, and reported to the Group Management. The latest analysis of the Group’s risks was in January 2023. Around year-end, the status of the main risks is reported to the Audit Committee and is approved by both the Audit Com- mittee and the Board of Directors. OPERATIONAL RISKS Farming One of the most significant risk factors, Bakkafrost is ex- posed to is the biological risk in the seawater grow-out stage. Such risks include direct threats to the fish, such as diseases, sea lice and algae blooms. Although comprehensive meas- ures are put in place to mitigate the negative impact arising from exposure to such threats, there is always a variation in key performance indicators such as mortality, growth, yield per smolt, price achievement versus reference prices, feed conversion ratio, costs of treatment and required fallowing time between generations for sites or larger geographic are- as. The impact of being exposed to such risks can vary from minor cost variations to a complete wipe-out of the biomass in a vast geographic area. Due to exceptionally good miti- gating measures in the Faroe Islands, the outcome on key performance indicators has been attractive in recent years. However, the corresponding scores have generally been less attractive in Scotland and have had significantly higher vol- atility. Bakkafrost’s investment plan for Scotland is expected to reduce the risk significantly. Although operational risks are, to a certain extent, reflected in budgets using estimates for mortality and the percentage of fish whose quality is downgraded in connection with pri- mary processing, such risks might, if they occur, materially affect Bakkafrost’s results and financial condition. Bakkaf- rost’s operations can also be materially impacted by what is classified as normal operating risks, e.g., quality from sup- pliers and sub-suppliers, etc. The salmon farming industry is associated with a high level of biological risk. Bakkafrost aims to reduce that risk through the entire production cycle using systematic group-wide biosecurity auditing. Fish escapes Bakkafrost has zero tolerance for the escape of farmed salm- on. However, the company operates many seawater sites, each exposed to risks linked to bad weather, handling of fish, changing of nets, operations of workboats and well boats, predators, etc. Escaped salmon and lumpfish may also inter- act with wild populations of salmon and lumpfish and cause genetic disruption of these populations. Considerably inter- national focus is on the possible negative impact of salmon farming on biodiversity, and incidents of fish escapes may lead to a negative public image. The direct financial expo- sure to escapes is moderate due to the geographic diversi- fication of the sites. The indirect effects, such as the spread of diseases, negative impact on wild salmon, governmental penalties and negative publicity, are hard to quantify for the accounts of Bakkafrost and the society. Procedures, quality assurance systems and new technological solutions, such as predator-resistant nets, are essential to mitigate the risk of escapes. Bakkafrost has a series of mitigating actions , such as staff training, regular net inspection, etc. New wave and current measurements at exposed sites and improved assessment of physical demands for equipment. Benthic impact Farming activity at sea-sites can result in the local impact of feed pellets or fish faeces on the seabed that may re- sult in elevated content of organic or inorganic matter in the sediment. While excess organic matter is typically relatively quickly mineralised by benthic fauna and bacteria, inorganic compounds like zinc added to fish feed as a dietary supple- ment are more persistently bound and tend to accumulate in the sediment on several farming sites. The Environment Agency has set national limits for acceptable organic impact on the seabed as well as the content of zinc and copper in sediment. Bakkafrost mitigates benthic impact due to the continuous adaptation to relocate farming activity to more exposed lo- cations. Since the company stopped using copper fouling, copper is no longer considered a risk. The levels are now Risk Management RISKS AND RISK MANAGEMENT 59 ANNUAL REPORT 2022 RISKS comparable with the background levels. Measures, such as changing the feed composition and rotating cage positions, have been taken to ensure that zinc concentrations will re- main below the limit set by the Environmental Agency. Sea lice and impact on wildlife Sea lice are one of the most significant risks and challenges in the farming industry globally. A high number of sea lice may cause stress, which can lead to diseases. Sea lice from farming may also infect wild salmon and trout populations and contribute to a negative impact on the condition of these populations. Farming activities may also have negative im- pact on sea mammals and birds. Bakkafrost has procedures for reducing the number of sea lice with different types of treatment. The procedures are improved continuously. Bakkafrost uses lumpfish as cleaner fish for sea lice. Lump- fish is the only cleaner fish used in the Faroe Islands, while a combination of lumpfish and wrasse is used in Scotland. These cleaner fish are essential preventive measures against sea lice. Bakkafrost uses a freshwater bath on-board live fish carriers and water flushing treatments in farming service vessels as a sea lice treatment. Additionally, Bakkafrost strives to im- prove delousing methods continuously. To achieve greater knowledge of the possible negative im- pact on the Faroese trout population, a research project has been funded to establish if any negative impact can be seen. So far, no negative impact has been observed. Negative im- pacts on seals and other sea mammals are also negligible. Possible entanglement of birds in bird nets and disturbance of bird colonies are also considered to be insignificant. Seals Seals cause loss of fish, as well as the presence of seals, dis- turbs salmon resulting in lowered feeding and fish growth. Faroese law prohibits killing seals. Bakkafrost is working on implementing effective and safe preventive measures on sites where seals constitute a fish welfare issue. This has been a growing challenge to production at sea, where it is difficult to find the right solutions. Storms The growth rate of farmed salmon depends, among other things, on weather conditions. Unexpected warm or cold temperatures can significantly negatively impact growth rates and feed consumption. Bakkafrost operates at sea under sometimes challenging conditions. This can result in incidents or necessary measures that may have significant cost implications, e.g., unexpected maintenance/repairs or escaped fish, even if Bakkafrost continually reduces risks using experience with equipment, location, and operational organisation. Bakkafrost’s facilities are in areas where the weather conditions are well known and the facilities well se- cured. However, other weather conditions, such as storms or floods, could also lead to unexpected losses at facilities. In recent years, Bakkafrost has moved several farming sites in the Faroe Islands to more exposed areas but simultaneously upgraded the farming equipment to more robust equipment to mitigate the risk of storms. Wave and current measure- ments at exposed sites have been improved, as well as im- proved assessments of physical demands for equipment. Climate change Climate change may have negative impact on fish health and increase the risk of harmful species. Elevated sea tempera- tures may lead to episodes of oxygen depletion, increased blooms of harmful algae and other plankton species, as well as more extreme weather events. Bakkafrost has close surveillance at the site with online ox- ygen monitoring implemented and monitoring sea tempera- ture at farming sites. Algae and patogens monitoring is im- plemented, and the assessment and procedures for physical demands for equipment have been improved. Algae, hydrozoa, and other plankton living species Microalgae, hydrozoa, and other plankton species may harm fish and cause mortalities either by causing oxygen deple- tion, releasing toxic substances or causing gill damage. Cur- rent knowledge on the prevalence of algae and hydrozoa is limited. Recent studies on salmon on one of our sites have indicated an inflammatory response on gill health at algae levels typically found at our farming sites. Further effort ought to be put into a survey of the prevalence of plankton living species and their effect on fish health. Surveillance of algae and other plankton living species is im- plemented, and Bakkafrost is working in collaboration with researchers to gain a better understanding of the occurrence of hydrozoans and other species. Bakkafrost also samples and analyse nutrients level preparing for further knowledge and possibilities of a modelling and predicting. Treatment and handling of fish One of the main causes of mortality, is the handling of fish during delousing procedures. Bakkafrost is continuously working on optimising delousing procedures to ensure op- timal fish welfare and reduce fish mortality. Non-medicinal treatments are well implemented in our lice treatment strat- egy, combined with preventive use of lumpfish and lice skirts and proper veterinary procedures. Salmon lice and deriva- tive actions to control lice infestation pressure, is however, still considered one of the biggest challenges and most criti- cal biological risks for the company. RISKS AND RISK MANAGEMENT 60 ANNUAL REPORT 2022 RISKS Fish diseases The operation of fish farming facilities involves risks regard- ing diseases. In the case of an outbreak of disease, Bakkaf- rost will, in addition to the direct loss of fish, incur substan- tial costs in the form of premature harvesting, loss of quality of harvested fish and subsequent periodic reduced produc- tion capacity. Examples of diseases being prevalent in the Faroe Islands in recent years are Amoebic gill disease (AGD), Bacterial kidney disease (BKD), Infectious salmon anaemia (ISA), Cardiomyopathy syndrome (CMS) and Heart and skel- etal muscle inflammation (HSMI). Related diseases prevalent in Scotland are, in addition to the above, Pancreas disease (PD) as an example. Bakkafrost’s large smolt strategy and investments in fresh- water treatment capacity play essential roles in mitigating these risks. Screening procedures to ensure early detection of disease agents have been implemented. Advancements in the broodstock operation also increases the overall resist- ance to diseases. Mortality The farming industry in the Faroe Islands has experienced a lower mortality rate than the rest of the farming industry in the last decade. In Scotland, the risk of mass mortality is higher and a mass mortality event in Scotland would lead to significantly reduced harvest biomass for the period, de- creasing the efficiency of the processing plant and harvest- ing, significantly impact EBIT and cash flow. Bakkafrost monitors fish health on a daily. Staff is trained to identify potential risks and disease is treated when iden- tified. Significant investments have been made in treatment capability and capacity (fresh water and sea lice) and recent site swap has been made to manage disease risk. Aeration is also installed on all sites and used 24/7 during risk period. Full mitigation is difficult as these are environmental factors often without our control. We will continue to review op- portunities for site swaps, potentially allowing more control over the spread of disease. As the size and robustness of the smolt increases in coming years, this will reduce the biolog- ical risk overall. Bakkafrost is continuously working on reducing mortality to have a 94% survival rate in the Faroe Islands. In Scotland, the survival rate is expected to be somewhat lower, and Bakkaf- rost targets 88% in 2026. Smolt The smolts are produced in freshwater hatcheries on land. Therefore, enough freshwater is critical for smolt production as reduced freshwater intake can severely affect the water quality in the hatcheries and cause mortality. In the Faroe Islands, Bakkafrost’s hatcheries use water-recycling tech- nology (RAS), whereby more than 97% of the freshwater is recycled. This significantly reduces the risk of freshwater shortage. In Scotland, Bakkafrost’s hatcheries are in part flow-through hatcheries but will all be replaced by modern RAS-based hatcheries over the following years. Bakkafrost releases millions of smolt per year. A limited ca- pacity in the wellboats for smolt transport can necessitate smolt transportation under sub-optimal conditions such as bad weather. This can strain the released smolt, leading to higher mortality. Bakkafrost is constantly improving han- dling procedures to optimise fish welfare. Transport of fish have improved considerably over the years, and a lot of this is caused by improved knowledge and experience of the workers. In 2022, Bakkafrost increased the wellboat capacity in the Faroe Island significantly. This will help mitigate the risk as- sociated with the smolt transfer. Roe Essential to a good smolt production is the quality of roe. Bakkafrost is dependent on external providers of roe to the production. Poor roe quality reduces the survival of fry in start feeding and affects the whole salmon production chain. Bakkafrost is ramping up its own roe production from the Faroese and Native Hebridean strains, which Bakkafrost owns. This reduces dependence on external providers of good quality roe, and Bakkafrost will control the productions. Also, this will reduce the risk of importing foreign pathogens into the stocks. Broodstock External suppliers of roe can supply Bakkafrost with roe for the whole intended production, and the Bakkafrost is there- fore not solely dependent on internal supply of roe. The broodstock operation in the Faroe Islands is divided into two branches, the production part with the aim to supply Bakka- frost Farming with roe and the genetic part with the aim to produce high quality roe with the traits necessary for mod- ern farming operations. Over the last years an extensive amount of work is done to build up and improve the Bakkafrost brood stock. Markers for disease resistance are identified with ongoing infection trials since 2017 and testing for heredity for quality parameters started when the first fish was harvested in 2020. Resistance against specific diseases shown to be challenging for farming operations are crucial for whether the roe is suitable for pro- duction. Several of the markers are so well characterized that these can be used for selection of the most resistant families for stripping already in 2021. Crucial for the realization of this work is that the genetic material is preserved, meaning that the broodfish in the facilities is kept alive. Accidents in the facilities could result in fish mortalities and irreversible loss of genetic material that has taken several generation and research effort to build up. RISKS AND RISK MANAGEMENT 61 ANNUAL REPORT 2022 RISKS As part of the 2022-2026 investment plan, Bakkafrost plans to build a new state-of-the-art broodstock facility. OTHER OPERATIONAL RISKS Raw materials for fishmeal, fish oil and fish feed The production of fishmeal, fish oil and fish feed follow es- tablished methods with automated and controlled processes. As the self-sufficient operator of fish meal, fish oil and fish feed, Bakkafrost is exposed to certain risks which may re- quire the purchase of fish feed from a third party. For exam- ple, Bakkafrost is vulnerable to food safety incidents, down- time, and possible insufficient supply of raw material input. Unexpected shortfalls in raw material due to limited catch volumes, geo-political issues or limited delivery or purchase of fish or supply of substitutes could affect the volumes pro- duced in the factory. This may result in incidents or neces- sary measures with significant cost implications. Bakkafrost is continually working on reducing risks. The Company’s fishmeal, fish oil and fish feed department at Havsbrún’s fa- cilities are in the Faroe Islands, in which case the Compa- ny’s business could be materially adversely affected directly from any trade restrictions or indirectly through restrictions on ocean harvests or quotas. Although any salmon farmer, being a net buyer of fish feed, is indirectly exposed to the same risk factors, this risk is usually mitigated contractually through third-party replacement obligations. Feed contaminants Through its use of different types of raw materials and in- gredients and its production processes, the feed may be exposed to contamination by several undesirable substanc- es. Most contaminants are accumulated in organisms, such as marine wild catch used to produce fishmeal and fish oil. These contaminants are deposited into the organism’s fat, and the concentration is greater the higher up the food chain. Authorities set maximum allowable levels for the most crit- ical contaminants. These limits are continuously monitored by the authorities and may be altered. There is also the pos- sibility of “new” contaminants being added periodically to the list. Generally, contamination may occur either accidentally or deliberately through malicious product tampering. Such contamination can affect the environment, fish health, and food safety, potentially negatively impacting the public’s confidence in eating salmon. Any of these events could hurt Bakkafrost’s operating results and financial condition. Future legislation may increase the risk of non-compliance and the cost of ensuring compliance. The reputation risk associated with non-compliance may be significant even if there is no impact on the environment, fish health or food safety. The Company´s feed department, Havsbrún, operates sev- eral controls to reduce the risk of contamination. Examples of measures and controls included in HACCP and ISO pro- cedures include supplier audits and supplier specifications of raw materials, targeted sourcing of raw materials, regular raw material and finished feed quality control analyses, pro- cedures for cleaning fish oils, etc. and strict plant security procedures. The risks, however, can never be eliminated. Contaminants that may be a risk for fish feed include, but are not limited to, organic contaminants such as dioxins and DL-PCBs, mycotoxins, pesticides, antioxidants such as Eth- oxyquin and BHT, brominated flame retardants and bacterial contamination and inorganic contaminants such as lead, mer- cury, arsenic, and cadmium. Even though all tests show that the levels of pollutants in the Bakkafrost salmon are well within the safety limits imposed by, e.g., the European Union, Bakkafrost has from early 2015 cleaned the fish oil used for Bakkafrost’s salmon feed for DL- PCBs and other pollutants. Since early 2018, the antioxidant, Ethoxyquin has been replaced with a natural antioxidant. Through accidents or tampering, the feed may also be con- taminated by other inorganic substances such as mineral oil, physical objects, etc. Several substances in addition to the list above are being monitored. Fish meal spontaneous combustion Spontaneous combustion is a serious risk that could occur when fishmeal is stored in silos or transported overseas, al- though very improbable. To avoid this, Havsbrún adds nat- ural antioxidants to the fishmeal during production. The ad- dition of an antioxidant is done according to requirements from IMO to prevent spontaneous combustion of fishmeal stored and transported overseas. IMO is a specialised agency of the UN, the global standard-setting authority for the safe- ty, security, and environmental performance of internation- al shipping. By not adding antioxidants to the fishmeal, the possibility of spontaneous combustion would be present, in- creasing the risk of an explosion/fire. The antioxidant dosage is based on research results from an IFFO report combined with equivalent internal research based on Havsbrún's stor- age and transport conditions. Fire in production facility or hatchery A fire occurrence in one of Bakkafrost’s large production fa- cilities or hatcheries could be severe. To mitigate the risk of fire, regular fire-technological inspections and assessments are made by 3rd parties who also advice on and supervise what changes should be made to reduce all possible risks of fire. To reduce the risk of fire spreading, the large production facilities and hatcheries are divided into several separate fire cells with automatic fire extinguishing systems. The walls within fire cells are covered with fire safe material and the staff are trained in handling fire handling incidents. RISKS AND RISK MANAGEMENT 62 ANNUAL REPORT 2022 RISKS MARKET RISKS Price on farmed salmon The Company’s financial position and future development depend considerably on the price of farmed salmon, which has historically been subject to substantial fluctuations. Therefore, farmed salmon is a commodity, and it is reason- able to assume that the market price will continue to follow a cyclical pattern. The balance between the total supply and demand for farmed salmon is a crucial parameter. In short term, covering the next 12-24 months, salmon pric- es are expected to be strong – hence constituting an upside risk rather than a significant downside risk. However, the volatility itself is the main risk. By selling around 40% of the harvested volumes on fixed price contracts, Bakkafrost’s sales strategy alleviates a substantial part of the risk induced by salmon prices. Annual revaluation of the company’s sales distribution between selling on spot and long-term contract prices. The goal is to have around 40% of the harvest volume on long-term contracts at fixed prices. The appropriate con- tract level is reviewed regularly and primarily towards the end of each year, covering the next year. Since the acquisition of SSC, Bakkafrost has focused on bring- ing together the brands and coordinating the sales and mar- ket approach under the One Company strategic pillar. This improves Bakkafrost’s agility in the market on a strategic, tactical and operational level, and helps to reduce the overall market risk. General inflation risk The inflation rates have increased in general. This affects revenues as well as the cost of operation and planned in- vestments. In 2022, inflation has significantly increased the salmon spot prices as well as the contracted prices from Bakkafrost’s VAP segment. While this is positive for the revenues, the input costs have also increased significantly – however not yet fully materialised in increased in cost of harvested fish. Due to the long production cycle of salmon, cost of harvested fish will continue to increase. The inflating input costs are to a high extent being passed on to customers. The observed inflation in 2022 on feed ingre- dients can also provide competitive opportunities for Bakka- frost. Bakkafrost is less exposed to the inflation of vegetable feed ingredients that it’s competitors, due to the much lower vegetable content in the Havsbrún feed. Also, Bakkafrost’s low feed conversion ratio compared to competitors and com- pared to other animal (non-salmon) protein producers, can give Bakkafrost a competitive advantage. Hence, remain- ing the high marine inclusion in the feed and continuously improve the FCR are measures that mitigate the effects of the inflation on vegetable feed ingredients. Bakkafrost also adapts procurement to inflation (e.g. procurement pooling and securing frame agreements, fixing terms and conditions where possible and feasible). Regarding the investment plan, this is regularly revisited to reflect observed and expected inflation. Price on fishmeal and fish oil Bakkafrost’s financial position and future development de- pend to some extent on the price of fishmeal and fish oil, which have historically been subject to substantial fluctua- tions. Fishmeal and fish oil are commodities, and it is reason- able to assume that the market price will continue to follow a cyclical pattern. The balance between the total supply and demand for fishmeal and fish oil is critical. Decreased supply may cause prices to increase. This could, in turn, impact the company’s profitability and cash position. Price on fish feed Feed costs account for a significant proportion of the total production costs within the salmon farming segment, and feed price fluctuations could substantially impact profitabil- ity. Feed prices are affected by both the global market for fishmeal and marine/animal/vegetable oils, and the feed industry is dominated by a small number of large, global producers. Natural limitations in the marine resource base could lead to global shortages of fishmeal and fish oil for fish feed produc- tion. However, the feed producers have come a long way in their efforts to replace some of the marine-based input fac- tors with vegetable raw materials. Furthermore, the produc- tion of fish feed is an integrated part of Bakkafrost’s value chain and thus reducing this risk. Customer and market dependency Single large customers or specific markets accounting for a large share of sales can constitute a risk to future revenues. Bakkafrost maintains a diversified sale strategy, spreading the sale across many customers in several markets. Bakkaf- rost’s strategy is to sell around 30-40% of the harvested vol- umes in the Faroe Islands to the retail segment, whereas the remaining share is sold to the foodservice market. In addi- tion, Bakkafrost has the flexibility and necessary production capacity to adapt the production to changes in demand, as demonstrated during the Covid-19 pandemic. FINANCIAL, LEGAL & REGULATORY RISKS Macro-economic factors Bakkafrost operates in different countries and sells its prod- ucts all over the world. Hence, Bakkafrost is subject to mac- roeconomic changes, whether local, regional or global. Such changes can be positive and negative to Bakkafrost and can significantly impact Bakkafrost. The Covid-19 pandemic and the ongoing war between Russia and Ukraine are recent ex- amples of the world economy, market and trade flow can be disrupted. This increases the level of financial uncertainty significantly. Bakkafrost maintains a diversified approach to the market, spreading the risk by selling products to different geograph- ic markets and selling to different channels (retail vs food RISKS AND RISK MANAGEMENT 63 ANNUAL REPORT 2022 RISKS service). Being present in different markets, which are not financially dependent on each other, lowers this risk. Like- wise, Bakkafrost seeks to source raw materials and servic- es from many suppliers to avoid relying on single suppliers. Also, Bakkafrost actively seeks good information sources on macro economical changes in areas where Bakkafrost oper- ates or sells products. Foreign exchange risk Bakkafrost trades in the world market for farmed salmonids. The revenues and accounts receivable are predominantly de- nominated in DKK, EUR, USD and GBP, but to some small ex- tent also in other foreign currencies. Accounts payables are primarily in DKK, USD, GBP and NOK. As a group, Bakkafrost has significant natural hedging. For those currencies not fully hedged, fluctuations in foreign exchange rates present a fi- nancial risk to Bakkafrost. The Company’s finance agreement is a 700 mEUR multicurrency facility giving Bakkafrost the possibility to request other currencies at utilisation. Bakkafrost’s foreign exchange risk is partly mitigated through the natural hedging within the Group. Intragroup transactions and external trade balance reduce the Group’s foreign exchange rate exposure to the reporting currency. A hedging strategy for the remaining net exposure to foreign exchange rates is implemented to reduce the risk further. The performance of the hedging strategy is reviewed monthly, and the Board oversees the strategy. Insurance risk Bakkafrost has significant assets and trade flows at risk, and risk mitigation is sought through insurance. The insurance market has tightened in recent years, and the insurance mar- ket has become less competitive. To get appropriate insurance cover at competitive prices, Bakkafrost offers its insurances to international insurance companies, and Group policies are sought where feasible. External benchmarking is performed regularly, and brokers are used to negotiating terms and pull quotes for a broader field of insurance providers. Tax risk The Bakkafrost Group is complex, with subsidiaries in several jurisdictions. This increases the risk of non-compliance with local tax rules, and transfer pricing rules becomes more com- plicated. In addition, the group is exposed to jurisdictions where taxation laws can change. The newly introduced re- source tax for the salmon industry in Norway has increased the risk of spillover effects to the Faroe Islands and Scotland and the government in the Faroe Islands are expected to in- crease the revenue tax. To mitigate this risk, Bakkafrost relies on tax and legal advice and relevant services from acknowledged competent exter- nal advisors/experts covering the jurisdictions where Bak- kafrost has its operation. Bakkafrost also maintains a firm transfer pricing policy and documentation. Bakkafrost also keeps a close dialog with politicians in the Faroe Islands in order to prevent tax increases, that are unhealthy for the future growth and development of the Faroese salmon in- dustry. Investment risk Bakkafrost has several large ongoing and planned invest- ments. There is a risk that these projects do not deliver the expected benefits, deliver on time or budget. To mitigate this, major investment projects are properly organized and staffed with skilled employees with clear objectives and mandate. Programme and project management skills are in strengthened across the organisation and efficient govern- ance structures established, rooted in well-defined project model and methodology. Project monitoring and reporting processes on projects and programmes are strengthened. Interest rate risk Interest rates have been historically low for years, but to combat the recent increasing inflation, interest rates have increased. It is likely, that interest rates will continue to in- crease during 2023, which not only affects Bakkafrosts cost of financing, but also affects the general market. Bakkafrost monitors the forecasted development in order to make ap- propriate and informed hedging decisions. Credit risk The risk that counterparties do not have the financial strength to meet their obligations is considered relatively low since historically, losses due to bad debts have been small. Bakkafrost has guidelines to ensure that sales are made only to customers that have not previously had pay- ment problems and that outstanding balances do not exceed fixed credit limits. Most accounts receivables are insured, but as not all receivables are insured, Bakkafrost must accept a certain risk element in accounts. Bakkafrost has implement- ed strong internal controls to reduce the credit risk. This in- cludes centralised weekly monitoring of debtors’ balances, and any non-standard credit terms need to be approved by the Credit Committee. Liquidity risk Bakkafrost has announced a 6.2 billion DKK investment programme for 2022-2026, which is financed with cash- flow from operation and debt. The cashflow from operation is dependent on the salmon market as well as the cost of operation and biological performance in particular. There is therefore a risk of reduced liquidity in the Group. Bakkafrost monitors weekly the liquidity and net debt. Also, the 5-year budget is updated on a quarterly basis, which also takes into account the Group’s liquidity and net debt development. If deemed necessary, the planned capex can be adapted and/or partly postponed, to reflects deteriorated liquidity forecasts. In February 2023, Bakkafrost’s group of RISKS AND RISK MANAGEMENT 64 ANNUAL REPORT 2022 RISKS lending banks accepted to extend their 5-year 700 mEUR fi- nance agreement with Bakkafrost to February 2028. Unused credit facilities and terms are described in Note 3.11. Capital structure and equity The prime objective of Bakkafrost’s capital management is to ensure that it maintains a good credit rating to achieve favourable borrowing terms. By ensuring a good debt-to-eq- uity ratio, Bakkafrost will support its business operations. Bakkafrost manages and changes its capital structure in re- sponse to an ongoing assessment of the financial conditions under which the business operates. It’s short- and medi- um-term outlook, including any adjustment in dividend pay- outs, buyback of its own shares, capital reduction or issue of new shares. Legal & Regulatory Due to environmental or animal welfare concerns, regulatory imposition may materially impact the Company’s operations and financial condition. The Company emphasises organis- ing its operations so that the risk for unexpected measures is reduced. Still, there will always be a latent risk that the regulatory authorities will impose restrictions and/or sudden changes in the industry framework. Salmon farming is regulated by licenses. The Group has a good dialogue with the Faroese and Scottish authorities regarding the prerequisites and restrictions connected to a farming license. In Scotland, all licenses and consents, policies and regulations are overseen by the Scottish Environment Protection Agency (SEPA). The authorities may withdraw licenses for fish farming oper- ations if substantial preconditions have been changed since the license was issued, if the license goes against overall de- velopment plans and protective measures, or if the licensee breaches the conditions set in connection with the issuance of the license. The license may also be withdrawn if the com- pany breaches the rule on maximum ownership of licenses or does not use the license. The license may also be revoked if the environmental license of the company is repealed. In the Faroese Islands, a salmon farming license is issued for a period of 12 years from the date of issue. The Faroese government may prolong the license period. If the company fulfils the conditions in the license and if a continuation of the activities is not contrary to overall development plans, which have been adopted, it must be assumed (but there can be no assurance) that the company has a legal claim to have the license period prolonged. Under the Act on Environmental Protection and under ex- isting practice, the relevant environmental authorities may demand a reduction in the stocking of fry, compared to the last stocking, in case examinations of the seabed or other en- vironmental studies show that pollution of the environment exceeds certain specified limits. The Faroese environment has become the subject of increasing attention and publici- ty about aquafarming. Therefore it can be expected that the rules in this area may become stricter or that existing prac- tice will become stricter. Geographical diversification by acquiring The Scottish Salm- on Company has reduced the likelihood of regulatory changes having devastating effects on a group level. In addition, con- tinuous dialogue with regulators and politicians in the Faroes and Scotland is performed to be able to influence regulatory changes and be prepared for changes. The dialogue occurs directly and via memberships in industry organisations such as Havbúnaðarfelagið and Salmon Scotland (former SSPO). Bakkafrost continuously monitors if the company complies with legal and regulatory requirements, such as veterinary regulations, food safety, human safety, financial regulations, tax, corporate laws etc. This responsibility is unambiguous- ly split between several parts of the organisation, e.g. the Quality Department (FO), Biology Department (SCO), Health & Safety and Finance. External advice and assistance are used when needed – e.g. lawyers and renowned professional ser- vices firms. ESG RISKS ESG rating and stakeholder management risk Sustainability is increasingly becoming a key priority to gov- ernments, the public, NGOs, customers, investors and the financial market as a whole. Due to the inherent complexi- ty in the “measurement of sustainability”, stakeholders are increasingly relying on ESG ratings before making decisions on buying Bakkafrost’s salmon, shares or providing financ- ing. It is increasingly important to demonstrate to stakehold- ers clearly and convincingly that Bakkafrost takes its ESG responsibility seriously. Failing in this can negatively affect license to operate, sales, share price, and access to capital. Bakkafrost has strengthened the capabilities and capacity to engage with organisations providing ESG ratings. Active dialogue with the most important and influential rating or- ganisations will increase transparency and accurately picture Bakkafrost’s sustainability profile and achievements. As a consequence, Bakkafrost has improved ESG-scorings in gen- eral. In Scotland, reputational management and communications planning help reduce the risk and our membership in Salmon Scotland is important in this respect. Direct engagement with the Scottish Government, participation in industry commit- tees is also important. External dependencies for ESG commitments Bakkafrost has set several ambitious targets: the scope 1 & 2 carbon emission reduction targets for 2030 and the net-ze- ro target for 2050. To reach these targets, the main hurdle RISKS AND RISK MANAGEMENT 65 ANNUAL REPORT 2022 RISKS is that Bakkafrost relies on deregulation of the electricity market in the Faroe Islands or access to suffi cient amounts of renewable energy to power its operation, primarily at Havsbrún. Although the declared 2030 goal from the Faro- ese Government is to have 100% renewable electricity in the Faroes in 2030, there is a signifi cant risk that this will not be achieved. Also, it is uncertain if the offered electricity prices in the Faroese national grid will be competitive compared to non-renewable alternatives. To mitigate this risk, Bakkafrost actively engages stakehold- ers to facilitate the transition to cost-effi cient solutions for powering Bakkafrost with renewable energy. This includes lobbying the political system and cooperation with the Faro- ese national electricity company, SEV. Bakkafrost is also ex- ploring other routes to ensure access to renewable energy. Failing to deliver on commitments In addition to ambitious carbon reduction targets, Bakkaf- rost has set a number of commitments in it’s sustainability plan. If Bakkafrost is signifi cantly underdelivering on these commitments, it can have a negative effect on Bakkafrost’s corporate brand and reputation. Bakkafrost performs regular reviews of target achievement and track to completion. Commitments are anchored at ex- ecutive level. However, some of the commitments are linked to improvements to the biological performance in Scotland. These improvements rely on the strategic investment plan to materialise in large robust smolt in Scotland. IT RISKS Cyber security With the increased use of technologies such as the internet to conduct business, the Group and its customers and service providers are susceptible to operational information security and related “cyber” risks both directly and indirectly. This could result in material adverse consequences for the Group RISKS AND RISK MANAGEMENT 66 ANNUAL REPORT 2022 RISKS and the shareholders, such as causing disruptions and im- pacting business operations, potentially resulting in financial losses. In general, cyber incidents can result from deliberate attacks or unintentional events. Cyber incidents include, but are not limited to, gaining unauthorised access to digital sys- tems (e.g., through “hacking” or malicious software coding) for purposes of misappropriating assets or sensitive infor- mation, corrupting data (e.g. ransomware), or causing oper- ational disruption. Cyber-attacks may also be carried out in a manner that does not require gaining unauthorised access, such as causing denial-of-service attacks on websites (i.e., efforts to make network services unavailable to intended users). In recent periods, examples have shown that large industrial groups can be subject to complete shutdowns be- cause of cyber-attacks. The most exposed areas of the Com- pany’s value chain in case of cyber-attacks are hatcheries, processing and sales. For shorter periods, harvestable fish can be held in seawater sites pending a solution to such an adverse event, implying a delay in profits and cash flows. The IT risks are assessed continuously, based on the impor- tance of a potential event for Bakkafrost operations and the likelihood that the event may occur. Bakkafrost’s IT infra- structure is being restructured to increase the robustness and resilience to malicious attacks. 24/7 monitoring is in place and 3rd parties are engaged for increased security. HR RISKS Recruitment of Operatives in Processing Bakkafrost is highly dependent on access to operative la- bour for the VAP and Harvest operations in Processing as well as operative staff for remote areas. The unemployment rate in the Faroe Islands is 0.8% and companies increasingly rely on foreign workers. In Scotland, Bakkafrost has had high staff turnover during 2022 and it has been more challenging to recruit adequate numbers and skilled employees to meet current or future requirements. Brexit has resulted in a more restricted access to labour, and we have felt that, as have other industries in UK. Furthermore, the high inflation has resulted in an increased mobility between operative staff, as the cost of living is fuelling a pressure on income. In the Faroes, the development is monitored closely, and Bakkafrost has been able to sufficiently recruit foreign work- ers. In Scotland, Bakkafrost will continue to focus in the most critical areas for recruitment. Future automation through in- vestments will require relatively fewer operative roles. Ro- tation patterns in key areas have been introduced to allow recruitment opportunities out-with regions. Consolidation of freshwater sites will also reduce geographical areas to hire for and investment in new processing/harvesting are planned for areas with higher concentration of labour. RISKS AND RISK MANAGEMENT 67 ANNUAL REPORT 2022 GOVERNANCE MARKET REVIEW GOVERNANCE 68 ANNUAL REPORT 2022 GOVERNANCE Corporate Governance BAKKAFROST’S GOVERNANCE MODEL P/F Bakkafrost is dedicated to maintaining high standards of corporate governance. The company endeavours to be in compliance with the Norwegian corporate governance re- gime, as detailed in the Norwegian Code of Practice for Cor- porate Governance, published on 14 October 2021 by the Norwegian Corporate Governance Board (the “Code of Prac- tice”). The recommendation may be found at www.nues.no. Beside the Corporate Governance description in our annual report, Bakkafrost publishes a more detailed report on Cor- porate Governance, which may be found on our website. Bakkafrost does not comply with the following recommenda- tions in the Norwegian Code of Practice for Corporate Gov- ernance: • Section 3 stipulates, “that mandates granted to the board should be limited in time to no later than the date of the next annual general meeting”. Bakkafrost’s Articles of Association § 4A gives the Board of Directors authorization to increase the share capital until the ordinary general meeting of the company in 2023, and § 4B gives the Board of Directors authorization to buy own shares on behalf of the company until the annual general meeting is held in 2023. According to the Faroese company law, a company may in its Articles of Association decide that the AGM may give the Board of Directors authority to increase the share capital and buy own shares. This permission may last for more than one year. For practi- cal reasons, this has been implemented into the Articles of Association of P/F Bakkafrost. It is the Board’s view that if shareholders find this authorization unacceptable, the Board will support a change to the Articles of Association. Bakkafrost’s Governance Model To ensure adherence to the principles, the company has elab- orated specific instructions regarding rules of procedure for the Board of Directors, instructions for the Nomination Com- mittee, instructions for the Chief Executive Officer and other management, guidelines with regards to values and ethics, instructions for the Audit Committee, an investor relations policy, guidelines relating to takeover bids and guidelines for related-party transactions. Shareholders and General Meeting Shareholders exercise their rights at Bakkafrost’s general meeting – such as appointing Bakkafrost’s Nomination Com- mittee, Board of Directors and auditor. SHAREHOLDERS GENERAL MEETING Bakkafrost’s shareholders exercise their rights at the General Meeting. BOARD OF DIRECTORS Consists of 3-7 members, which are elected every year. The Board of Directors is responsible for the overall management of Bakkafrost. GROUP EXECUTIVE MANAGEMENT The Group Executive Management is responsible for the day-to-day management of Bakkafrost. NOMINATION COMMITTEE Consists of four members, which are elected by AGM. Recommends candidates for election to the Board of Directors and Directors’ fees. AUDIT COMMITTEE Consists of three members from the Board of Directors and is chaired by the Board of Directors’ Chairman. REMUNERATION COMMITEE Consists of tree members from the board of Directors. CORPORATE GOVERNANCE 69 ANNUAL REPORT 2022 GOVERNANCE The procedures at Bakkafrost’s general meeting follow the standard rules stipulated in the Faroese company law and Bakkafrost’s Articles of Association. Nomination Committee The Nomination Committee recommends candidates for elec- tion to the Board of Directors and the Directors’ fees. The deadline for submitting proposals to the Nomination Com- mittee is 31 January. Bakkafrost’s General Meeting elects the members, hereun- der its chairman, for the Nomination Committee for a period of two years, unless the General Meeting decides otherwise. The remuneration payable to the Nomination Committee’s members is also determined by the General Meeting. The regulations governing the work of the Nomination Com- mittee are incorporated in Bakkafrost’s Articles of Associa- tion. At the end of 2022, the members of the Nomination Com- mittee were: • Gunnar í Liða (Chairman) • Eyðun Rasmussen • Rógvi Jacobsen • Leif Eriksrød Board of Directors Bakkafrost’s Board of Directors is responsible for the overall management of the company and appoints a management of one or several managers to manage the daily business of Bakkafrost. The Board of Directors sets out the strategy for Bakkafrost and decides major investments and divestments. The Board of Directors is also responsible for ensuring that Bakkafrost has at any time an appropriate capital base, key policies and controls and for reviewing audit matters. The Board of Directors is responsible for Bakkafrost’s Risk Man- agement and material operational decisions. The majority of the members of the Board of Directors shall be residents in the Faroe Islands. The chairman of the Board of Directors is elected by the general meeting, whilst the vice-chairman is appointed by the Board of Directors. The Board of Directors shall have between three and seven members. Information about the members of the Board of Directors may be found in “Directors’ Profiles” in the Annual Report. The Board of Directors has laid down detailed rules regard- ing its activities in a working procedure, which is reviewed regularly. The Board of Directors held eight meetings in 2022. Below under each Director’s profile is disclosed each Director’s par- ticipation in the Board meetings held during 2022. The members of the Board of Directors receive a fixed re- muneration, which is approved by the general meeting. The members of the Board of Directors are not part of Bakkaf- rost’s share savings plan for employees. Audit Committee The Audit Committee is a sub-committee of the Board of Di- rectors and assists the Board of Directors in overseeing the financial and non-financial reporting process, financial and business-related risks, internal controls, and compliance with statutory and other requirements from the public authorities. The Audit Committee decides the framework of Bakkafrost’s external auditors, evaluates the auditors’ independence and qualifications. The company’s audit committee met four times during 2022 to review accounting and operational issues in detail. The committee consists of Rúni M. Hansen (Chairman), Øystein Sandvik and Teitur Samuelsen. Remuneration Committee The Remuneration Committee is as sub-committee of the Board of Directors and consists of three members: Øystein Sandvik (Chairman), Einar Wathne and Teitur Samuelsen. The Remuneration Committee is responsible for setting an appropriate reward policy that motivates the Group Execu- tive Management to achieve the long-term interests of the shareholders. Responsibilities include setting the remunera- tion policy for the Group Executive Management, determin- ing individual compensation, and providing direction on sal- aries, bonuses and pensions and other remuneration. Group Executive Management The Group Executive Management leads Bakkafrost’s dai- ly business and shall adhere to any decisions made by the Board of Directors as well as to any rules and requests from the Board of Directors. The Board of Directors has in executive instructions laid down specific rules regarding the authority and duties of the Group Executive Management. The Board of Directors also decides the employment conditions of the Group Executive Manage- ment and gives more specific rules regarding its work. The Group Executive Management consist of CEO Regin Jacobsen, CFO Høgni Dahl Jakobsen and managing director of Havsbrún Odd Eliasen. Information about the Group Ex- ecutive Management may be found in “Group Managements’ Profiles” in the Annual Report. CORPORATE GOVERNANCE 70 ANNUAL REPORT 2022 GOVERNANCE Corporate Responsibility and Sustainability Governance and management Bakkafrost’s core values specify an intent to act responsi- bly, this includes thinking long-term on economic, social, and environmental issues. The company follows a precautionary approach to the management of sustainability risk through our risk assessment process. The process allocates responsi- bility for the mitigation of significant operational risks. Risks are monitored throughout the supply chain and reported in- ternally on a regular basis and externally on an annual basis in the Annual Report and Sustainability Report. The Audit Committee assists the Board in overseeing finan- cial and business-related risks, internal controls and compli- ance with statutory and other requirements from public au- thorities. Sustainability strategy, management and reporting is overseen by the Board of Directors and is the day-to-day responsibility of Bakkafrost’s Management Team. Sustainability is covered in Bakkafrost’s corporate strategy and management plans and will continue to be integrated into these in 2022, through the Healthy Living Plan. Compliance and ethical conduct Bakkafrost acts in accordance with strict national workplace health and safety, environmental, and fish health and welfare regulation in the Faroes and Scotland. The company has an ongoing commitment to have zero cases of non-compliance. The company upholds and promotes good business practice throughout the value chain, consistent with Bakkafrost’s core values and principles. Its values guide its behaviour and approach to creating long-term value for customers, share- holders and society and are outlined in Bakkafrost’s Code of Conduct, which aims to create a sound corporate culture. The Code requires all employees to observe high standards of business and personal ethics in the conduct of their duties and responsibilities. They must employ a fair and honest ap- proach in every dealing with fellow employees and all exter- nal stakeholders. Further commitment to voluntary sustainability standards and certifications is outlined below. Workplace and human rights The company is committed to respecting the protection of human rights and to making sure that it is not complicit in human rights abuses. Its Code states a commitment to ensure that neither Bakka- frost nor its business partners shall exploit children as a la- bour force. This is supported by the standards, suppliers are asked to sign up to, when entering into agreements. Bakkafrost’s Code of Conduct also outlines its approach to creating optimal working conditions and culture, including a commitment to create a professional and positive work en- vironment which is inclusive and free from discrimination. In 2018, Bakkafrost strengthened its commitment in this area by signing up to the ten principles of the UN Global Com- pact to pledge to protect human rights; respect the freedom of association and the right to collective bargaining; and to have a workforce free from forced/compulsory/child labour and discrimination. The company communicates its progress against these principles annually in the Healthy Living Sus- tainability Report. Human capital Bakkafrost employs 1,778 FTE’s in the Faroe Islands, UK, Scotland, USA, Denmark and France. It acknowledges that to achieve its mission and meet its strategic objectives, it must have a capable and engaged workforce, which is committed to its core values. The company is dedicated to having a diverse and inclusive workplace, to attract and retain talent and expertise, to build workforce competency and maintaining high employee en- gagement. The 2023 Healthy Living Plan outlines areas in which the company will increase focus to strengthen its hu- man capital. Health, safety and wellbeing Protecting human capital involves maintaining a high stand- ard of occupational health and safety and creating a healthy working culture. The company’s Code outlines its intention to ensure a sys- tematic approach to attaining an injury and accident-free workplace. This is achieved through a set of guidelines based on the highest health, safety and environment standards. Employees receive regular training on these. Product quality and safety Through various best practice standards and certification programmes (outlined below), Bakkafrost ensures indus- try-leading product quality and safety standards. A compre- hensive internal control system is in place, which is regularly inspected by the authorities; this involves daily product test- ing and monitoring for compliance with national health and food safety regulations. As well as ongoing adherence to the highest standards, the company has made a commitment to CORPORATE RESPONSIBILITY AND SUSTAINABILITY 71 ANNUAL REPORT 2022 GOVERNANCE maintain our high omega 3 levels and maintain high custom- er product quality scores. BIOSECURITY, FISH HEALTH AND WELFARE Bakkafrost is committed to upholding leading welfare stand- ards and reducing the use of chemicals and medicines in the prevention of disease and sea lice. The experienced fish health team – made up of certified veterinarians, biologists, and assistants – has a strategy in place to achieve this, which includes surveillance across all sites to ensure that optimal health and welfare is always maintained. The company has made a commitment to maintain high fish survival rates, to maintain an industry-leading approach to animal welfare and to have zero fish escapes. Environmental management and sustainable feed Bakkafrost is committed to minimizing pollution of the envi- ronment from each stage of the value chain. The company’s Code outlines an intention to strive to be market leading in environmental protection. All employees will be required to bear in mind the environmental effects work-related activi- ties have on nature and the environment and apply environ- mentally friendly solutions to the extent reasonably possible. The company is focused on optimizing its efficient use of fos- sil fuels and has made a series of commitments towards the health of the environment, including meeting a third-party environmental standard, reducing the impact from packaging on the environment and reducing its GHG emissions. Collaboration and certification As well as collaborating with the salmon industry through the Faroese Aquaculture Association and the Global Salm- on Initiative (GSI) Bakkafrost subscribes to several external standards and certification programmes to ensure product sustainability, quality and safety. The entire value chain in the Faroe Islands – feed production, broodstock, hatcher- ies, farming sites, and harvesting and processing plant – is certified according to the international GLOBAL g.A.P. stand- ard, which focuses on food safety throughout the production, fish welfare, health and safety and environmental manage- ment. Our value chain also has the Ohne Gentechnik Non- GMO add on. The operation in Scotland is accredited according to BAP (4- star) and BRC for the processing plants and the smokehouse. Bakkafrost’s harvesting and value-added product (VAP) pro- duction have the Aquaculture Stewardship Council (ASC) Chain of Custody certification, and the VAP production is cer- tified according to the BRC and IFS food safety standards. The fishmeal, oil and feed production at Havsbrún holds mul- tiple certifications; all units are certified to ISO9001:2015, and the fishmeal and fish oil division is certified according to the GMP+ standards, the IFFO RS certification and the MSC Chain of Custody standard. Our salmon meal and oil also have GMP+. All farming sites in the Faroe Islands are ASC certified. Responsible leadership and value generation The considerable value generated by Bakkafrost to the Faroe Islands through employment, taxes and returns, means it has a big responsibility to everyone with an invested interest in the company. The company has made a commitment to demonstrate responsible leadership at both a local and in- ternational level and increase transparency on issues of high stakeholder interest, such as community investment. Further information on Bakkafrost’s management approach to these issues, its plan to meet its commitments and its 2022 performance against them, can be found in Bakkaf- rost’s 2022 Healthy Living Sustainability Report. CORPORATE RESPONSIBILITY AND SUSTAINABILITY 72 ANNUAL REPORT 2022 GOVERNANCE Shareholder Information Information to shareholders has high priority in Bakkafrost. The company aims at maintaining a regular dialogue with the Group’s shareholders through the formal channel of stock exchange announcements, interim reports, annual reports, annual general meetings and presentations to investors and analysts. AUDITORS The consolidated accounts have been audited by P/F Januar, løggilt grannskoðanarvirki (State Authorized Public Account- ants), which is also the auditor of the parent company and all its subsidiaries, registered in the Faroe Islands. Auditor for subsidiaries - Bakkafrost UK Ltd is Forrester Boyd Chartered Account- ants, Grimsby - Bakkafrost Scotland Ltd is Azets, Glasgow. - Munkebo A/S is Beierholm, Aarhus - SARL Faroe France, Terninck Laurent, Saint Omer. DIVIDEND POLICY Bakkafrost aims to give its shareholders a competitive re- turn on their investment, both through payment of dividends from the company and by securing an increase in the value of the equity through positive operations. Generally, the company should pay dividends to its share- holders, but it is the responsibility of the Board of Direc- tors to make an overall assessment to secure the company a healthy capital base, both for the daily operations and for a healthy future growth of the company. A long-term goal for the Board of Directors is that 30–50% of adjusted EPS shall be paid out as dividends. Bakkafrost’s financial position is strong with a healthy bal- ance sheet, a competitive operation and undrawn available credit facilities. PARENT COMPANY’S FINANCIAL STATEMENTS AND ALLOCATION OF PROFIT FOR THE YEAR The parent company P/F Bakkafrost had a net profit of DKK 756 million for 2022. The Board of Directors has decided to propose to the Annual General Meeting that DKK 10.00 (ap- proximately NOK 14.53) per share shall be paid out as div- idends. This corresponds to DKK 591 million (NOK 836 mil- lion). The Board thereby proposes the following allocation of funds: - Result for 2022: DKK 756 million - Transferred to other equity: DKK 165 million - Total provision for dividends: DKK 591 million After the payment of dividends, the distributable equity to- tals DKK 9,087 million. SHAREHOLDERS, CAPITAL AND VOTES P/F Bakkafrost had on 31 December 2022, a total of 59,143,000 shares outstanding, each with a nominal value of DKK 1. Of the 59,143,000 shares outstanding, P/F Bakkafrost holds 44,519 treasury shares as at 31 December 2022. Ticker code: BAKKA LARGEST SHAREHOLDERS These shareholders held directly or indirectly more than 5% of the shares in the company as at 31 December 2022: Odd- vør Jacobsen, Regin Jacobsen, Goldman Sachs Group, Inc. and Folketrygdfondet. * The dividend per share in NOK is subject to changes, depending on the currency rate NOK/DKK. The currency rate NOK/DKK will be announced on ex-date. SHAREHOLDER INFORMATION 73 ANNUAL REPORT 2022 GOVERNANCE DIRECTORS AND MANAGEMENT Directors and Management 74 ANNUAL REPORT 2022 GOVERNANCE Directors’ Profiles RÚNI M. HANSEN Chairman of the Board Born 1967. Faroese citizen. He joined the Board in 2009 and has been Chairman since. The term of office expires in 2023. He is con- sidered to be independent. Executive Chairman of the industry hold- ing company Tjaldur. Chairman of the Board of Mintra. Mintra is a listed company on Oslo Euronext Growth. Education: MSc. in Economics and Business Administration, Copenhagen Busi- ness School. Postgraduate, Lancaster University. Board meetings in 2022: Participated in all 8 Board meetings in 2022. Number of shares held in Bakkafrost: Holds 10,761 shares – no change in portfolio in 2022. Mr Hansen is a member of The UN Global Compact´s Platform for Sustainable Ocean Business. He was a member of the World Eco- nomic Forum´s Agenda Council on the Arctic from 2012 to 2016. Mr Hansen has extensive experience in the seafood industry and the international energy industry. He was among other members of Equinor´s Exploration Executive team. During his time in Equinor (former Statoil), he has been based in London, Copenhagen, Oslo and The Faroe Islands. Prior to Equinor (Statoil) he was in the seafood and shipping industry. TEITUR SAMUELSEN Board member Born 1972. Faroese citizen. He joined the Board in 2016. The term of office expires in 2023. He is considered to be independent. Managing Director at P/F Eystur- og Sandoyartunlar and P/F Suðuroyartunlar. Education: MSc. in Business Economics & Auditing, Copenhagen Business School. Board meetings in 2022: Participated in all 8 Board meetings in 2022. Number of shares in Bakkafrost: Holds 100 shares – no change in portfolio in 2022. Mr Samuelsen has extensive experience in accounting and finance. He has worked at KMPG and Dong E&P in Denmark and has been CFO at Atlantic Petroleum (2005-2009) and Bakkafrost (2009-2014). Mr Samuelsen is presently a member of the Board of Directors at Betri Trygging. He is also a chairman of the board in Bústaðir, and a member of the Faroese auditor supervision board. ANNIKA FREDERIKSBERG Board member Born 1971. Faroese citizen. She joined the Board in 2008. The term of office expires in 2023. She is not considered to be independent. Sales Manager at Bakkafrost. Education: Basic Vocational Course, Commercial Line, Faroese Business School. Board meetings in 2022: Participated in all 8 Board meetings in 2022. Number of shares in Bakkafrost: Holds directly and indirectly 16,413 shares – change in portfolio in 2022: +163 shares. Mrs Frederiksberg has extensive experience in the salmon industry and sales. She has been part of Bakkafrost’s administration team and sales team for over 25 years. DireCtorS’ profileS 75 ANNUAL REPORT 2022 GOVERNANCE ØYSTEIN SANDVIK Board member Born 1948. Norwegian citizen. He joined the Board in 2013. The term of office expires in 2023. He is considered to be independent. Education: Bank Economist. Board meetings in 2022: Participated in all 8 Board meetings in 2022. Number of shares in Bakkafrost: Holds no shares – no change in portfolio in 2022. Mr Sandvik has extensive experience in the finance sector and sea- food. He has held several positions at Nordea Bank Norge within fish farming and fishery. Mr Sandvik is presently a member of the Board of Directors of Coldwater Prawns of Norway AS. EINAR WATHNE Board member Born 1961. Norwegian citizen. He joined the Board in 2019. The term of office expires in 2023. He is considered to be independent. Education: Master in Animal Nutrition at NMBU. Ph.D. in Aquaculture, NMBU. MBA, Handelshøyskolen BI Board meetings in 2022: Participated in all 8 Board meetings in 2022. Number of shares in Bakkafrost: Holds no shares – no change in portfolio in 2022. Mr Wathne has extensive experience in the seafood business. Mr Wathne has held positions as CEO in Cargill and EWOS. GUÐRIÐ HØJGAARD Board member Born 1972. Faroese citizen. Joined the board in 2022. Term of office expires in 2023. She is considered to be independent. She is current- ly CEO of Visit Faroe Islands and previously Marketing Director of Visit Stockholm. Education: MSc. in Business Administration & International Marketing, Copenha- gen Business School and Stockholm University. Board meetings in 2022: Participated in 6 Board meetings in 2022. Number of shares in Bakkafrost: Holds no shares – no change in portfolio in 2022. Mrs. Højgaard has extensive experience from international marketing and branding. She has worked in the travel and tourism industry in Sweden, Denmark and the Faroe Islands. Mrs. Højgaard is presently a member of the Board of Directors at P/F Postverk Føroya and The Faroese Business Development Fund (Framtak). DIRECTORS’ PROFILES 76 ANNUAL REPORT 2022 GOVERNANCE Group Management’s Profi les REGIN JACOBSEN Chief Executive Offi cer Born 1966. Faroese citizen. Mr Jacobsen has been Chief Executive Offi cer of Bakkafrost since 1989. Education: Graduate Diploma in Business Administration and Accounting (HD-R), Aarhus School of Business. Number of shares held in Bakkafrost: Holds 4,617,951 shares at year-end 2022. Changes in portfolio in 2022: +600 shares. Mr Jacobsen has extensive experience in the salmon industry and fi nances. He was the Financial Manager of Bakkafrost before he be- came Chief Executive Offi cer of Bakkafrost. HØGNI DAHL JAKOBSEN Chief Financial Offi cer Born 1972. Faroese & Swedish citizen. Mr Jakobsen has been Chief Financial Offi cer of Bakkafrost since 2019. Education: Business Design, Henley Business School. MSc in Business Administration and Computer Science (cand.merc. dat), Copenhagen Business School. Number of shares held in Bakkafrost: Holds directly and indirectly 75,024 shares at year-end 2022. Changes in portfolio in 2022: +431 shares. Mr Jakobsen has extensive experience in the management consult- ing sector. Before joining Bakkafrost, he has held positions as Senior Partner in Quorum Consulting and been Management Consultant at PA Consulting Group. ODD ELIASEN Managing Director of Havsbrún Born 1965. Faroese citizen. Mr Eliasen has been Managing Director of Havsbrún since 2012. Education: Teacher Certifi cate Exam, University of the Faroe Islands. Number of shares held in Bakkafrost: Holds 185,391 shares at year-end 2022. Changes in portfolio in 2022: +422 shares. Mr Eliasen has broad experience in the fi sh farming industry and has been an active player in restructuring the fi sh farming industry in the Faroe Islands. He has been responsible for Havsbrún’s farming activ- ities and has held various board positions in the industry. Mr Eliasen was a board member of Bakkafrost from 2006 to 2012. GROUP MANAGEMENT’S PROFILES 77 ANNUAL REPORT 2022 Statement by the Management and the Board of Directors on the Annual Report Today, the Management and the Board of Directors have con- sidered and approved the Annual and Consolidated Report and Accounts of P/F Bakkafrost for the financial year 1 Jan- uary 2022 to 31 December 2022. The Annual Report has been prepared in accordance with the International Financial Reporting Standards as adopted by the EU and Faroese disclosure requirements for listed com- panies. In our opinion, the accounting policies used are appropriate, and the Annual and Consolidated Report and Accounts gives a true and fair view of the Group's and parent company's fi- nancial positions at 31 December 2022, as well as the results of the Group's and the parent company's activities and cash flows for the financial year 1 January 2022 to 31 December 2022. In our opinion, the management's review provides a true and fair account of the development in the Group's and the par- ent company's operations and financial circumstances, of the results for the year and of the overall financial position of the Group and the parent company as well as a description of the most significant risks and elements of uncertainty facing the Group and the parent company. We recommend that the annual report be adopted at the an- nual general meeting. Glyvrar, 31 March 2023 Management: Regin Jacobsen CEO The Board of Directors of P/F Bakkafrost Rúni M. Hansen Øystein Sandvik Annika Frederiksberg Chairman of the Board Board Member Board Member Teitur Samuelsen Einar Wathne Guðrið Højgaard Board Member Board Member Board Member STATEMENT BY THE MANAGEMENT AND THE BOARD OF DIRECTORS ON THE ANNUAL REPORT 78 ANNUAL REPORT 2022 Independent Auditor’s Report To the Shareholders of P/F Bakkafrost Report on the Audit of the Consolidated financial statements and parent company financial statements Opinion We have audited the consolidated financial statements and parent company financial statements of P/F Bakkafrost and its subsidiaries (the Group), which comprise the consolidated statement of financial position as at December 31, 2022, and the consolidated statement of comprehensive income, con- solidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements and parent company financial statements, including a summary of significant ac- counting policies. In our opinion, the accompanying consolidated financial statements and parent company financial statements give a true and fair view of the consolidated financial position of the Group and the parent company as at December 31, 2022, and of its consolidated financial performance and its con- solidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU and further requirements in the Faroese Financial Statements Act. Our opinion is consistent with our auditor’s long-form report to the audit committee and the board of directors Basis for Opinion We conducted our audit in accordance with International Standards on Auditing (ISAs) and additional requirements ap- plicable in the Faroe Islands. Our responsibilities under those standards and requirements are further described in the Au- ditor’s Responsibilities for the audit of the Consolidated fi- nancial statements and parent company financial statements section of our report. We are independent of the Group in accordance with the International Ethics Standards Board for Professional Ac- countants (IESBA Code) and the additional ethical require- ments applicable in the Faroe Islands, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. To the best of our knowledge and belief, prohibited non-au- dit services referred to in article 5(1) of Regulation (EU) no 537/2014 were not provided. We believe that the audit evidence we have obtained is suf- ficient and appropriate to provide a basis for our opinion. Appointment P/F Januar was first appointed auditors of P/F Bakkafrost on 18 April 2013 for the financial year 2013. We have been reappointed by shareholders on AGMs for an annual engage- ment every year since. Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the con- solidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opin- ion on these matters. INDEPENDENT AUDITOR’S REPORT 79 ANNUAL REPORT 2022 Responsibilities of Management and Those Charged with Governance for the Consolidated financial statements and parent company financial statements Management is responsible for the preparation and fair pres- entation of the consolidated financial statements and parent company financial statements in accordance with IFRSs as adopted by the EU and further requirements in the Faro- ese Financial Statements Act, and for such internal control as management determines is necessary to enable the prepara- tion of consolidated financial statements and parent compa- ny financial statements that are free from material misstate- ment, whether due to fraud or error. In preparing the consolidated financial statements and par- ent company financial statements, management is responsi- ble for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting un- less management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Consolidated financial statements and parent company financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements and parent company financial statements, as a whole, are free from ma- terial misstatement, whether due to fraud or error, and to is- sue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements and parent company financial statements. Key Audit matter Our response to the matter during our audit Biomass at cost Biomass at marine sites is not accurately ascertainable prior to harvest and material accounting estimates are applied at the balance sheet date regarding existence and valuation. Estimates are based on information on the number at launch, feeding, sea temperature, exposure to daylight and treatment for lice and other health issues, and knowledge about how salmon responds to these factors in terms of growth rate, mortality, feed consumption ratio, and liability to stress and decease. Material inherent risk is related to biomass at sea. Summary of the audit approach During our audit, we: • Applied our experience and knowledge about the characteristics of the salmon production process when considering the accounting estimates. • Assured ourselves, that the estimates are based on factual data and data which can be supported empirically. • Assured ourselves, that management is applying estimates in a way consistent with knowledge of the production process, and that the estimates are performed consistently, and that the estimates are free from bias. • Assured ourselves of the ability of management to perform these estimates by examining estimates made by management at prior balance sheet dates on a back-end basis. Biomass at Fair Value according to IAS 41 Measuring biomass at fair value includes present value calculations based on complex inputs regarding the properties of existing biomass and forecast regarding growth and mortality rates from the balance sheet date to harvest, quality distributions, as well as market conditions at expected harvest date. Summary of the audit approach During our audit, we: • Reviewed and reconciled the company-specific characteristics of inputs into the valuation models • Reconciled inputs into the calculations model to observable market conditions at the balance sheet date. • Reviewed the calculation model and ascertained that it is comparable to industry standards. • On a sample bases reperformed net present value calculation. Valuation of licenses and goodwill The group has acquired production licenses at significant amounts as part of business combinations where the group is identified as acquiree according to IFRS 3. During the Purchase Price Allocation process, licenses and goodwill at material amounts were identified. Carrying amounts are calculated using generally accepted valuation models, based on unobservable inputs according to level 3 inputs in IFRS13. During our audit, we: Reviewed impairment model, and ascertained that it is built on observable assumptions • Aligned inputs to board approved plans and budgets, and historical performance of the individual licenses • Reviewed valuation models for mathematical coherence and reperformed calculations on a test basis. • Reviewed and challenged the indefinite useful life assumptions. INDEPENDENT AUDITOR’S REPORT 80 ANNUAL REPORT 2022 As part of an audit in accordance with ISAs as adopted by the EU and additional requirements applicable in the Faroe Islands, we exercise professional judgment and maintain pro- fessional scepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the consolidated financial statements and parent company financial statements, whether due to fraud or error, de- sign and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and ap- propriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrep- resentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are ap- propriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and relat- ed disclosures made by management. • Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast signif- icant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial state- ments and parent company financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the consolidated financial statements and parent company financial statements, including the disclosures, and wheth- er the consolidated financial statements and parent com- pany financial statements represent the underlying trans- actions and events in a manner that gives a true and fair view. • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements and parent company financial state- ments. We are responsible for the direction, supervision and performance of the group audit. We remain solely re- sponsible for our audit opinion. We communicate with those charged with governance re- garding, among other matters, the planned scope and tim- ing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a state- ment that we have complied with relevant ethical require- ments regarding independence, and to communicate with them all relationships and other matters that may reason- ably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial state- ments and parent company financial statements of the cur- rent period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Statement on the management’s review Management is responsible for the management’s review. Our opinion on the consolidated financial statements and parent company financial statements does not cover the management’s review, and we do not express any kind of assurance opinion thereon. In connection with our audit of the consolidated financial statements and parent company financial statements, our re- sponsibility is to read the management’s review and, in doing so, consider whether the management’s review is materially inconsistent with the consolidated financial statement or our knowledge obtained during the audit, or whether it other- wise appears to be materially misstated. Further, it is our responsibility to consider whether the man- agement’s review provides the information required by the International Financial Reporting Standards as adopted by EU and further requirements in the Faroe Islands financial statements act. Based on the work we have performed, we believe that the management’s review is in accordance with the consolidat- ed financial statements and parent company financial state- ments and that it has been prepared in accordance with the requirements of the International Financial Reporting Stand- ards as adopted by EU and further requirements in the Faroe Islands financial statements act. We did not identify any material misstatement in the man- agement’s review. Report on compliance with the ESEF Regulation As part of our audit of the Consolidated Financial Statements, we performed procedures to express an opinion on wheth- er the Consolidated Financial Statements of P/F Bakkafrost for the financial year 1 January to 31 December 2022 with the filename 2138007LH7OP4V112978-2022-12-31-en.zip INDEPENDENT AUDITOR’S REPORT 81 ANNUAL REPORT 2022 is prepared, in all material respects, in compliance with the Commission Delegated Regulation (EU) 2019/815 on the Eu- ropean Single Electronic Format (ESEF Regulation) which in- cludes requirements related to the preparation of the annual report in XHTML format and iXBRL tagging of the Consolidat- ed Financial Statements. Management is responsible for preparing a consolidated fi- nancial statement that complies with the ESEF Regulation. This responsibility includes: • The preparing of the annual report in XHTML format. • The selection and application of appropriate iXBRL tags, including extensions to the ESEF taxonomy and the an- choring thereof to elements in the taxonomy, for all fi- nancial information required to be tagged using judgement where necessary. • Ensuring consistency between iXBRL tagged data and the Consolidated Financial Statements presented in hu- man-readable format; and • For such internal control as Management determines nec- essary to enable the preparation of a consolidated finan- cial statement that is compliant with the ESEF Regulation. Our responsibility is to obtain reasonable assurance on whether the Consolidated Financial Statement is prepared, in all material respects, in compliance with the ESEF Regulation based on the evidence we have obtained and to issue a re- port that includes our opinion. The nature, timing and extent of procedures selected depend on the auditor’s judgement, including the assessment of the risks of material departures from the requirements set out in the ESEF Regulation, wheth- er due to fraud or error. The procedures include: • Testing whether the Consolidated Financial Statement is prepared in XHTML format. • Obtaining an understanding of the company’s iXBRL tag- ging process and of internal control over the tagging pro- cess. • Evaluating the completeness of the iXBRL tagging of the Consolidated Financial Statements. • Evaluating the appropriateness of the company’s use of iXBRL elements selected from the ESEF taxonomy and the creation of extension elements where no suitable element in the ESEF taxonomy has been identified. • Evaluating the use of anchoring of extension elements to elements in the ESEF taxonomy; and • Reconciling the iXBRL tagged data with the audited Consol- idated Financial Statements. In our opinion, the Consolidated Financial Report of P/F Bakkafrost for the financial year 1 January to 31 December 2022 with the file name 2138007LH7OP4V112978-2022- 12-31-en.zip is prepared, in all material respects, in compli- ance with the ESEF Regulation. Tórshavn, 31. March 2023 Januar P/F løggilt grannskoðanarvirki State Authorized Public Accountants • Company reg.no. 5821 Fróði Sivertsen State Authorised Public Accountant John Michal Petersen State Authorised Public Accountant INDEPENDENT AUDITOR’S REPORT 82 ANNUAL REPORT 2022 INDEPENDENT AUDITOR’S REPORT 83 ANNUAL REPORT 2022 Financial Statements and Notes BAKKAFROST GROUP 84 Table of Contents BAKKAFROST GROUP Consolidated Income Statement 88 Consolidated Statement of Other Comprehensive Income 89 Consolidated Statement of Financial Position 90 Consolidated Cash Flow Statement 92 Consolidated Statement of Changes in Equity 93 NOTES – SECTION 1 – BASIS OF PREPARATION 95 This section gives an overview of the financial accounting policies in general and an overview of the management’s key accounting estimates. Note 1. General Information 95 Note 1.1 Summary of Significant Accounting Policies 95 Note 1.2 Basis of Presentation 95 Note 1.3 Consolidation Principles 95 Note 1.4 Translation of Foreign Currencies 96 Note 1.5 Classification Principles 96 Note 1.6 Functional Currency 96 Note 1.7 New Standards 97 Note 1.8 Accounting Estimates 97 Note 1.9 IXBRL Reporting 97 TABLE OF CONTENTS - BAKKAFROST GROUP 85 ANNUAL REPORT 2022 NOTES – SECTION 2 – RESULTS FOR THE YEAR 98 This section gives more details on the results for the year, including operating segments, taxes, and employee costs. Note 2.1 Revenue 98 Note 2.2 Major Customers 98 Note 2.3 Operating Segment Information 99 Note 2.4 Salaries and other Personnel Expenses 103 Note 2.5 Other Operating Expenses and other Income 105 Note 2.6 Research and Development Expenses 105 Note 2.7 Net Financial Items 106 Note 2.8 Tax 107 NOTES – SECTION 3 – ASSETS AND LIABILITIES 109 This section gives more details on the assets that form the basis for the activities of bakkafrost and the related liabilities. Note 3.1 Intangible Assets 109 Note 3.2 Property, Plant and Equipment 113 Note 3.3 Leasing 115 Note 3.4 Companies in the Group 117 Note 3.5 Shares and Holdings in Other Companies 119 Note 3.6 Inventory 120 Note 3.7 Biological Assets 121 Note 3.8. Accounts Receivable and other Receivables 124 Note 3.9 Cash and Cash Equivalents 125 Note 3.10 Share Capital and Major Shareholders 126 Note 3.11 Interest-Bearing Debt 128 Note 3.12 Mortgages and Guarantees 131 Note 3.13 Derivatives 132 TABLE OF CONTENTS - BAKKAFROST GROUP 86 ANNUAL REPORT 2022 NOTES – SECTION 4 – CAPITAL STRUCTURE AND FINANCING ITEMS 134 This section gives an insight into the capital structure and financing items. Note 4.2 Categories and Fair Value of Financial Instruments 139 Note 4.3 Earnings Per Share 140 NOTES – SECTION 5 – OTHER DISCLOSURES 141 This section gives more details on the statutory notes that have secondary importance from the perspective of bakkafrost. Note 5.1. Capital Commitments 141 Note 5.2 Related-Party Transactions 142 Note 5.3 Business Combinations 143 Note 5.4 Events after the Date of the Statement of Financial Position 145 Note 5.5 Auditor’s Fees 145 Note 5.6 Going Concern 146 Note 5.7 Alternative Performance Measures 146 TABLE OF CONTENTS - BAKKAFROST GROUP 87 ANNUAL REPORT 2022 Consolidated Income Statement FOR THE YEAR ENDED 31 DECEMBER Operational EBIT is EBIT before fair value adjustment of biomass, onerous contracts, income from associates and revenue tax DKK 1,000 2022 2021 Operating revenue 7,129,967 5,553,849 Purchase of goods -2,756,273 -1,692,501 Change in inventory and biological assets (at cost) 666,550 -178,060 Salary and personnel expenses 2.4 -831,679 -728,423 Other operating expenses 2.5 -1,990,299 -1,632,114 Depreciation 3.1/3.2/3.3 -537,480 -530,434 Other income 2.5 24,379 28,877 Operational EBIT* 1,705,165 821,194 Fair value adjustments of biological assets 3.7 278,392 434,868 Income from associates 57,597 30,112 Revenue tax – FO -215,001 -141,489 Earnings before interest and taxes (EBIT) 1,826,153 1,144,685 Financial income 2.7 7,000 5,415 Financial expenses 2.7 -65,039 -40,608 Net currency effects 2.7 -69,066 38,761 Other financial items 2.7 -8,713 -10,591 Earnings before taxes (EBT) 1,690,335 1,137,662 Taxes 2.8 -346,005 -173,626 Profit or loss for the period continuing operations 1,344,330 964,036 Profit or loss for the year attributable to Non-controlling interests -780 -17 Owners of P/F Bakkafrost 1,345,110 964,053 1,344,330 964,036 Earnings/Diluted earnings per share (DKK) 4.3 22.75 16.32 CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 88 ANNUAL REPORT 2022 Consolidated Statement of Other Comprehensive Income FOR THE YEAR ENDED 31 DECEMBER DKK 1,000 2022 2021 Profit for the year 1,344,330 964,036 Change in tax rate on equity posted PPA in prior years 0 -193,574 Changes on financial derivatives 11,102 12,928 Hereof income tax effect -1,103 -1,972 Reserve to share based payment 12,760 1,570 Currency translation differences -28,490 36,139 Reclassification - Currency translation differences fund 0 -24,452 Reclassification - Biomass Fair value adjustments fund 0 24,452 Net other comprehensive income to be reclassified to profit or loss in subsequent periods -5,731 -144,909 Net other comprehensive income not to be reclassified to profit or loss in subsequent periods 0 0 Other comprehensive income -5,731 -144,909 Total comprehensive income for the year net tax 1,338,599 819,127 Total comprehensive income attributable to Non-controlling interests -780 -17 Owners of P/F Bakkafrost 1,339,379 819,144 1,338,599 819,127 CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 89 ANNUAL REPORT 2022 Consolidated Statement of Financial Position AS AT 31 DECEMBER DKK 1,000 Note 2022 2021 ASSETS Non-current assets Intangible assets 3.1 4,508,7044,495,726 Total intangible assets 4,508,704 4,495,726 Property, plant and equipment 3.2 5,647,161 4,888,778 Right of use assets 3.3 438,545 302,105 Total property, plant and equipment 6,085,706 5,190,883 Non-current financial assets Investments in associated companies 3.4 233,276 93,904 Investments in stocks and shares 3.5 933 55,321 Long-term receivables 3.8 0 8,102 Deferred tax assets 2.8 336,020 215,248 Total non-current financial assets 570,229 372,575 TOTAL NON-CURRENT ASSETS 11,164,639 10,059,184 Current assets Biological assets (biomass) 3.7 2,938,485 2,448,290 Inventory 3.6 1,074,344 709,306 Total inventory 4,012,829 3,157,596 Derivatives 3.13 7,474 0 Accounts receivables 3.8 808,755 620,324 Tax receivables 2.8 65,822 109,701 Other receivables 3.8 102,450 172,206 Total receivables 984,501 902,231 Cash and cash equivalents 3.9 719,603 509,157 TOTAL CURRENT ASSETS 5,716,933 4,568,984 TOTAL ASSETS 16,881,572 14,628,168 CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 90 ANNUAL REPORT 2022 DKK 1,000 Note 2022 2021 EQUITY AND LIABILITIES Equity Share capital 3.10 59,143 59,143 Other equity 10,333,259 9,288,269 Non-controlling interest 3,411 133 Total equity 10,395,813 9,347,545 Non-current liabilities Deferred taxes 2.8 1,825,873 1,590,034 Long-term interest-bearing debt 3.11 3,383,289 2,634,968 Long-term leasing debt 3.3 353,355 245,753 Derivatives 3.13 0 3,207 Total non-current liabilities 5,562,517 4,473,962 Current liabilities Financial derivatives 3.13 0 4,602 Trade payables 478,750 510,357 Current tax liabilities 2.8 237,780 170,997 Short-term leasing debt 3.3 106,215 87,668 Other current liabilities 100,497 33,037 Total current liabilities 923,242 806,661 Total liabilities 6,485,759 5,280,623 TOTAL EQUITY AND LIABILITIES 16,881,572 14,628,168 CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 91 ANNUAL REPORT 2022 Consolidated Cash Flow Statement FOR THE YEAR ENDED 31 DECEMBER Accounting Policies The Group’s statement of cash flow shows a breakdown of the Group’s overall cash flow into operating, investing and financing activities. The cash flow statement is prepared ac- cording to the indirect method. The statement shows the in- dividual activity’s impact on cash and cash equivalents. The cash flow deriving from the acquisition and sale of business- es is presented under investing activities. DKK 1,000 Note 2022 2021 Cash flow from operations EBIT 1,826,153 1,144,685 Adjustments for write-downs and depreciation 3.1/3.2/3.3 537,480 530,434 Adjustments for fair value adjustments on biomass 3.7 -278,392 -434,868 Adjustments for income from associates -57,597 -30,112 Adjustments for currency effects -145,495 45,160 Taxes paid -170,748 -54,327 Change in inventory -576,841 142,314 Change in receivables -208,951 -493,831 Change in current debts 276,247 275,099 Cash flow from operations 1,201,856 1,124,554 Cash flow from investments Proceeds from sale of fixed assets 368 667 Payments made for purchase of fixed assets 3.2 -1,235,680 -1,115,680 Purchase of shares and other investments -27,387 2,775 Change in long-term receivables 8,102 -1 Cash flow from investments -1,254,597 -1,112,239 Cash flow from financing Change in revolving credit facilities 735,352 404,600 Financial income 4,310 3,542 Financial expenses -68,255 -56,427 Lease payment -117,022 -116,897 Proceeds/Acquisition of treasury shares 12,797 10,957 Dividend paid -303,995 -215,872 Cash flow from financing 263,187 29,903 Net change in cash and cash equivalents in period 210,446 42,218 Cash and cash equivalents – opening balance 509,157 466,939 Cash and cash equivalents – closing balance total 719,603 509,157 CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 92 ANNUAL REPORT 2022 Consolidated Statement of Changes in Equity AS AT 31 DECEMBER Restricted equity comprises equity in which dis- tribution to the shareholders may only take place adhering to specific procedures prescribed by the Faroese Limited Companies Act. Restricted equi- ty consists of Equity Recognition Surplus and Fair Value Adjustments of Biomass. Free equity may be readily distributed to the shareholders, or otherwise disposed of, after due approval by the AGM. The composition of equity may be specified as follows: Share Share- Currency Non Share Premium Treasury Based translation Fair value Retained controlling Total DKK 1,000 Capital Reserve Shares Payment differences Derivatives Dividend adjustments Earnings interest Equity Equity 01.01.2022 59,143 4,027,375 -26,767 7,799 46,232 -3,873 303,995 604,707 4,328,801 1339,347,545 Consolidated profit 0 0 0 0 0 0 0 278,392 1,066,718 -780 1,344,330 Changes in financial derivatives 0 0 0 0 0 11,102 0 0 0 0 11,102 Hereof tax effect 0 0 0 0 0 -1,103 0 0 0 0 -1,103 Share-based payment 0 0 0 12,760 0 0 0 0 0 0 12,760 Currency translation differences 0 0 0 0 -28,490 0 0 0 0 0 -28,490 Total other comprehensive income 0 0 0 12,760 -28,490 9,999 0 0 0 0 -5,731 Total comprehensive income 0 0 0 12,760 -28,490 9,999 0 278,392 1,066,718 -780 1,338,599 Treasury shares 0 08,255 000001,34909,604 Addition of non-controlling interests 0 0 0 0 0 0 0 0 0 4,060 4,060 Paid-out dividend 0 0 0 0 0 0 -303,995 0 0 0 -303,995 Proposed dividend 0 0 0 0 0 0 591,430 0 -591,430 0 0 Total transaction with owners 0 0 8,255 0 0 0 287,435 0 -590,081 4,060 -290,331 Total changes in equity 0 0 8,255 12,760 -28,490 9,999 287,435 278,392 476,637 3,280 1,048,268 Total equity 31.12.2022 59,143 4,027,375 -18,512 20,559 17,742 6,126 591,430 883,099 4,805,438 3,413 10,395,813 DKK 1,000 Equity 01.01.2021 59,1434,027,375 -37,672 6,229 34,545 -14,829 215,872 145,3874,293,438 08,729,487 Consolidated profit 0 0 0 0 0 0 0 434,868 529,185 -17 964,036 Change in tax rate on equity posted PPA in prior years 0 0 0 0 0 0 0 0 -193,574 0 -193,574 Changes in financial derivatives 0 0 0 0 0 12,928 0 0 0 0 12,928 Hereof tax effect 0 0 0 0 0 -1,972 0 0 0 0 -1,972 Share-based payment 0 0 0 1,570 0 0 0 0 0 0 1,570 Currency translation differences 0 0 0 0 36,139 0 0 0 0 0 36,139 Reclassification between funds 0 0 0 0 -24,452 0 0 24,452 0 0 0 Total other comprehensive income 0 0 0 1,570 11,687 10,956 0 24,452 -193,574 0 -144,909 Total comprehensive income 0 0 0 1,570 11,687 10,956 0 459,320 335,611 -17 819,127 Treasury shares 0 0 10,905 0 0 0 0 0 3,748 0 14,653 Addition of non-controlling interests 0 0 0 0 0 0 0 0 0 150 150 Paid-out dividend 0 0 0 0 0 0 -215,872 0 0 0 -215,872 Proposed dividend 0 0 0 0 0 0 303,995 0 -303,995 0 0 Total transaction with owners 0 0 10,905 0 0 0 88,123 0 -300,247 150 -201,069 Total changes in equity 0 0 10,905 1,570 11,687 10,956 88,123 459,320 35,364 133 618,058 Total equity 31.12.2021 59,143 4,027,375 -26,767 7,799 46,232 -3,873 303,995 604,707 4,328,801 133 9,347,545 CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 93 ANNUAL REPORT 2022 Notes to the Consolidated Financial Statements BAKKAFROST GROUP 94 ANNUAL REPORT 2022 SECTION 1 NOTES – SECTION 1 Basis of Preparation This section gives an overview of the financial accounting policies in general and an overview of the management’s key accounting estimates. NOTE 1. GENERAL INFORMATION P/F Bakkafrost (“company”) is a public limited company dom- iciled in the Faroe Islands at Bakkavegur 9, Glyvrar. P/F Bakkafrost was listed on Oslo Stock Exchange in 2010 with the ticker code: BAKKA. NOTE 1.1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all periods presented. NOTE 1.2 BASIS OF PRESENTATION The Annual Report comprises the income statement, state- ment of comprehensive income, statement of financial posi- tion, specification of changes in equity, cash flow statement and note disclosures for the Group. The accounting year equals the calendar year. The financial statements were for- mally drawn up in accordance with International Financial Reporting Standards (IFRS) and the interpretations issued by the International Accounting Standards Board as approved by the European Community and the additional requirements in the Faroese Financial Reporting act. The Annual and Consolidated Report and Accounts for the period 1 January to 31 December 2022 comprises both the Consolidated Annual Report and Accounts for P/F Bakkafrost and its subsidiaries (Group) and the separate Annual Ac- counts for the parent company. The financial statements were formally authorized for issue by the Board of Directors on 31 March 2023. The Annual Report has been prepared on a historical cost basis except for where IFRS requires recognition at fair value, mainly valuation of licences, which are acquired by business combinations, and of biomass. Preparation of the financial statements involves the use of estimates and assumptions. Changes in estimates and esti- mated assumptions are accounted for when they occur. De- scriptions about the various estimates applied are given in the notes to the accounts where relevant. NOTE 1.3 CONSOLIDATION PRINCIPLES The consolidated financial statements include P/F Bakkafrost and the subsidiaries over which P/F Bakkafrost has a con- trolling influence either by shareholding or by agreement. A controlling interest is normally deemed to exist when own- ership directly or indirectly exceeds 50% of the voting rights. Controlling interest may also exist by nature of agreement. Similarly, limitations in voting rights by agreement may im- pede exercise of control, and the investment concerned will be considered an associate. Newly acquired subsidiaries are included from the date on which a controlling interest is secured, and divested subsid- iaries are included up until the date of divestment. The con- solidated accounts have been prepared in accordance with uniform accounting principles for similar transactions in all companies included in the consolidated accounts. All material transactions and balances between Group Com- panies have been eliminated. Shares in subsidiaries have been eliminated in the consoli- dated financial statements in accordance with the acquisition method. This means that the acquired company’s assets and liabilities are reported at fair value at the date of acquisition, with any excess value being classified as goodwill. Where the fair value of the assets acquired exceeds the payment made, the difference is treated as negative goodwill in the Income Statement. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 95 ANNUAL REPORT 2022 SECTION 1 When shares are acquired in stages, the value basis of the assets and liabilities is the date, the Group was formed. Later acquisition of assets in existing subsidiaries will not affect the value of assets or liabilities, except for goodwill, which is calculated with each acquisition. Investments in companies in which the Group has a signifi- cant influence (associated companies) are treated in accord- ance with the equity method in the consolidated accounts. A considerable influence is normally deemed to exist when the Group owns 20%–50% of the voting capital. The Group’s share of the profits in such companies is based on profit after tax, less internal gains, and depreciation on excess value due to the cost price of the shares being higher than the acquired portion of book equity. In the Income Statement, the profit share is presented on a separate line, while the assets are presented in the statement of financial position as non-cur- rent financial assets. The accounting principles used by as- sociated companies have been changed where necessary to achieve consistency with the principles used by the Group. NOTE 1.4 TRANSLATION OF FOREIGN CURRENCIES For each individual entity, which is recognized in the consoli- dated accounts, a functional currency is determined in which the entity measures its results and financial position. The functional currency is the currency of the primary economic environment in which the entity operates. Transactions in other currencies than the functional currency are transac- tions in a foreign currency. A foreign currency transaction is, on initial recognition, re- corded in the functional currency at the spot exchange rate between the functional currency and the foreign currency on the date of the transaction. At each balance sheet date, receivables, payables, and oth- er monetary items in foreign currency are translated to the functional currency using the closing rate. Exchange differ- ences arising on the settlement of monetary items or on translating monetary items, at rates different from those at which they were translated on initial recognition during the period or in previous financial statements, shall be recog- nized in the income statement under financial revenues and expenses. On consolidation, the results and financial position of the Group’s individual entities with different functional curren- cies than the Group’s presentation currency (DKK) are trans- lated into the Group’s presentation currency using the fol- lowing procedure: • Assets and liabilities are translated at the closing rate at the date of the balance sheet. • Income and expenses are translated at exchange rates at the dates of the transactions. • All resulting exchange differences are recognized directly in equity as a separate component of equity. For practical reasons an average rate for the period that approximates the exchange rates at the dates of the transactions is used. NOTE 1.5 CLASSIFICATION PRINCIPLES Biomass is recognized at fair value in the Statement of Fi- nancial Position. Changes in biomass and inventory meas- ured at cost are presented as a one-line item in the Income Statement. Biomass at cost consists of all production costs. The biomass is then adjusted to fair value, i.e., market value less finishing costs, by adding or subtracting an IFRS adjust- ment. The IFRS adjustment is the difference between bio- mass measured at cost and measured at fair value. Cash and cash equivalents consist of cash in hand and bank deposits. Assets, which form part of the production cycle or fall due for payment within 12 months, are classified as cur- rent assets. Other assets are classified as non-current assets. Liabilities, which form part of the production cycle or fall due for payment within 12 months, are classified as current liabilities. Other liabilities are classified as non-current lia- bilities. Dividend proposals are not classified as liabilities until the parent company has assumed an irrevocable obligation to pay the dividend, normally when dividend proposals have been approved by the Annual General Meeting. Next year’s instalments on long-term debts are classified as current liabilities. Changes in the fair value of biological assets are presented on a line item separately from biomass changes measured at cost under operating profit/loss. This allows the reader of the Financial Report to determine both production efficiency and biomass at fair value. NOTE 1.6 FUNCTIONAL CURRENCY The consolidated accounts are presented in Danish Kroner (DKK), which is the Group’s functional and presentation cur- rency. All transactions in foreign currencies are translated into DKK at the time of transaction. In the statement of fi- nancial position, monetary items in foreign currencies are translated at the exchange rate in effect on the statement of financial position date. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 96 ANNUAL REPORT 2022 SECTION 1 NOTE 1.7 NEW STANDARDS Standards and interpretations, which are issued at the date of the Group’s Financial statements, but will become effec- tive later, are disclosed below. The disclosures contain stand- ards including amendments, which may influence recognition or measurements in the Financial statements, alter existing disclosures or require additional disclosures when effective at a future date. The standards are implemented as they be- come effective. New standards, regulating issues not relevant to the Group or with insignificant impact on the Group, are omitted from this narrative. New standards effective from 1 January 2023 and Only minor adjustments have been made in standards and interpretations (IFRIC) which are effective for the financial year 2022. Neither are new standards nor amendments to these from 2023 and forth expected to have any impact on the Bakkafrost Group. NOTE 1.8 ACCOUNTING ESTIMATES The preparation of financial statements in accordance with IFRS requires the management to make judgement estimates and assumptions that affect the application of accounting principles and carrying amounts of assets and liabilities, in- come, and expenses. The estimates and underlying assump- tions are based on experience and other factors perceived to be relevant and probable when the judgements were made. Estimates are reviewed on an on-going basis, and actual val- ues and results may deviate from the initial estimates. Revi- sion to accounting estimates is recognized in the period in which the estimates are revised. The evaluations and esti- mates, deemed to be of greatest significance for Bakkafrost Group’s Financial Statements, are described in the notes. NOTE 1.9 IXBRL REPORTING We are required to file our annual report in the European Single Electronic Format (‘ESEF’) using the XHTML format and to tag the primary consolidated financial statements using Inline eXtensible Business Reporting Language (iXBRL). The iXBRL tags comply with the ESEF taxonomy. Where a finan- cial statement line item is not defined in the ESEF taxon- omy, an extension to the taxonomy has been created. The annual report submitted to the Faroese Financial Supervi- sory Authority consists of the XHTML document together with certain technical files, all included in a ZIP file named 2138007LH7OP4V112978-2022-12-31-en. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 97 ANNUAL REPORT 2022 SECTION 2 NOTES – SECTION 2 Results for the Year This section gives more details on the results for the year, including operating segments, taxes, and employee costs. NOTE 2.1 REVENUE Revenue is measured at the fair value of the consideration received or receivable for the sale of goods and services in the ordinary course of business. Revenue is recognized net of discounts, VAT and other sales related taxes. The revenue of the Group is mainly from sales of salmon, fishmeal, fish oil and fish feed. Sales revenue is recognized when the goods are delivered, and both title and risk have passed to the customer. This will normally be upon delivery. NOTE 2.2 MAJOR CUSTOMERS In 2022, there were no major customers - as defined in IFRS 8.34, compared to no major customer in 2021. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 98 ANNUAL REPORT 2022 SECTION 2 NOTE 2.3 OPERATING SEGMENT INFORMATION 2022 – DKK 1,000 Farming FO Value Added Products Fishmeal, oil and feed Farming SCT Eliminations Bakkafros Group External operating revenues 3,242,069 1,703,637 742,695 1,441,566 0 7,129,967 Internal operating revenues 1,390,512 0 1,690,799 0 -3,081,311 0 Total operating revenues 4,632,581 1,703,637 2,433,494 1,441,566 -3,081,311 7,129,967 Depreciation and amortization -298,677 -21,269 -25,882 -191,652 0 -537,480 Operating expenses -1,320,326 -342,680 -1,997,344 -982,145 -269,207 -4,911,702 Internal operating expenses -1,101,044 -1,390,512 0 -589,755 3,081,311 0 Other income 0 0 0 24,380 0 24,380 Operating EBIT 1,912,534 -50,824 410,268 -297,606 -269,207 1,705,165 Fair value adjustments on biological assets 170,228 0 0 108,164 0 278,392 Income from associates 4,415 0 53,182 0 0 57,597 Revenue tax -215,001 0 0 0 0 -215,001 EBIT 1,872,176 -50,824 463,450 -189,442 -269,207 1,826,153 Operating EBITDA 2,211,211 -29,555 436,150 -105,954 -269,207 2,242,645 INVESTMENTS Property, plant and equipment 681,395 9,170 140,624 435,867 1,267,056 Depreciation -298,677 -21,269 -25,882 -191,652 -537,480 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 99 ANNUAL REPORT 2022 SECTION 2 2021 – DKK 1,000 Farming FO Value Added Products Fishmeal, oil and feed Farming SCT Eliminations Bakkafros Group External operating revenue 2,665,396 1,195,195 237,867 1,455,391 0 5,553,849 Internal operating revenue 811,326 0 1,421,484 0 -2,232,810 0 Total operating revenue 3,476,722 1,195,195 1,659,351 1,455,391 -2,232,810 5,553,849 Depreciation and amortization -278,395 -21,316 -30,057 -200,666 0 -530,434 Operating expenses -1,241,170 -243,032 -1,353,124 -1,163,882 -229,890 -4,231,098 Internal operating expenses -1,052,267 -811,326 0 -369,217 2,232,810 0 Other income 0 0 0 28,877 0 28,877 Operating EBIT 904,890 119,521 276,170 -249,497 -229,890 821,194 Fair value adjustments on biological assets 539,040 0 0 -104,172 0 434,868 Income from associates 294 0 29,818 0 0 30,112 Revenue tax -141,489 0 0 0 0 -141,489 EBIT 1,302,735 119,521 305,988 -353,669 -229,890 1,144,685 Operating EBITDA 1,183,285 140,837 306,227 -48,831 -229,890 1,351,628 INVESTMENTS Property, plant and equipment 601,185 720 29,430 436,533 1,067,868 Depreciation -278,395 -21,316 -30,057 -200,666 -530,434 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 100 ANNUAL REPORT 2022 SECTION 2 2022 2021 FARMING FO – DISTRIBUTION OF HARVESTED VOLUMES tgw % tgw % Harvested FO volume used in VAP production 26,401 39.6% 21,974 32.7% Harvested FO volume sold fresh/frozen 40,285 60.4% 45,243 67.3% Total harvested volumes 66,686 100.0% 67,217 100.0% FOF SEGMENT – DISTRIBUTION OF FEED tonnes % tonnes % Volumes used internally 123,118 96.3% 124,259 96.7% External sold 4,722 3.7% 4,230 3.3% Total Sold volumes 127,840 100.0% 128,489 100.0% PRODUCTION OF FISHMEAL AND FISH OIL tonnes % tonnes % Fishmeal 65,395 73.3% 34,962 81.1% Fish oil 23,862 26.7% 8,124 18.9% Total production 89,257 100.0% 43,086 100.0% FARMING SCT – DISTRIBUTION OF HARVESTED VOLUMES tgw % tgw % Harvested volume sold fresh/frozen 23,917 100.0% 29,672 100.0% Total harvested volumes 23,917 100.0% 29,672 100.0% NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 101 ANNUAL REPORT 2022 SECTION 2 GEOGRAPHIC BREAKDOWN OF SALES REVENUES BASED ON SEGMENTS AND CUSTOMER LOCATION 2022 – DKK 1,000 Farming FO VAP FOF Farming SCT Total Western Europe 1,361,669 1,431,055 742,695 1,326,241 4,861,660 North America 1,102,303 119,255 0 72,078 1,293,636 Asia 583,572 51,109 0 28,831 663,512 Eastern Europe 162,103 85,182 0 14,416 261,701 Rest of the world 32,422 17,036 0 0 49,458 Total 3,242,069 1,703,637 742,695 1,441,566 7,129,967 2021 – DKK 1,000 Farming FO VAP FOF Farming SCT Total Western Europe 1,170,908 896,396 237,867 1,178,867 3,484,038 North America 693,003 179,279 0 145,539 1,017,821 Asia 453,117 11,952 0 130,985 596,054 Eastern Europe 346,501 107,568 0 0 454,069 Rest of the world 1,867 0 0 0 1,867 Total 2,665,396 1,195,195 237,867 1,455,391 5,553,849 The Group has four reportable segments in accordance with IFRS 8, Operating Segments. The Group’s main strategic business area is aquaculture, which consists of four segments: fish farm- ing Faroe Islands and Scotland, value added products (VAP) and production and sales of fishmeal, fish oil and fish feed (FOF). The same accounting principles, as described for the consol- idated financial statements, have been applied for the seg- ment reporting. Intersegment transfers or transactions are entered into under normal commercial terms and conditions, and the measurement used in the segment reporting is the same as used for the third party’s transactions. The pric- ing principle between the VAP and Farming FO segments is based on market reference prices for spot sale, and the pric- ing principle between the FOF and the Farming FO segments is based on quarterly contracts. ACCOUNTING POLICIES SEGMENT REPORTING Farming FO Fish farming involves the breeding and on-growing of salmon as well as the harvesting, sales, and distribution of salmon. The Group has production facilities around the Faroe Islands. There are no significant differences in the production prop- erties of the licences, and the Group therefore reports the farmed salmonids, including the sale of fresh salmon, as one segment. The salmon is sold on the spot market for salmon products and to foreign seafood processing companies. Farming SCT The Farming SCT segment comprises the total operation in the Scottish part of the Group. The operation in Scotland includes salmon farming, harvest, filleting, sales and administration. Value added products (VAP) A significant share of the farmed products is value added at the factory in Glyvrar. The outputs of the factory are pre- dominantly portions for the retail market. The business seg- ment definition is based on the distinction between output sold to the industrial market and the value-added products for the end-consumers in the retail market. Fishmeal, fish oil and fish feed (FOF) Fishmeal, fish oil and fish feed involve the production and sale of fishmeal, fish oil and fish feed. The production of fish- meal, fish oil and fish feed are operated by Bakkafrost’s sub- sidiary Havsbrún, located in Fuglafjørður. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 102 ANNUAL REPORT 2022 SECTION 2 NOTE 2.4 SALARIES AND OTHER PERSONNEL EXPENSES DKK 1,000 2022 2021 Wages and salaries 673,986 613,756 Share based payment 30,610 3,547 Social security taxes 50,809 45,825 Pension expenses 54,850 48,392 Other benefi ts 21,424 16,903 Total payroll expenses 831,679 728,423 Average number of full-time employees 1,778 1,653 DKK 1,000 2022 2021 Rúni M. Hansen Chairman of the Board 487 482 Johannes Jensen Deputy Chairman of the Board 90 274 Annika Frederiksberg Member of the Board 221 219 Einar Wathne Member of the Board 240 236 Teitur Samuelsen Member of the Board 266 263 Øystein Sandvik Member of the Board 289 283 Guðrið Højgaard Member of the Board 147 0 Total remuneration 1,740 1,757 * Annika Frederiksberg is also an employee in the Bakkafrost Group. For this, she received DKK 661 thousand (2021: DKK 656 thousand) and has been awarded 245 restriced shares which equals 85 tDKK ** Member of the audit committee. Salary includes fee to the audit committee. *** Member of the Board of Directors until May 2022 Member of the Board of Directors from May 2022 Remuneration to corporate management The total remuneration to the corporate management con- sists of basic salary (main element), benefi ts in-kind and pen- sion schemes, but varies from person to person. The Group’s Chief Executive Offi cer determines the remunerations to oth- er management in agreement with the Chairman of the Board of Directors. The total remuneration is determined based on the need to offer competitive terms in the various business areas. The remunerations should promote the Group’s com- petitiveness in the relevant labour market. The total remuneration must neither pose a threat to Bakka- frost’s reputation nor be market leading but should ensure that Bakkafrost attracts and retains senior executives with the desired skills and experience. The basic salary is subject to an annual evaluation and is determined based on general salary levels in the labour market. Notice of Termination and Severance Payment Bakkafrost may terminate employment by giving Group Man- agement Executives a notice period. The company’s period of notice for the Group’s Chief Executive Offi cer is 24 months. The company’s period of notice for other Group Management Executives covers a period from 6 to 12 months. SHARE-BASED PAYMENT In 2021, Bakkafrost implemented a share-based bonus scheme for all employees in the Group. According to the scheme, all employees are awarded free bonus shares de- pendent on achieved performance against certain KPIs and Bakkafrost Group’s adjusted earnings per share being above a certain threshold. The bonus shares are awarded quarterly as restricted shares units which are released pursuant only to the Annual General Meeting resolution to pay dividends to the shareholders. Employees still employed two calendar years after being awarded bonus shares, will additionally re- ceive free loyalty shares. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 103 ANNUAL REPORT 2022 SECTION 2 Fixed remuneration Variable remuneration 2022 - DKK 1,000 Share saving Salary and other benefits paid Salary Pension Other Total Bonus RSU 1 RSU 2** Plan Total Total Chief Executive Officer 2,048 195 89 2,332 0 402 402 136 940 3,272 Managing Director 1,485 141 0 1,626 0 292 292 93 677 2,303 Chief Financial Officer 1,485 141 89 1,715 0 292 292 61 645 2,360 Total remuneration 5,018 477 178 5,673 0 986 986 290 2,262 7,935 2021 - DKK 1,000 Share saving Salary and other benefits paid Salary Pension Other Total Bonus RSU 1 RSU 2 Plan Total Total Chief Executive Officer 2,099 168 89 2,356 0 0 0 117 117 2,473 Managing Director 1,727 140 0 1,867 58 0 0 97 155 2,022 Chief Financial Officer 1,362 109 89 1,560 58 0 0 0 58 1,618 Total remuneration 5,188 417 178 5,783 116 0 0 214 330 6,113 * Restricted Share Units 1 will be released out as shares if the AGM on 28 April 2023 pays out a dividend ** Restricted Share Units 2 will be released in shares in 2025 if the AGM on 8 April 2023 pays out a dividend and the employee still is hired *** Matching shares in the share saving plan Movements in share-based payment in DKK 1,000 Movements in share-based payment number of shares Outstanding per 01.01.22 Restricted Share based Payment Released Share based Payment Outstanding per 31.12.22 Outstanding per 01.01.22 Restricted Share based Payment Released Share based Payment Outstanding per 31.12.22 Chief Executive Officer 0 804 0 804 0 2,294 0 2,294 Managing Director 0 583 0 583 0 1,664 0 1,664 Chief Financial Officer 0 583 0 583 0 1,664 0 1,664 Total remuneration 0 1,970 0 1,970 0 5,622 0 5,622 Outstanding per 01.01.21 Restricted Share based Payment Released Share based Payment Outstanding per 31.12.21 Outstanding per 01.01.21 Restricted Share based Payment Released Share based Payment Outstanding per 31.12.21 Chief Executive Officer 0 0 0 0 0 0 0 0 Managing Director 0 0 0 0 0 0 0 0 Chief Financial Officer 0 0 0 0 0 0 0 0 Total remuneration 0 0 0 0 0 0 0 0 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 104 ANNUAL REPORT 2022 SECTION 2 Each quarter, the Board reviews and determines the param- eters used in the bonus scheme – e.g. overall size of bonus pool, KPIs and thresholds. The Board has the right to decide, in its sole discretion, whether the bonus scheme will be con- tinued in the following quarter, and the terms of the plan. SHARE SAVING PLAN Bakkafrost has established a share saving plan for its em- ployees in the Faroe Islands. In 2022, the plan will be ex- tended to all employees of the Group. It is the Board's inten- tion that the plan shall be a continuing part of the company's employee incentive scheme. The Board shall, however, have the right to decide, in its sole discretion, whether the plan will be extended in the future, and the terms of the plan. Employees may invest up to 5% of their base salary in Bak- kafrost shares. The saved amount is deducted from the monthly net salary and used to purchase Bakkafrost shares on behalf of the employees. The purchase will be made from Bakkafrost's treasury shares or on the market. An employee may not change the savings amount during the year, but an employee may cancel the subscription during the year. The purchase price and the number of shares acquired by the company will be reported in accordance with the applicable regulations. After a lock-in period of two calendar years, one extra match- ing share will be awarded for each share purchased. Shares transferred to employees are acquired by the company on the market. LOANS TO EMPLOYEES As at 31.12.2022, there are no loans to employees. ACCOUNTING POLICIES SHARE-BASED PAYMENTS The share saving plan liabilities and payroll expense have been allocated over the employees' contribution period. The contribution period is from when the employee signed the share saving plan and until the shares are granted. The fair value of these liabilities will be determined using the number of shares contracted at the start of the share saving plan, using the share price on the date of the employee signature, adjustment is made for estimated leavers of the share saving plan. The difference between the fair value and the share price, when the shares are granted, will be booked as a fi nan- cial item in the income statement. The liability is recognized in other equity reserves within equity. PENSIONS The Group operates a defi ned contribution pension scheme. Pension premiums are charged to the Income Statement as they accrue. The Group has no additional pension liabilities towards the employees, apart from these periodical pay- ments. NOTE 2.5 OTHER OPERATING EXPENSES AND OTHER INCOME DKK 1,000 2022 2021 Maintenance -239,362 -187,655 Operating expenses -418,158 -291,690 Health -183,070 -227,542 Freight -686,183 -629,123 Energy -364,513 -226,988 Other costs -99,013 -69,116 Other operating expenses total -1,990,299 -1,632,114 R&D Expenditure tax credit in SCT 28,877 44,041 Other income 28,877 44,041 NOTE 2.6 RESEARCH AND DEVELOPMENT EXPENSES R&D expenditure occurs throughout the value chain. R&D is built in the Bakkafrost business model DNA. Bakkafrost has a continual development of the entire value chain. This is not seen as R&D but is an integrated part of other operating expenses and salaries. The focus of Bakkafrost’s R&D efforts has been evaluated and slightly improved during recent years. Lice abatement, bio- mass control and smolt quality remain high priorities, and the development and improvement of vaccines, nutrition and feeding, as well as operating technologies, are equally top- ical. In addition, Bakkafrost continuously performs assess- ments of its own operating practices. Bakkafrost aims to expand its R&D activities in feed and feeding and sees a substantial need for greater focus on basic knowledge of how the fi sh are fed and how we can maintain a healthy salmon. The past year has proven to be above our NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 105 ANNUAL REPORT 2022 SECTION 2 expectations in terms of production improvements in farm- ing. We are convinced that our adaption of the mix of raw material has resulted in better nutritional quality in the feed. It is Bakkafrost’s clearly expressed goal to initiate better and more comprehensive research into these issues under large- scale conditions. Bakkafrost focuses on reducing biological risk continuously and has made several new investments and procedures to diminish this risk. Bakkafrost focuses on using non-medical methods in treatments against sea lice and has invested in new technology to follow this strategy. Bakkafrost has a large-smolt strategy and aims at increas- ing smolt size to around 500 grams smolts in 2023 the Faroe Islands. The strategy is also pivotal to the turnaround of the operation in Scotland. The benefi ts are shorter pro- duction time at sea and reduced biological risk. The hatch- ery at Strond, Klaksvík, is an essential part of this plan for the Faroe Islands. This hatchery is fully operational and can produce 8 million smolts at 500 g. In addition, Bakkafrost is expanding Faroese hatchery capacity of the hatcheries at Glyvradal, Norðtoftir and the new hatchery at Ónavík. In Scotland, three large hatcheries will be built, the fi rst be- ing the hatchery at Applecross. All Bakkafrost’s hatcheries will be based on state-of-the-art technology and advanced RAS (water recirculation) systems. The capacity growth from these investments is crucial to enable harvest volume growth to 150,000 tonnes for the Group in 2026. NOTE 2.7 NET FINANCIAL ITEMS DKK 1,000 2022 2021 Realised profi t on fi nancial derivatives 4,889 4,942 Other fi nancial income 2,111 473 Financial income 7,000 5,415 Interest expenses on long-term loans -53,135 -31,958 Loss on fi nancial derivatives -3,088 0 Interest expenses on credit lines -470 -403 Interest expenses on IFRS 16 (leases) -7,197 -7,468 Interest expenses on accounts payable -1,149 -779 Financial expenses -65,039 -40,608 Other exchange differences -69,066 38,761 Net currency effects -69,066 38,761 Other fi nancial expenses -8,713 -10,591 Other fi nancial items -8,713 -10,591 Net fi nancial items -135,818 -7,023 ACCOUNTING POLICIES FINANCIAL INCOME Interest income is recognized on an accrual basis. Dividend income is recognized, when the shareholders’ right to receive a dividend has been approved by the Annual General Meet- ing. BORROWING COSTS Borrowings is recognized initially at fair value, net of trans- action costs incurred. Borrowings is subsequently stated at amortized cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognized in the income statement over the period of the borrowings. Borrowings is classifi ed as a current liability, unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 106 ANNUAL REPORT 2022 ANNUAL REPORT 2022 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 107 NOTE 2.8 TAX The tax expense for the year breaks down as follows: DKK 1,000 2022 2021 Tax payable 240,529 171,283 Tax credit 0 -1,151 Change in deferred tax 105,476 3,494 Tax expense on ordinary profi t 346,005 173,626 Tax payable 237,780 170,997 Tax payable in the statement of fi nancial position 237,780 170,997 SECTION 2 Specifi cations of temporary differences and deferred tax DKK 1,000 2022 2021 Temporary Temporary Deferred tax assets Differences Deferred tax Differences Deferred tax Property, plant and equipment 21,083 5,271 32,450 8,037 Biomass 135,655 24,418 175,529 36,248 Receivables 1,245 224 1,995 359 Derivatives (Equity posted) 0 0 5,099 1,275 Losses carried forward 1,228,522 305,805 677,309 169,329 Other differances 1,207 302 0 0 Total temporary differences 336,020 215,248 SECTION 2 DKK 1,000 2022 2021 Temporary Temporary Deferred tax liabilities Differences Deferred tax Differences Deferred tax Licences 3,690,715 896,381 3,601,916 874,182 Goodwill 11,592 2,039 0 0 Research and development 541 119 0 0 Property, plant and equipment 2,463,339 491,927 1,539,529 353,079 Financial assets 149,582 26,925 92,302 16,614 Biomass 2,234,515 407,074 1,892,013 340,562 Currency effects 0 0 1,219 240 Derivatives (Equity posted) 7,474 1,346 0 0 Other differances 289 62 21,428 5,357 Total temporary differences 1,825,873 1,590,034 Deferred tax assets -336,020 -215,248 Deferred tax liabilities 1,825,873 1,590,034 Deferred tax liabilities (+) / assets (-) 1,489,853 1,374,786 Reconciliation from nominal to actual tax rate DKK 1,000 2022 2021 Profi t before tax 1,690,335 1,137,662 Expected tax at nominal tax rate 292,568 178,385 Permanent differences 53,437 -4,759 Calculated tax expense 346,005 173,626 Effective tax rate excl. equity entries 20.47% 15.26% Normal tax rate for countries in the Group: - Faroe Islands 18% - UK/Scotland 19% (25% from 2023) - USA 21% + New Jersey 11.5% - Denmark 22% - France 25% ACCOUNTING POLICIES The tax expense is matched against the profi t or loss before tax, as it appears in the accounts. Tax ascribable to equity transactions is taken to equity. The tax expense comprises tax payable (tax on the year’s direct taxable income) and changes in net deferred taxes. Deferred tax liabilities and deferred tax assets are presented net in the statement of fi nancial position to the extent that tax assets and liabilities can be netted against each other. Deferred tax in the statement of fi nancial position is a nom- inal amount calculated based on temporary differences be- tween accounting and tax values at their intended use, as well as the taxable loss carried forward at the end of the fi nancial year. SIGNIFICANT ASSUMPTION ACCOUNTING FOR DEFERRED TAX LIABILITIES The accounting of deferred taxes refl ects tax rates and tax laws that have been enacted or substantively enacted by the date of the statement of fi nancial position. The recognition of a deferred tax asset is based on expectations of profi tability in the future. In addition, there are many transactions and calculations during the ordinary course of business for which the ultimate tax determination is uncertain. Deferred taxes are calculated using the nominal tax rate ac- cording to IAS 12. SIGNIFICANT ASSUMPTION ACCOUNTING FOR DEFERRED TAX ASSETS Deferred tax assets, including tax loss carry forwards, are assessed once a year. Losses are recognized if it is likely that they will be utilized in the foreseeable future. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 108 ANNUAL REPORT 2022 SECTION 3 NOTES – SECTION 3 Assets and Liabilities This section gives more details on the assets that form the basis for the activities of Bakkafrost and the related liabil- ities. NOTE 3.1 INTANGIBLE ASSETS DKK 1,000 Goodwill Licences Brands Total Acquisitions costs as at 01.01.22 669,319 3,720,158 108,400 4,497,877 Reclassification -99,725 99,725 0 0 Additions in the year 12,136 0 0 12,136 Currency translation differences -1,309 0 0 -1,309 Acquisitions costs as at 31.12.22 580,421 3,819,883 108,400 4,508,704 Depreciations and impairments 01.01.22 -2,151 0 0 -2,151 Depreciation during the year 2,151 0 0 2,151 Accumulated impairments/depreciation and write-downs as at 31.12.22 0 0 0 0 Net book value as at 31.12.22 580,421 3,819,883 108,400 4,508,704 DKK 1,000 Goodwill Licences Brands Total Acquisitions costs as at 01.01.21 666,950 3,720,158 108,400 4,495,508 Currency translation differences 2,369 0 0 2,369 Acquisitions costs as at 31.12.21 669,319 3,720,158 108,400 4,497,877 Depreciations and impairments 01.01.21 -2,113 0 0 -2,113 Depreciation during the year -38 0 0 -38 Accumulated impairments/depreciation and write-downs as at 31.12.21 -2,151 0 0 -2,151 Net book value as at 31.12.21 667,168 3,720,158 108,400 4,495,726 In the Faroe Islands, Bakkafrost operates its sea farming ac- tivity in 14 identifiable CGUs based on single or groups of sea farming licenses, seven out of which are issued by the government without consideration, and hence are not capi- talized. These belong to the North region. The other seven CGUs were acquired as part of business com- binations. Respectively, when acquiring the Vestlax Group, Havsbrún Group and Faroe Farming, hence three groups of CGUs. These belong to the West region. These are considered as significant in comparison to the total carrying amount of goodwill and intangible assets with indefinite useful lives. In Scotland, Bakkafrost has chosen to include all the farming in Scotland into one CGU. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 109 ANNUAL REPORT 2022 SECTION 3 Impairment testing The Group tests intangible assets annually for impairment or more frequently if there are indications that the assets are impaired. The annual impairment test is performed at year- end. The Group has substantial assets with indefinite lives in the form of licenses. The licenses are subject to impairment testing in combination with goodwill in the annual test. The Group identifies each farming zone, which may contain one or several licences or farming sites, as one cash-generating unit. The procedure of impairment testing Impairment testing is carried out by calculating the net pres- ent value of estimated future cash flows (value in use) for the cash-generating unit in line with IAS 36 and comparing the net present value of the cash flow towards the carry- ing amount of net assets held by the cash-generating unit (CGU). The cash flow used in the calculations represents the management’s best estimate at the time of reporting. If the carrying amount is higher than the calculated value in use, the assets are considered impaired. The estimated cash flow is based on an assumption of continued operation. The ba- sis for the estimated cash flow is the strategic plan for the following years. The strategic plans have been reviewed and the targets approved by the Group management. The considered operating conditions are costs of feed, smolt, harvest, packaging, transport, and other costs. Other operat- ing conditions considered the same are mortality, production time, fallowing and harvest weight. CAPEX is also assumed to be the same for all CGUs over the calculated period. All CGUs are calculated with the same WACC. If there will be variances between the assumptions for the different CGUs in the future, this will be incorporated into the impairment test. Indications of impairment The impairment testing at year-end did not result in identifi- cation of impairment losses. Intangible assets were tested for impairment to evaluate if the cash flow from a conservative estimate was sufficient to support the carrying amount of net assets. The test confirmed the asset values. The key assumptions The key assumptions in the calculations of value in use are harvest volume, prices, and costs, hence EBIDTA and WACC. Amongst other assumptions are inflation, CAPEX, and termi- nal growth. In general, the value in use has been determined based on future strategic plans considering the expected development in both macroeconomic and company-related conditions. The assumptions used, rest on uncertainty regarding product prices, input prices, biological performance, and future reg- ulatory frameworks. Costs can normally be estimated with more accuracy than income. As profitability in the salmon farming industry historically has been very volatile, depend- ing on developments in the prices of salmon. Bakkafrost uses budgets and long-term plans for the first five years of the analysis but returns to long- term historic averages for prof- itability in the sixth year and terminal period. The key assumptions used in determining the value in use are: • Harvested volume is based on the current stocking plans for each unit, and forecasted figures for growth, assumed harvest weight and mortality, based on historical figures. • The costs are based on the Groups own assumptions, based on historical costs and expectations. The costs are expect- ed to remain stable but are calculated to increase with an inflation rate of FO: 2.6% (2021: 0.9%) and SCT: 2.0% (2021: 2.3%) • The forward prices are based on the Fish Pool index – which is a part of Oslo Børs ASA – at the day of the calcula- tion. The long-term forward prices are based on third-par- ties’ sources with adjustments to local conditions. • The WACC is FO: 9.6% (2021: 8.9%) and SCT 9.6% (2021: 8.9%) pre-tax and calculated in accordance with IAS 36. The WACC model is used for estimating the discount rate. The input data for the model is updated each year for the annual impairment test. The choice of input data for the model significantly influences the outcome of the model, and to ensure that there is as little uncertainty as possible with regards to the calculation of the WACC, third-party sources are used where available (interest, inflation, beta). The discount rate is based on a five-year average for ten- year bonds issued by the Danish government, with an ad- justment margin for the food industry in the EU. • The inflation is set to FO: 2.6% (2021: 0.9%) and SCT: 2.0% (2021: 2.3%) for the budget period. This is done based on third-parties’ sources. The terminal growth is set to 0%. • Capital expenditure (CAPEX). In the 5-year forecast period, the capital expenditure necessary to meet the expected growth in revenue and profit is taken into consideration. Capital expenditures are aligned with the growth and re- placement plans. Capital expenditure to comply with cur- rent laws and regulations has been included. Capex related to committed and approved efficiency improvement pro- grammes has also been included to support the inclusion of the benefits in the applied margin. Changes in applicable laws and regulations may affect future estimated capital expenditure needs; this is not reflected in the figures used in the impairment test. Beyond the forecast period, capital expenditure will in general equal depreciation and relate to maintenance investments. Sensitivity In connection with the impairment testing of intangible as- sets, a sensitivity analysis has been carried out. Sensitivity analysis has been performed for each of the defined cash generating units. With the assumptions used, the headroom is DKK 20,198 million (DKK 10,900 million). NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 110 ANNUAL REPORT 2022 SECTION 3 ACCOUNTING POLICIES Intangible assets that are purchased individually are capital- ized at acquisition cost. Intangible assets acquired in connec- tion with the purchase of a business entity are capitalized at acquisition cost when the criteria for separate recognition are met. Intangible assets with a limited economic lifespan are depre- ciated systematically. Intangible assets are written down to the recoverable amount if the expected financial benefits do not cover their carrying amount. Costs relating to research and development are charged as expenses as they accrue. R&D costs are capitalized in the statement of financial position, when it can be demonstrated that the relevant R&D projects carry economic benefits, that they can be technically finalized, and that the company in- tends to and is financially able to reap the economic benefits. Sea farming licences, which are purchased either as part of an acquisition or business combination according to IFRS 3, are capitalized at cost less accumulated write-downs according to a PPA analysis. Sea farming licences in the Faroe Islands and Scotland are considered perpetual, given that certain preconditions regarding environmental protection and ani- mal welfare are met. Consequently, sea farming licences are not depreciated systematically, but are subject to an annual impairment test. If the carrying amount exceeds the recov- erable amount, licences are considered impaired, and write- downs are entered and charged to the Income Statement. The assessment of indefinite life is reviewed annually to de- termine whether the indefinite life continues to be appropri- ate. If not, the change in useful life from indefinite to finite is made on a prospective basis. Licenses with indefinite useful lives The sea farming licenses in the Faroe Islands are defined as the right to utilize a given area of fjords for farming fish. There are no provisions as to the maximum allowed biomass at the given site, but the legislation has imposed strict meas- ures to regulate the farming activity to be environmentally sustainable. The sea farming licenses in the Faroes are issued with a nom- inal lifespan of 12 years. Licenses are renewed, unless there is a specific reason against renewal, based on failure to fulfil the veterinary conditions set by the authorities. In connec- tion with renewal of licenses, authorities may only decline renewal if specific legislation on area planning, animal wel- fare or environmental protection conflicts with renewal of the licenses. Special emphasis is to be placed on the fact that it is renewals of existing licenses. This means that sea farm- ing licenses are operated in a 12-year rolling lifespan system, where the licenses are renewed every 12th year. In the very rare cases, where the authorities have declined to renew li- censes to use locations for other purposes, the farmers have obtained licenses from the authorities at other locations. The sea farming licenses in Scotland are perpetual if certain environmental, operational, and biological conditions speci- fied in the licenses continue to be met. The Group has therefore decided to account for sea farming licenses, which are capitalized, following the provisions for intangible rights with indefinite useful lives. GOODWILL When the company assumes control over a separate business entity for a consideration that exceeds the fair value of the individual assets, the difference is entered as goodwill in the statement of financial position. Goodwill deriving from purchases of subsidiaries and asso- ciates is presented under intangible assets. Goodwill is not depreciated but is tested for impairment annually or more often if there are indications that its value is lower than the carrying amount. When assessing the need to write-down goodwill, this is assigned to relevant cash flow generating units or groups, which are expected to benefit from the ac- quisition. Write-downs are performed in accordance with an assess- ment of the recoverable value of each of the cash-flow generating units to which the goodwill is assigned. To iden- tify the Group’s cash-flow generating units, the assets are grouped according to the lowest level to which separate and independent cash flows may be ascribed. Recoverable value is calculated based on value in use. This is arrived at by esti- mating future cash flows. If the calculated value in use is less than the carrying amount of the cash-flow generating unit, goodwill is written down first, and then other assets as required. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 111 ANNUAL REPORT 2022 SECTION 3 SPECIFICATION OF CGUS - BOOKED VALUE TESTED AND SENSITIVITY Sensitivity analyses and booked value per CGU: Total booked EBITDA WACC WACC Other value change change change CGUs (1,000) Licenses assets tested WACC of +/-1% of -1% of +1% 31/12/2022 The Scottish Salmon Company acquisition 4,006,820 2,082,123 6,088,943 9.6% 455,069 2,213,869 -1,567,700 Vestlax acquisition 132,708 1,623,586 1,756,294 9.6% 92,103 876,396 -597,990 Havsbrún acquisition 157,430 390,749 548,179 9.6% 304,962 2,901,845 -1,980,012 Faroe Farming acquisition 82,000 1,131,089 1,213,089 9.6% 176,018 1,674,891 -1,142,825 TOTAL 4,378,958 5,227,547 9,606,505 1,028,152 7,667,001 -5,288,527 31/12/2021 The Scottish Salmon Company acquisition 4,006,820 1,906,234 5,913,054 8.9% 382,619 2,378,574 -1,599,072 Vestlax acquisition 132,708 1,318,791 1,451,499 8.9% 57,039 365,472 -269,400 Havsbrún acquisition 157,430 301,696 459,126 8.9% 188,862 1,210,119 -892,012 Faroe Farming acquisition 82,000 955,167 1,037,167 8.9% 109,008 514,853 -698,458 TOTAL 4,378,958 4,481,888 8,860,846 737,528 4,469,018 -3,458,942 * 4 CGUs in 7 licenses. Acquired in 2010. ** 2 CGUs in 2 licenses. Acquired in 2011. *** 1 CGU in 2 licenses A-92. Acquired in 2016. 7 CGUs in 44 licenses. Acquired in 2019. * Other assets consist of goodwill, PP&E, inventory, receivables, etc. which can be allocated to CGUs or are directly attributable to CGUs. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 112 ANNUAL REPORT 2022 SECTION 3 NOTE 3.2 PROPERTY, PLANT AND EQUIPMENT Plant, machinery, Land operating Other and equipment, operating Assets under DKK 1,000 buildings fixtures etc. equipment Vessels construction Total Acquisition costs as at 01.01.22 2,119,115 3,229,596 449,031 642,653 782,545 7,222,940 Reclassification -7,409 78,750 76,650 47,418 -201,554 -6,145 Acquisitions during the year 28,092 176,326 23,856 495,140 543,642 1,267,056 Disposals and scrapping during the year -25,096 -73,359 -922 -3,120 0 -102,497 Currency translation differences -2,757 -38,215 -509 -7,027 -9,763 -58,271 Acquisition costs as at 31.12.22 2,111,945 3,373,098 548,106 1,175,064 1,114,870 8,323,083 Accumulated depreciations and write-downs as at 01.01.22 -517,934 -1,443,109 -222,921 -150,199 0 -2,334,163 Reclassification 18,118 38,087 -38,498 -28,346 0 -10,639 Depreciations during the year -77,220 -252,802 -58,987 -47,168 0 -436,177 Accumulated deprecations and write-downs on disposals and scrapping 24,926 67,661 73 3,053 0 95,713 Currency translation differences 783 7,546 9 1,006 0 9,344 Accumulated depreciations and write-downs as at 31.12.22 -551,327 -1,582,617 -320,324 -221,654 0 -2,675,922 Net book value as at 31.12.22 1,560,618 1,790,481 227,782 953,410 1,114,870 5,647,161 Acquisition costs as at 01.01.21 1,936,967 2,746,675 406,493 450,899 387,946 5,928,980 Reclassification 83,078 61,012 57,444 53,117 -52,912 201,739 Acquisitions during the year 72,206 432,757 41,218 81,455 440,231 1,067,867 Disposals and scrapping during the year -2,519 -96,842 -5,023 -373 0 -104,757 Currency translation differences 29,383 85,994 -51,101 57,555 7,280 129,111 Acquisition costs as at 31.12.21 2,119,115 3,229,596 449,031 642,653 782,545 7,222,940 Accumulated depreciations and write-downs as at 01.01.21 -381,949 -1,043,442 -164,346 -118,644 0 -1,708,381 Reclassification -44,377 -141,158 -16,205 0 0 -201,739 Depreciations during the year -80,574 -277,445 -45,526 -30,403 0 -433,948 Accumulated deprecations and write-downs on disposals and scrapping 2,519 94,787 4,239 242 0 101,788 Currency translation differences -13,554 -75,850 -1,082 -1,394 0 -91,882 Accumulated depreciations and write-downs as at 31.12.21 -517,935 -1,443,108 -222,920 -150,199 0 -2,334,162 Net book value as at 31.12.21 1,601,180 1,786,488 226,111 492,454 782,545 4,888,778 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 113 ANNUAL REPORT 2022 SECTION 3 Description of depreciations Estimated lifetime Depreciation method Scrap value Land and buildings 10-25 years linear 10% Plant, machinery, operating equipment, fixtures etc. 3-20 years linear 0%-10% Other operating equipment 3-8 years linear 0% Ships 15-25 years linear 10%-13% ACCOUNTING POLICIES Property, plant, and equipment is capitalized at acquisition cost, less accumulated depreciation and write downs. When assets are sold, or divested, the book value is deducted, and any loss or gain entered to the Income Statement. Ordinary depreciation commences from the date on which the asset goes into normal operation and is calculated based on its economic lifespan. Depreciation is assigned in a straight line over the expected economic lifespan of the assets, taking into consideration the estimated residual value. If an asset comprises significant components with varying lifespan, these components are depreciated separately. The scrap value of the property, plant, and equipment as well as the depreciation period and depreciation method employed are reassessed annually. Facilities under construction are not depreciated. Deprecia- tion is charged to expenses when the facilities are ready for use. If the situation or circumstances indicate that the carry- ing amount of an asset cannot be recovered, an assessment is made about whether to write-down its value. If the recover- able value of the assets is less than the carrying amount and the impairment is not expected to be temporary, the assets are written down to the recoverable value. The recoverable value is the greater of net sales price or value in use. Value in use is the present value of the future cash flows, which the asset will generate. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 114 ANNUAL REPORT 2022 SECTION 3 NOTE 3.3 LEASING Right of use Land and buldings Ships, and DKK 1,000 & properties equipment TOTAL Beginning balance 01.01.22 126,861 175,244 302,105 Additions 0 253,383 253,383 Adjustments 4,184 -1,012 3,172 Depreciation -8,384 -95,070 -103,454 Effect of changes in currency exchange rate -2,381 -14,280 -16,661 Ending balance 31.12.22 120,280 318,265 438,545 Lease liability Beginning balance 01.01.22 -153,043 -180,378 -333,421 Additions 0 -244,898 -244,898 Effect of changes in currency exchange rate 0 2,223 2,223 Adjustments 2,212 10,518 12,730 Lease payments 13,001 97,833 110,834 Interests -2,448 -4,132 -6,580 Ending balance 31.12.22 -145,021 -314,549 -459,570 Current lease liability -12,682 -93,533 -106,215 Non-current lease liability -132,339 -221,016 -353,355 Maturity analysis, undiscounted cash flow Up to 1 year 106,215 1-2 years 96,670 2-3 years 90,716 3-4 years 53,167 4-5 years 39,090 More than 5 years 73,712 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 115 ANNUAL REPORT 2022 SECTION 3 Right of use Land and buildings Ships, and DKK 1,000 & properties other equipment TOTAL Beginning balance 01.01.21 107,108 239,376 346,484 Additions 10,322 10,752 21,074 Adjustments 17,267 305 17,572 Depreciation -7,835 -88,632 -96,467 Effect of changes in currency exchange rate -1 13,443 13,442 Ending balance 31.12.21 126,861 175,244 302,105 Lease liability Beginning balance 01.01.21 -136,031 -252,182 -388,213 Additions -9,962 -3,878 -13,840 Effect of changes in currency exchange rate 0 1,898 1,898 Adjustments -17,266 -304 -17,570 Lease payments 12,769 102,482 115,251 Interests -2,554 -5,050 -7,604 Effect of changes in currency exchange rate 1 -23,344 -23,343 Ending balance 31.12.21 -153,043 -180,378 -333,421 Current lease liability -9,399 -78,608 -87,668 Non-current lease liability -143,644 -101,769 -245,753 Maturity analysis, undiscounted cash flow Up to 1 year 87,668 1-2 years 51,216 2-3 years 48,550 3-4 years 46,710 4-5 years 11,257 More than 5 years 88,020 Bakkafrost has applied the rules for short-term leases and leases with low value leasing assets and has expensed these in the Income Statement. The amount is not material to the Group. Accounting policies Based on the accounting policy applied, Bakkafrost recogniz- es a right-of-use asset and a lease liability at the commence- ment date of the contract for all leases, conveying the right to control the use of an identified asset for a period. The commencement date is the date on which a lessor makes an underlying asset available for use by a lessee. The right of use assets is recognized at cost. The cost of the asset consists of the total discounted lease payments (the lease obligation), plus lease payments paid at contract of the agreement (e.g., upfront payments) less any lease incentives received, plus any costs directly related to the conclusion of the agreement and the obligation to demolish or restore the asset after use. Subsequent measurement of the leasing asset is done ac- cording to the same practice as for similar assets, that is owned by the company. This means that leased assets are classified as tangible fixed assets, even if it is legally a right of use asset. The lease obligation is recognized at the present value of the lease payments obtained by discounting the lease payments, using the company’s marginal borrowing rate, since the inter- nal rate cannot be reasonably defined. The lease payments consist of the fixed lease payments, guaranteed residual values and payment for exercise of pur- chase option or payment for cancellation of lease when con- sidered reasonably certain that the options are exercised. In addition, variable lease payments which are adjusted, based NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 116 ANNUAL REPORT 2022 SECTION 3 on an index, whereas consumption-based leasing payments are not recognized as part of the cost of the lease asset and liability. The lease payments are distributed between an instalment portion and an interest portion. The lease obligation is re- calculated at a constant interest rate, corresponding to the discount rate used. At initial recognition, the value of the leased asset corresponds to the value of the lease obligation, unless upfront payments and/or there are recovery obliga- tions regarding the asset. The Group chose to apply the two practical exceptions in IFRS 16 regarding short term leases and low value assets. Short term leases represent lease agreements shorter than 12 months from the date of the contract, and low value as- sets represent lease agreements that are lower than DKK 35,000 each. NOTE 3.4 COMPANIES IN THE GROUP The consolidated accounts for 2022 include the following subsidiaries and associates: Nominal Subsidiary Companies Currency Nature of Business Head Office Ownership share capital Bakkafrost Farming P/F DKK Salmon farming Glyvrar 100% 19,762 Bakkafrost Processing P/F DKK Value adding of salmon (VAP) Glyvrar 100% 150,000 Bakkafrost Sales P/F DKK Sales of salmon and VAP products Glyvrar 100% 667 Bakkafrost Packaging P/F DKK Production of styrofoam boxes Glyvrar 100% 8,022 Havsbrún P/F DKK Production and sales of fishmeal, fish oil and fish feed Fuglafjørður 100% 2,000 Bakkafrost UK Ltd. GBP Sales of salmon Grimsby 100% 2 GBP Bakkafrost USA LLC USD Sales of salmon Clifton, New Jersey 100% 2,000,000 USD Förka P/F DKK Production of biogas and fertilizer Glyvrar 100% 5,000 Bakkafrost Scotland Ltd. GBP Salmon Farming Edinburgh 100% 20,000,000 Scottish Salmon 2020 (Jersey) Ltd. GBP In liquidation Edinburgh 100% 17,530,000 Svínoyar rognkelsisstøð Sp/f DKK Lumpfish farming Svínoy 100% 8,102,222 Faroe Seafood 2011 P/F DKK Trading fish Glyvrar 100% 2,000,000 Bakkafrost France SARL EUR Trading fish Boulogne, France 100% 160,000 EUR Munkebo Seafood A/S DKK Production and sales of canned fish Munkebo 90% 1,800,000 FarCargo P/F DKK Freight transportation of goods Glyvrar 70% 4,666,667 * Previously Scottish Salmon Company Ltd. ** Previously 07.07.2021 P/F NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 117 ANNUAL REPORT 2022 SECTION 3 118 SECTION 3 Carrying Carrying Associated Companies Head Net Share of value value DKK 1,000 Offi ce Ownership Additions the result 2022 2021 Pelagos P/F Fuglafjørður 30% 0 10,427 98,734 88,307 Salmon Proteins P/F Eiði 79% 0 312 5,176 4,864 Svínoyar rognkelsisstøð Sp/f Svínoy 100% n/a n/a n/a 733 FF Skagen A/S Skagen 25% 90,854 38,512 129,366 n/a Total 233,276 93,904 Total assets Total assets Equity Equity Result Result 2022 2021 2022 2021 2022 2021 Pelagos P/F 540,104 540,104 291,441 291,441 97,495 97,495 Salmon Proteins P/F 9,557 9,557 6,183 6,183 407 407 Svínoyar rognkelsisstøð Sp/f n/a 8,386 n/a -842 n/a -837 FF Skagen A/S 1,364,847 1,364,847 412,081 412,081 8,403 8,403 Voting rights 30%. The voting rights are limited in the Articles of Association of P/F Salmon Proteins. **Changed classifi cation to a subsidiary company during 2022 Changed classifi cation to an associated company during 2022 Information from 2021 NOTE 3.5 SHARES AND HOLDINGS IN OTHER COMPANIES Carrying Carrying DKK 1,000 amount amount Companies 2022 2021 Others 933 55,321 Total 933 55,321 Companies 2022 2021 Others 933 55,321 Total 933 55,321 ACCOUNTING POLICIES Investments in other companies are classifi ed as available for sale. Shares and holdings in which the Group does not have signifi cant infl uence are valued at cost as fair value cannot be measured reliably. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 119 ANNUAL REPORT 2022 SECTION 3 NOTE 3.6 INVENTORY DKK 1,000 2022 2021 Raw materials and goods in-progress 843,909 514,977 Finished goods 230,435 194,329 Total inventory 1,074,344 709,306 Raw materials primarily consist of raw material to produce fi shmeal, fi sh oil and fi sh feed and packaging materials used in processing. Goods in-progress include semi-fi nished products and spare parts. Finished products include all products ready for sale, such as fi sh feed, fresh and frozen whole salmon, as well as pro- cessed salmon products. Inventories are measured at full cost price. ACCOUNTING POLICIES Inventories consist of inventories in the Farming FO unit, Farming SCT unit, VAP unit and the FOF unit. FARMING FO AND FARMING SCT Inventories include mainly feed, packaging materials and fi n- ished goods. Inventories of goods are stated at the lower of cost and net realizable value. The cost of processed goods is a full production cost that in- cludes direct material and personnel costs, and a percentage of indirect processing costs. Interest costs are not included in the value of inventory. The cost price of purchased goods is the acquisition price. Cost is based on the FIFO principle. Net realizable value is estimated sales price less selling expenses. VAP Inventories consist of raw material, additives, packaging ma- terial and fi nished goods. Raw material in the VAP unit con- sist basically of processed salmonids. Raw material is meas- ured at fair value at the time of harvesting. Packaging material and additives are valued at the lesser of cost or expected sales price less sales costs. The FIFO princi- ple is used concerning the periodic assignment of inventory costs. Finished goods in inventory, fresh or frozen, are measured at the lesser of cost or the expected sales price less sales costs. In a case, where the cost price exceeds the sales price less sales cost, impairment is entered and charged to the Income Statement. The cost price of goods produced in-house is the full pro- duction cost, including production costs, which can be only indirectly allocated to produce goods, less general adminis- tration costs. FOF Raw materials and purchased commodities are valued at the lower of historical cost and net realizable value in accord- ance with the FIFO principle. Finished goods are fi shmeal, oil and feed ready for delivery to customer, valued at the lower of cost and net realizable value. The cost of fi nished goods includes any processing costs that have incurred. Processing costs consist of logistics, handling and storage costs. The cost price of goods produced in-house is the full pro- duction cost, including production costs, which can be only indirectly allocated to produce goods, less general adminis- tration costs. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 120 ANNUAL REPORT 2022 SECTION 3 NOTE 3.7 BIOLOGICAL ASSETS DKK 1,000 2022 2021 Biological assets carrying amount 01.01. 2,448,289 2,117,024 Increase due to production or purchases 3,917,146 3,158,703 Reduction due to harvesting or sale (costs of goods sold) -3,363,747 -2,931,526 Reduction due to mortality (costs of incidents-based mortality) -282,768 -307,551 Fair value adjustment at the beginning of the period reversed -604,707 -145,387 Fair value reclassifi cation currency translation differences prior year 0 -24,452 Fair value adjustments at the end of the period 883,099 604,707 Reversal of elimination at the beginning of the period 134,193 80,083 Eliminations -135,650 -134,193 Currency translation differences -57,370 30,881 Biological assets carrying amount 31.12. 2,938,485 2,448,289 Cost price biological assets 2,248,406 1,946,894 Fair value adjustments at the end of the 883,099 604,707 Eliminations -135,650 -134,193 Currency translation differences -57,370 30,881 Biological assets carrying amount 2,938,485 2,448,289 Biomass on average (tonnes) < 1 kg 4,737 5,070 1 < 2 kg 6,811 7,673 2 < 3 kg 8,608 10,026 3 < 4 kg 9,589 13,538 4 kg < 18,566 22,288 Volume of biomass at sea 48,311 58,595 Number of fi sh on average (thousand) < 1 kg 11,043 9,770 1 < 2 kg 4,595 5,255 2 < 3 kg 3,520 3,873 3 < 4 kg 2,717 3,920 4 kg < 3,877 4,595 Total number of fi sh at sea 25,752 27,413 Harvested volumes (TGW) 90,603 96,889 Number of smolts released (thousand) Q1 4,237 4,044 Q2 6,166 5,233 Q3 6,563 7,022 Q4 8,459 9,236 Total number of smolts released 25,425 25,535 Chang e in discount rate +1% -212,686 -150,709 Change in discount rate -1% 238,534 167,502 Change in sales price +5 DKK 353,080 423,223 Change in sales price -5 DKK -353,080 -423,223 Change in biomass volume +1% 18,217 8,982 Change in biomass volume -1% -18,217 -8,982 One year forward prices in EUR FCA Oslo At year end 7.50 6.72 Q1 (forward) 8.58 6.86 Q2 (forward) 8.96 6.81 Q3 (forward) 7.16 5.66 Q4 (forward) 7.31 6.15 * Source Fish Pool NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 121 ANNUAL REPORT 2022 SECTION 3 ACCOUNTING POLICIES IAS 41 requires biomass to be accounted for at the estimated fair value net of sales costs and harvesting costs. The calcu- lation of the estimated fair value is based on market prices for harvested fish. In the accounts, the change in estimated fair value is entered to the Income Statement on a continuous basis. The Group’s biological assets are salmon at all stages of the life cycle. The fish is divided into two main groups, depend- ing on the stage of the life cycle. The first group is fish pro- duced on land in fresh water. The second is, when the fish are released to sea. For the first group, historical cost is deemed a reasonable approach to fair value, as there is little biological transfor- mation. This assessment must be seen in the light of the fact that smolts are currently released to sea at a stage when their weight is still relatively low. For the second group, the fair value is calculated by applying a present value model at level 3 in the fair value hierarchy in IFRS 13. In accordance with the principle in IFRS 13 for high- est and best use, the Group considers optimal harvest weight to be for Farming FO 5.2 kg gutted weight (6.3 kg live weight) and for Farming SCT 4.9 kg gutted weight (6.0 kg live weight). The valuation model The valuation model calculates the net present value of ex- pected cash flow from biological assets. Changes to estimated fair value of biological assets are pre- sented on the line Fair value adjustments of biological assets in the Income Statement. The measurement unit is the individual fish. However, for practical reasons, cash flows and estimates are carried out per locality. Main components in the model are: • Volume • Production costs • Sales price • Discount rate Volume Estimated harvest volume is based on the actual number of fish in the sea on the balance sheet date, minus estimated future mortality from balance sheet date and multiplied by optimal harvest weight per fish. Future monthly mortality is estimated to be for Farming FO 0.9% (2021: 0.9%) and for Farming SCT 2.0% (2021: 1.5%) of the number of incoming fish per month. Cost Estimated future costs are based on the Group´s prognoses per locality. Cost comprises mainly feed, production, harvest, and transport costs. Price Estimated sales prices are based on externally quoted prices from Fish Pool with adjustments to local conditions. Fish Pool is a marketplace for financial purchase and sale agreements for superior Norwegian salmon size 3-6 kg gut- ted weight. The volume on Fish Pool is, however, limited. This market may therefore be considered insufficiently active and effective. Despite this, Bakkafrost’s opinion is that the ob- servable forward prices are the best approach to a price for the sale of salmon. The prices are reduced for harvesting costs, freight costs to market to arrive at a net value back-to-farm and for Farming FO also revenue tax. The valuation also reflects the expected quality grading. Discounts The estimated future cash flow is discounted monthly. The monthly discount rate on 31 December 2022 is 6.0% (2021: 6.0%) per month for Farming FO and 4.0% (2021: 4.0%) per month for Farming SCT. The discount rate considers a risk NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 122 ANNUAL REPORT 2022 SECTION 3 adjustment and time value. The risk adjustment considers the volatility in volume, cost, and price. Mortality Mortality above normal will be accounted for when a farming site either experiences elevated mortality over time or mor- tality due to an incident. Costs related to abnormal mortality will be recognized in the Income Statement and presented on the line for changes in inventory, while normal mortality is classified as part of pro- duction costs. Bakkafrost uses a common indicator and threshold for all farming sites to assess normal and abnormal mortality. In- dication of abnormal mortality is when a farming site in a month registers mortality exceeding 1.5% (2021: 1.5%) for Farming FO and 4.0% (2021: 4.0%) for Farming SCT of the incoming number of fish. A more detailed assessment is then carried out to evaluate, whether mortality is abnormal. These assessments consider the cause of mortality and the size of the fish. SIGNIFICANT ASSUMPTIONS SENSITIVITY The estimate of fair value of biomass will always be based on uncertain assumptions, even though the company has built substantial expertise in assessing these factors. The Group considers three components to be key parameters for valuation. These are: average price, monthly discount rate and estimated biomass volume. In the table above a simu- lated sensitivity analysis to changes in fair value of the bi- ological assets is portrayed in the event of changes in these parameters. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 123 ANNUAL REPORT 2022 SECTION 3 NOTE 3.8. ACCOUNTS RECEIVABLE AND OTHER RECEIVABLES DKK 1,000 2022 2021 Accounts receivable 808,806 620,356 Provisions for bad debts -51 -32 Net accounts receivables 808,755 620,324 VAT 75,973 78,227 Other 26,477 93,979 Tax receivables 65,822 109,701 Other receivables 168,272 281,907 Total short-term receivables 977,027 902,231 Long-term receivables 0 8,102 Total accounts receivable and other receivables 977,027 910,333 AGE DISTRIBUTION OF ACCOUNTS RECEIVABLE DKK 1,000 Receivables not overdue 614,760 508,400 Overdue 0–6 months 190,538 103,258 Overdue more than 6 months 3,508 8,666 Total 808,806 620,324 The Group’s exposure to credit risks related to accounts receivable is disclosed in Note 4.1. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 124 ANNUAL REPORT 2022 SECTION 3 CURRENCY EXPOSURE TO ACCOUNTS RECEIVABLE The Group holds accounts receivable in foreign currencies amounting to DKK 672 million at year-end 2022. (2021: DKK 528 million). Below is presented the book value of receivables specifi ed in currency, translated into DKK employing the currency value at 31.12. CURRENCY DISTRIBUTION OF RECEIVABLES DKK 1,000 2022 2021 DKK 137,009 92,104 EUR 398,970 318,369 USD 105,135 126,231 GBP 73,511 66,754 JPY 5,730 0 NOK 88,451 2,803 Others 0 14,063 Total 808,806 620,324 ACCOUNTING POLICIES Accounts receivable and other receivables are presented at face value less provisions for bad debts. Provisions for bad debts are made based on an individual assessment of the receivables concerned. Due to insignifi cant cost and the short credit period, amortized cost is equivalent to face value less foreseeable losses. NOTE 3.9 CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of short-term bank depos- its and were DKK 720 million at year-end 2022, compared to DKK 509 million at year-end 2021. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 125 ANNUAL REPORT 2022 SECTION 3 NOTE 3.10 SHARE CAPITAL AND MAJOR SHAREHOLDERS Share capital: DKK 1,000 2022 2021 Share capital at 1 January 59,143 59,143 Share capital at 31 December 59,143 59,143 The parent company’s share capital comprises: DKK No. of Shares Face Value Share Capital Ordinary shares 59,143,000 1 59,143,000 Total share capital 59,143,000 Reconciliation of outstanding shares: 2022 2021 Outstanding shares at 1 January 59,075,165 59,044,071 Sale of own shares to cover the employee bonus program 23,316 31,094 Outstanding shares at 31 December 59,098,481 59,075,165 Treasury shares at 31 December 44,519 67,835 SHAREHOLDERS These shareholders held directly or indirectly more than 5% of the shares in the company as at 31 December 2022: Folketrygdfondet, Regin Jacobsen, Oddvør Jacobsen and The Goldman Sachs Group, Inc.. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 126 ANNUAL REPORT 2022 SECTION 3 Shares owned directly and indirectly by the members of the Board of Directors and Group Management: Name Position No. of shares Shareholding Rúni M. Hansen Chairman of the Board 10,761 0.02% Teitur Samuelsen Member of the Board 100 0.00% Annika Frederiksberg Member of the Board 16,250 0.03% Øystein Sandvik Member of the Board 0 0.00% Einar Wathne Member of the Board 0 0.00% Guðrið Højgaard Member of the Board 0 0.00% Regin Jacobsen Chief Executive Officer 4,617,351 7.81% Odd Eliasen Managing Director 184,969 0.31% Høgni D. Jakobsen Chief Financial Officer 74,593 0.13% Dividend The Board has proposed a dividend per share of DKK 10.00 for 2022. DKK 304 million were paid out for 2021. The div- idends proposed are to be approved at the Annual General Meeting and if approved, the total dividend payment will amount to DKK 591 million. The dividend proposal has not been recognized as a liability at 31 December 2022 but is presented as an item within equity. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 127 ANNUAL REPORT 2022 SECTION 3 NOTE 3.11 INTEREST-BEARING DEBT DKK 1,000 2022 2021 Long-term interest-bearing debt 3,383,289 2,634,968 Total long-term interest-bearing debt 31.12. 3,383,289 2,634,968 Total interest-bearing debt 3,383,289 2,634,968 Cash and cash equivalents -719,603 -509,157 Net interest-bearing debt 2,663,686 2,125,811 The maturity structure of the Group’s fi nancial commitments is based on undiscounted contractual payments. As the credit limit is not necessarily in the same currency of debt drawn, currency fl uctuations affect the amount available under the facilities at any time. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 128 ANNUAL REPORT 2022 SECTION 3 The maturity plan of the Group’s interest-bearing debt is as follows 2022 2021 DKK 1,000 Carrying Contractual Carrying Contractual amount amount amount payments Credit facilities -3,383,289 -3,408,576 -2,634,968 -2,648,059 Gross interest-bearing debt -3,383,289 -3,408,576 -2,634,968 -2,648,059 Credit line 5,205,550 5,205,550 Long-term interest-bearing debt -3,383,289 -2,634,968 Cash and cash equivalents 719,603 509,157 Total available credit lines 2,541,864 3,079,739 REMAINING PERIOD 31.12.2022 1–3 months 3–12 months 1–5 years > 5 years Total Interest-bearing bank loans 0 0 3,383,289 0 3,383,289 Accounts payable and other debt 579,247 237,780 0 0 817,027 REMAINING PERIOD 31.12.2021 1–3 months 3–12 months 1–5 years > 5 years Total Interest-bearing bank loans 0 0 2,634,968 0 2,634,968 Accounts payable and other debt 543,394 170,997 0 0 714,391 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 129 ANNUAL REPORT 2022 SECTION 3 The difference between the carrying amount and the total expected payments in the table above is due to upfront ar- rangement and legal fees incurred in connection with the re- financing of the credit facilities. One long-term bank borrow- ing is drawn from a revolving credit facility, under which the Group may draw and pay down any amount. The contractual payments illustrated in the table above do not reflect rollo- ver dates of loans drawn but are based on the maturity date of the credit facilities. INTEREST-BEARING DEBT IN MORE DETAIL Financing of the Bakkafrost Group is mainly executed by the parent company. Subsidiaries can only enter external financ- ing if it is seen favourable for the whole Bakkafrost Group. Sustainability-linked financing In December 2021 the Group entered a term sheet for a sus- tainability-linked EUR 700 million multicurrency revolving credit facility with a tenor of five years. The Facility Agree- ment was signed in March 2022. In February 2023 the Group made use of an extension option and extended the Facility with 12 months until February 2028. The purpose of the Facility was to refinance Bakkafrost’s ex- isting bank facilities as well as general corporate purposes including acquisitions. The Facility will serve as a robust and flexible financial framework for the Group’s investment plans aimed at organic growth for the Group and structural cost reductions in Scotland, as described at the Capital Markets Day 2021. As The Facility is sustainability-linked means that the margin payable will be linked to Bakkafrost’s performance against certain sustainability KPIs, consistent with the Group’s over- all ESG targets and ambitions. The Facility includes flexi- bility for the parties to agree an additional amount of up to EUR 150 million during the tenor. The principal financial covenants of the Facility are: (1) an equity ratio of no less than 35% and (2) an interest coverage ratio (EBITDA to net interest payable) of no less than 2x. The Bakkafrost Group complied with these covenants at the end of 2022. Coöperatieve Rabobank U.A, DNB Bank ASA and Nordea Bank ABPm (Filial i Norge), have agreed to continue their support as lenders. At the end of 2022, the Group had unused committed credit facilities of DKK 2,542 million (DKK 3,080 million). In addi- tion, the Group has an accordion of EUR 150 million. Maturity analysis - contractual payments DKK 1,000 2023 2024 2025 2026 2027 2028 Long-term credit facilities 0 0 0 0 0 3,383,289 Gross interest-bearing debt 0 0 0 0 0 3,383,289 Reconciliation of development in interest-bearing debt 2021 Cash flows 2022 Long term interest-bearing debt 2.634.968 748.321 3.383.289 Total interest-bearing debt 2.634.968 748.321 3.383.289 2020 Cash flows 2021 Long term interest-bearing debt 2.219.690 415.278 2.634.968 Total interest-bearing debt 2.219.690 415.278 2.634.968 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 130 ANNUAL REPORT 2022 SECTION 3 NOTE 3.12 MORTGAGES AND GUARANTEES Carrying amount of debt secured by mortgages and pledges The Bakkafrost Group has a group fi nancing. The Group com- panies are liable jointly and severely for the balance without limitations for each other. As part of the guarantees are also any insurance refunds. In addition, the shares in larger subsidiaries have been pledged to the bank syndicate. DKK 1,000 2022 2021 Long-term debt to fi nancial institutions 3,383,289 2,634,968 Carrying amount of assets pledged as security for recognized debt Licences 3,819,883 3,720,158 Property, plant and equipment 1,046,827 3,606,250 Biological assets (biomass) 2,938,485 2,448,289 Inventory 131,770 703,600 Total 7,936,965 10,478,297 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 131 ANNUAL REPORT 2022 SECTION 3 NOTE 3.13 DERIVATIVES DKK 1,000 2022 2021 Currency swaps regarding forward contracts -7,474 7,809 Derivatives total -7,474 7,809 The fair value of derivatives held at the balance sheet date can be allocated as follows: Recognized in Recognized in the Income Recognized the Income Recognized Fair Value Statement in equity Fair Value Statement in equity 2022 2022 2022 2021 2021 2021 Currency derivatives -7,474 0 -7,474 7,809 0 7,809 Total -7,474 0 -7,474 7,809 0 7,809 The expected timing of the effect on the income statement is as follows: Interest and Interest and Currency currency Total Currency currency Total derivatives derivatives 2022 derivatives derivatives 2021 Within one year -7,474 0 -7,474 4,602 0 4,602 Between one and fi ve years 0 0 0 3,207 0 3,207 After fi ve years 0 0 0 0 0 0 Total -7,474 0 -7,474 7,809 0 7,809 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 132 ANNUAL REPORT 2022 SECTION 3 ACCOUNTING POLICES In accordance with IFRS 9, financial instruments falling with- in its remit are classified into the following categories: fair value with changes in value entered to the Income State- ment, hold until maturity, loans and receivables, available for sale, and other liabilities. Financial instruments at fair value with changes in value entered to the Income Statement Financial instruments, which are held primarily for buying or selling in the short term, are classified as being held for trading purposes. These instruments are included in the cat- egory of financial instruments recognized at fair value with changes in value entered to the Income Statement alongside forward currency contracts, which are recognized at fair val- ue with changes in value, entered to the Income Statement. Hedge accounting Interest rate swaps and forward currency settlement con- tracts are used as hedges of its exposure to foreign currency risk, interest expenses and instalment payments in foreign currencies. The hedges are cash flow hedges. The effective portion of the gain or loss on the hedging in- strument is recognized directly in other comprehensive in- come in the cash flow hedge reserve. Amounts recognized as other comprehensive income are transferred to the Income Statement, when the hedged trans- action affects profit or loss, and when financial liabilities are settled, such as when the hedged financial income or finan- cial expense is recognized. If the forecast transactions or commitments are no longer ex- pected to occur, the cumulative gain or loss, previously rec- ognized in equity, is transferred to the Income Statement. If the hedging instrument expires or is sold, terminated, or ex- ercised without replacement or rollover, or if its designation as a hedge is revoked, any cumulative gain or loss, previ- ously recognized in other comprehensive income, remain in other comprehensive income until firm commitment affects profit or loss, or settlement payments are made. NOTE 3.14 PROVISIONS A provision is recognized when, and only when, the compa- ny has a valid liability (legal or self-imposed) deriving from an event which has occurred, and when it is probable (more likely than not) that a financial settlement will take place because of that liability, and when the amount in question can be reliably quantified. Provisions are reviewed on each closing date, and the level reflects the best estimate for the liability. The Group has no provisions as per 31 December 2022, compared to no provisions as per 31 December 2021. PROVISIONS FOR ONEROUS CONTRACTS ACCOUNTING POLICIES The Group enters sales contracts for value added salmon products (VAP) on an on-going basis. The contracts involve physical settlement, and deliveries associated with the con- tracts form part of the Group’s normal business activities. The contracts contain no built-in derivative elements. With respect to fixed-price contracts, which result in the Group being obligated to sell salmon products at a price less than production cost (including fair value adjustment of raw materials at the point of harvesting), the contracts are considered onerous, and provisions are calculated and en- tered to the statement of financial position. The provision is charged to the Income Statement. SIGNIFICANT ASSUMPTION The company holds long-term sale contracts related to salm- on products. These contracts do not contain any elements of embedded derivatives and are therefore not treated as financial instruments. The contracts are settled, based exclu- sively on the assumption that delivery of salmon products should take place. The contracts are not tradable, nor do they contain a clause for settlement in cash or cash equivalents. Provisions are made for estimated onerous contracts that oblige the Group to sell fish at a price less than calculated production costs including raw materials, biomass, measured at fair value. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 133 ANNUAL REPORT 2022 SECTION 4 NOTES – SECTION 4 Capital Structure and Financing Items This section gives an insight into the capital structure and financing items. NOTE 4.1 FINANCIAL RISK MANAGEMENT CAPITAL MANAGEMENT The Group’s objective, when managing capital, is to maintain a capital structure able to support the operations and max- imize shareholder value. The farming business is character- ized by price volatility and challenging production dynamics. The Group must be financially solid in order to be able to cope with fluctuations in profits and financial position, and the consolidated equity ratio shall at no time be lower than 35%. At 31 December 2022, the Group’s equity ratio was 62% (64%). The Group manages the capital structure and adjusts corre- sponding to changes in the underlying economic conditions. In December Bakkafrost entered a term sheet for a sustaina- bility-linked EUR 700 million multicurrency revolving credit facility with a tenor of five years. The facility agreement was signed in March 2022. In February 2023 the Group made use of an extension option and extended the Facility with 12 months until February 2028. According to the Group’s dividend policy, under normal cir- cumstances, average dividends over several years should be 30 to 50% of the adjusted net profit. The Board has proposed a dividend of DKK 10.00 per share for the financial year 2022, corresponding to a distribution to shareholders of DKK 591 million (DKK 304 million). At 31 December 2022, net interest-bearing debt amounted to DKK 2,664 million (DKK 2,126 million). Note 3.10 provides an overview of the debt’s maturity profile and information on the debt’s financial covenants. Bakkafrost complied with the covenants loan agreements at the end of 2022. FINANCIAL RISK MANAGEMENT The Group has exposure to the following risks from its use of financial instruments: market risk, liquidity risk and credit risk. This note presents information about the Group’s expo- sure to each of these risks, the Group’s objectives, policies and procedures for measuring and managing risks. Further quantitative disclosures are included throughout these consolidated financial statements. The main objective of Bakkafrost’s financial risk manage- ment policies is to ensure the ongoing liquidity of the Group, defined as being at all times in a position to meet the liabil- ities of the Group as they fall due. This also includes being able to meet financial covenants on Group debt under normal circumstances. Concerning insurance coverage, the Group insures against material risks, where the insurance is economically viable. The balance between the amount covered by insurance and what is left to own risk varies, depending on the nature of the risk, the value of the assets and prospective liabilities and the cost, actual coverage and the availability of insur- ance. The Board of Directors believe that the most important meas- ure against any risk is to have a strong financial position. At 31 December 2022, the Group’s equity ratio was 62% (64%). Risk management policies and procedures are reviewed reg- ularly to reflect changes in market conditions and the Group’s activities. FINANCIAL RISK Financial risk can be defined as the risk that the Group will not be able to meet its financial obligations. In addition to bank loans, the Group has financial instru- ments such as accounts receivables, cash, shares, accounts payables, etc., which are ascribable directly to day-to-day business operations. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 134 ANNUAL REPORT 2022 SECTION 4 The Group uses financial derivatives, mainly currency for- ward contracts. The purpose of these instruments is to man- age the currency risks arising from the Group’s operations. The Group does not employ financial instruments, including financial derivatives, for the purpose of arbitrage. The most important financial risks, to which the company is exposed, are interest rate risk, foreign exchange risk, liquidi- ty risk and credit risk. The management monitors these risks on an on-going basis and draws up guidelines, for how these should be managed. MARKET RISK Market risk can be defined as the risk that the Group’s in- come and expenses, future cash flows or fair value of finan- cial instruments will fluctuate because of changes in market prices. Market risk comprises three types of risk: currency risk, interest rates risk and other price risk (such as commod- ity prices and salmon spot prices). Market risk is monitored and actively managed by the Group. Exposure to these risks is reduced by diversification, suitable controls and business tactics. In some cases, market risks are transferred to third parties via contractual price adjustment clauses, but rarely by means of financial derivatives. Foreign exchange risk Because of the international nature of its operations, the Group is exposed to fluctuations of foreign currency rates. For risk management purposes, three types of currency ex- posure have been identified: Translational exposure, Trans- actional exposure and Economic currency exposure: Translational exposure Bakkafrost has subsidiaries abroad in Scotland, England, USA, France and Denmark. Thus, Bakkafrost faces currency risks arising from the translation of subsidiaries whose functional currency differ from the presentation currency of the Group. The exposure related to equity of foreign subsidiaries is gen- erally not hedged. Transactional exposure Most of the operating companies in the Group are exposed to changes in the value received or paid under foreign currency denominated committed transactions. For the farming seg- ments, exposure arises mainly from export sales, while for the FOF segment, exposure results from the sourcing of raw materials in the international commodities markets. The Group has normally a net positive cash flow exposure from USD and EUR and a net negative cash flow expo- sure from DKK, GBP, and NOK. The predominant exposure comes from the USD. The Group has therefore a policy for a 12-months layered hedging programme of USD/DKK. The table below summarizes the foreign currency exposure on the net monetary position of all Group entities against their functional currency. The exposure on translating the fi- nancial statements of subsidiaries into the presentation cur- rency is not included in the analysis. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 135 ANNUAL REPORT 2022 SECTION 4 Exposure to currency risk Currency DKK 1,000 2022 EUR/DKK GBP/DKK USD/DKK NOK/DKK JPY/DKK Cash and cash equivalents 358,978 0 219,246 24,031 2,324 Accounts receivable 398,970 73,511 105,135 88,451 5,730 Trade payables 0 -55,642 -22,555 -8,772 0 Interest-bearing debt -706,467 -628,838 0 0 0 Forward contracts 0 0 -331,250 0 0 Net exposure 51,481 -610,969 -29,424 103,710 8,054 2021 EUR/DKK GBP/DKK USD/DKK NOK/DKK JPY/DKK Cash and cash equivalents 203,593 0 181,144 0 15,018 Accounts receivable 318,369 66,785 203,383 14,063 2,803 Trade payables -1,253 -88,590 -9,992 0 0 Interest-bearing debt -706,468 -716,025 0 -8,905 0 Forward contracts 0 0 -249,562 7,873 0 Net exposure -185,759 -737,830 124,973 13,031 17,821 Sensitivity analysis Currency DKK 1,000 2022 EUR/DKK GBP/DKK USD/DKK NOK/DKK JPY/DKK Result Net exposure 51,481 -610,969 -29,424 103,710 8,054 Historical volatility for the last 5 years 0.28% 7.24% 7.35% 9.98% 8.34% Total effect on Profit of +movements 144 -44,234 -2,163 10,350 672 -35,231 Total effect on Profit of -movements -144 44,234 2,163 -10,350 -672 35,231 2021 EUR/DKK GBP/DKK USD/DKK NOK/DKK JPY/DKK Result Net exposure -185,759 -737,830 124,973 13,031 17,821 Historical volatility for the last 5 years 0.28% 7.19% 6.65% 9.31% 7.21% Total effect on Profit of +movements -520 -53,050 8,311 1,213 1,285 -42,761 Total effect on Profit of -movements 520 53,050 -8,311 -1,213 -1,285 42,761 The analysis is based on the currencies that the Group is most exposed to at the end of 2022. The reasonable shifts in exchange rates in the table above are based on 5 years historical volatility. If the relevant cross foreign exchange rates moved by the amounts showed in the table above, the effect on the Group’s net income would be DKK -35 million (2021: DKK -43 mil- lion). NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 136 ANNUAL REPORT 2022 SECTION 4 Currency forward contracts as at 31 December 2022 Bakkafrost Group buys Bakkafrost Group sells DKK 1,000 DKK 331,250 USD 46,957 Currency forward contracts as at 31 December 2021 Bakkafrost Group buys Bakkafrost Group sells DKK 1,000 DKK 249,562 39,247 NOK 10,950 GBP 7,873 Significant exchange rates (average) during the year EUR/DKK GBP/DKK USD/DKK NOK/DKK JPY/DKK 2022 743.96 872.59 708.30 73.69 5.40 2021 743.70 865.25 629.18 73.18 5.73 Interest rate risk The Group is exposed to increase in interest rates as a result of having debt with floating interest rate terms. An increased cost of borrowing might adversely affect the Group’s profita- bility. The Group does not have fixed interest rate debt. According to the Group’s finance policy, the main objective of interest rate risk management activities should be to min- imize the risk of breach of the Group’s debt covenants and to avoid situations of financial distress that might jeopard- ize strategic flexibility. Trading in interest rate derivatives is undertaken to cover existing exposures. Purely speculative transactions are not allowed. The Group has no fixed rate liabilities and is therefore not exposed to the risk that changes in interest rates might drive changes in market value of outstanding debt. A 100 basis points increase in interest rate at the reporting date would have a negative impact on the income statement amounting to DKK 27 million (2021: DKK 21 million), based on NIBD. Price risk The farming segments are sensitive to fluctuations in the spot prices of salmon, which are determined by global supply and demand. The impact of changes in salmon spot prices is partly mitigated by long-term contracts at fixed prices in the VAP segment and financial contracts, however, due to long production cycles, it is difficult to respond quickly to global trends in market prices. Salmon is to a large extent traded based on spot prices, although this would vary with different markets and with the market position of the Group. Other price risk The Group’s FOF segment is active in the international com- modity markets. A large portion of raw materials needed in production is contracted in advance of periodic sales price regulations, this way the risk associated with increases in commodity prices is effectively transferred to feed custom- ers, mainly inside the Group. Constraints in the availability of certain raw materials might result in increased sourcing costs in those cases, where an unexpected surge in sales vol- ume makes it necessary to purchase raw materials outside of previously negotiated purchase agreements. Under these cir- cumstances, it might not be possible to charge the customers with the increased cost, and profitability would thus suffer. Liquidity risk Liquidity risk arises from the Group’s potential inability to meet its financial obligations towards suppliers and debt capital providers. The Group’s liquidity situation is closely monitored and rolling forecasts of cash flows and cash hold- ings are prepared regularly. Liquidity risk is managed through maintaining flexibility in funding by securing available committed credit lines, pro- vided by our bank, and through maintaining sufficient liquid assets with the same relationship bank. The Group seeks to maintain committed facilities to cover forecast borrowings for the next 24 months, plus financial headroom to cover the planned investments and unfore- seen movements in cash requirements. Please also refer NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 137 ANNUAL REPORT 2022 SECTION 4 to Note 3.11 for information on committed credit facilities, available credit lines, and maturity of interest-bearing debt. In addition to the above-described sources of liquidity, Bakkafrost monitors funding options available in the capi- tal markets as well as trends in the availability and cost of such funding with a view to maintain financial flexibility and limiting refinancing risk. Bakkafrost’s overall liquidity as at 31 December 2022 included DKK 720 million (2021: DKK 509 million) (see Note 3.11) of cash and cash equivalents held in various currencies. Credit risk Credit risk represents the accounting loss that would have to be recognized if other parties failed to perform as con- tracted and is related to financial instruments such as cash and cash equivalents, receivables and derivative financial instruments. Bakkafrost has a Group-wide credit management policy, governed by Bakkafrost’s credit committee. The committee is responsible for granting credits to the Groups customers. In general, Bakkafrost uses credit insurance, bank guaran- tees, parent company guarantees, or other securities such as pledges on biological assets, thus reducing the actual risk on outstanding receivables significantly. Historically, losses due to bad debts have been low in Bakkafrost. Recoverable Tax and VAT, included in the balance, also reduces the risk. In addition to such risk mitigating measures, the Group focuses on detailed credit management in operating companies, sup- ported by regular follow up by central functions. The concentration of credit risk is at the outset not con- sidered significant, since the Group’s customers represent various industries and geographic areas. Counterparty risk against financial institutions is not considered significant, due to limited liquid assets and low traded volumes in deriv- atives. For these transactions, the Group relies upon Nordic relationship banks, other relationship banks or widely recog- nized commodity exchanges. The carrying amount of financial assets represents the max- imum credit exposure. The maximum exposure to credit risk at the reporting date consists of accounts receivables, other receivables, tax receivables and cash and cash equivalents and amounts to DKK 1,697 million as at 31 December 2022 (2021: DKK 1,411 million). For the age distribution of ac- counts receivable, please refer to Note 3.8. Credit Risk 2022 2021 Accounts receivable 808,755 620,324 Other receivables 102,450 172,206 Tax receivables 65,822 109,700 Cash and Cash equivalents 719,603 509,157 Total 1,696,630 1,411,387 Bakkafrost has implemented a Group-wide cash management policy with the overall objective of minimizing cash holdings, while ensuring sufficient liquidity to meet business needs, avoid shortage of cash and limit the need for borrowing. The cash management is carried out from the Group’s head office. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 138 ANNUAL REPORT 2022 SECTION 4 NOTE 4.2 CATEGORIES AND FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value of financial instruments All assets/liabilities, for which fair value is recognized or dis- closed, are categorized within the fair value hierarchy, de- scribed as follows, based on the lowest level input that is significant to the fair value measurement as a whole: Level 1: Quoted market prices in an active market (that are unadjusted) for identical assets or liabilities. Level 2: Valuation techniques (for which the lowest level in- put that is significant to the fair value measurement is direct- ly or indirectly observable). Level 3: Valuation techniques (for which the lowest level in- put that is significant to the fair value measurement is un- observable). For biological assets, the fair value calculation is done using a valuation model (level 3 in the valuation hierarchy), where the value is estimated based on observable market prices per period end. For more information on these calculations, refer to Note 3.7. For assets/liabilities that are recognized at fair value on a re- curring basis, the Group determines, whether transfers have occurred between Levels in the hierarchy by reassessing cat- egorization (based on the lowest level input that is signifi- cant to the fair value measurement). There have been no transfers into or out of Level 3 fair value measurements. As at December 31st the Group held the following classes of assets/liabilities measured at fair value: DKK 1,000 Assets and liabilities measured at fair value Fair value Cost amount Level 1 Level 2 Level 3 Biological assets (biomass) 2,938,485 2,055,386 0 0 2,938,485 Assets measured at fair value 31-12-22 2,938,485 2,055,386 0 0 2,938,485 Liabilities measured at fair value 31-12-22 0 0 0 0 0 Biological assets (biomass) 2,448,289 1,843,582 0 0 2,448,289 Assets measured at fair value 31-12-21 2,448,289 1,843,582 0 0 2,448,289 Liabilities measured at fair value 31-12-21 0 0 0 0 0 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 139 ANNUAL REPORT 2022 SECTION 4 NOTE 4.3 EARNINGS PER SHARE DKK 1,000 2022 2021 Earnings per share 2022 2021 Adjusted earnings per share (before fair value adjustments of biomass and provision for onerous contracts (adjusted EPS) Bakkafrost Group has no stock option programme running at present. ACCOUNTING POLICIES Basic earnings per share Basic EPS is calculated by dividing the profi t attributable to equity holders of the company by the weighted average number of ordinary shares in issue during the year, exclud- ing ordinary shares purchased by the company and held as treasury shares. Diluted earnings per share Diluted earnings per share are adjusted for the dilution ef- fect of issued share options. Bakkafrost has no share options outstanding. Adjusted earnings per share Adjusted EPS is based on the reversal of certain fair value adjustments shown in the table above, as it is Bakkafrost’s view that this fi gure provides a more reliable measure of the underlying performance. Profi t for the year to the shareholders of P/F Bakkafrost 1,344,330 964,036 Fair value adjustment of biomass (IAS 41) -278,392 -434,868 Tax on fair value adjustment 57,682 78,276 Adjusted profi t for the year to shareholders of P/F Bakkafrost 1,123,620 607,444 Ordinary shares as at 01.01. 59,143,000 59,143,000 Ordinary shares as at 31.12. 59,143,000 59,143,000 Time-weighted average number of shares outstanding through the year 59,090,186 59,064,994 Basic (DKK) 22.75 16.32 Diluted (DKK) 22.75 16.32 Basic (DKK) 19.02 10.28 Diluted (DKK) 19.02 10.28 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 140 ANNUAL REPORT 2022 SECTION 5 NOTES – SECTION 5 Other Disclosures This section gives more details on the statutory notes that have secondary importance from the perspective of Bakkafrost. NOTE 5.1. CAPITAL COMMITMENTS 2022 2023 2024 Total Total contractual new Hatchery stations in the Faroe Islands 57,077 26,294 83,371 Total contractual new marine sites and development of an existing freshwater site in Scotland. 233,900 0 233,900 Total contractual other PPE investments 336,700 0 336,700 Total 627,677 26,294 653,971 2021 2022 2023 Total Total contractual new Hatchery stations in the Faroe Islands 163,204 99,065 262,269 Total contractual new marine sites and development of an existing freshwater site in Scotland. 163,400 0 163,400 Total contractual other PPE investments 324,600 0 324,600 Total 651,204 99,065 750,269 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 141 ANNUAL REPORT 2022 ANNUAL REPORT 2022 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 142 SECTION 5 NOTE 5.2 RELATED-PARTY TRANSACTIONS Related parties are in this respect considered as persons or legal entities, which directly or indirectly possess signifi cant infl uence on the Bakkafrost Group through shareholding or position and vice versa. Related party transactions are at arm’s length terms. DKK 1,000 2022 2021 Based on key personnel Revenues - Betri Trygging P/F 368 0 Purchase - Betri Trygging P/F 36,948 42,593 Accounts receivables - Betri Trygging P/F 143 0 Accounts payable - Betri Trygging P/F 2,344 50 Revenues - Gist & Vist P/F n/a 919 Purchase - Gist & Vist P/F n/a 106 Accounts receivable – Gist & Vist P/F n/a 59 Purchase – Frost P/F n/a 669 Accounts payable - Frost P/F n/a 77 Revenues - Tjaldur P/F 108 0 Purchase - Tjaldur P/F 161,289 81,766 Accounts payable - Tjaldur P/F 12,211 5,375 Purchase - Eystur- og Sandoyartunlar P/F 813 704 Accounts payable - Eystur- og Sandoyartunlar P/F 27 2 Revenues - Posta P/F 2 n/a Purchase - Posta P/F 7,652 n/a Accounts receivables - Posta P/F 0 n/a Accounts payable - Posta P/F 9 n/a Based on association Revenues - FF Skagen A/S 49,242 14,019 Purchase - FF Skagen A/S 15,973 0 Accounts payable - FF Skagen A/S 6,099 0 Revenues - Pelagos P/F 0 27 Purchase - Pelagos P/F 144,702 51,401 Accounts payable - Pelagos P/F 46 4,028 Revenues - Salmon Proteins P/F 9,558 8,005 Purchase - Salmon Proteins P/F 1,794 131 Accounts receivables - Salmon Proteins P/F 0 1,941 Accounts payable - Salmon Proteins P/F 342 0 Revenues - Svínoyar Rognkelsisstøð SP/F n/a 411 Purchase - Svínoyar Rognkelsisstøð SP/F n/a 6,137 Accounts receivables - Svínoyar Rognkelsisstøð SP/F n/a 8,102 Accounts payable - Svínoyar Rognkelsisstøð SP/F n/a 722 SECTION 5 NOTE 5.3 BUSINESS COMBINATIONS In a transaction closed on 1 January 2022, Bakkafrost has acquired 90% of the shares in Munkebo Seafood A/S. The deal was jointly made with the General Manager of Munkebo Seafood. The shares were acquired from Paul Lybech, who has been engaged with Munkebo Seafood for almost 25 years. Following the transaction, the General Manager holds 10% of the shares in Munkebo Seafood A/S while Bakkafrost holds 90% of the shares. Munkebo Seafood A/S was founded in 1974 and has since the formation been engaged in production of canned fish at the factory in the city of Munkebo in Denmark. Today, the company operates a modern canning facility and offers a wide range of products, of which a larger share is based on salmon. Bakkafrost has been one of the largest suppliers of raw materials for Munkebo Seafood for the past few years, making Munkebo Seafood a great extension of Bakkafrost’s value chain. With a planned increase in production of salm- on over the coming years, from Bakkafrost’s farms in the Faroe Islands and in Scotland, Munkebo Seafood will have a strengthened raw material base and Bakkafrost will strength- en the ability to further increase the value derived from its salmon by-products. The operations of Munkebo Seafood will remain unchanged. Munkebo Seafood has around 40 employees, and the prod- ucts are currently sold mainly within the EU market to retail customers. The key employees of Munkebo AS will continue. There is considerable spare production capacity for future growth within the current facility. With the acquisition of Munkebo Seafood, Bakkafrost can now offer a wider range of products. Bakkafrost offers fresh, frozen, and smoked salmon products, and now canned food is added. Bakkafrost has a global sales network, and Munkebo Seafood’s products will now be offered in a wider market as a supplement to Bakkafrost’s other consumer packaged products. The fair value of intangible assets has been determined on an estimated fair value. Fair value has been identified in cus- tomer relationship employing generally accepted valuation techniques. The market value of the customer relationship is measured to DKK 6.2 million. The fair value of property, plant and equipment has been determined based a 3rd party valuation. The fair value of receivables has been determined based an estimate of an age-distributed debtor list and historical fig- ures on doubtful debtors. The fair value of the inventory has been determined based on inventory lists, historical sales data, and subtraction of obsolete goods. There have been no other new material business combina- tions in 2022 and there were no new material business com- binations in 2021. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 143 ANNUAL REPORT 2022 SECTION 5 Book value Fair Value DKK 1,000 31/12/2021 adjustments Fair value Goodwill 0 7,586 7,586 Intangible assets 7 0 7 Property, plant, and equipment - incl. IFRS 16 13,665 0 13,665 Account’s receivables 8,480 0 8,480 Inventories 21,238 0 21,238 Other current assets, excluding cash and bank 2,202 0 2,202 Total assets 45,592 7,586 53,178 Deferred taxes and other taxes 1,091 1,157 2,248 Long-term liabilities, interest-bearing 7,405 0 7,405 Accounts payable 13,733 0 13,733 Other payable 4,404 0 4,404 Liabilities 26,633 1,157 27,790 Net assets 18,959 6,429 25,388 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 144 ANNUAL REPORT 2022 SECTION 5 NOTE 5.4 EVENTS AFTER THE DATE OF THE STATEMENT OF FINANCIAL POSITION This is regarding new information regarding the company’s fi nancial position on the statement of fi nancial position, which is received after the date of the statement of fi nancial position, has been recognized in the annual accounts. Events after the date of the statement of fi nancial position, which do not affect the company’s fi nancial position on the statement of fi nancial position date, but which will affect the company’s future fi nancial position, are disclosed if material. NOTE 5.5 AUDITOR’S FEES Fees paid to auditors (ex. VAT) break down as follows: DKK 1,000 2022 2021 Statutory auditing 1,366 1,262 Tax advisory services 9 55 Other services 361 300 Total auditor’s fees 1,736 1,617 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 145 ANNUAL REPORT 2022 SECTION 5 NOTE 5.6 GOING CONCERN With reference to the Group’s profi ts, fi nancial strength and long-term forecasts for the years ahead, it is confi rmed that the fi nancial statements for 2022 are based on the assump- tion that Bakkafrost is a going concern. In the opinion of the Board, the Group’s fi nancial position is good. NOTE 5.7 ALTERNATIVE PERFORMANCE MEASURES The Groups fi nancial information is prepared in accordance with international fi nancial reporting standards (IFRS). In ad- dition, the management’s intention is to provide alternative performance measures, which are regularly reviewed by the management to enhance the understanding of the company’s performance, but not replacing the fi nancial statements pre- pared in accordance with IFRS. The alternative performance measures presented may be determined or calculated dif- ferently by other companies. Bakkafrost’s experience is that these APM’s are frequently used by analysts, investors and other parties. These APM’s are adjusted IFRS measures defi ned, calculated and used in a consistent and transparent manner over the years and across the company where relevant. NIBD Net interest-bearing debt consists of both current and non-current interest-bearing liabilities, less related current and non-current hedging instruments, fi nancial instruments, such as debt instruments and derivatives, and cash and cash equivalents. The net interest-bearing debt is a measure of the Group’s net indebtedness that provides an indicator of the overall balance sheet strength. It is also a single measure that can be used to assess both the Group’s cash position and its indebtedness. The use of the term ‘net debt’ does not neces- sarily mean that the cash included in the net debt calculation is available to settle the liabilities included in this measure. Net debt is an alternative performance measure as it is not defi ned in IFRS. The most directly comparable IFRS measure is the aggregate interest-bearing liabilities (both current and non-current) and cash and cash equivalents. A reconciliation from these to net debt is provided below. DKK 1,000 2022 2021 Cash and cash equivalents -719,603 -509,157 Long- and short-term interest-bearing debt 3,383,289 2,634,968 Net interest-bearing debt 2,663,686 2,125,811 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 146 ANNUAL REPORT 2022 SECTION 5 Operational EBIT Operational EBIT is EBIT aligned for fair value adjustments, onerous contracts provisions, income from associates and revenue tax - FO. Operational EBIT is a major alternative performance measure in the salmon farming industry. A reconciliation from EBIT to Operational EBIT is provided below. DKK 1,000 2022 2021 EBIT 1,826,153 1,144,685 Fair value adjustments of biological assets -278,392 -434,868 Income from associates -57,597 -30,112 Revenue tax - FO 215,001 141,489 Operational EBIT 1,705,165 821,194 EBITDA Earnings before interest, tax, depreciations and amortizations (EBITDA) is a key fi nancial parameter for Bakkafrost’s FOF segment. EBITDA before other income and other expenses is defi ned as EBITDA less gains and losses on disposals of fi xed assets and operations and is reconciled in the section Group overview. This measure is useful to users of Bakkafrost’s fi - nancial information in evaluating operating profi tability on a more variable cost basis, as it excludes depreciations and amortization expenses related primarily to capital expendi- tures and acquisitions, which occurred in the past, nonrecur- ring items, as well as evaluating operating performance in re- lation to Bakkafrost’s FOF segments competitors. The EBITDA margin presented is defi ned as EBITDA before other income and other expenses divided by total revenues. Operational EBIT per kg: Farming FO segment: Operational EBIT Farming FO segment Total harvested volumes FO (gw) VAP segment: Operational EBIT VAP segment Total volumes produced (raw material gw) Farming FO and VAP segment: Operational EBIT Farming FO and VAP segment Total harvested volumes FO (gw) Farming SCT segment: Operational EBIT Farming SCT segment Total harvested volumes SCT (gw) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 147 ANNUAL REPORT 2022 SECTION 5 DKK 1,000 2022 2021 Profi t for the year to the shareholders of P/F Bakkafrost 1,344,330 964,036 Fair value adjustment of biomass -278,392 -434,868 Tax on fair value adjustment and onerous contracts provisions 57,682 78,276 Adjusted profi t for the year to shareholders of P/F Bakkafrost 1,123,620 607,444 Time-weighted average number of shares outstanding through the year 59,090,186 59,064,994 Adjusted earnings per share (before fair value adjustment of biomass and provisions for onerous contracts) 19.02 10.28 Adjusted EPS Adjusted EPS is based on the reversal of certain fair value adjustments shown in the table above, as it is Bakkafrost’s view that this fi gure provides a more reliable measure of the underlying performance. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - BAKKAFROST GROUP 148 ANNUAL REPORT 2022 Financial Statements P/F BAKKAFROST 149 P/F BAKKAFROST Table of Contents P/F Bakkafrost – Income Statement for the Year ended 31 December 151 P/F Bakkafrost – Statement of Financial Positionas at 31 December 152 P/F Bakkafrost – Cash Flow Statement for the Year Ended 31 December 154 P/F Bakkafrost – Statement of Changes in Equity As at 31 December 155 Note 1 – Accounting Policies 156 Note 2 – Salaries and Other Personnel Expenses 156 Note 3 – Net Financial Items 157 Note 4 – Property, Plant and Equipment 158 Note 5 – Subsidiaries and Associates 159 Note 6 – Investments in Stocks and Shares 161 Note 7 – Share Capital and Major Shareholders 161 Note 8 – Tax 162 Note 9 – Security Pledges and Contingent Liabilities 163 Quarterly Financial Figures 2020-2022 164 Market Announcements Published in 2022 167 Financial Calendar for 2023 168 Glossary 169 TABLE OF CONTENTS – BAKKAFROST GROUP 150 ANNUAL REPORT 2022 DKK 1,000 Note 2022 2021 Operating revenue 196,657 163,467 Salary and personnel expenses 2 -49,050 -38,205 Other operating expenses -132,592 -97,291 Depreciation 4 -29,433 -29,500 Earnings before interest and taxes (EBIT) -14,418 -1,529 Dividends from subsidiaries 880,409 282,140 Income from other investments in shares 6 42 50 Financial income 3 84,358 44,227 Net interest expenses 3 -57,634 -31,501 Net currency effects 3 -149,523 31,014 Other fi nancial expenses 3 -6,509 -5,822 Earnings before taxes (EBT) 736,725 318,579 Taxes 8 19,743 -6,655 Profi t to shareholders of P/F Bakkafrost 756,468 311,924 Distribution of profi t Dividend proposed 591,430 303,995 Retained earnings 165,038 7,929 Distribution in total 756,468 311,924 P/F BAKKAFROST Income Statement FOR THE YEAR ENDED 31 DECEMBER Operating revenue 196,657 163,467 Salary and personnel expenses 2 -49,050 -38,205 Other operating expenses -132,592 -97,291 Depreciation 4 -29,433 -29,500 Earnings before interest and taxes (EBIT) -14,418 -1,529 Dividends from subsidiaries 880,409 282,140 Income from other investments in shares 6 42 50 Financial income 3 84,358 44,227 Net interest expenses 3 -57,634 -31,501 Net currency effects 3 -149,523 31,014 Other fi nancial expenses 3 -6,509 -5,822 Earnings before taxes (EBT) 736,725 318,579 Taxes 8 19,743 -6,655 Profi t to shareholders of P/F Bakkafrost 756,468 311,924 Dividend proposed 591,430 303,995 Retained earnings 165,038 7,929 Distribution in total 756,468 311,924 P/F BAKKAFROST - FINANCIAL STATEMENTS 151 ANNUAL REPORT 2022 DKK 1,000 Note 2022 2021 ASSETS Non-current assets Intangible assets 1,000 1,000 Total intangible assets 1,000 1,000 Property, plant and equipment Land, buildings and other real estate 4 208,757 219,864 Plant, machinery and other operating equipment 4 73,761 90,477 Total property plant and equipment 282,518 310,341 Non-current fi nancial assets Investments in subsidiaries 5 5,623,754 5,575,253 Investments in stocks and shares 6 790 750 Total non-current fi nancial assets 5,624,544 5,576,003 TOTAL NON-CURRENT ASSETS 5,908,062 5,887,344 Inventory 49,635 31,059 Total inventory 49,635 31,059 Receivables from Group companies 8,342,539 6,422,500 Derivatives 3.13 7,474 0 Accounts receivables 1,413 24,753 Other receivables 28,756 23,279 Total receivables 8,380,182 6,470,532 Cash and cash equivalents 588,639 400,145 TOTAL CURRENT ASSETS 9,018,456 6,901,736 TOTAL ASSETS 14,926,518 12,789,080 Group note 3.13 P/F BAKKAFROST Statement of Financial Position AS AT 31 DECEMBER Intangible assets 1,000 1,000 Total intangible assets 1,000 1,000 Land, buildings and other real estate 4 208,757 219,864 Plant, machinery and other operating equipment 4 73,761 90,477 Total property plant and equipment 282,518 310,341 Investments in subsidiaries 5 5,623,754 5,575,253 Investments in stocks and shares 6 790 750 Total non-current fi nancial assets 5,624,544 5,576,003 TOTAL NON-CURRENT ASSETS 5,908,062 5,887,344 Inventory 49,635 31,059 Total inventory 49,635 31,059 Receivables from Group companies 8,342,539 6,422,500 Derivatives 3.13 7,474 0 Accounts receivables 1,413 24,753 Other receivables 28,756 23,279 Total receivables 8,380,182 6,470,532 Cash and cash equivalents 588,639 400,145 TOTAL CURRENT ASSETS 9,018,456 6,901,736 TOTAL ASSETS 14,926,518 12,789,080 P/F BAKKAFROST - FINANCIAL STATEMENTS 152 ANNUAL REPORT 2022 DKK 1,000 Note 2022 2021 EQUITY AND LIABILITIES Equity Share capital 7 59,143 59,143 Other equity 9,618,988 9,146,165 Total equity 9,678,131 9,205,308 Non-current liabilities Long-term interest-bearing debt 9 3,353,892 2,634,362 Deferred taxes 8 12,173 10,116 Total non-current liabilities 3,366,065 2,644,478 Current liabilities Derivatives 3.13 0 4,721 Payables to Group companies 1,854,811 905,003 Current tax liabilities 0 7,559 Accounts payable 10,979 15,527 Other short-term liabilities 16,532 6,484 Total current liabilities 1,882,322 939,294 Total liabilities 5,248,387 3,583,772 TOTAL EQUITY AND LIABILITIES 14,926,518 12,789,080 Group note 3.13 Share capital 7 59,143 59,143 Other equity 9,618,988 9,146,165 Total equity 9,678,131 9,205,308 Long-term interest-bearing debt 9 3,353,892 2,634,362 Deferred taxes 8 12,173 10,116 Total non-current liabilities 3,366,065 2,644,478 Derivatives 3.13 0 4,721 Payables to Group companies 1,854,811 905,003 Current tax liabilities 0 7,559 Accounts payable 10,979 15,527 Other short-term liabilities 16,532 6,484 Total current liabilities 1,882,322 939,294 Total liabilities 5,248,387 3,583,772 TOTAL EQUITY AND LIABILITIES 14,926,518 12,789,080 P/F BAKKAFROST - FINANCIAL STATEMENTS 153 ANNUAL REPORT 2022 DKK 1,000 Note 2022 2021 Cash fl ow from operations EBIT -14,418 -1,529 Adjustments for write-downs and depreciation 4 29,433 29,500 Adjustments for net currency effects 3 -149,523 31,014 Adjustments for share-based payment 2 3,316 601 Taxes paid 8 -6,737 1,099 Change in inventory -18,576 -7,219 Change in receivables 17,863 -27,660 Change in current debts 5,248 5,397 Cash fl ow from operations -133,394 31,203 Cash fl ow from investments Increase of share capital in subsidiaries, etc., net 5 -48,541 1,770 Payments made for purchase of fi xed assets 4 -1,611 -5,712 Cash fl ow from investments -50,152 -3,942 Cash fl ow from fi nancing Changes in interest-bearing debt (short and long) 717,334 415,560 Financial income 3 84,358 44,227 Financial expenses 3 -64,143 -37,323 Financing of associates/subsidiaries -950,626 -475,733 Acquisition/sale treasury shares 8,703 11,499 Dividend from subsidiaries 880,409 282,140 Dividend paid -303,995 -215,872 Cash fl ow from fi nancing 372,040 24,498 Net change in cash and cash equivalents 188,494 51,759 Cash and cash equivalents – opening balance 400,145 348,386 Cash and cash equivalents – closing balance total 588,639 400,145 P/F BAKKAFROST Cash Flow Statement FOR THE YEAR ENDED 31 DECEMBER EBIT -14,418 -1,529 Adjustments for write-downs and depreciation 4 29,433 29,500 Adjustments for net currency effects 3 -149,523 31,014 Adjustments for share-based payment 2 3,316 601 Taxes paid 8 -6,737 1,099 Change in inventory -18,576 -7,219 Change in receivables 17,863 -27,660 Change in current debts 5,248 5,397 Cash fl ow from operations -133,394 31,203 Increase of share capital in subsidiaries, etc., net 5 -48,541 1,770 Payments made for purchase of fi xed assets 4 -1,611 -5,712 Cash fl ow from investments -50,152 -3,942 Cash fl ow from fi nancing Changes in interest-bearing debt (short and long) 717,334 415,560 Financial income 3 84,358 44,227 Financial expenses 3 -64,143 -37,323 Financing of associates/subsidiaries -950,626 -475,733 Acquisition/sale treasury shares 8,703 11,499 Dividend from subsidiaries 880,409 282,140 Dividend paid -303,995 -215,872 Cash fl ow from fi nancing 372,040 24,498 Net change in cash and cash equivalents 188,494 51,759 Cash and cash equivalents – opening balance 400,145 348,386 Cash and cash equivalents – closing balance total 588,639 400,145 P/F BAKKAFROST - FINANCIAL STATEMENTS 154 ANNUAL REPORT 2022 P/F BAKKAFROST Statement of Changes in Equity AS AT 31 DECEMBER Share Share- premium Treasury based Proposed Retained DKK 1,000 Share capital account shares payment Derivatives dividends earnings Total 1 January 2022 59,143 3,838,206 -26,727 1,571 -3,871 303,995 5,032,991 9,205,308 Net annual profit 0 0 0 0 0 0 758,116 758,116 Fair value adjustment on financial derivatives 0 0 0 0 11,102 0 0 11,102 Hereof tax effect 0 0 0 0 -1,103 0 0 -1,103 Total other comprehensive income 0 0 0 0 9,999 0 0 9,999 Total comprehensive income 0 0 0 0 9,999 0 758,116 768,115 Treasury shares 0 0 8,215 0 0 0 0 8,215 Share-based payment 0 0 0 212 0 0 0 212 Dividend treasury shares 0 0 0 0 0 0 276 276 Paid-out dividends 0 0 0 0 0 -303,995 0 -303,995 Proposed dividends 0 0 0 0 0 591,430 -591,430 0 Total transaction with owners 0 0 8,215 212 0 287,435 -591,154 -295,292 Total changes in equity 0 0 8,215 212 9,999 287,435 166,962 472,823 31 December 2022 59,143 3,838,206 -18,512 1,783 6,128 591,430 5,199,953 9,678,131 1 January 2021 59,143 3,838,206 -37,685 1,354 0 215,872 5,020,990 9,097,880 Net annual profit 0 0 0 0 0 0 311,924 311,924 Fair value adjustment on financial derivatives 0 0 0 0 -4,721 0 0 -4,721 Hereof tax effect 0 0 0 0 850 0 0 850 Total other comprehensive income 0 0 0 0 -3,871 0 0 -3,871 Total comprehensive income 0 0 0 0 -3,871 0 311,924 308,053 Treasury shares 0 0 10,958 0 0 0 3,748 14,706 Share-based payment 0 0 0 217 0 0 0 217 Dividend treasury shares 0 0 0 0 0 0 324 324 Paid-out dividends 0 0 0 0 0 -215,872 0 -215,872 Proposed dividends 0 0 0 0 0 303,995 -303,995 0 Total transaction with owners 0 0 10,958 217 0 88,123 -299,923 -200,625 Total changes in equity 0 0 10,958 217 -3,871 88,123 12,001 107,428 31 December 2021 59,143 3,838,206 -26,727 1,571 -3,871 303,995 5,032,991 9,205,308 P/F BAKKAFROST - FINANCIAL STATEMENTS 155 ANNUAL REPORT 2022 NOTE 2. SALARIES AND OTHER PERSONNEL EXPENSES DKK 1,000 2022 2021 Wages and salaries 34,551 30,834 Share based payments 3,316 601 Social security taxes 1,476 1,349 Pension expenses 2,603 2,153 Other benefi ts 7,104 3,268 Total payroll expenses 49,050 38,205 Average number of full-time employees 46 41 P/F BAKKAFROST Notes to the Financial Statements NOTE 1. ACCOUNTING POLICIES The fi nancial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS), endorsed by the European Union (EU), and the additional requirements according to the Faroese Financial Report- ing Act. The accounting policies applied to the consolidat- ed accounts have also been applied to the parent compa- ny, P/F Bakkafrost. The notes to the consolidated accounts provide additional information to the parent company’s ac- counts, which is not presented here separately. The compa- ny’s fi nancial statements are presented in DKK. Investments in subsidiaries are measured at historic cost unless there is any indication of impairment. In case of impairment, an in- vestment is written down to fair value. REMUNERATION TO SENIOR EXECUTIVES AND AUDITORS For details of remuneration paid to senior executives, see notes to the consolidated fi nancial statements. The company paid DKK 641,500 (586,000) for audit service, DKK 9,000 (55,000) for tax advisory and DKK 155,500 (97,500) for other service. Please also see note 5.5 in the consolidated fi nancial statements. Wages and salaries 34,551 30,834 Share based payments 3,316 601 Social security taxes 1,476 1,349 Pension expenses 2,603 2,153 Other benefi ts 7,104 3,268 Total payroll expenses 49,050 38,205 Average number of full-time employees 46 41 P/F BAKKAFROST - NOTES TO THE FINANCIAL STATEMENTS 156 ANNUAL REPORT 2022 NOTE 3. NET FINANCIAL ITEMS DKK 1,000 2022 2021 Interests received from Group companies 77,966 43,303 Realized profi t on fi nancial derivatives 4,889 861 Other fi nancial income 1,503 63 Financial income 84,358 44,227 Interest expenses on long- and short-term loans -57,624 -31,500 Interest expenses on accounts payable -10 -1 Financial expenses -57,634 -31,501 Other exchange differences -149,523 31,014 Net currency effects -149,523 31,014 Other fi nancial expenses -6,509 -5,822 Other fi nancial items -6,509 -5,822 Net fi nancial items -129,308 37,918 Interests received from Group companies 77,966 43,303 Realized profi t on fi nancial derivatives 4,889 861 Other fi nancial income 1,503 63 Financial income 84,358 44,227 Interest expenses on long- and short-term loans -57,624 -31,500 Interest expenses on accounts payable -10 -1 Financial expenses -57,634 -31,501 Other exchange differences -149,523 31,014 Net currency effects -149,523 31,014 Other fi nancial expenses -6,509 -5,822 Other fi nancial items -6,509 -5,822 Net fi nancial items -129,308 37,918 P/F BAKKAFROST - NOTES TO THE FINANCIAL STATEMENTS 157 ANNUAL REPORT 2022 NOTE 4. PROPERTY, PLANT AND EQUIPMENT Land and Other DKK 1,000 buildings equipment Total Acquisition cost as at 01.01.22 294,411 179,183 473,594 Disposals and scrapping during the year 0 -600 -600 Acquisitions during the year 361 1,600 1,961 Acquisition cost as at 31.12.22 294,772 180,183 474,955 Accumulated depreciation and write-down as at 01.01.22 -74,547 -88,707 -163,254 Depreciations during the year related to disposals 0 251 251 Depreciations during the year -11,468 -17,966 -29,434 Accumulated depreciation and write-down as at 31.12.22 -86,015 -106,422 -192,437 Net book value as at 31.12.22 208,757 73,761 282,518 Acquisition cost as at 01.01.21 289,773 178,737 468,510 Disposals and scrapping during the year 0 -787 -787 Acquisitions during the year 4,638 1,234 5,872 Acquisition cost as at 31.12.21 294,411 179,184 473,595 Accumulated depreciation and write-down as at 01.01.21 -63,067 -71,315 -134,382 Depreciations during the year related to disposals 0 628 628 Depreciations during the year -11,480 -18,020 -29,500 Accumulated depreciation and write-down as at 31.12.21 -74,547 -88,707 -163,254 Net book value as at 31.12.21 219,864 90,477 310,341 A significant part of Bakkafrost’s buildings is located on rented land. Estimated lifetime Depreciation method Scrap value Land and buildings 15-25 years linear 10% Other operating equipment 3-8 years linear 0% P/F BAKKAFROST - NOTES TO THE FINANCIAL STATEMENTS 158 ANNUAL REPORT 2022 NOTE 5. SUBSIDIARIES AND ASSOCIATES DKK 1,000 2022 2021 Acquisition cost as at 01.01. 5,578,019 5,579,266 Additions during the year 48,501 -1,247 Acquisition cost as at 31.12. 5,626,520 5,578,019 Re-evaluations as at 01.01. -2,766 -2,766 Re-evaluations as at 31.12. -2,766 -2,766 Net book value as at 31.12. 5,623,754 5,575,253 Acquisition cost as at 01.01. 5,578,019 5,579,266 Additions during the year 48,501 -1,247 Acquisition cost as at 31.12. 5,626,520 5,578,019 Re-evaluations as at 01.01. -2,766 -2,766 Re-evaluations as at 31.12. -2,766 -2,766 Net book value as at 31.12. 5,623,754 5,575,253 P/F BAKKAFROST - NOTES TO THE FINANCIAL STATEMENTS 159 ANNUAL REPORT 2022 Carrying Carrying Cost amount in amount in DKK 1,000 Method Head Voting P/F Bakkafrost P/F Bakkafrost Company Yes/No Offi ce Ownership share 2022 2021 Bakkafrost Processing P/F Yes Glyvrar 100% 100% 258,591 258,591 Bakkafrost Sales P/F Yes Glyvrar 100% 100% 879 879 Bakkafrost Packaging P/F Yes Glyvrar 100% 100% 7,781 7,781 Bakkafrost Farming P/F Yes Glyvrar 100% 100% 314,887 314,887 Havsbrún P/F Yes Glyvrar 100% 100% 908,884 908,884 Bakkafrost UK Ltd Yes Grimsby 100% 100% 4,649 4,649 Bakkafrost Danmark ApS Yes Glyvrar 100% 100% 50 50 Bakkafrost Scotland Ltd Yes Edinburgh 100% 100% 4,074,182 4,074,182 Förka P/F Yes Glyvrar 100% 100% 5,000 5,000 Faroe Seafood P/F Yes Glyvrar 100% 100% 14,000 n/a Munkebo Seafood A/S Yes Munkebo 90% 90% 22,851 n/a FarCargo P/F Yes Glyvrar 70% 70% 12,000 350 Total subsidiaries 5,623,754 5,575,253 P/F Bakkafrost and subsidiaries, the Group, own a total of 78.7% in P/F Salmon Proteins, which is an associated company on the Group level. P/F Bakkafrost owns 14.23% in P/F Salmon Proteins and this is classed in investment in stocks and shares. Excess dividends Result Result DKK 1,000 Dividends on result 2022 2021 Bakkafrost Farming P/F 1,010,177 160 1,010,337 317,033 Bakkafrost Sales P/F 207,769 13 207,782 207,408 Bakkafrost Packaging P/F 5,023 27 5,050 15,169 Bakkafrost Processing P/F 0 -95,111 -95,111 75,074 Havsbrún P/F 295,796 57,280 353,076 252,470 Bakkafrost UK Ltd. 0 6,285 6,285 3,754 Bakkafrost Danmark ApS 0 -9 -6 -6 Bakkafrost Scotland Ltd 0 -274,334 -274,334 -253,231 Förka P/F 0 2,430 2,430 2,430 Faroe Seafood P/F 0 915 915 n/a Munkebo Seafood A/S 0 1,425 1,425 n/a FarCargo P/F 0 -3,155 -3,155 -56 Total revenue Group contribution 1,518,765 -304,074 1,214,694 620,045 * Dividends from subsidiaries paid out in 2023 Bakkafrost Processing P/F Yes Glyvrar 100% 100% 258,591 258,591 Bakkafrost Sales P/F Yes Glyvrar 100% 100% 879 879 Bakkafrost Packaging P/F Yes Glyvrar 100% 100% 7,781 7,781 Bakkafrost Farming P/F Yes Glyvrar 100% 100% 314,887 314,887 Havsbrún P/F Yes Glyvrar 100% 100% 908,884 908,884 Bakkafrost UK Ltd Yes Grimsby 100% 100% 4,649 4,649 Bakkafrost Danmark ApS Yes Glyvrar 100% 100% 50 50 Bakkafrost Scotland Ltd Yes Edinburgh 100% 100% 4,074,182 4,074,182 Förka P/F Yes Glyvrar 100% 100% 5,000 5,000 Faroe Seafood P/F Yes Glyvrar 100% 100% 14,000 n/a Munkebo Seafood A/S Yes Munkebo 90% 90% 22,851 n/a FarCargo P/F Yes Glyvrar 70% 70% 12,000 350 Total subsidiaries 5,623,754 5,575,253 Bakkafrost Farming P/F 1,010,177 160 1,010,337 317,033 Bakkafrost Sales P/F 207,769 13 207,782 207,408 Bakkafrost Packaging P/F 5,023 27 5,050 15,169 Bakkafrost Processing P/F 0 -95,111 -95,111 75,074 Havsbrún P/F 295,796 57,280 353,076 252,470 Bakkafrost UK Ltd. 0 6,285 6,285 3,754 Bakkafrost Danmark ApS 0 -9 -6 -6 Bakkafrost Scotland Ltd 0 -274,334 -274,334 -253,231 Förka P/F 0 2,430 2,430 2,430 Faroe Seafood P/F 0 915 915 n/a Munkebo Seafood A/S 0 1,425 1,425 n/a FarCargo P/F 0 -3,155 -3,155 -56 Total revenue Group contribution 1,518,765 -304,074 1,214,694 620,045 P/F BAKKAFROST - NOTES TO THE FINANCIAL STATEMENTS 160 ANNUAL REPORT 2022 NOTE 6. INVESTMENTS IN STOCKS AND SHARES DKK 1,000 2022 2021 Acquisition cost as at 01.01. 183 183 Acquisition cost as at 31.12. 183 183 Re-evaluations as at 01.01. 567 1,090 Dividend 0 -573 Re-evaluations during the year 40 50 Re-evaluations as at 31.12. 607 567 Net book value as at 31.12. 790 750 Shares and holdings, in which the Group does not have signifi cant infl uence. These are valued using the equity method or at cost since fair value cannot be measured reliably. NOTE 7. SHARE CAPITAL AND MAJOR SHAREHOLDERS DKK 1,000 2022 2021 Share capital as at 31.12. 59,143 59,143 Share capital as at 31.12. 59,143 59,143 The share capital is distributed into shares of DKK 1 and multiples thereof. For shareholders holding more than 5% in the Com- pany as at 31 December 2022, see Group Account 3.10. Acquisition cost as at 01.01. 183 183 Acquisition cost as at 31.12. 183 183 Re-evaluations as at 01.01. 567 1,090 Dividend 0 -573 Re-evaluations during the year 40 50 Re-evaluations as at 31.12. 607 567 Net book value as at 31.12. 790 750 Share capital as at 31.12. 59,143 59,143 Share capital as at 31.12. 59,143 59,143 P/F BAKKAFROST - NOTES TO THE FINANCIAL STATEMENTS 161 ANNUAL REPORT 2022 NOTE 8. TAX The tax expense for the year breaks down as follows: DKK 1,000 2022 2021 Tax payable 19,605 -6,737 Change in deferred tax 138 82 Tax expense on ordinary profi t 19,743 -6,655 Tax in the statement of fi nancial position Deferred tax 12,173 10,116 Tax in the statement of fi nancial position 12,173 10,116 Specifi cation of temporary differences Property, plant and equipment 60,154 60,883 Currency derivatives 7,474 -4,683 Total temporary differences 67,628 56,200 Deferred tax liabilities (+) / assets (-) 12,173 10,116 Reconciliation from nominal to actual tax rate Profi t before tax 736,725 318,579 Expected tax at nominal tax rate (18%) -132,661 -57,344 Permanent differences, including Group contribution without tax effect (18%) 158,474 50,785 Other permanent differences (18%) -6,120 -96 Calculated tax expense 19,743 -6,655 Effective tax rate 2.68% -2.09% As Parent company in the Bakkafrost Group, Bakkafrost P/F is the administrating company in a Faroese Group Joint Tax- ation and is liable towards the Faroese Tax Authorities for taxes payable on behalf of the Faroese subsidiaries included in the Faroese Group Joint Taxation. 19,605 -6,737 138 82 Tax expense on ordinary profi t 19,743 -6,655 12,173 10,116 Tax in the statement of fi nancial position 12,173 10,116 60,154 60,883 7,474 -4,683 Total temporary differences 67,628 56,200 Deferred tax liabilities (+) / assets (-) 12,173 10,116 736,725 318,579 -132,661 -57,344 Permanent differences, including Group contribution without tax effect (18%) 158,474 50,785 -6,120 -96 Calculated tax expense 19,743 -6,655 2.68% -2.09% P/F BAKKAFROST - NOTES TO THE FINANCIAL STATEMENTS 162 ANNUAL REPORT 2022 NOTE 9. SECURITY PLEDGES AND CONTINGENT LIABILITIES Carrying amount of debt secured by mortgages and pledges: DKK 1,000 2022 2021 Long-term debt to fi nancial institutions 3,353,892 2,634,362 Total 3,353,892 2,634,362 Carrying amount of assets pledged as security for recognized debt Property, plant and equipment 0 219,864 Total 0 219,864 The company participates in a Group fi nancing for the Bakkafrost Group. In connection to this, the company has to- gether with other Group companies pledged licenses, prop- erty, plant and equipment, shareholdings, inventory and re- ceivables as surety for the Group’s total debt to the banks. In addition, the Group companies have guaranteed severally and jointly for the balance without limitations for each other. NOTE 10. RELATED-PARTY TRANSACTIONS The company operates cash pooling arrangements in the Group. Further, the company extends loans to subsidiaries and associates at terms and conditions refl ecting prevailing market conditions for corresponding services, allowing a margin to cover administration and risk. The company allo- cates costs for corporate staff services and shared services to subsidiaries and renting of buildings. The total amounts for rent are DKK 21.2 million (2021: DKK 21.2 million), allocation of administration etc. DKK 83.3 mil- lion (2021: DKK 84.4 million) and fi nancial incomes of DKK 64.8 million (2021: DKK 15.9 million). The principle of arm’s length is used in all transactions with related parties. As part of the guarantees are also any insurance refunds. In addition, the shares in larger subsidiaries have been pledged to the bank syndicate. Long-term debt to fi nancial institutions 3,353,892 2,634,362 Total 3,353,892 2,634,362 Property, plant and equipment 0 219,864 Total 0 219,864 P/F BAKKAFROST - NOTES TO THE FINANCIAL STATEMENTS 163 ANNUAL REPORT 2022 APPENDIX Quarterly financial figures 2020-2022 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 DKK 1,000 2020 2020 2020 2020 2021 2021 2021 2021 2022 2022 2022 2022 Operating revenue 1,255,226 1,134,222 1,123,147 1,139,297 1,175,637 1,617,534 1,272,362 1,488,316 1,639,345 1,683,824 1,866,989 1,939,809 Purchase of goods -415,276 -642,818 -574,394 -726,135 -288,602 -399,307 -496,680 -507,912 -559,267 -565,508 -1,048,355 -583,143 Change in inventory and biological assets (at cost) -56,667 215,285 22,773 220,288 -7,375 -79,924 30,181 -120,942 126,319 271,592 361,840 -93,201 Salary and personnel expenses -148,713 -159,987 -135,441 -164,206 -167,570 -184,782 -177,607 -198,464 -201,234 -186,279 -203,935 -240,231 Other operating expenses -267,470 -249,039 -248,265 -297,945 -357,934 -419,751 -434,744 -419,685 -455,576 -485,020 -525,902 -523,801 Depreciation -119,017 -115,766 -85,157 -126,825 -130,655 -126,281 -122,967 -150,531 -136,194 -137,112 -136,428 -127,746 Other income 0 0 0 44,041 0 0 0 28,877 4,496 5,081 10,478 4,324 Operational EBIT 248,083 181,897 102,663 88,515 223,501 407,489 70,545 119,659 417,889 586,578 324,687 376,011 Fair value adjustments on biological assets -410,711 426,650 124,429 -22,365 284,622 176,486 113,713 -139,953 177,338 575,911 -48,803 -426,054 Onerous contracts 0 0 0 0 0 0 0 0 -30,709 -33,606 64,315 0 Income from associates 0 0 0 5,546 1,317 3,081 7,963 17,751 3,345 -3,902 10,265 47,889 Revenue tax -19,132 -22,633 -9,353 -2,466 -20,363 -41,152 -30,645 -49,329 -57,750 -62,838 -43,393 -51,020 Earnings before interest and taxes (EBIT) -181,760 585,914 217,739 69,230 489,077 545,904 161,576 -51,872 510,113 1,062,143 307,071 -53,174 Net interest revenue 803 344 101 151 120 2,239 1,073 110 1,787 0 242 4,971 Net interest expenses -9,527 -10,057 -6,446 -10,287 -7,605 -10,908 -7,784 -10,566 -7,704 -9,545 -8,065 -39,725 Net currency effects 15,448 -2,554 -12,284 -13,706 18,901 -1,992 6,552 22,401 -8,506 10,266 -8,427 -62,399 Other financial expenses -6,015 -2,355 -3,919 -4,836 -7,025 -5,438 -3,319 -3,782 -3,851 -5,961 -8,508 9,607 Earnings before taxes (EBT) -181,051 571,292 195,191 40,552 493,468 529,805 158,098 -43,709 491,839 1,056,903 282,313 -140,720 Taxes 33,070 -99,611 -18,369 -78,229 -85,736 -101,678 -26,796 40,584 -87,082 -212,300 -33,293 -13,330 Profit or loss for the period -147,981 471,681 176,822 -37,677 407,732 428,127 131,302 -3,125 404,757 844,603 249,020 -154,050 Earnings per share (DKK) -2.50 7.98 2.99 -0.64 6.90 7.25 2.22 -0.05 6.85 14.29 4.21 -2.61 Diluted earnings per share (DKK) -2.50 7.98 2.99 -0.64 6.90 7.25 2.22 -0.05 6.85 14.29 4.21 -2.61 *Operational EBIT is EBIT before fair value of biomass, onerous contracts and income from associates, and revenue tax - FO APPENDIX 164 ANNUAL REPORT 2022 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 DKK 1,000 2020 2020 2020 2020 2021 2021 2021 2021 2022 2022 2022 2022 ASSETS Non-current assets Intangible assets 4,386,056 4,377,948 4,491,387 4,493,395 4,493,081 4,494,960 4,495,225 4,495,726 4,506,873 4,507,443 4,507,691 4,508,704 Property, plant and equipment 3,762,740 3,894,070 3,977,620 4,220,599 4,405,542 4,549,575 4,742,180 4,888,778 4,942,556 5,091,194 5,213,364 5,647,161 Right of use assets 480,085 431,525 380,121 353,192 337,739 314,509 308,919 302,105 279,128 280,234 468,106 438,545 Financial assets 119,116 116,712 116,702 122,459 123,204 124,225 132,313 149,225 154,467 139,162 149,188 234,209 Long-term receivables 4,422 4,422 8,737 8,101 8,202 8,101 8,204 8,102 0 0 0 0 Deferred tax assets 37,840 35,718 58,238 26,934 0 0 0 215,248 133,801 120,191 155,208 336,020 Total non-current assets 8,790,259 8,860,395 9,032,805 9,224,680 9,367,768 9,491,370 9,686,841 10,059,184 10,016,825 10,138,224 10,493,557 11,164,639 Current assets Biological assets (biomass) 1,492,337 1,903,359 2,146,338 2,117,024 2,441,083 2,489,210 2,703,268 2,448,290 2,636,644 3,300,603 3,268,658 2,938,485 Inventory 523,833 720,764 613,505 776,032 772,024 809,443 690,251 709,306 794,294 923,113 1,236,507 1,074,344 Total inventory 2,016,170 2,624,123 2,759,843 2,893,056 3,213,107 3,298,653 3,393,519 3,157,596 3,430,938 4,223,716 4,505,165 4,012,829 Financial derivatives 0 0 0 0 0 6,805 6,412 0 0 0 0 7,474 Accounts receivable 629,372 563,364 524,943 490,075 548,537 618,859 645,983 824,004 871,925 691,690 729,041 808,755 Other receivables 22,780 11,236 57,546 133,574 61,171 84,598 152,506 78,227 72,691 151,812 148,988 168,272 Total receivables 652,152 574,600 582,489 623,649 609,708 710,262 804,901 902,231 944,616 843,502 878,029 984,501 Cash and cash equivalents 801,079 454,389 445,929 466,939 373,706 552,981 373,318 509,157 445,079 508,193 568,165 719,603 Total current assets 3,469,401 3,653,112 3,788,261 3,983,644 4,196,521 4,561,896 4,571,738 4,568,984 4,820,633 5,575,411 5,951,359 5,716,933 TOTAL ASSETS 12,259,660 12,513,507 12,821,066 13,208,324 13,564,289 14,053,266 14,258,579 14,628,168 14,837,458 15,713,635 16,444,916 16,881,572 APPENDIX 165 ANNUAL REPORT 2022 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 DKK 1,000 2020 2020 2020 2020 2021 2021 2021 2021 2022 2022 2022 2022 EQUITY AND LIABILITIES Equity Share capital 59,143 59,143 59,143 59,143 59,143 59,143 59,143 59,143 59,143 59,143 59,143 59,143 Other equity 8,070,356 8,522,287 8,702,346 8,670,344 9,120,850 9,336,906 9,464,500 9,288,269 9,388,880 10,219,538 10,455,923 10,333,259 Non-controlling interests 0 0 0 0 0 0 0 133 2,722 -17 2,025 3,411 Total equity 8,129,499 8,581,430 8,761,489 8,729,487 9,179,993 9,396,049 9,523,643 9,347,545 9,450,745 10,278,664 10,517,091 10,395,813 Non-current liabilities Deferred and other taxes 1,097,117 1,181,972 1,218,379 1,222,222 1,288,242 1,367,759 1,409,473 1,590,034 1,598,438 1,798,404 1,867,840 1,825,873 Long-term interest-bearing debt 1,789,537 1,570,512 1,702,579 2,219,690 2,312,487 2,456,065 2,359,589 2,634,968 2,636,926 2,774,792 2,994,760 3,383,289 Long-term leasing debt 261,105 249,178 287,937 265,235 235,552 249,024 247,076 245,753 232,735 235,739 427,270 353,355 Financial derivatives 1,966 1,282 -1,077 1,480 0 0 0 3,207 0 0 0 0 Total non-current liabilities 3,149,725 3,002,944 3,207,818 3,708,627 3,836,281 4,072,848 4,016,138 4,473,962 4,468,099 4,808,935 5,289,870 5,562,517 Current liabilities Financial derivatives 13,158 18,042 17,371 9,710 4,649 2,251 2,994 4,602 8,675 7,302 15,233 0 Short-term leasing debt 201,047 195,140 130,043 131,336 143,271 97,669 93,487 87,668 76,902 70,423 52,647 106,215 Accounts payable and other debt 766,231 715,951 704,345 629,164 400,095 484,449 622,317 714,391 833,037 548,311 570,075 817,027 Total current liabilities 980,436 929,133 851,759 770,210 548,015 584,369 718,798 806,661 918,614 626,036 637,955 923,242 Total liabilities 4,130,161 3,932,077 4,059,577 4,478,837 4,384,296 4,657,217 4,734,936 5,280,623 5,386,713 5,434,971 5,927,825 6,485,759 TOTAL EQUITY AND LIABILITIES 12,259,660 12,513,507 12,821,066 13,208,324 13,564,289 14,053,266 14,258,579 14,628,168 14,837,458 15,713,635 16,444,916 16,881,572 APPENDIX 166 ANNUAL REPORT 2022 Market Announcements Published in 2022 Exclusive Invitations, Managements’, Board of Directors’ and large shareholders’ notification of trade and notification of trade regarding Bakkafrost’s Share Savings Plan. Q1 2022 3 January 2022: Bakkafrost has acquired 90% of the outstanding shares of Munkebo Seafood A/S 4 January 2022: Q4 2021 Trading Update 22 February 2022: Q4 2021 Interim Results and Full Year 2021 22 February 2022: Key Information Regarding Cash Dividend for Bakkafrost 31 March 2022: Annual Report 2021 and Sustainability report 2021 31 March 2022: Notice to the Annual General Meeting Q2 2022 4 April 2022: Q1 2022 Trading Update 25 April 2022: Currency Rate for the upcoming Cash Dividend 29 April 2022: Protocol from Annual General Meeting 2 May 2022: Ex dividend DKK 5.14 today 10 May 2022: Q1 2022 Interim Results Q3 2022 5 July 2022: Q2 2022 Trading Update 23 August 2022: Q2 2022 Interim Results 28 September 2022: Revenue tax on salmon farming in the Faroe Islands 30 September 2022: Update on Revenue tax on salmon farming in the Faroe Islands Q4 2022 3 October 2022: Q3 2022 Trading Update 19 October 2022: Financial Calendar 8 November 2022: Q3 2022 Interim Results All market announcements are available on www. Bakkafrost.com and www.newsweb.no. APPENDIX 167 ANNUAL REPORT 2022 Financial Calendar for 2023 Annual General Meeting will take place at Bakkavegur 9, Glyvrar, Faroe Islands. Please note that the financial calendar is subject to change. Any changes will be announced via Oslo Børs, and the Group’s website, www. Bakkafrost.com, will be updated accordingly.  28 April 2023 Annual General Meeting 2023  09 May 2023 Presentation of Q1 2023  06 June 2023 Capital Markets Day 2023  22 August 2023 Presentation of Q2 2023  7 November 2023 Presentation of Q3 2023 APPENDIX 168 ANNUAL REPORT 2022 Glossary AGM: Annual General Meeting ASC: Aquaculture Stewardship Council CGU: Cash-generating Unit EBT: Earnings Before Tax EBIT: Earnings Before Interest and Tax EBITA: Earnings Before Interest, Amortization and Tax EBITDA: Earnings Before Interest, Tax, Depreciation and Amortization EPS: Earnings Per Share FIFO: First in First out FOF: Fishmeal, Oil and Feed FO: Faroe Islands HACCP: Hazard Analyses Critical Control Point IAS: International Accounting Standards IFRS: International Financial Reporting Standards ISO: International Organization for Standardization LW: Live Weight NIBD: Net Interesting Bearing Debt PP&E: Property, Plant and Equipment R&D: Research and Development Costs SCT: Scotland SSC: The Scottish Salmon Company Ltd TGW: Tonnes Gutted Weight USP: Unique Selling Points VAT: Value Added Tax VAP: Value Added Products; Value Added Production WACC: Weighted Average Cost of Capital WFE: Whole Fish Equivalent APPENDIX 169 ANNUAL REPORT 2022 INDEPENDENT AUDITOR’S REPORT 170 ANNUAL REPORT 2022 Bakkafrost P/F • Bakkavegur 9 • PO Box 221 • FO-625 Glyvrar Tel +298 40 50 00 • Fax +298 40 50 09 • Bakkafrost@ Bakkafrost.com • www. Bakkafrost.com