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Bakkafrost P/f

Annual Report Mar 12, 2019

7331_10-k_2019-03-12_ac4f0252-7274-4507-a8a8-4858140a17c6.pdf

Annual Report

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ANNUAL REPORT 2018

Chairman's Statement 5
Contents Statement by the Management and the Board of Directors 6
Outlook 8
Bakkafrost at a Glance 10
Key Figures 11
Main Events 12
STRATEGY 13
Business Objectives and Strategy 14
Business Model 16
Outline of Bakkafrost's History 17
The Value Chain 18
PERFORMANCE 29
Operational Review 30
Financial Review 35
Farming Segment 38
VAP Segment 40
FOF Segment 42
Market Review 45

RISKS
59
Risks and Risk Management 60

GOVERNANCE
64
Corporate Governance 65
Corporate Responsibility and Sustainability 67
Shareholder Information 69
Directors and Management 70
Directors'
Profiles
71
Group
Management's
Profiles
73
Other
Managers'
Profiles
74

Statement by the Management

and the Board of Directors on the Annual Report 76
Independent Auditor's Report 77
STATEMENTS AND NOTES - BAKKAFROST GROUP 80
Contents Consolidated Income Statement 84
Consolidated Statement of Comprehensive Income 85
Consolidated Statement of Financial Position 86
Consolidated Cash Flow Statement 88
Consolidated Statement of Changes in Equity 89
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS - BAKKAFROST GROUP
90

NOTES - SECTION 1 BASIS OF PREPARATION
91

NOTES - SECTION 2 RESULTS FOR THE YEAR
94

NOTES - SECTION 3 ASSETS AND LIABILITIES
105

NOTES - SECTION 4 CAPITAL STRUCTURE
AND FINACING ITEMS 126

NOTES - SECTION 5 OTHER DISCLOSURES
133
FINANCIAL STATEMENTS - P/F BAKKAFROST 139
P/F BAKKAFROST - Income Statement 141
P/F BAKKAFROST - Statement of Financial Position 142
P/F BAKKAFROST - Cash Flow Statement 144
P/F BAKKAFROST - Statement of Changes in Equity 145

P/F BAKKAFROST - NOTES TO THE FINANCIAL STATEMENTS 146

APPENDIX 154
Quarterly Financial Figures 2016-2018 154
Market Announcements Published in 2018 157
Financial Calendar for 2019 158
Glossary 159

Chairman's Statement

RÚNI M. HANSEN Chairman of the Board

Improving our Company's settings to meet growing global demand for protein with healthy and efficiently-produced salmon products

Bakkafrost has been on an exciting journey for the last couple of years. High focus has been on improving company procedures and facilities to create more value in a sustainable way. Investments in farming sites, ships, factories and smolt facilities have had high priorities. The aim is moving Bakkafrost into a position to be much more capable to meet future opportunities and meet growing global demand for protein with healthy and efficiently-produced salmon products and at the same time create value for our company, shareholders and society.

An important occasion in this direction was the publication of Bakkafrost's first sustainability report last year, which shows our commitment to keep putting a sustainable and responsible approach to our salmon farming operation at the top of our agenda.

The journey continued in 2018. Having agreed with the Faroese Government that Bakkafrost would take over the responsibility of the Faroese broodstock programme, Bakkafrost has integrated the organization behind the programme into Bakkafrost. We are very excited about the prospect of adding the broodstock into our already long value chain. In the updated investment programme, announced in August 2018, we plan to build a new state of the art facility for the broodstock operation. The investment in the broodstock operation should be seen as a longterm investment, which we are convinced will create value for Bakkafrost.

In 2018, Bakkafrost decided in agreement with the Faroese authorities to restructure some farming activities, resulting in a more complete structure for the farming activity in Suðuroy. Bakkafrost now has four farming sites in Suðuroy, whereof the last farming site will start production in 2019. We have updated the harvesting facility in Suðuroy in 2018, so the infrastructure is ready for the new production setup in Suðuroy. Bakkafrost took over the farming operation in Suðuroy in 2016, and the results so far have been promising. With investments and good management, the farming activity in Suðuroy has potential for future growth in harvested volumes.

To continue to deliver return from our operations, we have focus on our business sustainability. In 2018, we decided to invest in the first biogas plant in the Faroe Islands. The biogas investment will make our business more sustainable as waist from our increasing smolt production on land will produce energy and at the same time produce good fertilizer to local farmers. We care about the environment, which is the precondition for a healthy operation in the long run. Preserving and respecting our heritage, operating in a society so dependent on nature – it is essential that the balance with nature is right and sustainable.

In 2016, we decided to upscale our smolt production significantly by building a new hatchery at Strond. This facility will be finished in 2019. In August 2018, we announced expansions on two existing hatcheries and the building of one new hatchery, resulting in a significant lift in our production capacity of smolt.

Our investments will play a significant role in Bakkafrost's future business model and give opportunities for sustainable production growth, reduced biological risk and create value for our customers and shareholders.

RETURN TO SHAREHOLDERS

Based on the good performance in 2018, the Board of Directors will propose a dividend of DKK 8.25 per share at the Annual General Meeting convened in April 2019. This corresponds to a total dividend of DKK 403.1 million.

THANK YOU TO OUR EMPLOYEES

On behalf of the Board of Directors, I express our appreciation to all Bakkafrost employees for the commitment and hard work in 2018.

Statement by the Management and the Board of Directors

FIRST HALF OF 2018 WAS SATISFYING, WHILE THE SECOND HALF WAS CHALLENGING

Bakkafrost had to adapt to some changes in strategy in 2018, as we were not able to pursue the planned strategy in the VAP segment of having around 40-50% sold on long-term contracts. The volumes sold through the VAP segment were at a much lower level, compared to recent years.

At the end of 2017 and coming into 2018, we decided to decrease the contract coverage in our VAP segment. This resulted in much lower activity in the VAP production, compared to recent years, and the low production had a negative effect on the VAP segment's result in 2018. The VAP segment's production decreased in 2018 to 8,355 tgw, compared to 19,067 tgw in 2017. The percentage of total harvest used in the VAP production was 19% in 2018, compared to 35% in 2017. The VAP segment had a positive margin in the second half of 2018. The VAP segment sells on long-term contracts and typically the prices in the long-term contracts have a time lag, compared with the spot price for fresh salmon. The contract coverage in 2019 will be higher than in 2018.

The average salmon spot price in 2018 was nearly flat, compared to 2017. During the year, the salmon price had quite a volatile development. The highest monthly average price in May 2018 was nearly EUR 8 per kilo, compared to the lowest monthly average price around EUR 5.5 per kg, corresponding to a spread of EUR 2.5 per kg. This is not uncommon for the salmon spot price. In 2017, the spread between the highest and lowest monthly average spot price during the year was EUR 3.4 per kg, and in 2016, the spread was EUR 2.5 per kg.

The Group's operational EBIT was DKK 1,075 for 2018, compared to DKK 1,378 million for 2017. The decrease in operational EBIT was mainly due to higher costs on two sites and lower harvested volumes in the farming segment.

2018 was mixed with different events, but the highlight was the celebration of Bakkafrost's 50th anniversary since the establishment of the company in 1968. The salmon farming industry has developed dramatically since it started in the Faroe Islands. We foresee great opportunities for development in the future, and to be able to transform these opportunities into realities, large investments are needed. Bakkafrost has in recent years made large investments to develop the company, and in 2018, we announced a new investment plan for the next five years. Bakkafrost expects to make investments of around DKK 3 billion during the period from 2018 to 2022.

The farming segment harvested 44,591 tgw in 2018, compared to 54,615 tgw in 2017. This corresponds to a decrease of 18%. The harvest in the farming segment is dependent on available farming sites with fish at the aimed harvest weight and the general biological situation. Although not affecting the harvest in 2018, the farming segment was hit by an algae bloom incident at one of our farming sites, A-81 Kolbanagjógv, in September 2018. The incident resulted in higher costs in 2018 and will have a negative effect on the 2019 harvest volumes, as nearly half of the fish at the farming site died of the algae bloom.

Bakkafrost signed an agreement with P/F Fiskaaling and the Faroese Ministry of Foreign Affairs and Trade concerning the Faroese broodstock programme at the end of 2017. In 2018, Bakkafrost has taken over the responsibility of the broodstock programme with the goal to examine the feasibility of the programme. At present, Bakkafrost is renting the old broodstock facilities from P/F Fiskaaling, but a new broodstock facility has been included in our new investment programme. According to the agreement, the genome rights in the Faroese broodstock programme will be transferred to Bakkafrost in 2021. This will require investments and demand effort and resources from Bakkafrost, but we believe this is an exciting project, which will benefit us in the long run.

The raw material intake in the FOF segment was 302,465 tonnes in 2018, compared to 342,456 tonnes in 2017. This is a decrease of 12%, but 2017 was record high in raw material intake in Havsbrún's history going back to 1966. The production of fishmeal and fish oil was consequently lower in 2018, compared to 2017. The feed sale was 77,775 tonnes in 2018, compared to 78,134 tonnes in 2017. The EBITDA margin in 2018 was 20%, marginally lower than in 2017.

Havsbrún started production of salmon-meal and salmon oil in its new production facility at the end of 2018. This production is expected to increase the value of the offcuts in our salmon production.

Feed costs – representing around 50-60% of the costs in a kilo of salmon – have increased in 2018, compared to 2017, but did not reach the same level as in 2015 and 2016.

In our farming operation, we have had high focus on improving our treatment method against sea lice. In 2018, medical bath treatments were not used against sea lice. The preferred treatments were using freshwater and lukewarm sea water, and in addition lumpfish - the only cleaner fish in the Faroe Islands was used as an important preventive measure against sea lice.

With the new mechanical treatment, we experienced some downturns, especially during the run-in period, resulting in a higher mortality rate. We are still adjusting the treatment, equipment and procedures to reduce the negative effects of the new treatments. The reason for the increasing mortality rate over the last two years is mainly because of the new sea lice treatments.

In 2018, Bakkafrost acquired the business and assets in US salmon importer North Landing, based in New Jersey, USA. North Landing was focusing on the East Coast with a sales office and handling and processing facilities in Clifton, New Jersey, USA. We are excited about the opportunities and improved market access by having a new Bakkafrost sales office in the USA. The intention is to improve our abilities to serve our customers in one of the largest salmon markets with a wider range of services.

Bakkafrost paid its outstanding NOK 500 million bond loan at maturity in February 2018. In connection with the payment of the bond loan, Bakkafrost refinanced its bank facility, with a senior secured five-year EUR 200 million credit facility. The Bakkafrost Group's interest-bearing debt amounted to DKK 495.5 million at the end of 2018, compared with DKK 258.1 million at year-end 2017. The Group had undrawn credit facilities of DKK 997.7 million at the end of 2018.

The Bakkafrost Group made a profit of DKK 960.3 million for 2018, compared with DKK 511.4 million for 2017. Bakkafrost's equity ratio was 70% at the end of 2018, compared to 70% at the end of 2017. Bakkafrost paid out DKK 513.0 million in dividends in the second quarter of 2018, corresponding to DKK 10.50 per share.

The management of Bakkafrost and our dedicated and talented employees look forward to an exciting year ahead of us.

Outlook MARKET

The global supply of Atlantic salmon in Q4 2018 increased around 5%, compared to Q4 2017, according to the latest estimate from Kontali Analyse. The global supply for 2018 increased by 6%, compared to 2017.

The global harvest of Atlantic salmon in Q1 2019 is expected to increase around 5%, compared to Q1 2018. The estimated global harvest of Atlantic salmon for 2019 is an increase of around 4-6%, compared to 2018.

Bakkafrost operates in the main salmon markets, Europe, USA, the Far East and Russia. Variation in sales distribution between the different markets is driven by the change in demand from quarter to quarter in the different regions. Bakkafrost, however, aims to have a balanced market diversification to reduce market risk.

FARMING

The outlook for the farming segment is good. The estimates for harvest volumes and smolt releases are dependent on the biological development. Larger smolts and high focus on improving procedures for mechanical treatments of salmon is expected to reduce mortality rates in 2019.

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's guidance for harvest in 2019 is 54,500 tonnes gutted weight.

Bakkafrost expects to release 13.5 million smolts in 2019, compared with 12.6 million smolts in 2018 and 9.9 million smolts in 2017. The number of smolts released is a key element of predicting Bakkafrost's future production.

VAP (VALUE ADDED PRODUCTS)

Bakkafrost has signed contracts covering around 33% of the expected harvested volumes for 2019. Bakkafrost's longterm strategy is to sell around 40-50% of the harvested volumes of salmon as VAP products at fixed price contracts.

The VAP contracts are at fixed prices, based on the salmon forward prices at the time they are agreed and the expectations for the salmon spot price for the contract period. The contracts last for 6 to 12 months.

FOF (FISHMEAL, OIL AND FEED)

The outlook for the production of fishmeal and fish oil is dependent on the availability of raw material.

The ICES 2019 recommendation for blue whiting is 1,143 thousand tonnes, which corresponds to a decrease of 18%, compared to ICES's recommendation for 2018.

Bakkafrost expects a decrease in production volumes of fishmeal and fish oil in 2019, compared to 2018.

The major market for Havsbrún´s fish feed is the local Faroese market including Bakkafrost's internal use of fish feed.

Havsbrún's sales of fish feed in 2019 are expected to be at 85,000 tonnes, depending on external sales.

INVESTMENTS

Bakkafrost's investment programme for the period from 2018 to 2022 will amount to DKK 3 billion, including maintenance capex, and will reinforce Bakkafrost's integrated business model. The aim of the investment programme is to minimize the biological risk, increase efficiency and create sustainable organic growth.

Bakkafrost's strategy and investment programme will be presented at Bakkafrost's Capital Markets Day on 12 June 2019 in the Faroe Islands.

FINANCIAL

Favourable market balances in the world market for salmon products and cost-conscious production will likely maintain the financial flexibility going forward.

A high equity ratio together with Bakkafrost's bank financing, makes Bakkafrost's financial situation strong. This enables Bakkafrost to carry out its investment plans to further focus on strengthening the Group, M&As, organic growth opportunities and to fulfil its unchanged dividend policy in the future, although a new investment programme is announced.

Fig. 1 INVESTMENT PLAN (mDKK)

Bakkafrost at a Glance

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 Employees: 1,073 (824 full time equivalent) Markets served: Western Europe (31%), North America (20%), Asia (24%), Eastern Europe (25%)

BAKKAFROST HEADQUARTERS

HAVSBRÚN

FAROE ISLANDS

BIOGAS

PACKAGING

HARVESTING FSV (FARMING SERVICE VESSELS)

BAKKAFROST US

SALES

PROCESSING

Map excludes farming sites not in operation in 2018

LEGEND TO MAP SYMBOLS

Key Figures DKK 1,000

Fig. 2
-------- --
)KK 1,000
Income Statement 2018 2017 2016 2015 2014
Operating revenues 3,177,422 3,770,049 3,202,686 2,850,363 2,683,319
Operational EBIT* 1,074,912 1,377,647 1,164,953 1,000,583 833,775
Operational EBITDA* 1,273,810 1,561,237 1,298,214 1,108,681 930,944
Earnings before interest and taxes (EBIT) 1,184,233 649,104 1,673,587 928,758 892,291
Earnings before taxes (EBT) 1,172,066 623,884 1,632,614 924,471 899,191
Net earnings 960,292 511,402 1,338,887 810,175 647,105
Earnings per share before fair value adjustments
of biomass and provision for onerous contracts (DKK) 16.44 21.08 17.57 17.16 12.33
Earnings per share after fair value adjustments
of biomass and provision for onerous contracts (DKK) 19.74 10.52 27.56 16.69 13.34
Statement of Financial Position
Total non-current assets 3,396,036 3,023,807 2,567,212 1,957,061 1,462,633
Total current assets 2,406,487 2,131,709 2,850,904 1,963,325 2,000,300
TOTAL ASSETS 5,802,523 5,155,516 5,418,116 3,920,386 3,462,933
Total equity 4,077,029 3,626,429 3,549,035 2,580,482 2,063,653
Total liabilities 1,725,494 1,529,087 1,869,081 1,339,904 1,399,280
TOTAL EQUITY AND LIABILITIES 5,802,523 5,155,516 5,418,116 3,920,386 3,462,933
Net interest-bearing debt 495,479 258,070 635,266 391,743 232,711
Equity share 70% 70% 66% 66% 60%

* Aligned for fair value adjustments of biomass, onerous contracts provision, income from associates and other non-operating related adjustments

Main Events

January

Bakkafrost makes an agreement with its existing lender, Nordea Bank, to refinance its existing bank facility and its outstanding NOK 500 million bond loan, with a senior secured five-year EUR 200 million bank facility. The facility includes an accordion increase option by further EUR 200 million during the term of the facility.

March Bakkafrost's

Bakkafrost P/F · Bakkavegur 8 · PO Box 221 · FO-625 Glyvrar Tel +298 40 50 00 · Fax +298 40 50 09 · [email protected] · www.bakkafrost.com

farming site A-12 Kunoyarnes is ASC certified. And Bakkafrost's farming site A-25 Gøtuvík, which was the first farming site in the Faroe Islands to receive an ASC certification back in March 2015, gets its certification renewed.

Bakkafrost launches its first sustainability report.

July

Bakkafrost closes the acquisition of the business and assets in the US salmon importer North Landing. August

Bakkafrost announces a new ambitious five-year investment plan for the period from 2018 to 2022. Total investment in the period will be DKK 3 billion.

February

Bakkafrost settles the NOK 500 million bond loan on maturity date 14 February 2018. The bond loan was raised in February 2013.

April

The annual general meeting approves a dividend of DKK 10.50 per share.

Bakkafrost starts the integration of the Faroese broodstock programme previously run by Fiskaaling P/F.

June New Hatchery at Strond starts operation. When in full operation the hatchery will produce 7 million smolts at 500 gram each.

November

Bakkafrost's farming sites A-04 Lambavík and A-13 Borðoyarvík become ASC certified.

Business Objectives and Strategy

VISION To be a world-class company in the salmon industry

MISSION To produce healthy world-class salmon

VALUES To be responsible, respectful, persistent, efficient and ambitious

Bakkafrost's vision is to be a world-class company in the salmon industry. Our mission is to produce healthy worldclass salmon to meet the world's growing demand for sustainably and responsibly produced protein and essential fatty acids.

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 wellbeing. 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 position to achieve this.

Today, our seven financial and non-financial strategic objectives are:

• DEVELOPMENT & GROWTH

We strive for a continuous market driven increase and development in feed, farming, production and sales, in addition to other potential prospects for growth.

• EFFICIENCY & CREATING VALUE

We are dedicated to optimizing the total value chain – from feed to finished product – and utilizing the benefits of competitive advantages throughout the value chain.

• FOOD SAFETY & TOP QUALITY

We aim at delivering products that match or exceed the requirements of our customers.

• SUSTAINABILITY

We are committed to securing a long-term sustainable increase in production, while balancing animal welfare and a cost-conscious production. See our sustainability report www.bakkafrost.com/sustainability for more information on our progress in 2018.

• BIOLOGICAL SECURITY

Fish health, fish welfare and the prevention of diseases are areas of vital importance to us. We aim at farming salmon in a sustainable environment securing the welfare and wellbeing of the salmon. See our sustainability report www.bakkafrost.com/sustainability for more information on our progress in 2018.

• ATTRACTIVE COMPANY CULTURE

We are dedicated to creating an interesting place of work, promoting dialogue and making room for different points of view to find the best solutions.

• SALES & MARKETING

We are focused on maintaining and strengthening our po sition in the marketplace as a reliable partner and supplier of healthy and nutritious salmon products. These priorities shape our actions with the purpose of creating value to our customers and shareholders. Furthermore, we aim at contributing to the society and continue pursuing the com pany's growth strategy.

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 2019, we will review our corporate strategy and align our strategic objectives with our Healthy Living Plan, outlined in our sustainability report.

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

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 capacity is low, this is Bakkafrost's starting point of value added salmon production.

2006

The Bakkafrost Group grows through acquisitions and mergers with several farming companies. Bakkafrost's farming operation 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 a fully 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 shareholder base. In addition to local Faroese investors, the company is now owned by International investors from all over Europe and the USA.

2011

Bakkafrost acquires P/F Havsbrún, a modern, internationally renowned producer of fishmeal, fish oil and fish feed, situated in the Faroe Islands.

2013

Bakkafrost announces its five-year investment plan to make the onshore operation more efficient, to increase organic growth and to reduce the biological risk.

2016

Bakkafrost updates a new five-year investment plan with the same goals as in 2013. Bakkafrost enhances the onshore operation and aims at producing 500 grams smolt by 2020.

2017

Bakkafrost's new harvest/VAP factory and the headquarters in Glyvrar are finished. The public is invited to visit the facilities in September.

FSVs Martin and Róland start operation.

The Value Chain

Bakkafrost 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 on a daily basis. 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 final result of the whole operation, from production of fishmeal and fish oil to the processing 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 enter into 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.

Bakkafrost continues to improve, adjust and extend the value chain on an ongoing basis. In 2018, broodstock and biogas were added to the value chain. The broodstock will widen the value chain even more vertically and increase the traceability back to the production of the salmon eggs.

Fig. 4

FISHMEAL, FISH OIL AND FISH FEED

Bakkafrost sources raw material for the production of fishmeal and fish oil. Various pelagic species are used in this production. Bakkafrost maintains exceptionally high standards with regard to the raw material used, and thus secures, a first-class fishmeal, fish oil and fish feed product. The fish, utilized in the production, is purchased from Faroese as well as foreign vessels operating in the North Atlantic.

Fishmeal has a very high protein content, which makes it an ideal ingredient in the feed blends for fish. The fish oil produced is mainly used in fish feed but is also used in a variety of health supplements and other products.

As producers of our own high-quality fish feed raw material, Bakkafrost is uniquely situated to select the very best fishmeal and fish oil for our fish feed production. Moreover, the produced fishmeal and oil in our fish feed comes from the very same species of fish on which wild ocean salmon feed. This fact alone dramatically enhances and assures the best possible growth conditions for our farming.

Bakkafrost feeds the salmon with fish feed produced from fish oil, which is cleaned for environmental pollutants like DL-PCBs and Dioxin. DL-PCBs and Dioxin can be detected in a variety of foods. Limits for the content of these environmental pollutants are strictly regulated. Routine tests made by the Faroese Food and Veterinary Authority – prior to cleaning the fish oil for environmental pollutants – show that the levels of these environmental pollutants in the salmon from the Faroe Islands are far below all assigned limits. Bakkafrost wants, however, to differentiate its salmon even more by cleaning the fish oil, and thus strengthening Bakkafrost salmon's position as one of the healthiest farmed salmon in the marketplace.

In Q1 2018, Bakkafrost decided to stop the use of the antioxidant, Ethoxyquin, and replace it with natural antioxidant.

Bakkafrost has invested in a high marine profile in the fish feed, aiming at keeping the salmon's diet as close as possible to the natural diet of the wild salmon. Bakkafrost's fish feed profile has measurable benefits. The salmon has a healthier nutritional profile, which gives the salmon a better meat structure, supplying the end customers with a superior product.

  • • 450 tonnes of fishmeal daily capacity
  • • 300 tonnes of fish oil daily capacity
  • • 700 tonnes of fish feed daily capacity

BROODSTOCK

In April 2018, Bakkafrost took full ownership and responsibility of the Faroese broodstock programme. Bakkafrost has the option to obtain the genome rights in 2021.

The acquisition of the programme from Fiskaaling (Aquaculture Research Station of the Faroes), forms part of our strategy to maximize biosecurity, breeding and genetics, and to have the longest integrated value chain in the industry.

The private ownership of the programme will not only enable 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 sizeable DKK 200 million investment into new infrastructure at a new site on the island of Sandoy, will provide the necessary conditions for the programme to be fully developed with a highly-skilled team of employees.

Roe from up to 400 Faroese salmon families across four generations will be bred in a controlled environment to find the optimal genetic diversity for example to identify hereditary characteristics for growth and quality, and to increase resistance against sea lice and breed out common pathogens which can cause disease. Early results in a new generation have indicated great progress with the PMCV pathogen.

The breeding programme was resurrected in 2016 by Fiskaaling with support from the Government of the Faroe Islands, using the few remaining Faroese salmon.

Bakkafrost expects to start breeding salmon based on Faroese roe in 2021.

  • • Faroese broodstock programme taken over in 2018
  • • Option to get the genome rights in 2021
  • • New broodstock facility in Skálavík to begin operation in 2022

HATCHERIES

The Bakkafrost Group operates six hatcheries with a total production capacity of 12 million smolts at an average weight of 200g for annual release. This will increase during 2019 to 15 million smolts at 400g per year.

Bakkafrost purchases salmon eggs externally. The capacity of the suppliers is sufficient to meet the current and future need of eggs.

In 2018 Bakkafrost started implementing part of our own broodstock production. This will increase going forward. Bakkafrost's capability to produce eggs will increase significantly when the new broodstock facility will be fully operational in 2022.

The vitality of the fish is important. Therefore, the selection of the best genetic properties is vital. The fish's resistance to diseases is an important property of the fish. To ensure access to high-quality eggs, Bakkafrost's strategy is to buy eggs from selected external suppliers that invest significant efforts and resources to improve product quality and performance.

Bakkafrost's hatcheries are located 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 in order to limit the effect of external factors, such as weather, birds and other pollution. The workforce in the hatcheries is very experienced; many of the employees have been working at the hatcheries for a long time.

The average weight of released smolt was around 180g in 2018 and will be somewhat higher in 2019. Bakkafrost aims at producing all smolts for release at an average weight of 500 grams by 2021. The benefits are a shorter production time at sea as well as reduced biological risk. The new hatchery at Strond, Klaksvík, is an important part of this plan. The hatchery started operation in June 2018 and has started a new batch every 3 months since then and will be in full operation from 2020. The capacity growth from this investment programme will gradually appear in harvested volumes from 2021.

In January 2019, Bakkafrost announced the plan to increase the capacity of the hatcheries by a total of 30,000m3. This will be achieved by building a new hatchery at Ónavík in Suðuroy, and by increasing the capacity of our current hatchery sites in Norðtoftir and Glyvradalur to begin operation in 2021.

The new hatchery at Ónavík in Suðuroy has an expected annual production capacity of around 3 million smolts and is expected to begin operation in 2022.

• 12 million smolts for release annual capacity

  • • The new hatchery at Strond fully operational by year-end 2020
  • • Increased capacity at Norðtoftir and Glyvradalur from 2021
  • • New hatchery at Ónavík with additional 3 million annual smolts capacity to begin operation in 2022

BIOGAS

STRATEGY

One man's trash is another man's treasure. Employing a resourceful mentality has been at the heart of our efficient growth over the years, and in 2018 we cemented this into our ambitious investment strategy, announcing a DKK 100 million investment to build a new biogas plant in the Faroes.

The plant will use waste products from our farms and other fish and dairy farmers to produce 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).

When in operation, the plant has the capacity to convert up to 90-100,000 tonnes annually of all waste from farms, providing enough renewable heat for 400 homes and electricity for 1,900 homes, with the current input predicted.

This is projected to save 11,000 tonnes of CO2 emissions (based on the equivalent fossil fuel replacement) annually.

liquid fertilizer annually, which will be redistributed to farmers across the islands, free of charge. The fertilizer's higher absorption potential is expected to decrease runoff into fjords.

The renewable energy produced, will feed into the national grid, contributing to the Faroe Island's national target to have 100% electricity from renewable sources by 2030, which in 2018 was 49%.

The biogas plant will be constructed during 2019 and is planned to be in operation during the first quarter of 2020.

Our ambitious investment strategy focusses on efficient growth to meet the growing demand for sustainably-produced protein. This includes advancing circular solutions such as this one, which reduce waste, reduce and avoid CO2 emissions, and stimulate sustainability through other industries. Our approach to date has received recognition at Edie's international Sustainability Leader Awards.

  • • New biogas plant operational in 2020
  • • 90-100,000 tonnes of waste conversion annual capacity

As well as producing renewable energy, it will produce natural

FARMING

Bakkafrost's 19 salmon farming sites in operation in 2018 extend across 17 of the islands' fjords and benefit from excellent water quality and circulation due to strong currents and cool steady sea temperatures. A new farming site in Hvalba in Suðuroy is expected to start operation in 2019.

The fish is kept, fed and nurtured in large sea pens, providing the fish with abundant space to grow for a period of 16–18 months. During this period, the fish grows from around 200g+ up to Bakkafrost's average target weight of about 6.0–6.5 kg wfe. This target weight is considered to provide an optimal breakdown/mix of sizes in order to serve both the fresh fish market and the internal VAP production.

As a rule, the larger fish are distributed as fresh fish and the smaller fish are used as raw material in the VAP production. The fish are fed several times a day, and the feed consumption is monitored continuously.

During the entire production period, each generation is kept in a separate fjord, and after all locations in a fjord have been harvested, the fjord is set aside for 2–4 months before a new generation is released.

In 2017 and 2018, we have observed increased mortality rates as a result of the strategy to avoid using chemical treatment against sea lice. High focus is kept on improving procedures and equipment in order to reduce mortality level to previous levels.

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. Following national regulations, environmental investigations are undertaken each year by external agencies at each farming location. The result of each survey becomes input data used in the tactical planning to achieve the best environmental and sustainable farming results possible.

The environmental authorities also have to approve a 3-year production plan for the Faroese salmon companies on a yearly basis.

  • • 19 farming sites in operation across 17 fjords
  • • New farming site in Hvalba expected to start operation in 2019

FARMING SERVICE VESSELS (FSV)

Bakkafrost´s FSV fleet consist of six vessels: Four live fish carriers and two service vessels.

The live fish carrier fleet again consists of two vessels for smolt transport and two vessels for transportation of fish to harvest: One medium size live fish carrier (660m3/110 tonnes wfe) and one large live fish carrier (3,500m3/450 tonnes wfe), equipped with the latest technology and both with closed systems. In addition to transporting fish to harvest, the largest live fish carrier has equipment for treatment of the fish in fresh water. The two remaining FSV's are equipped with various non-medical systems for lice-treatment, systems for net-cleaning and are also equipped to do other operations.

Bakkafrost is continually seeking to improve methods for delousing without using any chemicals and creating lowest possible stress on the salmon.

  • • 6 farming service vessels (including 4 live fish carriers) and 74 smaller boats
  • • New farming service vessel to support biosecurity strategy in 2021

HARVESTING

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 350 tonnes wfe at the current run rate with one shift on average but can increase the daily capacity by 100-150 tonnes wfe. The reconstruction of the harvest factory in Vágur was completed in 2018, increasing its daily capacity to 100 tonnes wfe.

The fish is transported from the farming sites to the harvest factory in live fish carriers with closed water systems.

  • • 44,600 tonnes of salmon harvested in 2018
  • • Reconstruction of harvest plant in Vágur completed in 2018, increasing daily capacity to 100 tonnes wfe

PROCESSING

The 4,000 m2 VAP factory at Glyvrar has a production capacity of 100 tons of value added products a day. The primary customers for these products are the supermarket chains and the Horeca segment.

Another market segment important for the VAP products is industrial customers buying whole fillets for further processing and by-products. This market has been developed during the last decade. The customers in this segment are mainly from Europe and the Far East.

• 40,000 tonnes annual secondary processing capacity

PACKAGING

Bakkafrost has a packaging factory, which is located and integrated into the Glyvrar processing facility. The packaging factory produces styropor boxes for the fresh salmon, both for sea and air freight. The packaging factory at Glyvrar meets all Bakkafrost's need for styropor boxes and has equipment to customize the boxes with logo etc.

• 70,000 tonnes of salmon, annual packaging capacity

SALES AND DISTRIBUTION

Bakkafrost has three sales offices. The Glyvrar International Sales department in the Faroe Islands serves the global market. The UK sales office is in Grimsby, serving the UK market, and the US sales office is in Clifton, New Jersey, serving the US market.

Bakkafrost has through its recently established subsidiary, Bakkafrost US, signed an agreement in Q2 2018 to acquire the business and assets in North Landing, which was a US salmon importer focusing on the East Coast with a sales office and handling and processing facilities in Clifton, New Jersey, USA. Through the acquisition, Bakkafrost will have a better market access and better abilities to serve Bakkafrost's customers in the US market. The acquisition of North Landing was closed in Q3 2018.

Sales strategy

The Group's strategy is to balance the sales mix between different geographical markets and different product segments. The most important markets are the European, US, Chinese and Russian market. As a rule, the VAP products are sold on long-term contracts and the whole fish is sold on the spot market.

Bakkafrost believes that its capability to serve these geographical markets with the two categories of products efficiently reduces cross-cycle fluctuations in both revenues and profitability.

The strategy is to offer advantages to the larger supermarket chains by securing product availability and stable high quality and preferred products.

Distribution

The current distribution network is based on transportation by ship to Europe and Russia and by plane to the US and China from the UK. Bakkafrost can distribute both fresh and frozen fish to the various markets.

With the existing distribution network, Bakkafrost can ship products to the UK within 20 hours by ship. From the UK, the products are distributed by plane to major airports in the US and China within 24 hours, with a total cost of DKK 10–14 per kg from factory to customer.

Products planned for the European and Russian markets are transported by ship to Denmark or the UK within two days for further distribution on trucks.

• Sales to 29 countries

• Markets served: Western Europe (31%) North America (20%) Asia (24%) Eastern Europe (25%)

PERFORMANCE

Operational Review Bakkafrost holds sea farming licenses in the north-eastern and southern parts of the Faroe Islands. The licenses give the right to utilize a given area of a fjords for farming fish. Farming authorities focus on veterinary and environmental key performing indicators. Yearly reports and plans, approved by the authorities, are requested in order to certify the operation. The Faroese farming legislation has imposed strict measures to regulate the operation into being sustainable. Bakkafrost farming sites are located in 17 different fjords.

The Gulf Stream provides stable farming conditions in the Faroe Islands throughout the year as well as excellent water quality. The water temperature in the region is steady, with a fluctuation of only 6 °C during the year. The lowest temperatures, approximately 6 °C, are usually reached in February, and the highest temperatures, approximately 10.5 °C, are reached in the late summer months.

The farming sites are both environmentally certified and yearly audited by environmental agencies. The production plans are approved on a yearly basis by both veterinary and environmental authorities. The biological situation in the Faroe Islands provides the opportunity to utilize a higher-than-average weight of the fish, minimizing unit costs, biological feed conversion rate and giving a best-in-class performance. The excellent biological situation is crucial to maintain production costs at current levels and to maximize the return on the invested capital.

In addition to the sea farming licenses, Bakkafrost holds six licenses for smolt production on land. These licenses give a smolt facility, also called hatchery, the right to farm salmon, from roe to smolt. Bakkafrost operated five hatcheries until June 2018, when the new smolt facility at Strond, Klaksvík, started operation, making it six hatcheries.

COST-CONSCIOUS PRODUCER AND VETERINARY MODEL

In terms of production costs, our farming operation has delivered strong results following the implementation of the veterinary regime in the Faroe Islands – a set of laws implemented since 2003, stating quite strictly, how salmon farmers must operate.

The objective of the veterinary model in the Faroe Islands is to increase biological and veterinary security and to support a sustainable and healthy operation, by total separation of salmon generations, vaccination against different diseases (ISA among others), strict regulation of movement of equipment and fish and other regulations. The Faroese veterinary system has improved fish health and reduced costs. Thus, Bakkafrost's EBIT per kg is among the highest, compared to peers.

The farming costs have increased in recent years, especially because of increased feed costs and health costs. Another factor is that the farming sites have been moved further out the fjords to more exposed areas, where more expensive equipment is needed. Bakkafrost uses salmon feed with a high marine profile, which is relatively costly, because of the high level of marine ingredients. Bakkafrost gets other benefits from this diet, which is similar to the diet of the wild salmon. Good animal welfare has positive impact on non-feed cost elements and results in higher production efficiency.

The health costs mainly relate to treatments against sea lice. The treatment against sea lice used to be medical bath treatment, but since 2015, when Bakkafrost began using fresh water treatment against sea lice and in 2017, when Bakkafrost began using lukewarm seawater against sea lice, Bakkafrost has not used medical bath treatment. Initially, these new mechanical 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 still working on improving the negative side effects of these mechanical treatments.

In addition to this, Bakkafrost has used lumpfish at some farming sites to reduce the number of sea lice. The purpose of these initiatives is to maintain a sustainable, cost-conscious farming operation.

INVESTMENTS TO REDUCE BIOLOGICAL RISK

Bakkafrost has invested nearly DKK 3 billion since 2013 in all parts of its value chain. In August 2018, Bakkafrost announced a new five-year investment plan amounting to around DKK 3 billion from 2018 to 2022. Around DKK 0.5 billion has been invested in 2018, so for the next four years, Bakkafrost will invest around DKK 2.5 billion. The goals for the investment plan are; reducing the biological risk, increasing efficiency and giving organic growth.

In the period from 2018 to 2022, Bakkafrost will invest around DKK 1 billion in its smolt operation. Bakkafrost is self-supplied with smolt but aims to have an average weight of 500g for all smolts release into the sea. Bakkafrost has expanded both the hatcheries at Norðtoftir and Viðareiði, but when the new hatchery at Strond is fully operating at the end of 2020, Bakkafrost's smolt capacity will increase substantially.

At present Bakkafrost's smolts for release production has a yearly capacity of around 12 million smolts for release at an average weight of 200g. When the capacity at Strond is in full operation, this capacity will be around 12 million smolts with an average weight of 500g.

Bakkafrost plans building a new hatchery in Suðuroy and expanding two of its existing hatcheries, enabling further growth in Bakkafrost's smolt production. The construction of the hatchery in Suðuroy is expected to commence late 2019.

The average release size of smolt has increased from around 120g in 2014 to around 180g in 2018, corresponding to a 50% increase in size. The average release size was around 200g in 2017, but considering the number of smolts released during the year, the production output was higher in 2018, compared to 2017.

The larger smolts will have a positive effect on the biological risk and the future growth potential, as larger smolts will reduce the production time at sea in the farming sites.

Bakkafrost has invested in new equipment in the farming operation. Since 2015, Bakkafrost has acquired three ships, one Fig. 15

HATCHERY CAPACITY (M3)

live fish carrier and two service vessels. Significant amount has also been invested in new equipment at Bakkafrost's farming sites, e.g. new feeding barges, catamarans and larger pens.

MORTALITY % OF OUTPUT*

Fig. 16 Fig. 17 Fig. 18

BIOLOGICAL FEED FACTOR*

AVERAGE HARVEST WEIGHT (KG LW)*

SMOLT RELEASE, NUMBER AND AVERAGE SIZE SMOLT RELEASE, NUMBER AND AVERAGE SIZE (1,000)

CERTIFICATES

To ensure prime quality, Bakkafrost has implemented a series of procedures and quality control systems, not only at our own salmon farms and processing plants, but also for our suppliers. All stages of our production chain are Global G.A.P compliant. Other certifications include ASC, HACCP, IFS, GMP+, MSC, ISO9001:2015 and BRC.

Bakkafrost is a member of the Global Salmon Initiative (GSI). GSI is focused on three pillars of sustainability: Reducing environmental impact, increasing social contribution and maintaining economic growth.

Bakkafrost's goal is to have all its farming sites ASC certified by 2020. The ASC standard was developed in cooperation with WWF and is seen as the most stringent standard in the aquaculture industry with requirements regarding fish welfare, sea lice, smolt production, feed production and the environment.

Bakkafrost's farming site, Gøtuvík, was ASC certified in 2015 as the first Faroese farming site to get an ASC certification. In the period from 2016 to 2018, Bakkafrost had six additional farming sites ASC certified. In January 2019, Bakkafrost included two more sites to its list of ACS certified sites. Bakkafrost is still working on getting more farming sites ASC certified.

GEOGRAPHICAL LOCATION

Bakkafrost's salmon farms are located in areas with attractive qualities for salmon farming in terms of water quality, water temperature and circulation. The Faroese fjords provide separation between locations, which improves biological control and area management. Relatively short distances between farming areas and processing facilities and well-developed infrastructure offer cost-efficient transportation of both feed and fish on land and at sea. Transportation opportunities from Faroe Islands to the different markets are good.

STRONG CUSTOMER BASE

By focusing on meeting existing customers' demands, Bakkafrost benefits from its long-term relationships with a large number of customers. The relationships with customers have proven to give a competitive advantage through product development and marketing.

WELL PLACED TO ACCESS THE US, CHINA AND RUSSIA

Bakkafrost and the other Faroese salmon producers are in a favourable competitive position in the US market. Therefore, Bakkafrost has established an experienced sales force with long-term relations with customers in the US. The company has a running operation and on-going sales of large salmon, supported by efficient logistical systems for the distribution of the products (both fresh and frozen) from the Faroe Islands to the US.

The US market prefers the higher-than-average size and weight and the high level of Omega-3 offered in the salmon produced in the Faroe Islands by Bakkafrost. As a result, the US market has become an important market for Bakkafrost. The sales to the US market accounted for 21% of Bakkafrost's total sales of fresh whole salmon in 2018, compared to 24% in 2017.

In 2018, Bakkafrost acquired the business and assets of a salmon importer on the east coast of USA. The purpose of the acquisition is to improve Bakkafrost's abilities to serve its customers in USA. With a sales office, handling and processing facilities in New Jersey, USA, Bakkafrost will have better market access.

Since 2011, the export of large fresh salmon to China has increased significantly. The logistics from the Faroe Islands to China are also efficient. Over the last three years, the sales to China of fresh salmon has been stable. The sales to Asia, mainly China, accounted for 27% in 2018, compared to 23% of total sales of fresh whole salmon in 2017.

The sales to Russia increased significantly following the import ban of Norwegian salmon to Russia in Q3 2014. The ban resulted in a favourable market position and access for Faroese salmon on the Russian market from second half of 2014. It is uncertain how long the import ban for Norwegian salmon will last. Of the total sales of fresh whole salmon, the Eastern Europe market, where Russia is the main market, accounted for 29% in 2018, compared to 30% in 2017.

In Q4 2018, Bakkafrost's processing plant in Glyvrar, Faroe Islands was banned exporting to the Russian market. This resulted in lower sales to Russia in Q4 2018, which accounted for 7% of the total sales of fresh whole salmon, compared to 40% in Q4 2017. The export ban against the processing plant in Glyvrar was lifted in Q1 2019.

VAP

Bakkafrost has long-term experience in producing and selling value added products (VAP). Bakkafrost's long-term strategy is that VAP products shall represent 40–50% of the Group's harvested volumes. The sales of VAP products stabilize the Group's earnings, as the sales 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 decrease.

The VAP segment struggled in 2016 and in 2017, because of the steep increase of the spot prices. Going into 2018, Bakkafrost decided to lower the VAP volumes, as price indications for 2018 were uncertain at this period.

The VAP segment produced 8,355 tonnes in 2018, compared to 19,067 tonnes in 2017. The lower volumes in the VAP segment for 2018, had a negative effect on the margins in the VAP segment for 2018. For 2019, Bakkafrost has again increased the share of VAP on contract.

PRODUCTION OF FISHMEAL, OIL AND FEED

Havsbrún – FOF segment – performed very well in 2018 and had good access to raw material. Havsbrún received 302,465 tonnes raw materials in 2018 which is a decrease of 12%, compared with 2017 which was record high, but at the same time an increase of 50%, compared with 2016 when 201,222 tonnes were received. The production of fishmeal and fish oil depends on the sourcing of raw material, and the availability is highly related to the quotas for pelagic fishery in the North Atlantic. The raw material situation will be volatile in the future. Quotas for fishing blue whiting, however, have increased over the last years. This has improved Havsbrún's possibilities of sourcing raw material to its production of fishmeal and oil. Beside sourcing wild caught pelagic fish, Havsbrún also sourced offcuts from pelagic fish factories in the Faroe Islands. Processing plants for pelagic species have been built in the Faroe Islands in recent years, increasing access to offcuts from this production.

Havsbrún sold 43,235 tonnes of fishmeal externally in 2018, compared with 59,006 tonnes in 2017, a decrease of 27%. Nearly all the production of fish oil is used for feed production – but in 2018 3,225 tonnes were sold external due to good market situation and a large storage.

Havsbrún sold 77,775 tonnes of feed in 2018, of which 90% were used internally. In 2017, Havsbrún sold 78,134 tonnes of feed.

The fish oil market has been volatile for the last three years. The price increased significantly at the end of 2014 and has been on a high level until first half of 2017, when the fish oil price fell. This drop only lasted half a year, because the prices rose again in the second half of 2017. In the first half of 2018, the fish oil price again fell to the same level as in the first half of 2017. The world's total production of fish oil has been relatively stable for many decades, while the demand for fish oil has increased. Therefore, fish oil is expected to be a scarce resource in the future, but decreasing content of fish oil in the salmon feed, led by the major producers, will reduce some of the demand. Bakkafrost's strategy is to have a high content of fish oil in the feed, resulting in a salmon with a high content of omega 3.

Even though all tests show that the levels of pollutants in Havsbrún's fish oil are well within the safety limits imposed by e.g. the European Union, Havsbrún has cleaned the fish oil used for Bakkafrost's salmon feed for dioxin and dl PCB from early 2015.

The fishmeal market did experience the same price development as fish oil in 2017, but during 2018 the price has been stable.

Havsbrún built two new tunnels for storing fishmeal in the summer of 2016. The tunnels enable Havsbrún to store large volumes of fishmeal and to adapt to the marked situations.

PEOPLE

Our most important asset is our employees, and for Bakkafrost to remain a high-performing organization and expand our leading market position, it is vital to attract and retain employees with the right competences and knowledge. Therefore, we shall maintain and further strengthen the focus on HR, work satisfaction and developing the competences of the employees.

The foundations of our human resource development are the company culture and the fundamental values of Bakkafrost to be a reliable and responsible partner. Many great results have been achieved during the past years, but there is still room for improvement. Thus, striving continuously to improve our business is embedded in our company culture.

We aim at strengthening the competences of our employees on all levels in the Group on a continuous basis by implementing relevant training schemes to meet current and future demands for a qualified workforce. Supporting Bakkafrost's strategy and securing high standards in our business conduct in addition to creating the best possible value for our customers is essential for all training efforts.

Bakkafrost's training is performed as work-related training, inhouse and external courses, and other forms of training. It is an ongoing process to further developing professional competences as well as developing leadership skills on all levels in the Group.

For work-related training, in-house and external courses, as well as other forms of training, we engage and form partnerships with local educational institutions and experts focusing on health, safety, business and commerce education.

In 2018, the number of full-time equivalent employees in the Bakkafrost Group was 824 employees, compared to 960 employees in 2017.

There are strong seasonal variations related to the Harvest and VAP divisions, primarily due to short-term employment of young employees of one to two years.

For further information see our Sustainability Report 2018.

Financial Review The supply of salmon to the world market increased by around 6% in 2018 (2017: 2% increase). The increase was due to a comeback in Chile after a decrease in 2016, because of an algae bloom. The improved biological performance in Norway in 2017 also had a positive effect on the supply. The average salmon spot price in 2018 was DKK 47.18, compared to DKK 48.65 in 2017.

In Norwegian krone, the average salmon spot price was almost flat in 2018, compared to 2017. In Danish krone and EURO, the average salmon spot price decreased 3% in 2018, compared to 2017, and therefore Bakkafrost did not experience the small protection from the currency development as its Norwegian peers in 2018. The supply of salmon to the world market increased by around 6% in 2018, compared to 2017. Almost all the supply increase came outside Europe, mainly from Chile..

The prices for value added products (VAP) have increased in 2018 and are now on a level not experienced before. Important for the result for the VAP segment are also the raw material prices, as the VAP segment purchases its raw material on the salmon spot market every week. Although the raw material prices experienced some volatility in 2018, the average price was almost the same as in 2017. Bakkafrost's value added production margins were negatively affected by lower volumes in 2018, as overhead costs were the same. Therefore, the VAP segment made a loss in 2018, although the sales prices achieved in 2018 had never been higher. The value added products are typically sold on fixed price contracts with duration of 6-12 months, where the prices for VAP products follow the trend on the spot market with a time lag.

The feed prices have been fairly flat in 2018, and the average feed price was lower than the average feed price in 2017. The reason for the fluctuations in the feed price is the market situation for fish oil and fishmeal, which are the main

ingredients in Bakkafrost's salmon feed. The fluctuations in the feed prices will be reflected in the production costs for salmon.

INCOME STATEMENT

DKK 1,000 2018 2017
Operating revenue 3,177,422 3,770,049
Purchase of goods -1,074,645 -883,871
Change in inventory and biological assets (at cost) 199,696 -141,406
Salary and personnel expenses -353,756 -400,267
Other operating expenses -674,907 -783,268
Depreciation -198,898 -183,590
Operational EBIT 1,074,912 1,377,647
Fair value adjustments of biological assets 195,819 -693,540
Onerous contracts 0 67,376
Income from associates 9,369 17,302
Revenue tax -95,867 -119,681
EBIT 1,184,233 649,104
EBT 1,172,066 623,884
Taxes -211,774 -112,482
Profit or loss for the period 960,292 511,402

The Bakkafrost Group generated gross operating revenues of DKK 3,177.4 million in 2018, compared to DKK 3,770.0 million in 2017. The decrease in the revenue is mainly due to lower volumes of both fresh/frozen salmon and value added products in 2018. Harvested volumes of salmon decreased 18% in 2018, compared to 2017, and the volumes sold as value added products decreased 56% in 2018. The external revenue from sales of fishmeal decreased in 2018, compared to 2017. The external sales of fish oil were higher in 2018, compared to 2017.

The operations harvested a total of 44,591 tonnes gutted weight, compared to 54,615 tonnes in 2017.

Operational EBIT was DKK 1,074.9 million, compared to DKK 1,377.6 million in 2017. A positive fair value adjustment of the Group's biological assets has been recognized in 2018 amounting to DKK 195.8 million, compared to an adjustment of DKK -693.5 million in 2017. The positive fair value adjustment is due to higher prices at year-end 2018, compared to the previous year. In 2018, Bakkafrost made a change in provisions for onerous contracts of DKK 0.0 million, compared to a change in provisions for onerous contracts amounting to DKK 67.4 million in 2017. No provisions are made, as Bakkafrost has no long-term contracts to deliver value added products at a fixed price in the future with a negative margin. The reason is low raw material costs at the end of 2018, compared to the contract prices.

In 2018, the Group's associated companies made a net result to Bakkafrost of DKK 9.4 million, compared to DKK 17.3 million in 2017.

Financial income in 2018 amounted to DKK 2.7 million, compared to DKK 1.4 million in 2017. Net interest expenses amounted to DKK -12.5 million, compared to DKK -26.4 million in 2017. Net currency effects amounted to DKK 1.4 million, compared to DKK 4.7 million in 2017. Included in the net currency is a realized exchange rate adjustment relating to the bond loan of NOK 500 million amounting to DKK -10.9 million, compared to DKK 30.8 million in 2017.

Net taxes amounted to DKK -211.8 million, compared to DKK -112.5 million in 2017.

The consolidated net profit totalled DKK 960.3 million in 2018, compared to DKK 511.4 million in 2017. Earnings per share totalled DKK 19.74 in 2018, compared to DKK 10.52 in 2017.

STATEMENT OF FINANCIAL POSITION

The Group's total assets as at end 2018 amounted to DKK 5,802.5 million, compared to DKK 5,155.5 million at the end of 2017.

The Group's intangible assets amounted to DKK 389.7 million at the end of 2018, compared to DKK 376.7 million at the end of 2017. The change relates to goodwill from the acquisition of Bakkafrost USA. Intangible assets comprise primarily the fair value of acquired farming licences. No licences in the North region are recorded with a value in the Bakkafrost accounts.

Property, plant and equipment amounted to DKK 2,884.3 million at the end of 2018, compared to DKK 2,570.4 million at the end of 2017. In 2018, Bakkafrost made investments in PP&E amounting to DKK 526.0 million, compared to 640.6 million in 2017. The most significant investments, Bakkafrost carried out in 2018, were in the new hatchery at Strond. Other investments relate mainly to maintenance investments.

Investments in associated companies and stocks and shares amounted to DKK 112.8 million at the end of 2018, compared to DKK 76.7 million at the end of 2017. The increase in financial assets relates to the result from the associated companies and an increase of shares in one of the companies.

Bakkafrost had DKK 9.2 million in long-term receivables at the end of 2018, compared to DKK 0.0 million at the end of 2017.

The Group's carrying amount (fair value) of biological assets amounted to DKK 1,358.5 million at the end of 2018, compared to DKK 1,096.7 million at the end of 2017. Included in the carrying amount of the biological assets is a fair value adjustment amounting to DKK 382.8 million, compared to DKK 187.0 million at the end of 2017. The increase is due to higher salmon prices at the end of 2018, compared to end 2017.

The Group's total inventories amounted to DKK 438.8 million as at the end of 2018, compared to DKK 305.8 million at yearend 2017. The inventory primarily represents Havsbrún's inventory of fishmeal, fish oil and fish feed in addition to feed at the feed stations, finished VAP products, packing materials and other raw materials.

The Group's total receivables amounted to DKK 292.3 million as at the end of 2018, compared to DKK 419.6 million at the end of 2017.

Cash and cash equivalents at the end of 2018 amounted to DKK 316.9 million, compared to DKK 309.6 million at the end of 2017.

The Group's equity at the end of 2018 was DKK 4,077.0 million, compared to DKK 3,626.4 million at the end of 2017. The increase in equity consists primarily of the positive result for 2018, reduced by the dividend paid out in April 2018.

The Group's total non-current liabilities amounted to DKK 1,346.5 million at the end of 2018, compared to DKK 602.1 million at the end of 2017. Deferred taxes amounted to DKK 534.4 million, compared to DKK 455.5 million at the end of 2017. The main reason for the increase is the increase in the fair value adjustment of the biomass.

Long-term debt was DKK 812.1 million at the end of 2018, compared to DKK 146.7 million at the end of 2017.

Derivatives amounted to DKK 0.3 million at the end of 2018, compared to DKK 127.3 million at the end of 2017 due to volatility in NOK, compared to DKK.

DKK 1,000 2018 2017
ASSETS
Non-current assets
Intangible assets 389,745 376,675
Property, plant and equipment 2,884,325 2,570,430
Financial assets 121,966 76,702
NON-CURRENT ASSETS 3,396,036 3,023,807
Current assets
Inventory 1,797,309 1,402,509
Receivables 292,284 419,649
Cash and cash equivalents 316,894 309,551
CURRENT ASSETS 2,406,487 2,131,709
ASSETS 5,802,523 5,155,516
Equity 4,077,029 3,626,429
Deferred taxes 534,430 455,448
Long-term interest-bearing debt 812,053 146,696
Non-current liabilities 1,346,483 602,144
Current liabilities
Derivatives 320 127,255
Short-term interest-bearing debt 0 378,300
Trade payables 204,500 189,548
Current tax liabilities 152,655 198,141
Other current liabilities 21,536 33,699
Current liabilities 379,011 926,943
Total liabilities 1,725,494 1,529,087

EQUITY AND LIABILITIES 5,802,523 5,155,516

At the end of 2018, the Group's total current liabilities were DKK 379.0 million, compared to DKK 926.9 million at the end of 2017.

Trade payable amounted to DKK 204.5 million, compared to DKK 189.5 million at the beginning of the year. Provision for onerous contracts at year-end 2018 amounted to DKK 0.0 million, compared to DKK 0.0 million in 2017.

In January 2018, Bakkafrost made an agreement with its existing lender, Nordea, to refinance its existing DKK 850 million bank facility and its outstanding NOK 500 million bond loan, which had a maturity on 14 February 2018, with a senior secured five-year EUR 200 million credit facility.

The facility includes an accordion increase option, which provides flexibility for the parties to agree an increased size of the facility by further up to EUR 200 million during the term of the facility.

Bakkafrost's equity ratio was 70% at the end of 2018, compared to 70% at the end of 2017.

CASH FLOW

DKK 1,000 2018 2017
Cash flow from operations
Operating profit (EBIT) 1,184,233 649,104
Cash flow from operations 912,937 1,458,162
Cash flow from investments -530,746 -635,542
Cash flow from financing -374,848 -748,065
Cash and cash equivalents – opening balance 309,551 234,996
Cash and cash equivalents – closing balance total 316,894 309,551

The total cash flow from operations in 2018 was DKK 912.9 million, compared to DKK 1,458.2 million in 2017. The cash flow from operations in 2018 is primarily due to strong results, but also due to a decrease in receivables. Paid taxes had a negative effect on the cash flow from operations in 2018. Cash flow from investment activities amounted to DKK -530.7 million, compared to DKK -635.5 million in 2017.

For 2018, cash flow from financing amounted to DKK -374.8 million, compared to DKK -748.1 million for 2017. The change in long-term interest-bearing debt of DKK 146.8 million had a positive effect on the cash flow from financing in 2018. Other 2018 figures include financial expenses of DKK -16.2 million, sales of treasury shares of DKK 2.6 million and net dividend payment of DKK -510.7 million.

With the established credit facilities, the Group's liquidity and financial strength is considered good. Bakkafrost had undrawn credit facilities of approximately DKK 997.7 million at the end of 2018.

Farming Segment

The farming segment produces high quality Atlantic salmon from juveniles to harvest size salmon. The salmon is sold to fresh fish markets globally and to the internal VAP production. The farming sites are located in the Faroe Islands.

DKK 1,000 2018 2017 Change
Total revenue 2,568,366 2,986,561 -14%
EBIT 1,065,923 495,116 115%
Operational EBIT 965,659 1,308,194 -26%
Farming - Operational EBIT/kg (DKK) 21.66 23.95 -10%
Harvested volume (tgw) 44,591 54,615 -18%

VOLUMES

The Group's farming segment harvested 44,591 tonnes gutted weight in 2018, compared to 54,615 tonnes gutted weight in 2017. Farming North harvested 25,889 tonnes gutted weight in 2018, compared to 24,365 tonnes gutted weight in 2017. Farming West harvested 18,702 tonnes gutted weight in 2018, compared to 30,251 tonnes in 2017.

The Group released 12.6 million smolts into the sea in 2018. The smolt release in 2017 was 9.9 million smolts.

FINANCIAL PERFORMANCE

The market in 2018 was in line with 2017, although we had some challenges in Q4 2018. The good financial performance in the farming segment is also due to good and stable farming operations and only minor biological issues in 2018.

Total revenues for Bakkafrost's farming segment in 2018 amounted to DKK 2,568.4 million, compared to DKK 2,986.6 million in 2017, a change of -14%. Gross external operating revenues for Bakkafrost's farming segment increased to DKK 2,226.1 million in 2018, up from DKK 2,150.9 million in 2017. The volumes sold externally increased in 2018, compared to 2017. The internal revenue decreased in 2018 from DKK 835.6 million in 2017 to DKK 342.2 million in 2018. The volumes sold to the VAP segment were lower in 2018 than in 2017.

In 2018, operational EBIT totalled DKK 965.7 million, compared to DKK 1,308.2 million in 2017. This corresponds to an operational EBIT of DKK 21.66 (NOK 27.89) per kg gutted weight, compared to DKK 23.95 (NOK 30.02) per kg gutted weight in 2017.

TOTAL REVENUE (DKK 1,000) OPERATIONEL EBIT/KG (DKK) HARVESTED VOLUME (TGW)

Fig. 20 Fig. 21 Fig. 22

Fig. 23

SMOLT RELEASE - THOUSAND SMOLTS

Fig. 24

HARVEST VOLUMES (TGW)

VAP Segment

The VAP (value added products) segment produces skinless and boneless portions of salmon. The main market for the VAP products is Europe with increasing sales in other markets. The VAP products are sold on long-term contracts.

DKK 1,000 2018 2017 Change
Total revenue 364,827 998,778 -63%
EBIT -22,424 -8,063 -178%
Operational EBIT -22,424 -75,441 70%
VAP - Operational EBIT/kg (DKK) -2.68 -3.96 32%
VAP produced volume (tgw) 8,355 19,067 -56%

VOLUMES

Bakkafrost has a long-term strategy of producing 40-50% of its harvested salmon as value added products. The output is predominantly portions for the retail market in Europe, but some sales are also to the US retail market. The strategy with the value added products is – in addition to increasing the Group's earnings – to reduce the volatility in the Bakkafrost Group's net earnings, as these products are sold at different fixed-price contracts for a period of up to 12 months. As there is a time lag between the movement in the fresh salmon prices and the contract prices, Bakkafrost normally makes a profit in the VAP segment, when the spot prices are decreasing and vice versa, when the spot prices increase during a period. Therefore, the VAP segment has struggled in 2018 even though the contract prices for the value added products have increased in 2018.

For 2018, 19% of the total harvested volumes went to the production of VAP products, compared to 35% in 2017.

The VAP production in 2018 was 8,355 tonnes gutted weight, compared to 19,067 tonnes gutted weight in 2017.

FINANCIAL PERFORMANCE

The contract prices in 2018 have not increased at the same rate as the spot prices, but the contract prices were on a higher level than in 2017. The VAP segment's operating revenue amounted to DKK 364.8 million in 2018, compared to DKK 998.8 million in 2017, a decrease of 63%.

Operational EBIT in 2018, which is EBIT adjusted for provision for onerous contracts etc., totalled DKK -22.4 million, compared to DKK -75.4 million in 2017. This corresponds to an operational EBIT of DKK -2.68 (NOK -3.46) per kg gutted weight, compared to DKK -3.96 (NOK -4.96) per kg gutted weight in 2017. The main reason for the loss in the VAP segment in 2017 was the high salmon spot prices affecting the raw material cost heavily.

The VAP segment had no onerous contracts at the end of 2018, and therefore a change in provision amounting to DKK 0.0 million was made, compared to a change of DKK 67.4 million in 2017.

TOTAL REVENUE (DKK 1,000)

Fig. 26

OPERATIONEL EBIT/KG (DKK)

Fig. 27

VAP VOLUME (TGW)

PRODUCT WEIGHT OF VAP (TGW) DISTRIBUTION OF HARVESTED VOLUMES (%)

FOF Segment

The FOF (fishmeal, oil and feed) segment produces fishmeal, fish oil and fish feed. Most of the production is used for fish feed, which is used internally in the farming segment. The quality of the fish feed is important to the quality of the salmon from Bakkafrost. Fishmeal, fish oil and fish feed is also sold externally.

DKK 1,000 2018 2017 Change
Total revenue 1,268,564 1,303,161 -2,7%
EBIT 233,981 252,556 -7,4%
EBITDA 254,281 266,093 -4,4%
FOF - EBITDA margin 20.0% 20.4% -1,8%
Sold feed tonnes 77,774 78,134 -0,5%

VOLUMES

Havsbrún, which represents the FOF segment, has over the last couple of years had an improving raw material situation for the fishmeal and fish oil production. The produced fishmeal and oil were partly used internally for the feed production, and partly exported. In 2018, Havsbrún sourced 302,465 tonnes of raw material, compared to 342,456 tonnes in 2017, which corresponds to a decrease of 11,7%. The raw material intake depends on the fishery in the North Atlantic and available species of fish.

The production of fishmeal in 2018 was 65,141 tonnes, compared to 74,089 tonnes in 2017. The production of fish oil in 2018 was 10,257 tonnes, compared to 10,387 tonnes in 2017. The production of fish oil varies, depending on the species of fish for production and the timing of catch.

Havsbrún sold 77,774 tonnes of feed in 2018, compared to 78,134 tonnes in 2017. Bakkafrost used 70,240 tonnes of the sold feed in 2018 internally, corresponding to 90%. The internal use in 2017 was 72,960 tonnes, corresponding to 93%.

FINANCIAL PERFORMANCE

Total revenues for Bakkafrost's FOF segment in 2018 amounted to DKK 1,268.6 million, compared to DKK 1,303.2 million in 2017, a decrease of 2.7%.

The external operating revenue for the FOF segment amounted to DKK 586,5 million in 2018, compared to DKK 620.3 million in 2017. The decrease in the external revenue from 2017 to 2018 is mainly due to lower external sale of fishmeal and fish oil.

The internal revenue in 2018 amounted to DKK 682.1 million, compared to DKK 682.8 million in 2017. The internal revenue comprises the sales of feed to Bakkafrost's farming activities.

EBITDA was DKK 254.3 million in 2018, compared to DKK 266.1 million in 2017, and the EBITDA margin was 20.0% in 2018, compared to 20.4% in 2017.

TOTAL EBITDA (DKK 1,000)

SOLD FEED TONNES (TGW)

Fig. 32

EBITDA MARGIN (%)

Fig. 33 Fig. 34

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000

Q4 2011 Q2 2012 Q4 2012 Q2 2013 Q4 2013 Q2 2014 Q4 2014 Q2 2015 Q4 2015 Q2 2016 Q4 2016 Q2 2017 Q4 2017 Q2 2018 Q4 2018

FISH FEED PRODUCTION VOLUMES (TONNES) SOURCING OF RAW MATERIAL (TONNES)

Market Review MARKETING STRATEGY

Bakkafrost is committed to produce tasty, healthy and sustainable, superior quality salmon with the properties that create value for the customers and thereby maximize the Group's result. Hence, Bakkafrost has received a price premium for its salmon in recent years.

The Bakkafrost Group is determined to further strengthen its position in the marketplace by investing in the implementation and marketing of the below USPs (unique selling points).

THE FAROE ISLANDS ORIGIN

The natural conditions in and around the Faroe Islands are perfect for raising salmon, and Bakkafrost is committed to promote the Faroe Islands origin as a boutique origin for superior quality salmon. The North Atlantic Current engulfs the Faroe Islands with cool and steady sea temperatures.

SCARCITY

As the Faroe Islands produce only about 3% of the world's salmon and demand is high for the origin, the customers, who prefer the Faroe Islands origin, must pay a premium to get their share of Faroe Islands salmon.

LARGE SALMON

The Faroe Islands aquaculture industry produces the largest Atlantic salmon in the world. The average weight of Faroese salmon in 2018 was 4.82 kg, gutted weight. The price difference between the different sizes of salmon has been historically big during the last years, where especially the 6+ kg salmon sizes have received a considerable price premium. This is due to a lack of supply of larger size salmon as it requires good biology to produce large salmon. The longer the salmon is at sea, the more it is exposed to different risks.

Bakkafrost aims at producing salmon with an average weight of around 5.2 kg, gutted.

SALES AND GEOGRAPHICAL DIVERSIFICATION

Bakkafrost has its own Sales and Marketing Department, which is responsible for selling Bakkafrost´s salmon worldwide. The Group aims at selling its salmon as directly as possible to the best paying segments worldwide. Bakkafrost´s strategy is to have a healthy geographical sales diversification to minimize the risk of any individual market fluctuations.

Worldwide reach

Bakkafrost wants to have as many options as possible when it comes to markets and global reach. By working closely with key freight forwarders, Bakkafrost has developed an industry leading logistics setup, which ensures that Bakkafrost´s salmon is delivered as fresh as possible by airfreight worldwide at the most competitive transport prices. Bakkafrost's salmon is shipped to major airports, where the salmon is transported with passenger airlines to markets worldwide.

This effective logistics network is evident, when looking at Bakkafrost´s sales in 2018.

SEGMENTATION

The brand preference for Bakkafrost's salmon is especially strong in the US, where demand from the Group's customers for salmon above 6 kg is particularly strong. Bakkafrost has a strong market share in China as well. A large share of the salmon, which Bakkafrost exports to the US and China, is used for sushi.

Bakkafrost´s salmon appeals especially to the premium sushi segment, as it has a strong sustainability profile. Bakkafrost does not use any antibiotics and only uses non-GMO raw ingredients in the feed.

VAP

PERFORMANCE

Bakkafrost is one of the leading processors of frozen salmon portions, which are sold by leading European and US retailers. Bakkafrost aims to add value to its VAP production through focusing on producing high quality products and being a reliable and responsible supplier.

The strategy of diversifying Bakkafrost´s product mix has other clear benefits for the Group. It increases the revenue stability as salmon portions are sold on 6-12 months contract prices and whole fresh salmon on spot prices. Bakkafrost does not need to push fresh whole fish sales in adverse market conditions.

FEED

Feed is one of the most important aspects in the production of salmon, both in regard to costs and quality of the salmon.

Full vertical integration

Bakkafrost is one of the most vertically integrated salmon farming companies in the world. Uniquely, Bakkafrost even produces its own fishmeal and fish oil, which is used for the company´s salmon feed. This gives Bakkafrost full control and responsibility over all aspects of the production, and it gives our clients unparalleled traceability.

Feed rich in marine content

The vertical integration gives Bakkafrost the knowhow and ability to make the decision to invest in salmon feed with a substantially higher percentage of marine content.

The marine content gives Bakkafrost salmon a better fat content, rich in the healthy Omega 3 fatty acids DHA and EPA. This natural diet is also evident in the good taste of Bakkafrost´s salmon.

The natural diet for wild salmon is rich in marine resources, and by keeping the diet of Bakkafrost salmon as natural as possible, the 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.

ASC

Bakkafrost is pursuing the rigorous ASC certification, and the goal is to have all sites certified by 2020.

Being one of the first companies certified by ASC underlines Bakkafrost´s commitment to sustainability and care for the environment – values, which Bakkafrost´s discerning customers appreciate.

SEAFOOD CONSUMPTION

Capture fisheries and aquaculture is estimated to about 172 million tonnes of fish in 2016, of which about 152 million tonnes were utilized as food. This corresponds to seafood consumption per capita of 20.5 kg (live weight equivalent). Preliminary estimates indicate a growth rate of 2% in 2017 for global fisheries and aquaculture.

Overall, global capture fisheries production continues to remain stable just above 90 million tonnes, of which about 20 million is utilized in the production of fishmeal and fishoil. The share of non-food uses has remained at a steady level over the last couple of years. WORLD CONSUMPTION OF SEAFOOD

Aquaculture production continues to increase its share of the world seafood consumption, as capture fisheries production has remained stable for a long period. Consequently, aquaculture has covered the increasing demand for seafood. This trend is most likely to continue also in the upcoming years.

Fig. 36

WORLD SEAFOOD PRODUCTION FOR HUMAN CONSUMPTION AND CONSUMPTION PER CAPITA

MAIN MARKETS FOR SALMON AND CONSUMPTION TRENDS

In 2018, worldwide supply of farmed Atlantic salmon increased by 6.5% and ended just above 2.4 million tonnes wfe. The supply volume corresponds to a per capita consumption of approx. 300 grams wfe or approx. 150 grams of edible product, which is about one meal per capita per year.

The world's largest consumer market of Atlantic salmon, however, is the European Union (EU-28), where 1.06 million tonnes wfe were consumed in 2018 (+4%). With a population of approx. 511 million, this corresponds to a per capita consumption of 2.1 kg wfe per year. This indicates approx. 7 meals per capita per year on average.

In 2018, production growth was very limited in Europe (+1%) – whereas Chile grew its supply by 20% or 113 000 tonnes wfe. In a market perspective, growth was also most noticeable for the core Chilean markets – namely, USA, Russia, Latin America and China/Asia.

European spot prices for Atlantic salmon in 2018 were just above 60 NOK per kg on average – like 2016 and 2017. First half saw higher prices due to limited supply as result of a cold winter period in Norway but trended on a lower level in the second half due to improved productivity and production both in Chile and Europe.

PERFORMANCE

THE US MARKET

In 2018, the US market for farmed Atlantic salmon grew by 33 500 tonnes wfe – to a total supply of 475 400 tonnes. With a population of 328 million, this corresponds to a per capita consumption of approx. 1.5 kg wfe per year – indicating 4-5 meals per capita per year.

Chile was the only producing country which increased sales to the US in 2018, with sales rising from 220 000 tonnes wfe in 2017 to almost 270 000 tonnes wfe last year. All other major supplying countries saw a decline in supply.

During the past decade (since 2009), the US market for Atlantic salmon has increased by 200 000 tonnes wfe. While the US industry (both HORECA and Retail) is partly built up around the frozen category, there is a clear increasing trend towards the fresh category. Also, compared to European industry, there is larger difference in segments and type of retailers.

Fig. 38

SUPPLY OF ATLANTIC SALMON TO THE US MARKET (TONNES WFE)

Country 2010 2011 2012 2013 2014 2015 2016 2017 2018
Chile 53,200 99,100 162,200 191,600 214,700 224,100 217,300 220,400 267,200
Canada 87,600 80,400 98,200 77,400 55,000 92,900 100,900 92,100 90,500
Norway 53,800 28,700 23,700 27,000 39,900 51,200 55,700 68,400 67,300
Faroe Islands 10,000 16,600 13,100 16,400 17,100 14,700 16,900 14,800 13,000
United Kingdom 20,600 21,500 17,700 16,100 20,400 16,300 12,700 18,000 17,600
USA 6,900 13,200 9,400 10,100 16,200 13,800 7,700 13,100 6,800
Other 10,800 4,500 5,200 11,400 10,600 10,400 8,400 15,100 13,000
Total 242,900 264,000 329,500 350,000 373,900 423,400 419,600 441,900 475,400

Fig. 39

SUPPLY OF ATLANTIC SALMON TO THE US MARKET (TONNES WFE)

THE EUROPEAN MARKET

In 2018, the EU market for farmed Atlantic salmon increased by 38 400 tonnes wfe – to a total supply of 1.06 million tonnes wfe. With a combined population of 511 million, this corresponds to a per capita consumption of 2 kg wfe per year – indicating approx. 7 meals per capita per year.

Germany, France and the United Kingdom are the largest consuming markets within the European Union accounting for approx. 50% of the total consumption.

Norway was the only large producing country with increased sales to the EU in 2018, increasing supply from 840 000 tonnes wfe in 2017 to almost 910 000 tonnes wfe last year. Both Scotland and the Faroe Islands saw lower supply last year.

During the past decade (since 2009), the EU market for Atlantic salmon has increased by more than 300 000 tonnes wfe.

Fig. 40

SUPPLY OF ATLANTIC SALMON TO THE EU MARKET (TONNES WFE)

Country 2010 2011 2012 2013 2014 2015 2016 2017 2018
Norway 615,300 648,400 761,900 755,500 834,600 912,200 860,200 841,400 910,800
United Kingdom 112,800 117,500 117,000 110,300 117,800 121,100 115,400 124,900 107,900
Chile 10,600 17,200 27,000 50,200 50,500 44,900 53,900 42,500 40,700
Faroe Islands 25,400 28,700 36,800 34,300 32,300 20,400 28,400 27,800 19,800
Other/ Re-export (12,500) (6,800) (8,900) (19,100) (23,300) (18,100) (7,800) (13,100) (17,300)
Total 751,600 805,000 933,800 931,200 1,011,900 1,080,500 1,050,100 1,023,500 1,061,900

Fig. 41

SUPPLY OF ATLANTIC SALMON TO THE EU MARKET (TONNES WFE)

Source: Kontali

PERFORMANCE

CHINA / HONG KONG

The rapid supply growth of Atlantic salmon to China and Hong Kong continued in 2018, and for the first time supply exceeded 100 000 tonnes wfe. The growth was most notable from Chile direct to China – with shipments close to 45 000 tonnes wfe.

Net change in supply from all other suppliers was negative (-3 500 tonnes). A vast increase in direct supply from Norway was equalized by lower supply through 3rd countries (Vietnam). Supply from the Faroe Islands and Canada increased somewhat, while supply from Australia was marginally lower than in 2017.

The vast increase of fresh whole salmon to China from Chile must be seen in relation to higher average harvest weights and better availability of large sized salmon (+5kg) – also, vs. lower availability in Europe.

Fig. 42

SUPPLY OF ATLANTIC SALMON TO CHINA AND HONG KONG (TONNES WFE)

Country 2010 2011 2012 2013 2014 2015 2016 2017 2018
Norway 32,970 24,260 34,450 27,770 34,140 31,110 16,480 17,860 30,920
Chile 3,380 5,180 4,920 9,630 19,960 18,270 29,280 27,790 44,770
United Kingdom 770 5,400 8,020 11,540 16,430 14,920 12,250 12,660 12,710
Denmark 720 110 100 310 350 130 80 340 10
Australia 1,550 1,500 290 150 940 6,420 1,670 11,800 8,000
Faroe Islands 160 3,710 6,800 9,640 11,050 9,520 10,410 8,730 10,700
Canada 550 690 580 320 280 2,430 5,790 2,120 5,300
Others 620 9,040 6,000 10,070 3,200 2,510 12,090 18,240 610
Total SUPPLY
OF
40,720
ATLANTIC
49,890
61,160 SALMON
69,430
TO
86,350
THE CHINESE
85,310
AND
88,050
99,540 113,020
HONG KONG MARKET

Fig. 43

0 20,000 40,000 60,000 80,000 100,000 120,000 2010 2011 2012 2013 2014 2015 2016 2017 2018 Others Canada Faroe Islands Australia Denmark United Kingdom Chile Norway

SUPPLY OF ATLANTIC SALMON TO CHINA AND HONG KONG (TONNES WFE)

Source: Kontali

HISTORICAL SUPPLY OF ALL SALMONIDS (TONNES WFE)

2010 2011 2012 2013 2014 2015 2016 2017 2018
Atlantic salmon 1,455,302 1,633,400 1,998,550 2,041,250 2,229,300 2,319,100 2,161,950 2,294,100 2,416,800
Small trout 446,600 490,600 534,100 577,500 555,700 573,400 613,400 634,000 659,000
Chum 309,300 274,600 294,700 338,300 321,900 338,100 280,900 270,500 211,500
Pink 399,100 587,500 410,300 580,600 307,900 398,900 354,300 452,700 622,500
Large trout 325,800 343,500 386,200 321,700 308,300 282,200 280,200 263,100 268,300
Sockeye 167,600 148,800 142,300 133,200 173,700 190,300 183,000 173,600 172,000
Coho 160,700 174,400 191,000 SUPPLY OF ALL SALMONIDS
176,800
200,400 189,900 151,800 195,000 212,000
Chinook 19,700 22,000 18,800 21,500 22,300 23,900 22,200 23,100 23,600
Total 3,284,102 3,674,800 3,975,950 4,190,850 4,119,500 4,315,800 4,047,750 4,306,100 4,585,700

Fig. 45

PERFORMANCE

GLOBAL HARVEST OF FARMED ATLANTIC SALMON

Norway is the largest producing country of Atlantic salmon and accounts for 52% of the global production. Despite increasing smolt stocking, harvest growth in Norway has been limited since 2012 due to lower productivity and lower average harvest weights. This is particularly linked to sea lice regulation and treatment to combat lice – resulting in poor growth (treatment leading to lost feeding days) and lower utilization of biomass capacity. In 2018, harvest volume in Norway rose by 4% and was driven almost 100% by more individuals harvested.

The second largest producing country of Atlantic salmon, Chile, accounted for 28% of the global production in 2018. Since the ISA-crisis in 2008-2009, Chile has experienced recovery biology-wise and seen improved productivity year after year. New all-time high records were also set last year for smolt yield and harvest weights.

Other major farming regions include North America (Canada), United Kingdom (Scotland), the Faroe Islands and Australia. In 2018, these farming countries saw lower production due to biological challenges and sea lice related issues. A comeback is expected this year.

Other regions with conventional farming include Ireland, Russia, Iceland with marginal production below 20 000 tonnes wfe. Also, land-based RAS plants (global) harvested approx. 5,000 tonnes wfe in 2018.

Fig. 46

GLOBAL HARVEST OF ATLANTIC SALMON (TONNES WFE)

Country 2010 2011 2012 2013 2014 2015 2016 2017 2018
Norway 944,600 1,005,600 1,183,100 1,143,600 1,199,000 1,234,200 1,171,100 1,207,800 1,253,400
Chile 129,600 221,000 364,000 468,100 582,900 598,200 504,400 564,200 677,400
UK 142,900 154,700 159,400 157,800 170,500 166,300 157,400 177,200 153,600
North America 140,000 137,800 156,100 135,400 119,000 155,400 168,500 160,700 163,900
Faroe Island 41,800 56,300 70,300 72,600 82,700 75,600 77,300 80,300 71,700
Ireland 17,800 16,000 15,600 10,600 12,300 15,700 15,800 17,000 14,300
Australia 33,000 36,000 40,000 39,000 42,000 54,400 50,900 61,200 61,300
Iceland 1,200 1,200 3,250 3,350 4,400 3,600 8,100 11,500 13,600
Russia 3,500 4,000 6,000 10,000 14,500 13,600 5,000 10,200 4,000
Others 802 700 300 300 300 300 450 500 500
Landbased RAS - 100 100 300 1,800 1,800 2,900 3,400 4,600
Total 1,455,202 HARVEST OF
1,633,400
1,998,150 ATLANTIC
2,041,050
SALMON
2,229,400
2,319,100 2,161,850 2,294,000 2,418,300

Fig. 47

GLOBAL HARVEST OF ATLANTIC SALMON (TONNES WFE)

Source: Kontali

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 - leading to the highest smolt yield in the industry.

However, in late 2017, the industry was faced with health issues like gill disease but also by higher levels of sea lice. The losses rose significantly in the last months of 2017 and contributed to lower production in 2018.

With continued Russian import embargo - the Faroe Islands have remained the largest salmon supplier of fresh whole salmon to Russia, with exports of 20 - 25 000 tonnes wfe annually since the import ban was implemented in 2014. A weak Russian rouble and high salmon prices have to a degree limited the market potential.

Fig. 48

SUPPLY OF ATLANTIC SALMON FROM THE FAROE ISLANDS (TONNES WFE)

Country 2010 2011 2012 2013 2014 2015 2016 2017 YTD 2018(Nov)
Russia 208 2,373 7,997 2,613 15,465 25,660 19,798 24,096 21,745
USA 9,994 16,579 13,085 16,394 17,105 14,671 16,908 14,820 11,622
United Kingdom 5,940 7,631 9,466 10,199 9,050 4,633 8,024 5,621 5,802
Denmark 4,385 5,195 4,806 1,447 2,122 5,489 5,010 4,920 5,527
Germany 7,251 6,265 8,637 11,439 11,256 5,404 8,156 10,916 1,390
France 2,682 3,636 5,304 3,938 3,663 1,740 3,061 1,557 1,118
Sweden 817 749 2,638 3,074 2,585 1,334 1,289 1,134 836
United Arab Emirates 317 44 499 1,037 772 455 277 761 678
SUPPLY
Belgium
313 OF ATLANTIC
377
SALMON
251
144 FROM
171
THE FAROE
303
617 ISLANDS
824
613
Italy 177 43 25 75 0 253 363 404 545
All other markets 6,266 6,737 9,538 9,497 6,350 3,342 2,925 4,113 1,973

Fig. 49

SUPPLY OF ATLANTIC SALMON FROM THE FAROE ISLANDS TO DIFFERENT MARKETS (TONNES WFE) (ILLUSTRATES THE MARKET DIVERSIFICATION)

PERFORMANCE

CHANGE IN MARKET SUPPLY AND MARKET PRICES

2018 started with high supply volumes (20% global growth in January) and market prices trending in the mid NOK-fifties. This was an early indicator of a strong underlying market (demand) for Atlantic salmon, particularly in Europe.

Medio February, sea temperatures were trending downwards – and all likelihood was pointing towards a cold winter period in Norway. This combined with weak feed sales for January made both the short and medium terms outlook on production look gloomier – and spot prices for fresh Atlantic salmon quickly rose to above NOK seventies.

From June, global productivity increased with strong growth for Norway following a cold winter period, and less biological challenges in Chile increased availability of salmon in the second half of 2018. As a result, spot prices fell back to the mid NOK fifties level and have since trended between 50-60 NOK per kg.

While Chilean harvest volume and supply rose by 20% in 2018 – most of this increase was shipped and sold to core Chilean markets, namely the US market, Russia, China and other Asia. Thus, not increasing pressure on the European market and increasing the global market diversification for Atlantic salmon.

Fig. 50

SUPPLY AND MARKET PRICES SUPPLY AND MARKET PRICES

Source: Kontali

TOP 15 - FARMING COMPANIES (SALMONIDS)

In 2017, the world's fifteen largest salmon farming companies harvested approx. 1.6 million tonnes wfe of salmonids (Atlantic Salmon, Coho Salmon, Chinook, Big Trout), representing 58% of the total harvest quantity. In Norway, these companies made up 62% of the total harvest and 76% in Chile.

Fig. 51

TOP 15 SALMON FARMING COMPANIES 2017 - HARVEST VOLUME, ALL FARMED SALMONIDS SPECIES (TONNES WFE)

Group Head-office Total Norway United K. Chile North Am. Faroe Islands Ireland Others
Marine Harvest Group Norway 411,500 233,500 66,900 49,900 43,800 6,600 10,800 -
Lerøy Seafood Group Norway 175,300 175,300 - - - - - -
Salmar Norway 161,000 150,200 - - - - - 10,800
Mitsubishi / Cermaq Norway 156,000 53,000 - 79,000 24,000 - - -
Cooke Aquaculture Canada 102,000 - 22,000 17,000 63,000 - - -
AquaChile Chile 82,400 - - 82,400 - - - -
Multiexport Foods Chile 75,700 - - 75,700 - - - -
Grieg Seafood Norway 69,600 45,500 13,400 - 10,700 - - -
Australis Seafood Chile 64,800 - - 64,800 - - - -
Bakkafrost Faroe Islands 60,700 - - - - 60,700 - -
Los Fiordos Chile 60,000 - - 60,000 - - - -
Nova Sea Norway 45,200 45,200 - - - - - -
Nordlaks Norway 45,000 45,000 - - - - - -
Norway Royal Salmon Norway 35,500 35,500 - - - - - -
Scottish Seafarms UK 34,400 - 34,400 - - - - -
Top 15 1,579,100 783,200 136,700 428,800 141,500 67,300 10,800 10,800
Farmed Salmonids 2,742,400 1,267,900 179,300 815,600 164,800 80,300 18,000 216,500
Share 58% 62% 76% 53% 86% 84% 60% 5%

Source: Kontali

PERFORMANCE

COST OF PRODUCTION

The cost of producing 1 kg of Atlantic salmon is highly influenced by the feed cost, which comprises between 45 and 60 percent of the production cost. This expense depends mainly on two factors: the price of the fish feed, and how much feed is needed to produce 1 kg fish at the point of harvest/sale. The latter is also known as the Economic Feed Conversion Rate (EFCR), and considers mortality, escapes, harvest weight and other factors.

During the past decade it's mainly higher feed prices which have driven the total cost upwards – as commodity prices for the ingredients used in the salmon feed have increased and markup for the feed producers have remained fairly stable. During the last years, biological challenges and efforts to combat the levels of sea lice have increased labour and other operational costs.

Compared to Norwegian farmers, the average cost of production is somewhat lower for Faroese farmers - a result of better biological performance; lower feed conversion ratio and higher smolt yield (higher average harvest weights and lower loss-rates), but also due to what has become a generally higher cost level in Norway.

COST SPLIT FOR ATLANTIC SALMON - 2018E

Source: Kontali Source: Kontali

PERFORMANCE

BUSINESS REVIEW – FISH FEED

Feed consumption to ocean-farmed salmonids saw double digit growth in both 2011 and 2012, and in 2012 consumption exceeded 3.7 million tonnes of fish feed. While harvest volume growth has been limited since then, fish feed consumption has increased and exceeded 4 million tonnes in 2017. While the biological fcr have been stable, higher biomass losses due to e.g. sea lice treatments and other fish health related issues have increased the economic fcr.

In 2018, the global feed consumption increased by 3% to 4.16 million tonnes. Most of the growth was seen in Chile and other regions (increasing large trout production). Fish feed consumption in Norway showed a modest increase last year of 1%.

The share of marine ingredients in feed for farmed salmonids has over the last decade shown a decreasing trend. However, both fishmeal and fish oil prices still impact the feed-price delivered to farmers.

Global fishmeal and fish oil production recovered in 2018 and is estimated to exceed 5.5 million tonnes of fishmeal and above 1 million tonnes of fish oil. This is a result of a 90% increase in Peruvian Anchovy catches last year followed by a growth in fishmeal and fish oil production. Peruvian fishmeal production will exceed 1.4 million tonnes in 2018, a 90% increase from 2017, while Peruvian fish oil production, due to high oil yield, shows 126% increase to 230 000 tonnes from 2017.

In 2018, about 1.46 million tonnes of fishmeal were imported to China down from 1.56 million tonnes in 2017, but still well above the 10-year average and the second highest amount in the decade after the 2017 record. 53% of the fishmeal amount was sourced from Peru with Vietnam and Chile on second and third place.

Fishmeal prices are expected to remain stable the coming months due to well covered consumers (China) and a good chunk of fishmeal left in Peru as we enter 2019. Fish oil

prices have come down from the peak seen in the beginning of 2018, and the outlook for the coming months is prices on today's level.

Fig. 54

ESTIMATED FEED CONSUMPTION/SALE TO SALMONIDS FOR SELECTED SALMONID PRODUCING REGIONS (ATLANTIC SALMON, LARGE TROUT, COHO, CHINOOK) (1,000 TONNES)

Country 2010 2011 2012 2013 2014 2015 2016 2017 2018
Norway 1,340 1,496 1,664 1,624 1,742 1,746 1,709 1,827 1,838
Chile 720 1,037 1,254 1,209 1,258 1,239 1,046 1,196 1,274
UK 216 227 210 223 231 245 244 244 247
North America 221 225 235 202 235 258 266 285 289
Faroe Islands 61 85 89 96 98 103 107 101 102
Others 232 RAW
271
MATERIAL PRICES
288
304 335 359 368 397 411
Total 2,790 3,340 3,740 3,660 3,900 3,950 3,740 4,050 4,160

Fig. 55

RAW MATERIAL PRICES 2011-2018 (USD/TONNES)

Source: Kontali

Risk Management

The Bakkafrost Group is exposed to a number of different risks, and risks will always be a natural part of our business activities. Risk management is therefore crucial, so that the risks Bakkafrost is exposed to, and the potential financial impact of these are reduced to an acceptable level.

Bakkafrost has general operational and business risks arising from the normal business activities in the value chain. In addition to the operational risks, Bakkafrost is exposed to markets and financial risks arising from the normal business activities 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 determines the framework for identifying and mitigating risks. The Audit Committee supervises the risk management.

The Group Management is responsible for the daily compliance with the risk management framework and the Group's daily risk management. The Group Management assesses the Group's main risks on an ongoing basis, based on weekly or monthly reporting from the organization on business activities, market development, technology etc. The ongoing risk assessment is followed up yearly with an extensive 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 December 2018.

At year-end, status on main risks are reported to the Audit Committee and is approved by both the Audit Committee and the Board of Directors.

OPERATIONAL RISKS Farming

Although operational risks are, to a certain extent, reflected in budgets by means of estimates for mortality and the percentage of fish whose quality is downgraded in connection with primary processing, such risks might, if occurring, materially affect Bakkafrost's results and financial condition. Bakkafrost's operations can also be materially impacted by what is classified as normal operating risks, e.g. quality from suppliers and sub-suppliers, etc. The salmon farming industry is associated with a high level of biological risk, and Bakkafrost aims at reducing that risk through the entire production cycle by means of systematic group-wide biosecurity auditing.

Bakkafrost's production facilities are located within a relatively small geographical area, limited to the Faroe Islands; accordingly, some operational risks, if occurring, can affect Bakkafrost strongly (e.g. weather conditions, some diseases, etc.).

Storms

The growth rate of farmed salmon depends, among other things, on weather conditions. Unexpected warm or cold temperatures can have a significant negative impact on 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. Bakkafrost is continually working on reducing risks using experience with equipment, location and operational organization. Bakkafrost's facilities are located in areas, where the weather conditions are well known and the facilities well secured, though other weather conditions, such as storms or floods, could also lead to unexpected losses at facilities.

Disease

Operation of fish farming facilities involves considerable risk with regard to disease. In the case of an outbreak of disease, Bakkafrost will, in addition to the direct loss of fish, incur substantial costs in the form of premature harvesting, loss of quality of harvested fish and subsequent periodic reduced production capacity.

Sea lice

The increasing number of sea lice is one of the largest risks and challenges in the farming industry globally and in the Faroe Islands today. Increased number of sea lice may cause stress, which can lead to diseases. Bakkafrost has procedures for how to reduce the number of sea lice with different types of treatment. The procedures are improved on a continuing basis. Like almost all other salmon farming companies, Bakkafrost is looking into non-medicinal treatment options. The future goal is that medicinal treatments will be exchanged with non-medicinal treatment options.

Bakkafrost uses lumpfish as cleaner fish for sea lice. Lumpfish is the only cleaner fish used in the Faroe Islands, and is an important preventive measure against sea lice. Bakkafrost will increase the use of lumpfish in its farming sites. Bakkafrost uses both freshwater bath on-board a live fish carrier, and lukewarm seawater treatment in two farming service vessels as sea lice treatment. Additionally, Bakkafrost strives to improve deloucing methods continuously.

Escapes

Although Bakkafrost does not tolerate the escape of farmed salmon, there is a risk that escapes will occur, in which case

RISKS

Bakkafrost's business could be materially adversely affected, directly through loss of farmed salmon, and indirectly through the spread of diseases, governmental sanctions, negative publicity or other indirect effects. Procedures and new technological solutions in this respect are constantly monitored.

Deformities

RISKS

As the aquaculture industry has evolved and developed, the biological limits for how fast fish can grow have also been challenged. As with all other forms of intensive food production, a number of production-related disorders arise, i.e. disorders caused by intensive farming methods.

As a rule, such disorders appear infrequently, but certain populations can be severely affected. The most important production-related disorders relate to physical deformities and cataracts. These invariably cause financial loss by way of reduced growth and inferior health, reduced quality on harvesting and damage to the industry's reputation.

Fishmeal, fish oil and fish feed

The production of fishmeal, fish oil and fish feed follows established methods with automated and controlled processes. However, any production is vulnerable to downtime and possible insufficient supply of raw material input. Unexpected shortfalls in raw material due to limited catch volumes or limited delivery or purchase of fish or supply of substitutes, could affect the volumes produced in the factory. This may result in incidents or necessary measures that may have significant cost implications. Bakkafrost is continually working on reducing risks.

Bakkafrost's fishmeal, fish oil and fish feed department at Havsbrún's facilities are located in the Faroe Islands, in which case the company's business could be materially adversely affected directly from any trade restrictions, or indirectly through restrictions on ocean harvests or quotas.

Feed contaminants

Feed may, through its use of different types of raw materials and ingredients and through its production processes, be exposed to contamination by a number of undesirable substances. 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 important contaminants. These limits are continuously monitored by the authorities and may be altered. There is also the possibility of "new" contaminants being added periodically to the list.

Generally, contamination may occur either accidentally or deliberately through malicious product tampering. Such contamination has the potential to affect the environment, fish health and/or food safety, with a potential negative impact on the public's confidence in eating salmon. Any of these events could have a negative impact on Bakkafrost's operating result 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.

Bakkafrost's feed department, Havsbrún, operates a number of controls to reduce the risk of contamination. Examples of measures and controls, included in HACCP and ISO procedures, include supplier audits and supplier specifications of raw materials, targeted sourcing of raw materials, regular raw material and finished feed quality control analyses, procedures for cleaning of fish oils, etc. and strict plant security procedures. The risks, however, can never be completely eliminated.

Contaminants that may be a risk for fish feed include, but are not limited to, organic contaminants such as dioxins and DL-PCBs, myco toxins, pesticides, antioxidants such as Ethoxyquin and BHT, brominated flame retardants and bacterial contamination and inorganic contaminants such as lead, mercury, 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, and since early 2018, the antioxidant, Ethoxyquin, has been replaced with natural antioxidant.

The feed may also, through accidents or tampering, be contaminated by other inorganic substances such as mineral oil, physical objects, etc. Several substances in addition to the list above are being monitored.

IT

IT-related risks have increased in recent years, as IT has become more integrated in Bakkafrost's operations. Therefore, breakdown of Bakkafrost's control systems and administrative systems will have negative effect on Bakkafrost's operations. The IT risks are assessed continuously, based on the importance of a potential event for Bakkafrost operations and the likelihood that the event may occur.

MARKET RISKS Price on farmed salmon

Bakkafrost's financial position and future development depend to a considerable extent on the price of farmed salmon, which has historically been subject to substantial fluctuations. Farmed salmon is a commodity, and it is therefore reasonable 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 key parameter.

Price on fishmeal and fish oil

Bakkafrost's financial position and future development depend to some extent on the price of fishmeal and fish oil, which have historically been subject to substantial fluctuations. Fishmeal and fish oil are commodities, and it is therefore reasonable 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 a key parameter. Decreased supply may cause prices to increase. This could in turn have an impact on 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 fluctuations in feed prices could therefore have a major impact on profitability. 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 the fish feed production. The feed producers have come a long way, however, in their efforts to replace some of the marine based input factors with vegetable raw materials. Furthermore, the production of fish feed is an integrated part in Bakkafrost's value chain and thus reducing this risk.

Geography

Bakkafrost sells its salmon products to more than 20 different countries. Fishmeal, fish oil and feed are sold to a limited number of countries. From time to time, due to different reasons, the company might suffer export restrictions to countries or regions. This could, in turn, have a significant impact on the company's profitability and cash position.

FINANCIAL RISKS

Bakkafrost seeks to manage financial risks through operational measures or (where such measures are not available) through the use of financial derivatives. A policy on the management of these risks has been approved by the Board of Directors.

The follow-up of internal procedures associated with financial reporting is undertaken as part of the management's day-to-day supervision and the process owners'

RISKS

follow-up. Please refer to Note 4.1 for additional information.

Foreign exchange risk

Bakkafrost trades in the world market for farmed salmonids. The revenues and accounts receivables are predominantly denominated in DKK, EUR and USD, but to some extent also in other foreign currencies. On the other hand, purchases of raw materials etc. are predominantly denominated in DKK, but linked to the USD. Therefore, Bakkafrost has some natural hedging. For those currencies not fully hedged, fluctuations in foreign exchange rates present a financial risk to Bakkafrost.

Bakkafrost's financing is bank financing and is in DKK and EUR, but Bakkafrost has the possibility to finance in other currencies.

In connection with some material investments, Bakkafrost is in some degree exposed to NOK, USD and EUR.

Credit risk

RISKS

The risk that counterparties do not have the financial strength to meet their obligations is considered relatively low, since losses due to bad debts historically have been small. Bakkafrost has guidelines to ensure that sales are made only to customers that have not previously had payment problems and that outstanding balances do not exceed fixed credit limits. The majority part of the total accounts receivables is insured. As not all receivables are insured, Bakkafrost must accept a certain risk element in accounts receivables.

The main credit risk on the date of the statement of financial position regards Bakkafrost's receivables portfolio.

Liquidity risk

Liquidity risk is the risk that Bakkafrost will not be able to meet its financial obligations as they fall due. Liquidity risk is

managed by maintaining a flexible financial structure, which is secured by means of established borrowing facilities. Bakkafrost's objective is to have sufficient cash, cash equivalents or medium-term credit facilities to meet its borrowing requirement in the short term. Unused credit facilities and terms are described in Note 4.1.

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-equity ratio, Bakkafrost will support its business operations. Bakkafrost manages and makes changes to its capital structure in response to an ongoing assessment of financial conditions under which the business operates and its short- and medium-term outlook, including any adjustment in dividend pay-outs, buyback of own shares, capital reduction or issue of new shares.

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 regime, as detailed in the Norwegian Code of Practice for Corporate Governance, published on 17 October 2018 by the Norwegian Corporate Governance Board (the "Code of Practice"). 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 Corporate Governance, which may be found on our website.

Bakkafrost does not comply with the following recommendations in the Norwegian Code of Practice for Corporate Governance:

• 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 2022, 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 2022. 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 practical 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.

SHAREHOLDERS

GENERAL MEETING

Bakkafrost's shareholders exercise their rights at the General Meeting.

NOMINATION COMMITTEE

Consists of four members, which are elected by AGM. Recommends candidates for election to the Board of Directors and Directors' fees.

BOARD OF DIRECTORS

Consists of 3-7 members, which are elected every second year. The Board of Directors is responsible for the overall management of Bakkafrost.

AUDIT COMMITTEE

Consists of three members from the Board of Directors and is chaired by the Board of Directors' Chairman.

GROUP EXECUTIVE MANAGEMENT

The Group Executive Management is responsible for the day-to-day management of Bakkafrost.

Bakkafrost's Governance Model

To ensure adherence to the principles, the company has elaborated specific instructions regarding rules of procedure for the Board of Directors, instructions for the Nomination Committee, 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 Committee, Board of Directors and auditor.

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 election to the Board of Directors and the Directors' fees. The deadlines for submitting proposals to the Nomination Committee is 31 January.

Bakkafrost's General Meeting elects the members, hereunder 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 Committee are incorporated in Bakkafrost's Articles of Association.

At the end of 2018, the members of the Nomination Committee 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 that Bakkafrost at any time has an appropriate capital base, key policies, control and audit matters. The Board of Directors is responsible for Bakkafrost's Risk Management and material operational decisions.

The majority of the members of the Board of Directors shall be resident 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 regarding its activities in a working procedure, which is reviewed regularly.

The Board of Directors held eight meetings in 2018. Below under each Director's profile is disclosed each Director's participation in the Board meetings held during 2018.

The members of the Board of Directors receive a fixed remuneration, which is approved by the general meeting. The members of the Board of Directors are not part of Bakkafrost's share savings plan for employees.

Audit Committee

The Audit Committee is a sub-committee of the Board of Directors 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 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 five times during 2018 to review accounting and operational issues in detail. The committee consists of Rúni M. Hansen (Chairman), Øystein Sandvik and Teitur Samuelsen.

Group Executive Management

The Group Executive Management manages Bakkafrost's daily 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 Management and gives more specific rules regarding its work.

The Group Executive Management consist of CEO Regin Jacobsen, CFO Gunnar Nielsen and MD Odd Eliasen. Information about the Group Executive Management may be found in "Group Managements' Profiles" in the Annual Report.

Corporate Responsibility and Sustainability

Governance and management

Bakkafrost's core values specify an intent to act responsibly, 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 responsibility for the mitigation of significant operational risks. Risks are monitored throughout the supply chain and reported internally 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 financial and business-related risks, internal controls and compliance with statutory and other requirements from public authorities. 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 2019.

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. 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, shareholders 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 approach in every dealing with other employees and all external 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 Bakkafrost nor its business partners shall exploit children as a labour 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 environment 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 Compact 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.

Human capital

Bakkafrost employs 1,073 employees (824 full time equivalent). It acknowledges that in order 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 to maintain high employee engagement. By 2020, it will renew its employee strategy.

Health, safety and wellbeing

Protecting human capital involves maintaining a high standard of occupational health and safety and creating a healthy working culture.

The company's Code outlines its intention to ensure a systematic 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 industry-leading product quality and safety standards. A comprehensive internal control system is in place, which is regularly inspected by the authorities; this involves daily product testing 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 maintain our high omega 3 levels and maintain high customer product quality scores.

Biosecurity and fish health and welfare

Bakkafrost is committed to upholding leading welfare standards 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 maintained at all times. The company has made a commitment to maintain low fish mortality rates, to further develop and implement non-medicinal treatments (with high focus on fish welfare), and to have zero fish escapes.

Environmental management and sustainable feed

Bakkafrost is committed to minimizing pollution of the environment 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 activities have on nature and the environment and apply environmentally friendly solutions to the extent reasonably possible.

The company is focused on optimizing its efficient use of fossil fuels and has made a series of commitments towards the health of the environment, including investment in a new biogas plant, a sustainable feed policy, and implementation of measures to reduce pollution in the fjords.

Collaboration and certification

As well as collaborating with the salmon industry through the Faroe Fish Farmer's Association and the Global Salmon Initiative (GSI). Bakkafrost subscribes to a number of external standards and certification programmes to ensure product sustainability, quality and safety. The entire value chain – feed production, broodstock, hatcheries, farming sites, and harvesting and processing plant – is certified according to the international GLOBAL G.A.P. standard, which focuses on food safety throughout the production, fish welfare, health and safety, and environmental management.

Bakkafrost's harvesting and value-added product (VAP) production has the Aquaculture Stewardship Council (ASC) Chain of Custody certification, and the VAP production is certified according to the BRC and IFS food safety standards. The fishmeal, oil and feed production at Havsbrún, hold multiple 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.

Bakkafrost has made a commitment to have all farming sites 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 international 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 2018 performance against them, can be found in Bakkafrost's 2018 Healthy Living Sustainability Report.

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 Accountants), which is also the auditor of the parent company and all its subsidiaries, registered in the Faroe Islands. Auditor for Havsbrún Norge ASA is Bruli Revisjon AS, and auditor for Havsbrún Shetland Plc. is A9 Partnership Ltd. Auditors for Bakkafrost UK Ltd is Forrester Boyd Chartered Accountants. Auditor for Bakkafrost USA LLC is EisnerAmper LLC.

DIVIDEND POLICY

Bakkafrost aims to give its shareholders a competitive return 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 shareholders, but it is the responsibility of the Board of Directors to make an overall assessment in order 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 balance sheet, a competitive operation and undrawn available credit facilities. The Board of Directors has therefore decided to propose to the Annual General Meeting that DKK 8.25 (NOK 10.70*) per share shall be paid out as dividends. This corresponds to DKK 403.1 million (NOK 523.5* million).

PARENT COMPANY'S FINANCIAL STATEMENTS AND ALLOCATION OF PROFIT FOR THE YEAR

The parent company P/F Bakkafrost had a net profit of DKK 1,012.0 million for 2018. The Board of Directors has decided to propose to the Annual General Meeting that DKK 8.25 (approximately NOK 10.70*) per share shall be paid out as dividends. This corresponds to DKK 403.1 million (NOK 523.5* million).

The Board thereby proposes the following allocation of funds:

  • Result for 2018: DKK 1,012.0 million
  • Transferred to other equity: DKK 608.9 million
  • Total provision for dividends: DKK 403.1 million

After payment of dividends, the distributable equity totals DKK 3,544.1 million.

SHAREHOLDERS, CAPITAL AND VOTES

P/F Bakkafrost had, on 31 December 2018, a total of 48,858,065 shares outstanding, each with a nominal value of DKK 1. Of the 48,858,065 shares outstanding, P/F Bakkafrost holds 202,565 treasury shares as at 31 December 2018.

Ticker code: BAKKA

LARGEST SHAREHOLDERS

These shareholders held directly or indirectly more than 5% of the shares in the company as at 31 December 2018: Oddvør Jacobsen, Regin Jacobsen 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.

Directors and Management

Øysten Sandvik Board member

Gunnar Nielsen Chief Financial Officer

Odd Eliasen Managing Director of Havsbrún

Regin Jacobsen Chief Executive Officer

Rúni M. Hansen Chairman of the Board Annika Frederiksberg Board Member Teitur Samuelsen Board Member

Johannes Jensen Deputy Chairman of the Board

Directors' Profiles

RÚNI M. HANSEN Chairman of the Board

Born 1967. Faroese citizen. Joined the Board in 2009 and has been Chairman since. Term of office expires in 2019. Is considered to be independent. Executive chairman of the industry holding company Tjaldur.

Education:

GOVERNANCE

MSc. in Economics and Business Administration, Copenhagen Business School. Postgraduate, Lancaster University Management School.

Board meetings in 2018:

Participated in all 8 Board meetings in 2018.

Number of shares held in Bakkafrost:

Holds 10,000 shares at year-end 2018 – no change in portfolio in 2018.

Mr. Hansen has extensive experience in the international oil and gas industry. He has been Head of Statoil's Arctic Unit and a member of Statoil's Worldwide Exploration Management Team. For a number of years, he was the Country Manager for Statoil, in charge of operations in the Faroes and Greenland, including operated drilling campaigns. He has also been the Manager of Commercial and Negotiations for Europe and North Africa at Statoil. During his time in Statoil, he has been based in Copenhagen, London, Oslo and the Faroe Islands. Prior to Statoil, he was in the shipping and seafood industry.

Rúni M. Hansen was a member of the World Economic Forum´s Global Agenda Council on the Arctic in the period 2012-2016.

JOHANNES JENSEN Deputy Chairman of the Board

Born 1962. Faroese citizen. Joined the Board in 2009 and has been Deputy Chairman since. Term of office expires in 2020. Is considered to be independent. Managing Director at P/F Gist & Vist.

Education:

MBA, Lancaster University Management School.

Board meetings in 2018:

Participated in all 8 Board meetings in 2018.

Number of shares held in Bakkafrost:

Holds no shares at year-end 2018 – no change in portfolio in 2018.

Mr. Jensen has extensive experience in seafood and marketing. He had a long career at Faroe Seafood, where he was Marketing Director from 1992 to 2001. Mr. Jensen is presently also Chairman of P/F Frost and of P/F Visit Faroe Islands.

TEITUR SAMUELSEN Board member

Born 1972. Faroese citizen. Joined the Board in 2016. Term of office expires in 2020. Is considered to be independent. Managing Director at P/F Eystur- og Sandoyartunlar.

Education:

MSc. in Business Economics & Auditing, Copenhagen Business School.

Board meetings in 2018:

Participated in all 8 Board meetings in 2018.

Number of shares in Bakkafrost:

Holds 100 shares – no change in portfolio in 2018.

Mr. Samuelsen has an extensive experience from 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 P/F 6. September, Vest Pack and Betri Trygging.

ANNIKA FREDERIKSBERG Board member

Born 1971. Faroese citizen. Joined the Board in 2008. Term of office expires in 2019. Is not considered to be independent. Sales Manager at Bakkafrost.

Education:

Basic Vocational Course, Commercial Line, Faroese Business School.

Board meetings in 2018:

Participated in all 8 Board meetings in 2018.

Number of shares in Bakkafrost:

Holds directly and indirectly 15,556 shares at year-end 2018 – change in portfolio in 2018: +301 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.

ØYSTEIN SANDVIK Board member

Born 1948. Norwegian citizen. Joined the Board in 2013. Term of office expires in 2019. Is considered to be independent.

Education:

Bank Economist.

Board meetings in 2018:

Participated in all 8 Board meetings in 2018.

Number of shares in Bakkafrost:

Holds no shares at year-end 2018 – no change in portfolio in 2018.

Mr. Sandvik has extensive experience from the finance sector and seafood. 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.

Group Management's Profiles

REGIN JACOBSEN Chief Executive Officer

Born 1966. Faroese citizen. Mr. Jacobsen has been Chief Executive Officer 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 4,495,198 shares at year-end 2018.

Changes in portfolio in 2018: +884 shares.

Mr. Jacobsen has extensive experience from the salmon industry and finances. He was Financial Manager of Bakkafrost before he became Chief Executive Officer of Bakkafrost.

GUNNAR NIELSEN Chief Financial Officer

Born 1977. Faroese citizen. Mr. Nielsen has been Chief Financial Officer of Bakkafrost since 2014.

Education:

Graduate Diploma in Business Administration and Accounting (HD-R), Aarhus School of Business. MSc. in Business Economics & Auditing, Copenhagen Business School.

Number of shares held in Bakkafrost:

Holds 1,651 shares at year-end 2018.

Changes in portfolio in 2018: +608 shares.

Mr. Nielsen has extensive experience in the finance sector. He has held positions as corporate finance advisor and auditor. Before joining Bakkafrost, Mr. Nielsen held different positions at the Betri Group, including being advisor and CEO of TF Íløgur.

ODD ELIASEN Managing Director of Havsbrún

Born 1965. Faroese citizen. Mr. Eliasen has been Managing Director of Havsbrún since 2012.

Education:

Teacher Certificate Exam, University of the Faroe Islands.

Number of shares held in Bakkafrost:

Holds 173,066 shares at year-end 2018. Changes in portfolio in 2018: +697 shares.

Mr. Eliasen has broad experience from the fish farming industry and has been an active player in restructuring the fish farming industry in the Faroe Islands. He has been responsible for Havsbrún's farming activities and has held various board positions in the industry. Mr. Eliasen was a board member of Bakkafrost from 2006 to 2012.

Other Managers' Profiles

SÍMUN P. JACOBSEN, Senior Sales Manager

Símun P. Jacobsen (born 1963) was appointed Senior Sales Manager at Bakkafrost in 2012. Mr. Jacobsen holds a Graduate Diploma in Business Administration and Accounting (HD-R) from Handelshøjskolen Syd in Denmark. Mr. Jacobsen held the position as sales manager at United Seafood from 1998 and at Faroe Seafood from 2005.

JÓN PURKHÚS, Farming Manager (North region)

Jón Purkhús (born 1958) was appointed Farming Manager at Bakkafrost in 2006, following the merger of Faroe Salmon with Bakkafrost. Mr. Purkhús has held positions in the Faroese salmon farming industry and was the founder of Faroe Salmon, where he held the position as Managing Director from 1985.

KÁRI JACOBSEN, VAP Manager

Kári Jacobsen (born 1963) was appointed VAP Manager at Bakkafrost in 2008. Mr. Jacobsen was educated at Statens Fagskole for Fiskeindustri in Vardø and held the position as production manager at Tavan from 1984 to 1994, and from 1999 to 2008. Mr. Jacobsen held the position as production manager at United Seafood from 1994 to 1998.

ODDVALD OLSEN, Farming Manager (West region)

Oddvald Olsen (born 1964) was appointed Farming Manager at Bakkafrost in 2011. Mr. Olsen has held positions in the Faroese salmon farming industry, and from 1993 to 2004, he held the position as Managing Director in Sjólaksur. Mr. Olsen joined Bakkafrost in 2010.

ANDRIAS PETERSEN, Harvest Manager

Andrias Petersen (born 1973) was appointed Harvest Manager at Bakkafrost in 2010, following the merger of Vestlax Group with Bakkafrost. Mr. Petersen holds a BSc in Chemical Engineering from the Technical University of Denmark. From 2002 to 2008, he joined the Faroese Food, Veterinary and Environmental Agency, and from 2008 to 2010, Mr. Petersen held the position as production manager at Vestlax.

HARTVIG JOENSEN, Manager, Fishmeal and Fish Oil

Hartvig Joensen (born 1967) was appointed Manager at Havsbrún's Fishmeal and Fish Oil Department in 2005. Mr. Joensen was educated at Copenhagen University College of Engineering as a Technical Assistant and holds a Diploma in Leadership from the Faroese Business School.

RÚNI WEIHE, Manager, Fish Feed

Rúni Weihe (born 1980) holds a MSc in Fisheries from the University in Tromsø and a PhD in dietary salmon farming from the Norwegian University of Life Sciences. From 2008, Mr. Weihe held the position as Research & Development Manager of Havsbrún's Feed Department and in 2014, he was appointed Feed Department Manager.

HEINI KRISTIANSEN, Group HR Manager

Heini Kristiansen (born 1986) was appointed Group HR Manager at Bakkafrost in November 2018. Mr. Kristiansen holds a BSc in International Business and Politics and a cand.merc.HRM from Copenhagen Business School. Mr. Kristiansen has previous experience as HR Manager at Smyril Line and as a professional within individual and collective labor market negotiations in Denmark.

ANNA JOHANSEN, Group Quality Manager

Anna Johansen (born 1974) was appointed Quality Manager at Bakkafrost in 2010, following the merger of Vestlax Group with Bakkafrost. Mrs. Johansen holds a cand.scient in biology from the University of Copenhagen, Denmark. From 2003 to 2007, she joined the Faroese Food, Veterinary and Environmental Agency, and from 2007 to 2010, she held the position as quality manager at Vestlax. In 2015, Mrs. Johansen was appointed Group Quality Manager.

RÚNI OLSEN, Fresh Water Manager

Rúni Olsen (born 1967) was appointed Fresh Water Manager at Bakkafrost in February 2018. Mr. Olsen holds a Master's Certificate from Føroya Sjómansskúli in Tórshavn, Faroe Islands. And from 1996 to 2009, he held leading positions in international shipping. From 2009, Mr. Olsen held the position as Maritime Chief at P/F Smyril Line.

SVERRI KJÆRBÆK, Operations Manager

Sverri Kjærbæk (born 1964) was appointed Operations Manager at Bakkafrost in 2016. Mr. Kjærbæk holds a Master's Certificate from Føroya Sjómansskúli in Tórshavn, Faroe Islands, and from 1989 to 2007, he held positions as Captain in Mærsk Line. From 2007, Mr. Kjærbæk has served as captain on board passenger as well as offshore vessels.

Statement by the Management and the Board of Directors on the Annual Report

The Management and the Board of Directors have today considered and approved the Annual and Consolidated Report and Accounts of P/F Bakkafrost for the financial year 1 January 2018 to 31 December 2018.

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 companies.

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 financial positions at 31 December 2018, as well as the results of the Group's and the parent company's activities and cash

Glyvrar, 12 March 2019

Management:

Regin Jacobsen CEO

The Board of Directors of P/F Bakkafrost

Rúni M. Hansen Johannes Jensen Øystein Sandvik Chairman of the Board Deputy Chairman of the Board Board Member

Annika Frederiksberg Teitur Samuelsen Board Member Board Member

flows for the financial year 1 January 2018 to 31 December 2018.

In our opinion, the management's review provides a true and fair account of the development in the Group's and the parent 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 annual general meeting.

Independent Auditor's Report

To the shareholders of P/F Bakkafrost

Opinion

In our opinion, the consolidated annual accounts and the annual accounts give a true and fair view of the assets and liabilities, of the financial position of the Group and the Company as at 31 December 2018, and of the results of the Group and the Company operations as well as the consolidated cash flows for the financial year 1 January - 31 December 2018 in accordance with International Financial Reporting Standards as adopted by the EU.

Identification

We have audited the consolidated annual accounts and the annual accounts of P/F Bakkafrost for the financial year 1 January - 31 December 2018, which comprise Income Statement, Statement of Financial Position, Statement of Comprehensive Income, Statement of Changes in Equity, and notes, including a summary of accounting policies used, for both the Group and the Company, as well as consolidated statement of cash flows. The consolidated annual accounts and the annual accounts are prepared in accordance with the International Financial Reporting Standards as adopted by the EU.

Basis of opinion

We conducted our audit in accordance with international standards on auditing and the additional requirements applicable in the Faroe Islands. Our responsibilities under those standards and requirements are further described in the below section "Auditor's responsibilities for the audit of the consolidated annual accounts and the annual accounts".

Independence

We are independent of the Group in accordance with international ethics standards for accountants (IESBA's Code of Ethics) and the additional requirements applicable in the Faroe Islands, and we have fulfilled our additional ethical responsibilities in accordance with these standards and requirements. We believe that the audit evidence obtained is sufficient and appropriate to provide a basis for our opinion.

Key Audit matters

Key audit matters are the matters, which we consider central to our audit of the annual and consolidated accounts for 2018. The matters are considered during our audit of the accounts in their entirety and when forming our opinion. We do not provide separate opinions on these matters.

Key Audit matter

Biomass

Biomass at marine sites is not accurately ascertainable until harvest, but based on accounting estimates, which again is based on partly factual information relevant to stocking, feeding, sea temperature, mortality, and production expenses, as well as experience on growth, undetected mortality, feed consumption ratio, etc.

Measuring biomass at fair value implies exercising material estimates on future events and values, such as development and costs on biomass during remaining growth period, future quality distribution, future market conditions at expected point of harvest etc. The management is exercising material estimates in value measurement on biomass at Fair Value.

Our response to the matter during our audit

We apply our experience and knowledge on salmon production, considering the estimates, and assure ourselves, that the estimates are based on factual data, that the management is applying estimates based on factual and empirical data on salmon production, and that the estimates are free from bias. Moreover, we assure ourselves on an ex-post basis, that accounting estimates made by the management at the balance sheet are not materially misstated, once the biomass has been harvested.

We assure ourselves, that estimates are based on ascertainable information in line with company specific data as that estimates on future conditions are based on the best information available. We also ascertain that estimates on future market conditions are based on public market analyses, and that valuation techniques are in line with generally accepted valuation principles and are consistently applied.

Statement on the management's review

The management is responsible for the management's review.

Our opinion on the consolidated annual accounts and the annual accounts does not cover the management's review, and we do not express any kind of assurance opinion on the management's review.

In connection with our audit of the consolidated annual accounts and the annual accounts, our responsibility is to read the management's review and, in that connection consider whether the management's review is materially inconsistent with the consolidated annual accounts and the annual accounts or our knowledge obtained during the audit, or whether it otherwise appears to contain material misstatement.

Furthermore, it is our responsibility to consider whether the management's review provides the information required under the International Financial Reporting Standards as adopted by EU.

Based on the work we have performed, we believe that the

management's review is in accordance with the consolidated annual accounts and the annual accounts and that it has been prepared in accordance with the requirements of the International Financial Reporting Standards as adopted by EU. We did not find any material misstatement in the management's review.

Responsibilities for the accounts and the audit

The management's responsibilities for the consolidated annual accounts and the annual accounts

The management is responsible for the preparation of consolidated annual accounts and annual accounts that give a true and fair view in accordance with the International Financial Reporting Standards as adopted by EU. The management is also responsible for such internal control as the management determines is necessary to enable the preparation of consolidated annual accounts and annual accounts that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated annual accounts and the annual accounts, the management is responsible for evaluating the Group's and the Company's ability to continue as a going concern, and, when relevant, disclosing matters related to going concern and using the going concern basis of accounting when preparing the consolidated annual accounts and the annual accounts, unless the management either intends to liquidate the Group or the Company or to cease operations, or if it has no realistic alternative but to do so.

Auditor's responsibilities for the audit of the consolidated annual accounts and the annual accounts

Our objectives are to obtain reasonable assurance about whether the consolidated annual accounts and the annual accounts as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report including an opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with international standards on auditing and the additional requirements applicable in the Faroe Islands will always detect a material misstatement when it exists. Misstatements may arise due to fraud or error and may be considered material if, individually or on aggregate, they could reasonably be expected to influence the economic decisions made by users on the basis of these consolidated annual accounts and annual accounts.

As part of an audit conducted in accordance with international standards on auditing and the additional requirements applicable in the Faroe Islands, we exercise professional evaluations and maintain professional scepticism throughout the audit. We also:

  • Identify and assess the risks of material misstatement in the consolidated annual accounts and the annual accounts, whether due to fraud or error, design and perform audit procedures in response to those risks and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than the risk of not detecting a misstatement resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or overriding of internal control.
  • Obtain an understanding of the internal controls relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group's and the Company's internal controls.
  • Evaluate the appropriateness of accounting policies used by the management and the reasonableness of accounting estimates and related disclosures made by the management.

  • Conclude on the appropriateness of the management's preparation of the consolidated annual accounts and the annual accounts being based on the going concern principle and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may raise significant doubt about the Group's and the Company's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the consolidated annual accounts and the annual accounts or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Group and the Company to cease to continue as a going concern.

  • Evaluate the overall presentation, structure and contents of the consolidated annual accounts and the annual accounts, including the disclosures in the notes, and whether the consolidated annual accounts and the annual accounts reflect the underlying transactions and events in a manner that gives a true and fair view.
  • • Obtain sufficient and appropriate audit evidence regarding the financial information of the entities or the business activities within the Group to express an opinion on the consolidated annual accounts. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in the internal control that we identify during our audit.

We also provide a statement to the Board of Directors stat-

ing, that we adhere to the relevant ethical requirements relating to our independence, and provide information on any relation, which may reasonably be considered to influence our independence, and where relevant, security measures are employed.

Based on the issues communicated to the Board of Directors, we determine which issues we consider key to our audit of the annual and consolidated accounts for the current period, and hence Key Audit Matters. We describe these matters in our report, unless legislation or other legal impediments prohibit publication of the matters, or in the extremely rare circumstances, where we determine, that matters cannot be described in our Auditors Report, because negative implications thereof may reasonably be expected to outweigh the public interest in the information provided by description of Key Audit Matters.

Tórshavn, 12 March 2019

Januar P/F

løggilt grannskoðanarvirki State authorized Public Accountants Company reg.no. 5821

Fróði Sivertsen State Authorized Public Accountant

Statements and Notes

BAKKAFROST GROUP

BAKKAFROST GROUP

Table of Contents

Consolidated Income Statement for the year ended 31 December 84
Consolidated Statement of Comprehensive Income for the year ended 31 December 85
Consolidated Statement of Financial Position as at 31 December 86
Consolidated Cash Flow Statement for the year ended 31 December 88
Consolidated Statement of Changes in Equity as at 31 December 89
NOTES - SECTION 1 – BASIS OF PREPARATION 91
The
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 91
Note
1.1
Summary
of
Significant
Accounting
Policies
91
Note 1.2 Basis of Presentation 91
Note 1.3 Consolidation Principles 91
Note 1.4 Translation of Foreign Currencies 92
Note
1.5
Classification
Principles
92
Note 1.6 Functional Currency 92
Note 1.7 Standards issued, but not yet effective 93
Note 1.8 Accounting Estimates 93
NOTES - SECTION 2 – RESULTS FOR THE YEAR 94
This section gives more details on the results for the year, including operating segments, taxes and employee costs.
Note 2.1 Revenues 94
Note 2.2 Major Customers 94
Note 2.3 Operating Segment Information 95
Note 2.4 Salaries and other Personnel Expenses 99
Note 2.5 Other Operating Expenses 101
Note 2.6 Research and Development Expenses 101
Note 2.7 Net Financial Items 102
Note 2.8 Tax 103
NOTES - SECTION 3 – ASSETS AND LIABILITIES
105

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 105
Note 3.2 Property, Plant and Equipment 109
Note 3.3 Companies in the Group 111
Note 3.4 Shares and Holdings in other Companies 112
Note 3.5 Inventory 112
Note 3.6 Biological Assets 113
Note 3.7 Accounts Receivables and other Receivables 116
Note 3.8 Cash and Cash Equivalents 117
Note 3.9 Share Capital and Major Shareholders 118
Note 3.10 Interest-bearing Debt 120
Note 3.11 Mortgages and Guarantees 123
Note 3.12 Derivatives 124
Note 3.13 Provisions 125
NOTES - SECTION 4 – CAPITAL STRUCTURE AND FINANCING ITEMS 126
This
section
gives
an
insight
into
the
capital
structure
and
financing
items.
Note 4.1 Financial Risk Management 126
Note 4.2 Categories and Fair Value of Financial Instruments 131
Note 4.3 Earnings per Share 132
NOTES - SECTION 5 – OTHER DISCLOSURES 133
This section gives more details on the statutory notes that have secondary importance from the perspective of Bakkafrost.
Note 5.1 Capital Commitments 133
Note 5.2 Related-Party Transactions 134
Note 5.3 Business Combinations 135
Note 5.4 Events after the Date of the Statement of Financial Position 135
Note 5.5 Auditor's Fees 136
Note 5.6 Going Concern 136
Note 5.7 Alternative Performance Measures 136

Consolidated Income Statement

FOR THE YEAR ENDED 31 DECEMBER

DKK 1,000 Note 2018 2017
Operating revenue 3,177,422 3,770,049
Purchase of goods -1,074,645 -883,871
Change in inventory and biological assets (at cost) 199,696 -141,406
Salary and personnel expenses 2.4 -353,756 -400,267
Other operating expenses 2.5 -674,907 -783,268
Depreciation 3.2 -198,898 -183,590
Operational EBIT* 1,074,912 1,377,647
Fair value adjustments of biological assets 3.6 195,819 -693,540
Onerous contracts 3.13 0 67,376
Income from associates 9,369 17,302
Revenue tax -95,867 -119,681
Earnings before interest and taxes (EBIT) 1,184,233 649,104
Financial income 2.7 2,651 1,395
Net interest expenses 2.7 -12,477 -26,365
Net currency effects 2.7 1,419 4,173
Other
financial
expenses
2.7 -3,760 -4,423
Earnings before taxes (EBT) 1,172,066 623,884
Taxes 2.8 -211,774 -112,482
Profit or loss for the period continuing operations 960,292 511,402
Profit or loss for the year attributable to
Non-controlling interests 0 0
Owners of P/F Bakkafrost 960,292 511,402
Earnings per share (DKK) 4.3 19.74 10.52

*Operational EBIT is EBIT before fair value adjustment of biomass, onerous contracts, income from associates and revenue tax

Consolidated Statement of Comprehensive Income

FOR THE YEAR ENDED 31 DECEMBER

DKK 1,000 2018 2017
Profit for the year 960,292 511,402
Fair
value
adjustment
on
financial
instruments
126,935 -25,799
Income tax effect -22,848 4,644
Currency translation differences -95 415
Reserve to share-based payment 2,279 1,223
Adjustment treasury shares 2,634 2,885
Net other comprehensive income to be reclassified to profit or loss in subsequent periods 108,905 -16,632
Net other comprehensive income not to be reclassified to profit or loss in subsequent periods 0 0
Other comprehensive income 108,905 -16,632
Total comprehensive income for the year net tax 1,069,197 494,770

Consolidated Statement of Financial Position

AS AT 31 DECEMBER

2017
389,745 376,675
3.1 389,745 376,675
994,353 1,148,572
926,335 957,857
160,064 97,654
356,514 366,347
447,059 0
3.2 2,884,325 2,570,430
3.3 57,497 51,406
3.4 55,269 25,296
3.7 9,200 0
121,966 76,702
3,396,036 3,023,807
3.6 1,358,462 1,096,664
3.5 438,847 305,845
1,797,309 1,402,509
262,493
3.7 22,936 157,156
292,284 419,649
3.8 316,894 309,551
2,406,487 2,131,709
5,802,523 5,155,516
Note
3.7
2018
269,348
Note 2018 2017
3.9 48,858 48,858
4,028,171 3,577,571
4,077,029 3,626,429
2.8 534,430 455,448
3.10 812,053 146,696
1,346,483 602,144
3.12 320 127,255
3.10 0 378,300
204,500 189,548
2.8 152,655 198,141
3.13 0 0
21,536 33,699
379,011 926,943
1,725,494 1,529,087
5,155,516
5,802,523

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 according to the indirect method. The statement shows the individual activity's impact on cash and cash equivalents. The cash flow deriving from the acquisition and sale of business is presented under investing activities

DKK 1,000 Note 2018 2017
Cash flow from operations
Operating profit (EBIT) 1,184,233 649,104
Adjustments for write-downs/profit and depreciation 3.2 177,898 183,590
Adjustments for value adjustments on biomass 3.6 -195,819 693,540
Adjustments for income from associates -9,369 -17,301
Adjustments for currency effects 11,059 11,198
Provision for onerous contracts 0 -67,376
Taxes paid -201,678 -140,337
Change in inventory -198,981 117,990
Change in receivables 103,437 -2,073
Change in current debts 42,157 29,827
Cash flow from operations 912,937 1,458,162
Cash flow from investments
Acquisition/sale of subsidiaries and activities, etc., net -12,057 0
Proceeds from sale of fixed assets 34,214 2,954
Payments made for purchase of fixed assets 3.2 -526,007 -638,496
Purchase of shares and other investments -26,896 0
Cash flow from investments -530,746 -635,542
Cash flow from financing
Change in revolving credit facilities 146,783 -298,757
Financial income 2,650 1,393
Financial expenses -16,237 -30,789
Proceeds/Acquisition of treasury shares 2,634 2,883
Dividend paid -510,678 -422,795
Cash flow from financing -374,848 -748,065
Net change in cash and cash equivalents in period 7,343 74,555
Cash and cash equivalents – opening balance 309,551 234,996
Cash and cash equivalents – closing balance total 316,894 309,551

Consolidated Statement of Changes in Equity

AS AT 31 DECEMBER

Restricted equity comprises equity in which distribution to the shareholders may only take place adhering to specific procedures prescribed by the Faroese Limited Companies Act. Restricted equity 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:

DKK 1,000 Share
Capital
Share
Premium
Reserve
Treasury
Shares
Share
Based
Payment
Currency
translation
differences
Derivatives Proposed
Dividend
Biomass
Fair value
adjustments
Retained
Earnings
Total
Equity
Equity 01.01.2018 48,858 306,537 -18,159 3,874 6,271 -104,351 513,009 186,951 2,683,439 3,626,429
Consolidated profit 0 0 0 0 0 0 0 195,819 772,455 968,274
Other comprehensive income:
Fair value adjustment on financial derivatives 0 0 0 0 0 126,935 0 0 -138,748 -11,813
Income tax effect 0 0 0 0 0 -22,848 0 0 22,848 0
Share-based payment 0 0 0 2,279 0 0 0 0 0 2,279
Currency translation differences 0 0 0 0 -95 0 0 0 0 -95
Total other comprehensive income 0 0 0 2,279 -95 104,087 0 0 -115,900 -9,629
Total comprehensive income 0 0 0 2,279 -95 104,087 0 195,819 656,555 958,645
Transaction with owners:
Treasury shares 0 0 2,634 0 0 0 0 0 0 2,634
Paid-out dividend 0 0 0 0 0 0 -513,009 0 2,331 -510,678
Proposed dividend 0 0 0 0 0 0 403,079 0 -403,079 0
Total transaction with owners 0 0 2,634 0 0 0 -109,930 0 -400,748 -508,044
Total changes in equity 0 0 2,634 2,279 -95 104,087 -109,930 195,819 255,807 450,601
Total equity 31.12.2018 48,858 306,537 -15,525 6,153 6,176 -264 403,079 382,770 2,939,245 4,077,029
Equity 01.01.2017 48,858 306,537 -21,045 2,651 5,856 -83,196 425,065 880,491 1,983,818 3,549,035
Consolidated profit 0 0 0 0 0 0 0 -693,540 1,210,359 516,819
Other comprehensive income:
Fair value adjustment on financial derivatives 0 0 0 0 0 -25,799 0 0 0 -25,799
Income tax effect 0 0 0 0 0 4,644 0 0 0 4,644
Share-based payment 0 0 0 1,223 0 0 0 0 0 1,223
Currency translation differences 0 0 0 0 415 0 0 0 0 415
Total other comprehensive income 0 0 0 1,223 415 -21,155 0 0 0 -19,517
Total comprehensive income 0 0 0 1,223 415 -21,155 0 -693,540 1,210,359 497,302
Transaction with owners:
Treasury shares 0 0 2,886 0 0 0 0 0 2,886
Paid-out dividend 0 0 0 0 0 -425.065 0 2.271 -422,794
Proposed dividend 0 0 0 0 0 513.109 0 -513.109 0
Total transaction with owners 0 0 2,886 0 0 0 88.044 0 -510.838 -419,908
Total changes in equity 0 0 2,886 1,223 415 -21,155 88.044 -693.540 699.521 77,394
Total equity 31.12.2017 48,858 306,537 -18,159 3,874 6,271 -104,351 513.109 186.951 2.683.339 3,626,429

Notes to the Consolidated Financial Statements

BAKKAFROST GROUP

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 domiciled 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, statement of comprehensive income, statement of financial position, 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 formally 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 2018 comprises both the Consolidated Annual Report and Accounts for P/F Bakkafrost and its subsidiaries (Group) and the separate Annual Accounts for the parent company.

The financial statements were formally authorized for issue by the Board of Directors on 12 March 2019.

The Annual Report has been prepared on a historical cost basis except for where IFRS require 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 estimated assumptions are accounted for when they occur. Descriptions about the various estimates applied are given in the notes to the accounts where relevant.

There are no new or amended IFRSs or IFRIC interpretations that are effective for the financial year beginning on or after 1 January 2018 that are assumed to have a material impact on the Group.

NOTE 1.3 CONSOLIDATION PRINCIPLES

The consolidated financial statements include P/F Bakkafrost and the subsidiaries over which P/F Bakkafrost has controlling influence either by shareholding or by agreement. A controlling interest is normally deemed to exist when ownership directly or indirectly exceeds 50 percent of the voting rights. Controlling interest may also exist by nature of agreement. Similarly, limitations in voting rights by agreement may impede 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 subsidiaries are included up until the date of divestment. The consolidated 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 Companies have been eliminated.

Shares in subsidiaries have been eliminated in the consolidated 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 badwill in the Income Statement.

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 significant influence (associated companies) are treated in accordance with the equity method in the consolidated accounts. A considerable influence is normally deemed to exist when the Group owns 20–50 percent 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-current financial assets. The accounting principles used by associated 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 consolidated 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 transactions in a foreign currency.

A foreign currency transaction is, on initial recognition, recorded 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 other monetary items in foreign currency are translated to the functional currency using the closing rate. Exchange differences 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 recognized 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 currencies than the Group's presentation currency (DKK) are translated into the Group's presentation currency using the following 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 Financial Position. Changes in biomass and inventory measured 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 an IFRS adjustment. The IFRS adjustment is the difference between biomass measured at cost and measured at fair value.

From 2018, the interest costs are no longer capitalized in biological assets. This change has an effect of 2.9 million DKK in accrued capitalized interest and is recognized in the income statement for 2018. The change is not considered material and is in line with the process of aligning the accounting policy in the industry.

Cash and cash equivalents consist of cash in hand and bank deposits. Assets, which form part of the production cycle and fall due for payment within 12 months, are classified as current 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 noncurrent liabilities.

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 currency. All transactions in foreign currencies are translated into DKK at the time of transaction. In the statement of financial position, monetary items in foreign currencies are translated at the exchange rate in effect on the statement of financial position date.

NOTE 1.7 STANDARDS ISSUED BUT NOT YET EFFECTIVE

Standards and interpretations, which are issued at the date of the Groups Financial statements, but will become effective later, are disclosed below. The disclosures contain standards 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 become effective.

New standards, regulating issues not relevant to the Group, or with insignificant impact on the Group, are omitted from this narrative.

IFRS 16 Leases

IFRS 16 was issued in January 2016. It will result in almost all leases being recognized on the balance sheet by lessees, as the distinction between operating and finance leases is removed. Under the new standard, an asset (the right to use the leased item) and a financial liability to pay rentals are recognized. The only exceptions are short-term and low-value leases.

The Group has set up a project team which has reviewed all the Group's leasing arrangements over the last year considering the new lease accounting rules in IFRS 16. The standard will affect primarily the accounting for the Group's operating leases.

As at the reporting date, the Group has non-cancellable operating lease commitments of tDKK 7,590. Of these commitments, approxi-mately tDKK 3,262 relate to short-term leases and to low value leases which will both be recognized on a straight-line basis as expense in profit or loss.

For the remaining lease commitments, the Group expects to recognize right-of-use assets of approximately tDKK 64,078 on 1 January 2019, lease liabilities of tDKK 64,078.

Operational EBIT used to measure segment results is expected to increase by approximately tDKK 481, as the operating lease payments were included in EBIT, but the amortization of the right-of-use assets and interest on the lease liability are excluded from this measure.

Operating cash flows will increase, and financing cash flows decrease by approximately tDKK 481 as repayment of the principal portion of the lease liabilities will be classified as cash flows from financing activities.

The Group's activities as a lessor are not material and hence the Group does not expect any significant impact on the financial statements. However, some additional disclosures will be required from next year.

The Group will apply the standard from its mandatory adoption date of 1 January 2019. The Group intends to apply the simplified transition approach and will not restate comparative amounts for the year prior to first adoption. Right-of-use assets for property leases will be measured on transition as if the new rules had always been applied. All other rightof-use assets will be measured at the amount of the lease liability on adoption (adjusted for any prepaid or accrued lease expenses).

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, income and expenses. The estimates and underlying assumptions 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 values and results may deviate from the initial estimates. Revision to accounting estimates are recognized in the period in which the estimates are revised. The evaluations and estimates, deemed to be of greatest significance for Bakkafrost Group's Financial Statements, are described in the notes.

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 REVENUES

Revenue is measured at the fair value of the consideration received or receivables 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 for sales of salmon, fishmeal, fish oil and fish feed. Sales revenues are 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 2018, there were no major customers - as defined in IFRS 8.34, compared to one major customer in 2017 of DKK 583 million, corresponding to 59% of the VAP operating revenue.

NOTE 2.3 OPERATING SEGMENT INFORMATION

2018 – DKK 1,000 Farming Value Added
Products
Fishmeal,
oil and feed
Eliminations Bakkafrost
Group
External operating revenues 2,226,118 364,827 586,477 0 3,177,422
Internal operating revenues 342,248 0 682,087 -1,024,335 0
Total operating revenues 2,568,366 364,827 1,268,564 -1,024,335 3,177,422
Depreciation and amortization -154,456 -15,085 -29,357 0 -198,898
Operating expenses -766,164 -29,918 -1,014,283 -93,247 -1,903,612
Internal operating expenses -682,087 -342,248 0 1,024,335 0
Operating EBIT 965,659 -22,424 224,924 -93,247 1,074,912
Provision for onerous contracts 195,819 0 0 0 195,819
Fair value adjustments on biological assets 311 0 9,057 0 9,368
Revenue tax -95,866 0 0 0 -95,866
EBIT 1,065,923 -22,424 233,981 -93,247 1,184,233
Net interest revenue 2,651 -179 0 0 2,472
Net interest expenses -10,420 0 -1,878 0 -12,298
Net currency effects 995 -316 740 0 1,419
Other financial expenses -3,233 -24 -503 0 -3,760
Earnings before taxes 1,055,916 -22,943 232,340 -93,247 1,172,066
Taxes -170,527 31 -41,278 0 -211,774
Net earnings 885,389 -22,912 191,062 -93,247 960,292
Operating EBITDA 1,120,115 -7,339 254,281 -93,247 1,273,810
ASSETS 4,860,227 192,841 749,455 0 5,802,523
Whereof intangible assets 376,675 0 0 0 376,675
LIABILITIES 1,482,751 31,075 209,634 2,034 1,725,494
INVESTMENTS
Property, plant and equipment 490,133 17,400 18,474 0 526,007
Depreciation -154,456 -15,085 -29,357 0 -198,898
ANNUAL REPURT ZUT8
2017 – DKK 1,000 Farming Value Added
Products
Fishmeal,
oil and feed
Eliminations Bakkafrost
Group
External operating revenues 2,150,939 998,778 620,332 0 3,770,049
Internal operating revenues 835,622 0 682,829 -1,518,451 0
Total operating revenues 2,986,561 998,778 1,303,161 -1,518,451 3,770,049
Depreciation and amortization -136,673 -16,221 -30,696 0 -183,590
Operating expenses -858,865 -222,377 -1,037,068 -90,502 -2,208,812
Internal operating expenses -682,829 -835,622 0 1,518,451 0
Operating EBIT 1,308,194 -75,442 235,397 -90,502 1,377,647
Provision for onerous contracts 0 67,378 0 0 67,378
Fair value adjustments on biological assets -693,540 0 0 0 -693,540
Income from associates 142 0 17,159 0 17,301
Revenue tax -119,680 0 0 0 -119,680
EBIT 495,116 -8,064 252,556 -90,502 649,106
Net interest revenue 7,089 0 0 -5,694 1,395
Net interest expenses -21,433 -2,899 -7,729 5,694 -26,367
Net currency effects 16,531 -345 -11,536 0 4,650
Other financial expenses -4,672 -10 -218 0 -4,900
Earnings before taxes 492,631 -11,318 233,073 -90,502 623,884
Taxes -71,541 1,679 -42,620 0 -112,482
Net earnings 421,090 -9,639 190,453 -90,502 511,402
Operating EBITDA 1,444,867 -59,221 266,093 -90,502 1,561,237
ASSETS 4,728,402 302,135 803,359 -678,380 5,155,516
Whereof intangible assets 376,675 0 0 0 376,675
LIABILITIES 529,931 3,248 562,189 433,719 1,529,087
INVESTMENTS
Property, plant and equipment 545,932 35,450 59,207 0 640,589
Depreciation -136,673 -16,221 -30,696 0 -183,590

SALMON - DISTRIBUTION OF HARVESTED AND PURCHASED VOLUME

2018 2017
tgw % tgw %
Harvested volume used in VAP production 8,355 18.7% 19,067 34.9%
Harvested volume sold fresh/frozen 36,236 81.3% 35,548 65.1%
Harvested and purchased volumes 44,591 100.0% 54,615 100.0%
FISHMEAL, OIL AND FEED (FOF) 2018 2017
DISTRIBUTION FEED tonnes % tonnes %
Volumes used internally 70,240 90.3% 72,960 93.4%
External purchase 7,534 9.7% 5,175 6.6%
Sold volumes 77,774 100.0% 78,135 100.0%
PRODUCTION OF FISHMEAL AND FISH OIL 2018 2017
tonnes % tonnes %
Fishmeal 65,141 86.4% 74,089 87.7%
Fish oil 10,257 13.6% 10,387 12.3%
Sold volumes 75,398 100.0% 84,476 100.0%

GEOGRAPHIC BREAKDOWN OF SALES REVENUES BASED ON SEGMENTS AND CUSTOMER LOCATION

2018 – DKK 1,000 Farming VAP FOF
Europe 512,007 269,972 586,379
Eastern Europe 645,574 51,076 97
USA 467,485 25,538 0
China 601,052 18,241 0
Total 2,226,118 364,827 586,476
2017 – DKK 1,000 Farming VAP FOF
Europe 489,617 886,010 620,332
Eastern Europe 644,233 21,048 0
USA 519,681 58,132 0
China 491,765 37,084 0
Other 2,148 0 0
Total 2,147,444 1,002,273 620,332

Value added products (VAP)

A significant share of the farmed products is value added at the factory in Glyvrar. The outputs of the factory is predominantly portions for the retail market. The business segment 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 fishmeal, fish oil and fish feed is operated by Bakkafrost's subsidiary Havsbrún, located in Fuglafjørður.

The Group has three reportable segments in accordance with IFRS 8 Operating Segments. The Group's main strategic business area is aquaculture, which consists of three segments: fish farming, value added products (VAP) and production and sales of fishmeal, fish oil and fish feed (FOF).

The same accounting principles, as described for the consolidated financial statements, have been applied for the segment 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 pricing principle between the VAP and Farming segment is based on market reference prices for spot sale, and the pricing principle between the FOF and the farming segment is based on quarterly contracts.

ACCOUNTING POLICIES SEGMENT REPORTING

Realization of excess values on tangible and intangible assets deriving from acquisitions is not allocated to the segments.

Farming including sales of fresh fish

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 properties 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.

NOTE 2.4 SALARIES AND OTHER PERSONNEL EXPENSES

DKK 1,000 2018 2017
Wages and salaries 306,794 354,432
Social security taxes 13,767 14,625
Pension expenses 23,996 26,541
Other
benefits
9,199 4,669
Total payroll expenses 353,756 400,267
Average number of full-time employees 824 960

REMUNERATION TO CORPORATE MANAGEMENT

DKK 1,000 Total
Salary and other benefits paid Salary Bonus Pension Other 2018
Chief
Executive
Officer
1,756 39 0 88 1,883
Managing Director 1,410 145 0 0 1,555
Chief
Financial
Officer
1,347 144 0 88 1,579
Total remuneration 4,513 328 0 176 5,105
DKK 1,000 Total
Salary and other benefits paid Salary Bonus Pension Other 2017
Chief
Executive
Officer
1,800 189 0 87 2,076
Managing Director 1,410 144 0 0 1,554
Chief
Financial
Officer
1,347 143 0 87 1,577
Total remuneration 4,557 476 0 174 5,207

FEES PAID TO THE BOARD OF DIRECTORS

DKK 1,000 2018 2017
Rúni M. Hansen** Chairman of the Board 455 440
Johannes Jensen Deputy Chairman of the Board 258 250
Annika Frederiksberg* Member of the Board 206 200
Virgar Dahl*** Member of the Board 55 200
Teitur Samuelsen** Member of the Board 248 240
Øystein Sandvik** Member of the Board 259 240
Total remuneration 1,481 1,570

* Annika Frederiksberg is also an employee in the Bakkafrost Group. For this, she received DKK 628 thousand (2017: DKK 613 thousand).

** Member of the audit committee. Salary includes fee to the audit committee

*** Member of the Board of Directors until April 2018

Remuneration to corporate management

The total remuneration to the corporate management consists of basic salary (main element), benefits in-kind and pension schemes, but varies from person to person. The Group's Chief Executive Officer determines the remunerations to other 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 competitiveness in the relevant labour market.

The total remuneration must neither pose a threat to Bakkafrost'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 Management Executives a notice period. The company's period of notice for the Group's Chief Executive Officer 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

Bakkafrost has established a share saving plan for its employees. It is the Board's intention 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 Bakkafrost shares. The saved amount is deducted from the monthly net salary and used to purchase Bakkafrost shares in 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 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 31.12.2018, 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 financial item in the income statement. The liability is recognized in other equity reserves within equity.

PENSIONS

The Group has employed a defined 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 payments.

NOTE 2.5 OTHER OPERATING EXPENSES

DKK 1,000 2018 2017
Maintenance -150,315 -171,486
Operating expenses -19,261 -62,396
Health -90,481 -113,702
Freight -249,577 -237,845
Energy -128,527 -124,169
Other costs -36,746 -73,670
Other operating expenses total -674,907 -783,268

NOTE 2.6 RESEARCH AND DEVELOPMENT EXPENSES

DKK 1,000 2018 2017
R&D expenditure consist of other operating expenses and of salaries in total -5,533 -587

R&D expenditure in this note is only costs and salaries directly attributable to R&D.

Bakkafrost has a continual development of the entire value chain. This is not seen as a R&D but is an integrated part of other operating expenses and salaries.

The focus on Bakkafrost's R&D efforts has been evaluated and slightly improved during the latest years. Lice abatement, biomass control and smolt quality remain high priorities, and the development and improvement of vaccines, nutrition and feeding, as well as operating technologies, are equally topical. In addition, Bakkafrost continuously performs assessments of its own operating practices.

Bakkafrost aims to expand its R&D activities in the area of feed and feeding and sees a substantial need for greater focus on basic knowledge of how the fish are fed and how

we can maintain a healthy salmon. 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 aims at being self-supplied with 500 grams smolts in 2021. The benefits are a shorter production time at sea as well as reduced biological risk. The new hatchery at Strond, Klaksvík, is an important part of this plan. The hatchery is expected to be in full operation from 2020. The capacity growth from this investment programme will gradually appear in harvested volumes from 2021.

NOTE 2.7 NET FINANCIAL ITEMS

DKK 1,000 2018 2017
Other
financial
income
2,651 1,395
Financial income 2,651 1,395
Interest expenses on long-term loans -11,139 -21,118
Interest expenses on credit lines -875 -4,831
Interest expenses on accounts payable -463 -416
Financial expenses -12,477 -26,365
Unrealized exchange gain on bond -10,850 30,800
Other exchange differences 12,269 -26,627
Net currency effects 1,419 4,173
Other
financial
expenses
-3,760 -4,423
Other financial items -3,760 -4,423
Net financial items -12,167 -25,220

ACCOUNTING POLICIES FINANCIAL INCOME

Interest income is recognized on an accrual basis. Dividend is recognized when the shareholders' right to receive a dividend has been approved by the Annual General Meeting.

BORROWING COSTS

Borrowings are recognized initially at fair value, net of transaction costs incurred. Borrowings are 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 are classified as current liabilities, unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date.

NOTE 2.8 TAX

The tax expense for the year breaks down as follows:

DKK 1,000 2018 2017
Tax payable 151,966 198,093
Change in deferred tax 59,808 -85,611
Tax expense on ordinary profit 211,774 112,482
Tax payable 151,966 198,093
Tax payable in the statement of financial position 151,966 198,093

Specifications of temporary differences and deferred tax

2018 2017
Tax rate Temporary
Differences
Deferred tax Tax rate Temporary
Differences
Deferred tax
Licences 18.0% 375,678 67,622 18.0% 375,678 67,622
Property, plant and equipment 18.0% 1,187,172 213,691 18.0% 1,021,867 183,936
Financial assets 18.0% 50,556 9,100 18.0% 44,572 8,023
Biomass 18.0% 1,358,472 244,525 18.0% 1,096,667 197,400
Receivables 18.0% -2,644 -476 18.0% -2,644 -476
Currency effects 18.0% 583 105 18.0% 121,833 21,930
Derivatives (Equity posted) 18.0% -317 -57 18.0% -127,256 -22,906
Losses carried forward 18.0% -444 -80 18.0% -450 -81
Total temporary differences 2,969,056 2,530,267
Deferred tax liabilities (+) / assets (-) 534,430 455,448

Reconciliation from nominal to actual tax rate

DKK 1,000 2018 2017
Profit
before
tax
1,172,066 623,884
Expected tax at nominal tax rate (18%) 210,972 112,299
Permanent differences 802 183
Calculated tax expense 211,774 112,482
Effective tax rate excl. equity entries 18.07% 18.03%

Normal tax rate for countries in the Group:

  • Faroe Islands 18%
  • UK 20%
  • Norway 23%
  • USA 28%

Under the Faroese tax regime, growth of live biomass is not tax relevant before harvesting. Tax losses to be carried forward are infinite. Deferred taxes on temporary differences, deriving from shares in associated companies, are not entered, as intercompany dividends are not tax relevant in the Faroese tax regime.

ACCOUNTING POLICIES

The tax expense is matched against the profit 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 financial position to the extent that tax assets and liabilities can be netted against each other.

Deferred tax in the statement of financial position is a nominal amount calculated based on temporary differences between accounting and tax values at their intended use, as well as the taxable loss carried forward at the end of the financial year.

SIGNIFICANT ASSUMPTION ACCOUNTING FOR DEFERRED TAX LIABILITIES

The accounting of deferred taxes reflects tax rates and tax laws that have been enacted or substantively enacted by the date of the statement of financial position. The recognition of a deferred tax asset is based on expectations of profitability 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 according 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. Management's estimates depend on whether a final investment decision has been made, and the long-term outlook for Bakkafrost's development.

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 liabilities.

NOTE 3.1 INTANGIBLE ASSETS

Total
DKK 1,000 Goodwill Licences 2018
Acquisitions costs as at 01.01.18 4,537 372,138 376,675
Additions in the year as a result of acquisitions 13,948 0 13,948
Acquisitions costs as at 31.12.18 18,485 372,138 390,623
Impairments 01.01.18 0 0 0
Depreciation during the year -878 0 -878
Accumulated impairments/depreciation and write-downs as at 31.12.18 -878 0 -878
Net book value as at 31.12.18 17,607 372,138 389,745
DKK 1,000 Goodwill Licences Total
2017
Acquisitions costs as at 01.01.17 4,537 372,138 376,675
Acquisitions costs as at 31.12.17 4,537 372,138 376,675
Impairments 01.01.17 0 0 0
Accumulated depreciation and write-downs as at 31.12.17 0 0 0
Net book value as at 31.12.17 4,537 372,138 376,675

Bakkafrost operates its sea farming activity 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 capitalized. These belong to the North region.

The other seven CGUs are acquired as part of business combinations. Respectively, when acquiring the Vestlax Group, Havsbrún Group and Faroe Farming hence three groups of CGUs. These belong to the West region. Bakkafrost considers these as significant in comparison to Bakkafrost's total carrying amount of goodwill and intangible assets with indefinite useful lives. Bakkafrost has decided to disclose specific information concerning these three groups of CGUs.

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 yearend. Bakkafrost 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. Bakkafrost 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 present 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 carrying 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 the assumption of continued operation. The basis 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.

All CGUs have the same operating assumptions since the operating conditions are predominantly the same all over the Faroe Islands. The considered operating conditions are costs of feed, smolt, harvest, packaging, transport and other costs. Other operating 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 identification 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 terminal 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 regulatory frameworks. Costs can normally be estimated with more accuracy than income. As profitability in the salmon farming industry historically has been very volatile, depending 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 profitability 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 Bakkafrost's own assumptions, based on historical costs and expectations. The costs are expected to remain stable but are calculated to increase with an inflation rate of 2%.
  • The forward prices are based on the Fish Pool index which is a part of Oslo Børs ASA – at the day of the calculation.

The long-term forward prices are based on third-parties' sources.

  • The WACC is 8.8% (2017: 9.1%) 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 adjustment margin for the food industry in the EU.
  • • The inflation is set to 2% 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 replacement plans. Capital expenditure to comply with current laws and regulations has been included. Capex related to committed and approved efficiency improvement programmes 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 assets, 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 3,505 million.

  • • A change in the EBITDA margin of +/- 1% would affect the headroom with +/- DKK 261 million.
  • • A change in WACC of +1% would affect the headroom with DKK -898 million.
  • A change in WACC of -1% would affect the headroom with DKK +1,291 million.

ACCOUNTING POLICIES

Intangible assets, that are purchased individually, are capitalized at acquisition cost. Intangible assets acquired in connection 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 depreciated 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 intends to and is financially able to reap the economic benefits.

Capitalized R&D costs are recognized at acquisition cost less accumulated depreciation and write-downs. Capitalized R&D costs are depreciated in a straight line over the asset's estimated period of use.

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 are considered perpetual, given that certain preconditions regarding environmental protection and animal 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 recoverable amount, licences are considered impaired, and writedowns are entered and charged to the Income Statement.

The assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be appropriate. 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 measures to regulate the farming activity in order to be environmentally sustainable.

The sea farming licenses are issued with a nominal 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 connection with renewal of licenses, authorities may only decline renewal if specific legislation on area planning, animal welfare or environmental protection is in conflict 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 farming 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 licenses in order to use locations for other purposes, the farmers have obtained licenses from the authorities at other locations.

Bakkafrost 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 associates 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 acquisition.

Write-downs are performed in accordance with an assessment of the recoverable value of each of the cash-flow generating units to which the goodwill is assigned. To identify 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 estimating 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.

SPECIFICATION OF CGUS - BOOKED VALUE TESTED AND SENSITIVITY

The CGUs tested are in the West region

Sensitivity analyses and booked value per CGU:

CGUs Other Time
booked
value
Number
of smolts
EBITDA
change
WACC
change
WACC
change
DKK 1,000 Licenses assets**** tested WACC (1,000) of +/-1% of +1% of +1%
31.12.2018
Vestlax acquisition* 132,708 1,101,306 1,234,014 8.8% 7,670 43,751 216,296 -150,593
Havsbrún acquisition** 157,430 283,311 440,741 8.8% 2,250 149,143 737,328 -513,356
Faroe Farming acquisition*** 82,000 592,960 674,960 8.8% 3,500 68,058 336,460 -234,256
TOTAL 372,138 1,977,577 2,349,715 8.8% 13,420 260,952 1,290,084 -898,205
31.12.2017
Vestlax acquisition* 132,708 1,096,040 1,228,748 9.1% 7,220 55,417 169,942 -239,347
Havsbrún acquisition** 157,430 494,419 651,849 9.1% 3,250 123,111 377,532 -531,719
Faroe Farming acquisition*** 82,000 269,476 351,476 9.1% 1,660 28,305 86,801 -122,251
TOTAL 372,138 1,859,935 2,232,073 9.1% 12,130 206,833 634,275 -893,317

* 4 CGUs in license numbers A-03, A-05, A-06, A-25, A-57, A-80 and A-81. Acquired in 2010.

** 2 CGUs in license numbers A-71 and A-82. Acquired in 2011.

*** 1 CGU in license numbers A-15 and A-92. Acquired in 2016.

**** Other assets consist of goodwill, PP&E, inventory, receivables, etc. which can be allocated to CGUs or are directly attributable to CGUs.

NOTE 3.2 PROPERTY, PLANT AND EQUIPMENT

DKK 1,000 Land
and
buildings
Plant,
machinery,
operating
equipment,
fixtures etc.
Other
operating
equipment
Vessels Prepayments
for purchase
of PP&E
Total
Acquisition costs as at 01.01.18 1,365,469 1,628,881 193,053 402,577 0 3,589,980
Reclassification -285,078 -148,815 0 0 433,893 0
Acquisitions during the year 189,515 228,844 80,619 13,863 13,166 526,007
Disposals and scrapping during the year -20,974 -20,047 -2,011 0 0 -43,033
Acquisition costs as at 31.12.18 1,248,933 1,688,862 271,661 416,440 447,059 4,072,955
Accumulated depreciations and write-downs as at 01.01.18 -216,897 -671,024 -95,399 -36,230 0 -1,019,550
Depreciations during the year -46,630 -110,851 -17,722 -23,696 0 -198,898
Accumulated deprecations and write-downs on disposals and scrapping 8,948 19,347 1,523 0 0 29,819
Accumulated depreciations and write-downs as at 31.12.18 -254,579 -762,528 -111,598 -59,925 0 -1,188,630
Net book value as at 31.12.18 994,354 926,335 160,064 356,514 447,059 2,884,325
Acquisition costs as at 01.01.17 1,072,042 1,456,737 143,660 298,855 0 2,971,294
Reclassification 6,952 -6,952 0 0 0 0
Acquisitions during the year 306,607 180,867 49,393 103,722 0 640,589
Disposals and scrapping during the year -20,132 -1,771 0 0 0 -21,903
Acquisition costs as at 31.12.17 1,365,469 1,628,881 193,053 402,577 0 3,589,980
Accumulated depreciations and write-downs as at 01.01.17 -197,135 -550,691 -84,660 -20,337 0 -852,823
Reclassification 6,952 -6,952 0 0 0 0
Depreciations during the year -42,507 -114,452 -10,739 -15,893 0 -183,590
Accumulated deprecations and write-downs on disposals and scrapping 15,792 1,071 0 0 0 16,863
Accumulated depreciations and write-downs as at 31.12.17 -216,897 -671,024 -95,399 -36,230 0 -1,019,550
Net book value as at 31.12.17 1,148,572 957,857 97,654 366,347 0 2,570,430
Description of depreciations Estimated lifetime Depreciation method Scrap value
Land and buildings 15-25 years linear 10%
Plant,
machinery,
operating
equipment,
fixtures
etc.
8-15 years linear 0%-10%
Other operating equipment 3-8 years linear 0%
Vessels 15-25 years linear 10%

ACCOUNTING POLICIES

Property, plant and equipment are 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. Depreciation is charged to expenses, when the facilities are ready for use. If the situation or circumstances indicate that the carrying amount of an asset cannot be recovered, an assessment is made about whether to write-down its value. If the recoverable 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.

NOTE 3.3 COMPANIES IN THE GROUP

The consolidated accounts for 2018 include the following subsidiaries and associates:

Subsidiary Companies Nominal
DKK 1,000 Currency Nature of Business Head Office Ownership share capital
P/F Bakkafrost Farming DKK Salmon farming Glyvrar 100% 19,762
P/F Bakkafrost Processing DKK Value adding of salmon (VAP) Glyvrar 100% 50,000
P/F Bakkafrost Sales DKK Sales of salmon and VAP products Glyvrar 100% 667
P/F Bakkafrost Packaging DKK Production of styrofoam boxes Glyvrar 100% 8,022
P/F
Havsbrún
DKK Production
and
sales
of
fishmeal,
fish
oil
and
fish
feed
Fuglafjørður 100% 2,000
Havsbrún
Shetland
Ltd.
GBP Sales
of
fishmeal,
fish
oil
and
fish
feed
Lerwick 100% 17
Havsbrún
Norge
ASA
NOK Sales
of
fishmeal,
fish
oil
and
fish
feed
Flekkefjord 100% 105
Bakkafrost UK Ltd. GBP Sales of salmon Grimsby 100%
Bakkafrost USA LLC USD Sales of salmon Clifton, New Jersey 100% 2 mUSD
P/F Förka DKK Production of biogas and fertilizer Glyvrar 100% 5,000
Associated Companies Head Net Share of Carrying
value
Carrying
value
DKK 1,000 Office Ownership Additions the result 2018 2017
P/F Pelagos Fuglafjørður 30% 0 10,875 48,296 42,334
P/F Salmon Proteins* Eiði 79% 0 124 9,201 9,072
Total 57,497 51,406
Total assets
2018
Total assets
2017
Equity
2018
Equity
2017
Result
2018
Result
2017
P/F Pelagos 407,882 444,253 159,394 139,717 35,892 56,621
P/F Salmon Proteins* 16,035 17,355 11,691 11,527 164 -40

*Voting rights 30%. The voting rights are limited in the Articles of Association of P/f Salmon Proteins.

NOTE 3.4 SHARES AND HOLDINGS IN OTHER COMPANIES

DKK 1,000 Carrying
amount
2018
Carrying
amount
2017
Companies
Others 55,268 25,296
Total 55,268 25,296

ACCOUNTING POLICIES

Investments in other companies are classified as available for sale. Shares and holdings in which the Group does not have significant influence are valued at cost as fair value cannot be measured reliably.

NOTE 3.5 INVENTORY

DKK 1,000 2018 2017
Raw materials and goods in-progress 292,286 262,131
Finished goods 146,561 43,714
Total inventory 438,847 305,845

Raw materials primarily consist of raw material for the production of fishmeal, fish oil and fish feed and packaging materials used in processing.

Goods in-progress include semi-finished products and spare parts.

Finished products include all products ready for sale, such as fish feed, fresh and frozen whole salmon, as well as processed salmon products.

Inventories are measured at cost price.

ACCOUNTING POLICIES

Inventories consist of inventories in the farming unit, the VAP unit and the FOF unit.

Farming unit

Inventories consist of feed and additives. Inventories are measured at the lesser of cost or expected sales price less sales costs. The FIFO principle is used concerning the periodic assignment of inventory costs.

VAP unit

Inventories consist of raw material, additives, packaging material and finished goods. Raw material in the VAP unit

consist basically of processed salmonids. Raw material is measured 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 principle 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 production cost, including production costs, which can be only indirectly allocated to produce goods, less general administration costs.

FOF unit

Raw materials and purchased commodities are valued at the lower of historical cost and net realizable value in accordance with the FIFO principle.

Finished goods are fishmeal, oil and feed ready for delivery to customer, valued at the lower of cost and net realizable value. The cost of finished 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 production cost, including production costs, which can be only indirectly allocated to produce goods, less general administration costs.

NOTE 3.6 BIOLOGICAL ASSETS

DKK 1,000 2018 2017
Biological assets carrying amount 01.01. 1,096,665 1,858,434
Increase due to production or purchases 1,333,160 1,368,608
Reduction due to harvesting or sale (costs of goods sold) -1,273,150 -1,475,571
Fair value adjustment at the beginning of the period reversed -186,956 -880,492
Fair value adjustments at the end of the period 382,775 186,956
Reversal of elimination at the beginning of the period 59,758 98,487
Eliminations -53,790 -59,758
Biological assets carrying amount 31.12. 1,358,462 1,096,664
Cost price biological assets 1,029,477 969,466
Fair value adjustments at the end of the period 382,775 186,956
Eliminations -53,790 -59,758
Biological assets carrying amount 1,358,462 1,096,664
Whereof capitalized interests in biological assets* 0 6,684
Biomass on average (tonnes lw)
< 1 kg 1,958 1,775
1 kg < 2 kg 2,959 3,605
2 kg < 3 kg 5,189 4,562
3 kg < 4 kg 6,010 5,810
4 kg < 22,962 21,544
Volume of biomass at sea 39,078 37,296
Number of fish on average (thousand)
< 1 kg 4,951 4,390
1 kg < 2 kg 2,113 2,456
2 kg < 3 kg 2,044 1,813
3 kg < 4 kg 1,782 1,665
4 kg < 4,359 4,105
Total number of fish at sea
2018 2017
Harvested volumes (tgw) 44,591 54,615
Number of smolts released (thousand)
Q1 3,134 1,395
Q2 2,776 1,918
Q3 3,315 3,204
Q4 3,358 3,411
Total number of smolts released 12,583 9,928

Sensitivity analysis of biomass in DKK 1,000

Change
in
discount
rate
+1%
93,586 73,961
Change in discount rate -1% -104,991 -83,038
Change
in
sales
price
+5
DKK
-224,143 -212,869
Change in sales price -5 DKK 224,143 212,869
Change
in
biomass
volume
+1%
-6,551 -4,217
Change in biomass volume -1% 6,551 4,217

One year forward prices in EUR FCA Oslo*

At year-end 6.01 5.30
Q1 (forward) 6.48 5.48
Q2 (forward) 6.52 5.42
Q3 (forward) 5.94 5.41
Q4 (forward) 6.12 5.58

* Source Fish Pool

VALUATION OF BIOLOGICAL ASSETS

IAS 41 requires biomass to be accounted for at the estimated fair value net of sales costs and harvesting costs. The calculation 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, depending on the stage of the life cycle. The first group is fish produced on shore. The second is, when the fish is released to sea.

For the first group, historical cost is deemed a reasonable approach to fair value, as there is little biological transformation. 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 highest and best use, the Group considers optimal harvest weight to be 5.2 kg gutted weight (6.3 kg live weight).

The valuation model

The valuation model calculates the net present value of expected cash flow from biological assets.

Changes to estimated fair value of biological assets are presented 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 mortality is estimated to be 0.6% of the number of incoming fish per month.

Cost

Estimated future costs are based on Bakkafrost'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.

Fish Pool is a market place for financial purchase and sale agreements for superior Norwegian salmon size 3-6 kg gutted weight. The volume on Fish Pool is, however, limited. This market is therefore initially to be insufficiently active and effective. Despite this, Bakkafrost's opinion is that the observable forward prices must be seen as the best approach to a price for the sale of salmon.

The prices are reduced for harvesting costs, Faroese revenue tax and freight costs to market to arrive at a net value back-to-farm. The valuation also reflects the expected quality grading.

Discounts

The estimated future cash flow is discounted monthly. The monthly discount rate at 31 December 2018 is estimated to be 6% per month. The discount rate takes into account a risk adjustment and time value. The risk adjustment takes into account 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 mortality 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 production costs.

Bakkafrost uses a common indicator and threshold for all farming sites to assess normal and abnormal mortality. Indication of abnormal mortality is when a farming site in a month registers mortality exceeding 1.5% of the incoming number of fish. A more detailed assessment is then carried out to evaluate, whether mortality is abnormal. These assessments take into account 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 simulated sensitivity analysis to changes in fair value of the biological assets is portrayed in the event of changes in these parameters.

NOTE 3.7. ACCOUNTS RECEIVABLES AND OTHER RECEIVABLES

DKK 1,000 2018 2017
Accounts receivables 269,348 262,493
Provisions for bad debts 0 0
Net accounts receivables 269,348 262,493
Prepayments 0 4,322
Deposit for interest- and currency swap 0 84,630
VAT 12,336 68,201
Other 10,599 3
Other receivables 22,936 157,156
Total short-term receivables 292,284 419,649
Long-term receivables 9,200 0
Total accounts receivables and other receivables 301,484 419,649
AGE DISTRIBUTION OF ACCOUNTS RECEIVABLES
DKK 1,000 2018 2017
Receivables not overdue 205,064 237,661
Overdue 0–6 months 63,594 24,809
Overdue more than 6 months 690 23
Total 269,348 262,493

The Group's exposure to credit risks related to accounts receivables is disclosed in Note 4.1.

CURRENCY EXPOSURE TO ACCOUNTS RECEIVABLES

The Group holds accounts receivables in foreign currencies amounting to DKK 209.6 million at year-end 2018. (2017: DKK 230.5 million).

Below is presented the book value of receivables specified in currency, translated into DKK employing the currency value at 31.12.

CURRENCY DISTRIBUTION OF RECEIVABLES

DKK 1,000 2018 2017
DKK 59,721 32,013
EUR 72,296 59,724
USD 96,217 62,630
GBP 10,639 5,952
NOK 26,636 95,134
Others 3,839 7,039
Total 269,348 262,493

SECTION 3

ACCOUNTING POLICIES

Accounts receivables and other receivables are presented at face value less provisions for bad debts. Provisions for bad debts are made on the basis of an individual assessment of the receivables concerned. Due to insignificant cost and the short credit period, amortized cost is equivalent to face value less foreseeable losses.

NOTE 3.8 CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of short-term bank deposits and were DKK 317 million at year-end 2018, compared to DKK 310 million at year-end 2017.

NOTE 3.9 SHARE CAPITAL AND MAJOR SHAREHOLDERS

Share capital:

DKK 1,000 2018 2017
Share capital at 1 January 48,858 48,858
Share capital at 31 December 48,858 48,858

The parent company's share capital comprises:

DKK No. of Shares Face Value Share Capital
Ordinary shares 48,858,065 1 48,858,065
Total share capital 48,858,065
Reconciliation of outstanding shares: 2018 2017
Outstanding shares at 1 January 48,621,140 48,583,490
Purchase of treasury shares 0 0
Sale of own shares to cover the employee bonus programme 34,360 37,650
Outstanding shares at 31 December 48,655,500 48,621,140
Treasury shares at 31 December 202,565 236,925

All full-time employees from 2017, still employed in Bakkafrost, have received bonus shares in 2018 with a total value of 2% of paid out salary in 2017. In total, Bakkafrost has allocated 14,206 shares to its employees at a fair value of DKK 5.2 million. The grant date was 14 June 2018, and the share price was DKK 366.54 (NOK 463.80) per share.

SHAREHOLDERS

These shareholders held directly or indirectly more than 5% of the shares in the company as at 31 December 2018: Oddvør Jacobsen, Regin Jacobsen and Folketrygdfondet.

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 10,000 0.02%
Johannes Jensen Deputy Chairman of the Board 0 0.00%
Teitur Samuelsen Member of the Board 100 0.00%
Annika Frederiksberg Member of the Board 15,556 0.03%
Øystein Sandvik Member of the Board 0 0.00%
Regin
Jacobsen
Chief
Executive
Officer
4,495,198 9.20%
Odd Eliasen Managing Director 173,066 0.35%
Gunnar
Nielsen
Chief
Financial
Officer
1,651 0.00%

Dividend

The Board has proposed a dividend per share of DKK 8.25 for 2018. Dividends in 2017 were DKK 10.50 per share. The dividends proposed are to be approved at the Annual General Meeting and if approved, the total dividend payment will amount to DKK 403.1 million. The dividend proposal has not been recognized as a liability at 31 December 2018, but is presented as an item within equity.

NOTE 3.10 INTEREST-BEARING DEBT

DKK 1,000 2018 2017
Long-term interest-bearing debt 812,053 146,696
Next year instalments on long-term interest-bearing debt 0 0
Total long-term interest-bearing debt 31.12. 812,053 146,696
Bonds 0 378,300
Next year's instalments on long-term interest-bearing debt 0 0
Total short-term interest-bearing debt 31.12. 0 378,300
Derivatives 320 127,255
Security account derivatives 0 -84,630
Total interest-bearing debt 812,373 567,621
Cash and cash equivalents -316,894 -309,551
Net interest-bearing debt 495,479 258,070

The maturity structure of the Group's financial commitments is based on undiscounted contractual payments. As the credit limit is not necessarily in the same currency of debt drawn, currency fluctuations affect the amount available under the facilities at any time.

The maturity plan of the Group's interest-bearing debt is as follows

2018 2017
DKK 1,000 Carrying Contractual Carrying Contractual
amount payments amount payments
Credit facilities 804,131 812,053 146,696 146,696
Bonds 0 0 378,300 378,300
Gross interest-bearing debt 804,131 812,053 524,996 524,996
Credit line 1,493,460 1,228,300
Available credit lines 680,807 703,304
Cash and cash equivalents 316,894 309,551
Total available credit lines 997,701 1,012,855

REMAINING PERIOD

31.12.2018 1–3 months 3–12 months 1–5 years > 5 years Total
Interest-bearing bank loans 0 0 812,053 0 812,053
Accounts payable and other debt 226,036 152,655 0 0 378,691

REMAINING PERIOD

31.12.2017 1–3 months 3–12 months 1–5 years > 5 years Total
Interest-bearing bank loans 0 0 146,696 0 146,696
Bonds 378,300 0 0 0 378,300
Accounts payable and other debt 223,247 189,548 0 0 412,795

The difference between the carrying amount and the total expected payments in the table above is due to upfront arrangement and legal fees incurred in connection with the refinancing of the credit facilities and the bond issue. One long-term bank borrowing 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 rollover dates of loans drawn but are based on the maturity date of the credit facilities.

INTEREST-BEARING DEBT IN MORE DETAIL

Bakkafrost's bank loan is a senior secured five-year EUR 200 million credit facility. The facility includes an accordion increase option, which provides flexibility for the parties to agree an increased size of the facility by further up to EUR 200 million during the term of the facility. The new loan was effectuated in January 2018.

The loan facility is secured in both the Group's property, plants and other tangible and fixed assets as well as stock, farming licences and insurance policies. The interest payable is the reference interest rate for the respective currencies (IBOR) plus a margin, which is calculated based on the Group's leverage ratio.

FINANCIAL COVENANTS

Regarding the loan facility amounting to EUR 200 million, the covenant stipulates that the equity ratio of the Group must be at least 35% from the first quarter of 2018. Furthermore, the interest cover shall not be less than 3.00. Bakkafrost complied with the covenant in its loan agreement during 2018 and at year-end.

The Bakkafrost Group had total available bank finances of EUR 200 million. The undrawn amount at 31 December 2018 was DKK 997.7 million.

Maturity analysis - contractual payments

DKK 1,000 2019 2020 2021 2022 2023
Long-term credit facilities 0 0 0 0 812,053
Gross interest-bearing debt 0 0 0 0 812,053

Reconciliation of development in interest-bearing debt

2017 Cash flows Acquistion Reclassification FX movements 2018
Long-term interest-bearing debt 146,696 665,357 0 0 0 812,053
Short-term interest-bearing debt 378,300 -367,450 0 0 -10,850 0
Total interest-bearing debt 524,996 297,907 0 0 -10,850 812,053

Reconciliation of development in interest-bearing debt

2016 Cash flows Acquisition Reclassification FX movements 2017
Long-term interest-bearing debt 827,146 -302,150 0 -378,300 0 146,696
Short-term interest-bearing debt 0 0 0 347,500 30,800 378,300
Total interest-bearing debt 827,146 -302,150 0 -30,800 30,800 524,996

NOTE 3.11 MORTGAGES AND GUARANTEES

Carrying amount of debt secured by mortgages and pledges

The Bakkafrost Group has a group financing covering the Group. In addition, the Group companies are liable jointly and severely for the balance without limitations for each other.

As part of the guarantees are also any insurance refunds.

DKK 1,000 2018 2017
Long-term
debt
to
financial
institutions
812,053 146,696
Derivatives 320 127,255
Total 812,373 273,951
Carrying amount of assets pledged as security for recognized debt
Licences 372,138 294,675
Property, plant and equipment 2,162,917 1,719,430
Financial assets 57,497 51,406
Biological assets (biomass) 1,358,462 993,037
Inventory 435,218 305,845
Total 4,386,232 3,364,393

NOTE 3.12 DERIVATIVES

DKK 1,000 2018 2017
Currency swaps regarding forward contracts 320 -148
Interest and currency swaps regarding bonds 0 127,403
Derivatives total 320 127,255

The fair value of derivatives held at the balance sheet date can be allocated as follows:

Recognized in
the Income
Recognized Recognized in
the Income
Recognized
DKK 1,000 Fair Value
2018
Statement
2018
in equity
2018
Fair Value
2017
Statement
2017
in equity
2017
Currency derivatives 320 0 320 -148 0 -148
Interest and currency derivatives 0 0 0 127,403 0 127,403
Total 320 0 320 127,255 0 127,255

The expected timing of the effect on the income statement is as follows:

Currency
derivatives
Interest and
currency
derivatives
Total
2018
Currency
derivatives
Interest and
currency
derivatives
Total
2017
Within one year 320 0 320 -148 127,403 127,255
Between
one
and
five
years
0 0 0 0 0 0
After
five
years
0 0 0 0 0 0
Total 320 0 320 -148 127,403 127,255

FINANCIAL INSTRUMENTS

In accordance with IFRS 9, financial instruments falling within its remit are classified into the following categories: fair value with changes in value entered to the Income Statement, 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 category 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 value with changes in value, entered to the Income Statement.

Hedge accounting

Bonds are measured at fair value.

Interest rate swaps and forward currency settlement contracts 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 instrument is recognized directly in other comprehensive income in the cash flow hedge reserve.

Amounts recognized as other comprehensive income are transferred to the Income Statement, when the hedged transaction affects profit or loss, and when financial liabilities are settled, such as when the hedged financial income or financial expense is recognized.

If the forecast transactions or commitments are no longer expected to occur, the cumulative gain or loss, previously recognized in equity, is transferred to the Income Statement. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, any cumulative gain or loss, previously recognized in other comprehensive income, remain in other comprehensive income until firm commitment affects profit or loss, or settlement payments are made.

NOTE 3.13 PROVISIONS

A provision is recognized when, and only when, the company 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.

ACCOUNTING POLICIES

The Group enters into sales contracts for value added salmon products (VAP) on an on-going basis. The contracts involve physical settlement, and deliveries associated with the contracts, 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 entered 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 salmon products. These contracts do not contain any elements of embedded derivatives, and are therefore not treated as financial instruments. The contracts are settled based exclusively 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

PROVISIONS FOR ONEROUS CONTRACTS

DKK 1,000 2018 2017
Provisions for onerous contracts 01.01. 0 67,378
Change in provisions for onerous contracts for the year 0 -67,378
Provisions for onerous contracts 31.12. 0 0

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 maximize shareholder value. The farming business is characterized 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 percent. At 31 December 2018, the Group's equity ratio was 70 percent.

According to the Group's dividend policy, under normal circumstances, average dividends over several years should be 30 to 50 percent of the adjusted net profit. The Board has proposed a dividend of DKK 8.25 per share for the financial year 2018, corresponding to a distribution to shareholders of DKK 403.1 million.

The Group manages the capital structure and adjusts corresponding to changes in the underlying economic conditions. The Group monitors continuously access to borrowed capital and has ongoing dialogue with its lenders. The Group is financed by bank loans. At 31 December 2018, net interest-bearing debt amounted to DKK 495.5 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 2018.

There were no changes in the Group's approach to capital management during the year. Neither the company nor any of its subsidiaries are subject to externally imposed capital requirements.

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 exposure to each of these risks, the Group's objectives, policies and procedures for measuring and managing risk.

Further quantitative disclosures are included throughout these consolidated financial statements.

The main objective of Bakkafrost's financial risk management policies is to ensure the ongoing liquidity of the Group, defined as being at all times in a position to meet the liabilities 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 insurance.

The Board of Directors believe that the most important measure against any risk is to have a strong financial position. At 31 December 2018, the Group's equity ratio was 70%.

Risk management policies and procedures are reviewed regularly 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 instruments such as accounts receivables, cash, shares, accounts payables, etc., which are ascribable directly to day-to-day business operations.

The Group uses financial derivatives, mainly currency forward contracts. The purpose of these instruments is to manage the currency risks arising from the Group's operations.

The Group does not employ financial instruments, including financial derivatives, for the purpose of speculation.

The most important financial risks, to which the company is exposed, are interest rate risk, foreign exchange risk, liquidity 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 income and expenses, future cash flows or fair value of financial 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 commodity 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. As hedging activities normally result in lower average expected return, the Group only uses external hedging, where there is a significant risk of breach of financial covenants.

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 exposure have been identified: Translational exposure, Transactional exposure and Economic currency exposure:

Translational exposure

Bakkafrost has subsidiaries abroad in the UK, Shetland, USA and Norway. 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 generally not hedged, as it is not considered material.

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 segment, exposure arises mainly from export sales, while for the FOF segment, exposure results from the sourcing of raw materials in the international commodities markets.

Transactional exposure for the Group is mitigated by diversification benefits. Where opposite exposure from different segments are not perfectly offset, the residual effect of adverse movements in foreign currency rates on transaction streams could negatively impact the results and financial position of the Group, thus affecting covenants based on accounting measures.

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 financial statements of subsidiaries into the presentation currency is not included in the analysis.

Exposure to currency risk Currency

DKK 1,000
2018 EUR/DKK GBP/DKK USD/DKK NOK/DKK JPY/DKK
Cash and cash equivalents 21,978 67,195 89,700 21,338 2,543
Accounts receivables 59,720 10,639 96,217 26,636 3,839
Trade payables -7,184 -414 -6,631 -15,237 0
Interest-bearing debt -373,365 0 0 0 0
Forward contracts 0 0 -320 0 0
Net exposure -298,851 77,420 178,966 32,737 6,382
2017 EUR/DKK GBP/DKK USD/DKK NOK/DKK JPY/DKK
Cash and cash equivalents 24,073 16,240 94,935 65,425 3
Accounts receivables 50,743 5,142 57,331 93,769 6,339
Trade payables -2,169 -647 -73 -6,958 0
Interest-bearing debt 0 0 0 -378,300 0
Forward contracts 0 0 -3,429 0 0
Net exposure 72,647 20,735 148,764 -226,064 6,342

The analysis is based on the currencies that the Group is most exposed to at the end of 2018. 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 24.1 million (2017: DKK 3.7 million).

The Group does not hedge transaction exposure in the financial markets as a general rule. Currency protection measures may be allowed to prevent situations of financial distress in those cases, where the exposure cannot be effectively reduced by use of operational hedges.

Sensitivity analysis

DKK 1,000

2018 EUR/DKK GBP/DKK USD/DKK NOK/DKK JPY/DKK Result
Net exposure -298,851 77,420 178,966 32,737 6,382
Historical volatility for the last 5 years 0.34% 8.66% 8.50% 7.91% 9.46%
Total effect on Profit of +movements -1,016 6,705 15,212 2,589 604 24,094
Total effect on Profit of -movements 1,016 -6,705 -15,212 -2,589 -604 -24,094
2017 EUR/DKK GBP/DKK USD/DKK NOK/DKK JPY/DKK Result
Net exposure 72,647 20,735 148,764 -226,064 6,342
Historical volatility for the last 5 years 0.33% 8.79% 8.51% 8.42% 10.40%
Total effect on Profit of +movements 240 1,823 12,660 -19,035 660 -3,653
Total effect on Profit of -movements -240 -1,823 -12,660 19,035 -660 3,653

Currency forward contracts as at 31 December 2018

Bakkafrost Group buys Bakkafrost Group sells
DKK 1,000
DKK 15,700 USD 2,475

Currency forward contracts as at 31 December 2017

Bakkafrost Group buys Bakkafrost Group sells
DKK 1,000
DKK -3,429 USD 21,376
NOK 500,000 DKK 505,050

Economic currency exposure

The Group is exposed to the risk that medium/long-term trend shifts in exchange rates might affect its competitive position. This strategic currency exposure is regularly monitored, but as the exposure is currently considered limited it is not actively hedged.

Significant exchange rates (average) during the year EUR/DKK GBP/DKK USD/DKK NOK/DKK JPY/DKK
2018 745.32 842.44 631.74 77.69 5.72
2017 743.86 848.63 659.53 79.82 5.88

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 profitability. 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 minimize the risk of breach of the Group's debt covenants and to avoid situations of financial distress that might jeopardize 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 5.0 million (2017: DKK 2.6 million), based on NIBD.

Price risk

The farming segment is 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 commodity 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 customers, 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 volume makes it necessary to purchase raw materials outside of previously negotiated purchase agreements. Under these circumstances, 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 holdings are prepared regularly.

Liquidity risk is managed through maintaining flexibility in funding by securing available committed credit lines, provided 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 12 months, plus financial headroom to cover the planned investments and unforeseen movements in cash requirements. Please also refer to Note 3.10 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 capital 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 2018 included DKK 316.9 million, and DKK 309.5 million as at 31 December 2017 (see Note 3.10) 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 contracted 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 guarantees, 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 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, supported by regular follow up by central functions.

Concentration of credit risk is at the outset not considered 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 derivatives. For these transactions, the Group relies upon Nordic relationship banks, other relationship banks or widely recognized commodity exchanges.

The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date consists of accounts receivables, other receivables and cash and cash equivalents and amounts to DKK 609.2 million as at 31 December 2018 (2017: DKK 729.2 million). For age distribution of accounts receivables, please refer to Note 3.7.

Credit Risk 2018 2017
Accounts receivables 269,348 262,493
Other receivables 22,936 157,156
Cash and Cash equivalents 316,894 309,551
Total 609,178 729,200

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.

The Group does not make extensive use of financial derivatives, and in those cases, where it is deemed appropriate to hedge an existing exposure on the financial markets, agreements are entered into with one of the Group's relationship banks.

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 disclosed, are categorized within the fair value hierarchy, described 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 input that is significant to the fair value measurement is directly or indirectly observable).

Level 3: Valuation techniques (for which the lowest level input that is significant to the fair value measurement is unobservable).

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 3.6.

For assets/liabilities that are recognized at fair value on a recurring basis, the Group determines, whether transfers have occurred between Levels in the hierarchy by reassessing categorization (based on the lowest level input that is significant 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) 1,358,462 975,687 0 0 1,358,462 Assets measured at fair value 31-12-18 1,358,462 975,687 0 0 1,358,462 Liabilities measured at fair value 31-12-18 0 0 0 0 0 Biological assets (biomass) 1,096,664 909,708 0 0 1,096,664 Assets measured at fair value 31-12-17 1,096,664 909,708 0 0 1,096,664 Liabilities measured at fair value 31-12-17 0 0 0 0 0

NOTE 4.3 EARNINGS PER SHARE

DKK 1,000 2018 2017
Profit
for
the
year
to
the
shareholders
of
P/F
Bakkafrost
960,292 511,402
Fair value adjustment of biomass (IAS 41) -195,819 693,540
Onerous contracts provision 0 -67,376
Tax on fair value adjustment 35,247 -112,710
Adjusted profit for the year to shareholders of P/F Bakkafrost 799,720 1,024,856
Ordinary shares as at 01.01. 48,858,065 48,858,065
Ordinary shares as at 31.12. 48,858,065 48,858,065
Time-weighted average number of shares outstanding through the year 48,645,774 48,609,644
2018 2017
Earnings per share
Basic (DKK) 19.74 10.52
Diluted (DKK) 19.74 10.52

Adjusted earnings per share (before fair value adjustments

of biomass and provision for onerous contracts (adjusted EPS)

Basic (DKK) 16.44 21.08
Diluted (DKK) 16.44 21.08

Bakkafrost Group has no stock option programme running at present.

EARNINGS PER SHARE (EPS)

Basic earnings per share

Basic EPS is calculated by dividing the profit attributable to equity holders of the company by the weighted average number of ordinary shares in issue during the year, excluding ordinary shares purchased by the company and held as treasury shares.

Diluted earnings per share

Diluted earnings per share are adjusted for the dilution effect 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 figure provides a more reliable measure of the underlying performance.

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

2018 2019 2020
Total contractual new Hatchery stations 109,170 0
Total contractual new Biogas plant 57,180 0
Total contractual other PPE investments 14,380 0
Total 180,730 0
2017 2018 2019
Total contractual new Hatchery stations 299,510 0
Total contractual other PPE investments 37,960 0
Total 337,470 0

The Group had capital expenditure committed but not provided in these accounts at the date of the Statement of Financial Position of approximately DKK 181 million. DKK 109 million relate to the building of new hatchery stations. DKK 57 million relate to the building of a new biogas plant.

NOTE 5.2 RELATED-PARTY TRANSACTIONS

Related parties are in this respect considered as persons or legal entities, which directly or indirectly possess significant influence on the Bakkafrost Group through shareholding or position and vice versa. Related party transactions are at arm's length terms.

DKK 1,000 2018 2017
Based on key personnel
Revenues - Betri Trygging P/F 683 2,804
Purchase - Betri Trygging P/F 7,373 15,204
Accounts payable - Betri Trygging P/F 445 5,329
Revenues - Gist & Vist P/F 772 329
Purchase - Gist & Vist P/F 583 768
Purchase – Frost P/F 4,794 0
Accounts payable - Frost P/F 26 0
Purchase - Vest Pack P/F 9,765 12,557
Accounts payable - Vest Pack P/F 1,188 2047
Based on association
Revenues - FF Skagen A/S 0 35,049
Purchase - FF Skagen A/S 421 328
Accounts payable - FF Skagen A/S 38 0
Revenues - Pelagos P/F 0 92
Purchase - Pelagos P/F 26,208 36,504
Accounts payable - Pelagos P/F 0 1,860
Revenues - Salmon Proteins P/F 1,937 13,361
Accounts receivables - Salmon Proteins P/F 576 2,253

NOTE 5.3 BUSINESS COMBINATIONS

2018:

On 1 July 2018, Bakkafrost purchased the business and assets in North Landing via Bakkafrost USA LLC.

The purchase is paid in cash and financed by existing facilities. The key employees of North Landing will continue in Bakkafrost USA LLC.

The fair value of intangible assets has been determined on an estimated fair value. Fair value has been identified in customer 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.

From 1 July to 31 December 2018, the acquired business contributed with a result of -8.5 mDKK to the Group's result.

2017:

There were no business combinations in 2017.

NOTE 5.4 EVENTS AFTER THE DATE OF THE STATEMENT OF FINANCIAL POSITION

This is regarding new information regarding the company's financial position on the statement of financial position, which is received after the date of the statement of financial position, has been recognized in the annual accounts. Events after the date of the statement of financial position, which do not affect the company's financial position on the statement of financial position date, but which will affect the company's future financial position, are disclosed if material. From the date 31-12-2018 until today, no events have occurred, which materially affect the information provided by the accounts.

Identifiable assets assumed:

DKK 1,000 1 July 2018
Intangible assets 13,948
Property, plant and equipment 13,372
Inventory 1,590
Total net identifiable assets 28,910

NOTE 5.5 AUDITOR'S FEES

Fees paid to auditors (ex. VAT) break down as follows:

DKK 1,000 2018 2017
Statutory auditing 898 950
Tax advisory services 8 75
Other services 175 210
Total auditor's fees 1,081 1,235

NOTE 5.6 GOING CONCERN

With reference to the Group's profits, financial strength and long-term forecasts for the years ahead, it is confirmed that the financial statements for 2018 are based on the assumption that Bakkafrost is a going concern. In the opinion of the Board, the Group's financial position is good.

NOTE 5.7 ALTERNATIVE PERFORMANCE MEASURES

Bakkafrost's financial information is prepared in accordance with international financial reporting standards (IFRS). In addition, 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 financial statements prepared in accordance with IFRS. The alternative performance measures presented may be determined or calculated differently 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 defined, 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, financial 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 necessarily 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 defined 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.

31.12.18 31.12.17
DKK 1,000
Cash and cash equivalents 316,894 309,551
Deposit for interest- and currency swap 0 84,630
Derivatives -320 -127,255
Long- and short-term interesting-bearing debt -812,053 -524,996
Net interest-bearing debt -495,479 -258,070

EBITDA

Earnings before interest, tax, depreciations and amortizations (EBITDA) is a key financial parameter for Bakkafrost's FOF segment. EBITDA before other income and other expenses is defined as EBITDA less gains and losses on disposals of fixed assets and operations, and is reconciled in the section Group overview. This measure is useful to users of Bakkafrost's financial information in evaluating operating profitability on a more variable cost basis, as it excludes depreciations and amortization expenses related primarily to capital expenditures and acquisitions, which occurred in the past, nonrecurring items, as well as evaluating operating performance in relation to Bakkafrost's FOF segments competitors. The EBITDA margin presented is defined as EBITDA before other income and other expenses divided by total revenues.

Operational EBIT

Operational EBIT is EBIT aligned for fair value adjustments, onerous contracts provisions, income from associates and revenue tax.

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 2018 2017
EBIT 1,184,233 649,104
Fair value adjustments on biological assets -195,819 693,540
Onerous contracts 0 -67,376
Income from associates -9,369 -17,302
Revenue tax 95,867 119,681
Operational EBIT 1,074,912 1,377,647

Operational EBIT per kg:

Farming segment: VAP segment: Farming and VAP:
Operational EBIT Farming segment Operational EBIT VAP segment Operational EBIT Farming and VAP segment
Total harvested volumes (gw) Total volumes produced (raw material gw) Total harvested volumes (gw)
DKK 1,000 2018 2017
Profit
for
the
year
to
the
shareholders
of
P/F
Bakkafrost
960,292 511,402
Fair value adjustment of biomass -195,819 693,540
Onerous contracts provision 0 -67,376
Tax on fair value adjustment 35,247 -112,710
Adjusted profit for the year to shareholders of P/F Bakkafrost 799,720 1,024,856
Time-weighted average number of shares outstanding through the year 48,645,774 48,609,644
Adjusted earnings per share (before fair value adjustments of
biomass and provision for onerous contracts (adjusted EPS) 16.44 21.08

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 figure provides a more reliable measure of the underlying performance

Financial Statements

P/F BAKKAFROST

Table of Contents

P/F BAKKAFROST – Income Statement for the year ended 31 December 141
P/F BAKKAFROST – Statement of Financial Position as at 31 December 142
P/F BAKKAFROST – Cash Flow Statement for the year ended 31 December 144
P/F BAKKAFROST – Statement of Changes in Equity as at 31 December 145
Note 1 - Accounting Policies 146
Note 2 - Salaries and other Personnel Expenses 146
Note 3 - Net Financial Items 147
Note 4 - Property, Plant and Equipment 148
Note 5 - Subsidiaries and Associates 149
Note 6 - Investments in Stocks and Shares 151
Note 7 - Share Capital and Major Shareholders 151
Note 8 - Tax 152
Note 9 - Security Pledges and Contingent Liabilities 153
Note 10 - Related-Party Transactions 153

Income Statement

FOR THE YEAR ENDED 31 DECEMBER

DKK 1,000 Note 2018 2017
Operating revenue 116,855 114,914
Salary and personnel expenses 2 -29,793 -27,466
Other operating expenses -61,044 -61,584
Depreciation 4 -29,066 -19,249
Earnings before interest and taxes (EBIT) -3,048 6,615
Dividends from subsidiaries 5 1,013,205 1,042,959
Income from other investments in shares 6 9,538 -6
Financial income 3 10,592 20,741
Net interest expenses 3 -10,338 -23,113
Net currency effects 3 -4,838 36,544
Other
financial
expenses
3 -3,339 -3,644
Earnings before taxes (EBT) 1,011,772 1,080,096
Taxes 8 190 -7,900
Profit to shareholders of P/F Bakkafrost 1,011,962 1,072,196
Distribution of profit
Dividends 403,079 513,009
Retained earnings 608,883 559,187
Distribution in total 1,011,962 1,072,196

Statement of Financial Position

AS AT 31 DECEMBER

DKK 1,000 Note 2018 2017
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 4 358,864 387,251
Plant, machinery and other operating equipment 4 32,868 37,174
Total property plant and equipment 391,732 424,425
Non-current financial assets
Investments in subsidiaries 5 1,400,671 1,395,671
Investments in stocks and shares 6 1,764 1,741
Total non-current financial assets 1,402,435 1,397,412
TOTAL NON-CURRENT ASSETS 1,795,167 1,822,837
Inventory 16,087 11,390
Total inventory 16,087 11,390
Receivables from Group companies 2,789,791 2,061,618
Accounts receivables 12,257 1,230
Other receivables 14,276 84,630
Total receivables 2,816,324 2,147,478
Cash and cash equivalents 135,168 150,417
TOTAL CURRENT ASSETS 2,967,579 2,309,285
TOTAL ASSETS 4,762,746 4,132,122
DKK 1,000 Note 2018 2017
EQUITY AND LIABILITIES
Equity
Share capital 7 48,858 48,858
Other equity 3,898,368 3,405,809
Total equity 3,947,226 3,454,667
Non-current liabilities
Long-term interest-bearing debt 9 765,564 137,769
Deferred taxes 8 11,347 10,658
Total non-current liabilities 776,911 148,427
Current liabilities
Derivatives 3.12 320 127,255
Short-term interest-bearing debt 9 0 389,100
Accounts payable 14,623 10,312
Other short-term liabilities 23,666 2,361
Total current liabilities 38,609 529,028
Total liabilities 815,520 677,455
TOTAL EQUITY AND LIABILITIES 4,762,746 4,132,122

Cash Flow Statement

FOR THE YEAR ENDED 31 DECEMBER

DKK 1,000 Note 2018 2017
Cash flow from operations
Operating profit (EBIT) -3,048 6,615
Adjustments for write-downs and depreciation 4 29,066 19,249
Adjustments for net currency effects -4,838 43,150
Adjustments for share-based payment 2 455 270
Taxes paid 8 292 -1,661
Change in inventory -4,697 -8,784
Change in receivables 59,327 -14,431
Change in current debts 25,324 -41,957
Cash flow from operations 101,881 2,451
Cash flow from investments
Increase of share capital in subsidiaries, etc., net 5 -5,000 0
Payments
made
for
purchase
of
fixed
assets
4 3,627 -47,635
Cash flow from investments -1,373 -47,635
Cash flow from financing
Changes in interest-bearing debt (short and long)
111,760 -285,573
Financial income 10,592 20,741
Financial expenses -13,677 -26,757
Financing of associates/subsidiaries -728,173 -226,157
Acquisition/sale treasury shares 1,229 3,177
Dividend from subsidiaries 5 1,013,205 1,042,959
Dividend paid -510,693 -422,794
Cash flow from financing -115,757 105,596
Net change in cash and cash equivalents -15,249 60,412
Cash and cash equivalents – opening balance 150,417 90,005
Cash and cash equivalents – closing balance total 135,168 150,417

Statement of Changes in Equity

AS AT 31 DECEMBER

DKK 1,000 Share capital Share
premium
account
Treasury
shares
Share
based
payment
Derivatives Proposed
dividends
Retained
earnings
Total
1 January 2018 48,858 117,368 -18,159 764 -104,352 513,009 2,897,179 3,454,667
Net annual profit 0 0 0 0 0 0 1,011,962 1,011,962
Other comprehensive income:
Fair value adjustment on financial derivatives 0 0 0 0 126,935 0 -138,748 -11,813
Income tax effect 0 0 0 0 -22,848 0 22,848 0
Total other comprehensive income 0 0 0 0 -104,087 0 -115,900 -11,813
Total comprehensive income 0 0 0 0 -104,087 0 896,062 1,000,149
Transaction with owners:
Treasury shares 0 0 2,634 0 0 0 -2,634 0
Share-based payment 0 0 0 455 0 0 0 455
Dividend treasury shares 0 0 0 0 0 0 2,648 2,648
Proceeds/acquisition treasury shares 0 0 0 0 0 0 2,316 2,316
Paid-out dividends 0 0 0 0 0 -513,009 0 -513,009
Proposed dividends 0 0 0 0 0 403,079 -403,079 0
Total transaction with owners 0 0 2,634 455 0 -109,930 -400,749 -507,590
Total changes in equity 0 0 2,634 455 -104,087 -109,930 495,313 492,559
31 December 2018 48,858 117,368 -15,525 1,219 -265 403,079 3,392,492 3,947,226
1 January 2017 48,858 117,368 -21,045 494 -83,196 425,065 2,329,115 2,816,659
Net annual profit 0 0 0 0 0 0 1,078,802 1,078,802
Other comprehensive income:
Fair value adjustment on financial derivatives 0 0 0 0 -25,800 0 0 -25,800
Income tax effect 0 0 0 0 4,644 0 0 4,644
Total other comprehensive income 0 0 0 0 -21,156 0 0 -21,156
Total comprehensive income 0 0 0 0 -21,156 0 1,078,802 1,057,646
Transaction with owners:
Treasury shares 0 0 2,886 0 0 0 -2,886 0
Share-based payment 0 0 0 270 0 0 0 270
Dividend treasury shares 0 0 0 0 0 0 2,271 2,271
Proceeds/acquisition treasury shares 0 0 0 0 0 0 2,886 2,886
Paid-out dividends 0 0 0 0 0 -425,065 0 -425,065
Proposed dividends 0 0 0 0 0 513,009 -513,009 0
Total transaction with owners 0 0 2,886 270 0 87,944 -510,738 -419,638
Total changes in equity 0 0 2,886 270 -21,156 87,944 568,064 638,008
31 December 2017 48,858 117,368 -18,159 764 -104,352 513,009 2,897,179 3,454,667

Notes to the Financial Statements

NOTE 1. ACCOUNTING POLICIES

The financial 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 Reporting Act. The accounting policies applied to the consolidated accounts have also been applied to the parent company, P/F Bakkafrost. The notes to the consolidated accounts provide additional information to the parent company's accounts, which is not presented here separately. The company's financial 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 investment is written-down to fair value.

NOTE 2. SALARIES AND OTHER PERSONNEL EXPENSES

DKK 1,000 2018 2017
Wages and salaries 23,966 22,174
Share-based payments 455 400
Social security taxes 891 853
Pension expenses 1,133 906
Other
benefits
3,349 3,133
Total payroll expenses 29,793 27,466
Average number of full-time employees 38 36

REMUNERATION TO SENIOR EXECUTIVES AND AUDITORS

For details of remuneration paid to senior executives, see notes to the consolidated financial statements. The company

paid DKK 45,000 for audit service and DKK 10,000 for tax advisory. For other services, see note to the consolidated financial statements.

NOTE 3. NET FINANCIAL ITEMS

DKK 1,000 2018 2017
Interests received from Group companies 8,465 20,010
Other
financial
income
2,127 731
Financial income 10,592 20,741
Interest expenses on long- and short-term loans -10,334 -23,052
Interest expenses on accounts payable -4 -61
Financial expenses -10,338 -23,113
Exchange gain on bond -10,850 30,800
Other exchange differences 6,012 5,744
Net currency effects -4,838 36,544
Other
financial
expenses
-3,338 -3,644
Other financial items -3,338 -3,644
Net financial items -7,922 30,528

NOTE 4. PROPERTY, PLANT AND EQUIPMENT

DKK 1,000 Land and
buildings
Other
equipment
Total
Acquisition cost as at 01.01.18 420,460 49,522 469,982
Disposals and scrapping during the year - reclass -9,006 -998 -10,004
Acquisitions during the year 3,627 2,211 5,838
Acquisition cost as at 31.12.18 415,081 50,735 465,816
Accumulated depreciation and write-down as at 01.01.18 -33,209 -12,348 -45,557
Depreciations during the year related to disposals 0 538 538
Depreciations during the year -23,009 -6,058 -29,066
Accumulated depreciation and write-down as at 31.12.18 -56,218 -17,867 -74,085
Net book value as at 31.12.18 358,864 32,868 391,732
Acquisition cost as at 01.01.17 376,385 45,962 422,347
Acquisitions during the year 44,075 3,560 47,635
Acquisition cost as at 31.12.17 420,460 49,522 469,982
Accumulated depreciation and write-down as at 01.01.17 -19,858 -6,450 -26,308
Depreciations during the year -13,351 -5,898 -19,249
Accumulated depreciation and write-down as at 31.12.17 -33,209 -12,348 -45,557
Net book value as at 31.12.17 387,251 37,174 424,425

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%

NOTE 5. SUBSIDIARIES AND ASSOCIATES

DKK 1,000 2018 2017
Acquisition cost as at 01.01. 1,398,437 1,398,437
Additions during the year 5,000 0
Acquisition cost as at 31.12. 1,403,437 1,398,437
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. 1,400,671 1,395,671
DKK 1,000
Company
Cost
Method
Yes/No
Head
Office
Ownership Voting
share
Carrying
amount in
P/F Bakkafrost
2018
Carrying
amount in
P/F Bakkafrost
2017
P/F Bakkafrost Processing Yes Glyvrar 100% 100% 158,591 158,591
P/F Bakkafrost Sales Yes Glyvrar 100% 100% 879 879
P/F Bakkafrost Packaging Yes Glyvrar 100% 100% 7,781 7,781
P/F Bakkafrost Farming Yes Glyvrar 100% 100% 314,887 314,887
P/F Havsbrún Yes Glyvrar 100% 100% 908,884 908,884
Bakkafrost UK Ltd Yes Grimsby 100% 100% 4,649 4,649
P/F Förka Yes Glyvrar 100% 100% 5,000 0
Total subsidiaries 1,400,671 1,395,671
Excess
dividends
Result Result
DKK 1,000 Dividends* on result 2018 2017
P/F Bakkafrost Farming 719,577 -233,116 486,461 675,735
P/F Bakkafrost Sales 109,247 56,343 165,590 109,246
P/F Bakkafrost Packaging 7,751 -576 7,175 7,749
P/F Bakkafrost Processing 0 -44,595 -44,595 -29,101
P/F Havsbrún 176,630 14,474 191,104 193,782
Bakkafrost UK Ltd. 0 6,842 6,842 5,573
P/F Förka 0 8 8 0
Total revenue Group contribution 1,013,205 -200,620 812,585 962,984

* Dividends from subsidiaries paid out in 2018

P/F Bakkafrost and subsidiaries, the Group, owns a total of 78.7% in P/F Salmon Proteins, which is an associated company on the Group level due to restrictions in exercising majority-voting rights. P/F Bakkafrost owns 14.2% in P/F Salmon Proteins and is included in the item Investment in stocks and shares.

NOTE 6. INVESTMENTS IN STOCKS AND SHARES

2018 2017
183 183
183 183
1,558 1,564
23 -6
1,581 1,558
1,741
1,764

Shares and holdings, in which the Group does not have significant influence. These are valued at cost, since fair value cannot be measured reliably.

NOTE 7. SHARE CAPITAL AND MAJOR SHAREHOLDERS

DKK 1,000 2018 2017
Share capital at 31.12. 48,858 48,858
Share capital at 31.12. 48,858 48,858

The share capital is distributed into shares of DKK 1 and multiples thereof. For shareholders holding more than 5% in the Company as at 31 December 2018, see Group Accounts.

NOTE 8. TAX

The tax expense for the year breaks down as follows:

DKK 1,000 2018 2017
Tax payable -21,970 292
Change in deferred tax 22,160 -8,192
Tax expense on ordinary profit 190 -7,900
Tax in the statement of financial position
Deferred tax 11,347 10,658
Tax in the statement of financial position 11,347 10,658
Specification
of
temporary
differences
Property, plant and equipment 63,360 59,721
Swaps -320 -127,255
Currency effects 0 126,750
Total temporary differences 63,040 59,216
Deferred tax liabilities (+) / assets (-) 11,347 10,658
Reconciliation from nominal to actual tax rate
Profit
before
tax
1,011,772 1,080,096
Expected tax at nominal tax rate (18%) -182,119 -194,417
Permanent differences, including Group contribution without tax effect (18%) 182,377 187,733
Calculated tax expense 258 -6,685
Effective tax rate 0.03% -0.62%

As Parent company in the Bakkafrost Group, Bakkafrost P/F is the administrating company in the Group Joint Taxation and is liable towards the Faroese Tax Authorities for taxes payable on behalf of its subsidiaries.

NOTE 9. SECURITY PLEDGES AND CONTINGENT LIABILITIES

Carrying amount of debt secured by mortgages and pledges:

DKK 1,000 2018 2017
Long-term
debt
to
financial
institutions
765,564 137,769
Short-term
debt
to
financial
institutions
0 389,100
Total 765,564 526,869
Carrying amount of assets pledged as security for recognized debt:
Property, plant and equipment
391,732 424,425
Non-current
financial
assets
1,402,435 1,397,406
Receivables 2,816,324 2,147,478
Total 4,610,491 3,969,309

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 reflecting prevailing market conditions for corresponding services, allowing a margin to cover administration and risk. The company allocates costs for corporate staff services and shared services to subsidiaries and renting of buildings.

The total amounts for rent are DKK 19.7 million (2017: DKK 13.8 million), allocation of administration etc. DKK 64.9 million (2017: DKK 67.5 million), financial incomes of DKK 8.5 million (2017: DKK 20.0 million) and financial expenses amounting to DKK 0.0 million (2017: DKK 0.0 million). The principle of arm's length is used in all transactions with related parties.

The company participates in a Group financing for the Bakkafrost Group. In connection to this, the company has together with other Group companies pledged licenses, property, plant and equipment, shareholdings, inventory and receivables 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.

As part of the guarantees are also any insurance refunds.

As Parent company in the Bakkafrost Group, Bakkafrost P/F is the administrating company in the Group Joint Taxation and is liable towards the Faroese Tax Authorities for taxes payable on behalf of its subsidiaries.

APPENDIX

Quarterly financial figures 2016-2018

DKK 1,000 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018
Operating revenue 904,550 789,690 639,999 868,447 853,681 1,206,148 804,150 906,070 851,156 954,316 621,602 750,348
Purchase of goods -306,427 -243,112 -159,521 -211,088 -273,978 -240,697 -159,166 -210,030 -289,145 -254,324 -177,389 -332,721
Change in inventory and biological assets (at cost) -70,320 39,083 53,180 36,931 82,501 -137,750 -72,885 -13,272 31,393 6,770 7,117 154,416
Salary and personnel expenses -72,555 -83,542 -73,632 -98,096 -95,433 -112,729 -85,361 -106,744 -91,183 -87,115 -71,940 -103,518
Other operating expenses -173,461 -165,935 -173,046 -202,931 -189,700 -210,361 -184,755 -198,452 -188,224 -163,172 -158,008 -186,569
Depreciation -28,217 -29,092 -32,311 -43,641 -41,617 -45,454 -50,187 -46,332 -45,775 -48,582 -53,094 -51,447
Operational EBIT 253,570 307,092 254,669 349,622 335,454 459,157 251,796 331,240 268,222 407,893 168,288 230,509
Fair value adjustments on biological assets 107,646 -29,379 121,802 408,126 -234,577 54,853 -155,122 -358,694 107,131 34,777 293,459 -239,548
Onerous contracts -59,959 22,778 86,411 -65,602 30,132 25,087 12,157 0 0 -6,109 -10,968 17,076
Income from associates 3,087 6,665 -4,689 9,758 2,252 -2,312 -1,037 18,399 2,419 -1,695 -2,459 11,104
Revenue tax -22,575 -29,520 -23,370 -32,985 -30,212 -45,468 -23,712 -20,289 -26,327 -31,411 -14,092 -24,036
Badwill 0 0 10,440 0 0 0 0 0 0 0 0 0
Earnings before interest and taxes (EBIT) 281,769 277,636 445,263 668,919 103,049 491,317 84,082 -29,344 351,445 403,455 434,228 -4,895
Net interest revenue 553 616 214 141 190 364 456 385 1,001 621 467 562
Net interest expenses -6,380 -6,609 -6,507 -6,487 -7,198 -6,349 -6,814 -6,004 -4,925 -3,019 -2,271 -2,262
Net currency effects -14,490 1,163 -13,987 14,959 1,841 2,277 -8,728 9,260 -13,159 12,347 1,938 293
Other
financial
expenses
-1,066 -1,045 -1,022 -1,026 -1,162 -1,165 -1,035 -1,538 -1,627 -815 -799 -519
Earnings before taxes (EBT) 260,386 271,761 423,961 676,506 96,720 486,444 67,961 -27,241 332,735 412,589 433,563 -6,821
Taxes -47,074 -48,001 -77,611 -121,041 -17,690 -88,378 -11,746 5,332 -60,434 -73,833 -77,708 201
Profit or loss for the period 213,312 223,760 346,350 555,465 79,030 398,066 56,215 -21,909 272,301 338,756 355,855 -6,620
Earnings per share (DKK) 4.39 4.61 7.13 11.44 1.63 8.19 1.16 -0.45 5.60 6.96 7.32 -0.14
Diluted earnings per share (DKK) 4.39 4.61 7.13 11.44 1.63 8.19 1.16 -0.45 5.60 6.96 7.32 -0.14
DKK 1,000 31/3 30/6 30/9 31/12 31/3 30/6 30/9 31/12 31/3 30/6 30/9 31/12
2016 2016 2016 2016 2017 2017 2017 2017 2018 2018 2018 2018
ASSETS
Non-current assets
Intangible assets 294,675 294,675 376,675 376,675 376,675 376,675 376,675 376,675 376,675 376,675 388,934 389,745
Property, plant and equipment 1,622,469 1,792,855 1,971,356 2,118,470 2,256,205 2,380,348 2,447,998 2,570,430 2,636,126 2,714,633 2,788,753 2,884,325
Financial assets 130,793 136,134 49,405 59,407 61,652 59,340 58,303 76,702 79,121 79,310 101,864 112,766
Long-term receivables 0 0 0 12,660 0 0 0 0 9,200 9,200 9,200 9,200

Total non-current assets 2,047,937 2,223,664 2,397,436 2,567,212 2,694,532 2,816,363 2,882,976 3,023,807 3,101,122 3,179,818 3,288,751 3,396,036

Biological assets (biomass) 1,129,744 1,036,553 1,412,544 1,858,435 1,645,053 1,543,687 1,416,990 1,096,664 1,114,678 1,107,275 1,562,940 1,358,462 Inventory 370,759 485,187 378,493 355,604 422,203 459,955 352,858 305,845 428,639 478,872 330,851 438,847 Total inventory 1,500,503 1,521,740 1,791,037 2,214,039 2,067,256 2,003,642 1,769,848 1,402,509 1,543,317 1,586,147 1,893,791 1,797,309

Accounts receivables 240,594 240,698 222,895 292,009 253,487 325,358 333,423 262,493 244,231 352,437 247,657 269,348 Other receivables 114,642 182,900 88,312 109,860 108,860 134,364 31,845 157,156 75,008 67,591 54,365 22,936 Total receivables 355,236 423,598 311,207 401,869 362,347 459,722 365,268 419,649 319,239 420,028 302,022 292,284

Cash and cash equivalents 320,624 173,730 240,856 234,996 499,174 353,349 347,394 309,551 668,361 284,329 306,167 316,894 Total current assets 2,176,363 2,119,068 2,343,100 2,850,904 2,928,777 2,816,713 2,482,510 2,131,709 2,530,917 2,290,504 2,501,980 2,406,487

TOTAL ASSETS 4,224,300 4,342,732 4,740,536 5,418,116 5,623,309 5,633,076 5,365,486 5,155,516 5,632,039 5,470,322 5,790,731 5,802,523

Current assets

DKK 1,000 31/3 30/6 30/9 31/12 31/3 30/6 30/9 31/12 31/3 30/6 30/9 31/12
2016 2016 2016 2016 2017 2017 2017 2017 2018 2018 2018 2018
EQUITY AND LIABILITIES
Equity
Share capital 48,858 48,858 48,858 48,858 48,858 48,858 48,858 48,858 48,858 48,858 48,858 48,858
Other equity 2,752,840 2,585,138 2,948,297 3,500,177 3,578,804 3,549,785 3,612,988 3,577,571 3,842,919 3,676,540 4,033,116 4,028,171
Total equity 2,801,698 2,633,996 2,997,155 3,549,035 3,627,662 3,598,643 3,661,846 3,626,429 3,891,777 3,725,398 4,081,974 4,077,029
Non-current liabilities
Deferred and other taxes 398,242 445,033 567,992 545,699 562,299 647,842 660,664 455,449 538,840 613,025 690,629 534,430
Long-term interest-bearing debt 492,697 736,572 708,084 827,146 507,096 476,566 256,475 146,696 770,383 727,474 591,956 812,053
Financial derivatives 119,780 114,425 94,222 101,456 0 0 0 0 0 0 0 0
Total non-current liabilities 1,010,719 1,296,030 1,370,298 1,474,301 1,069,395 1,124,408 917,139 602,145 1,309,223 1,340,678 1,282,585 1,346,483
Current liabilities
Financial derivatives 0 0 0 0 104,899 117,858 110,798 127,255 0 0 630 320
Short-term interest-bearing debt 0 0 0 0 405,650 388,500 395,350 378,300 0 0 0 0
Accounts payable and other debt 411,883 412,706 373,083 394,780 415,703 403,667 280,353 421,387 431,039 404,246 425,542 378,691
Total current liabilities 411,883 412,706 373,083 394,780 926,252 910,025 786,501 926,942 431,039 404,246 426,172 379,011
Total liabilities 1,422,602 1,708,736 1,743,381 1,869,081 1,995,647 2,034,433 1,703,640 1,529,087 1,740,262 1,744,924 1,708,757 1,725,494
TOTAL EQUITY AND LIABILITIES 4,224,300 4,342,732 4,740,536 5,418,116 5,623,309 5,633,076 5,365,486 5,155,516 5,632,039 5,470,322 5,790,731 5,802,523

Market Announcements Published in 2018

(Exclusive Invitations, Managements', Board of Directors' and large shareholders' notification of trade and notification of trade regarding Bakkafrost's Share Savings Plan).

Q1 2018

3 January 2018: Q4 2017 Trading Update 25 January 2018: Refinancing 20 February 2018: Q4 Interim Results and Full Year 2017 20 February 2018: Key Information Regarding Cash Dividend for Bakkafrost 19 March 2018: Financial Calendar 2018 - Amendment 19 March 2018: Annual Report 2017 and Sustainability Report 2017 19 March 2018: Notice to the Annual General Meeting

Q2 2018

3 April 2018: Q1 2018 Trading Update 13 April 2018: Protocol from Annual General Meeting 16 April 2018: Ex Dividend DKK 10.50 16 April 2018: Payment of Dividend in NOK on 30 April 2018 7 May 2018: Q1 2018 Interim Results

Q3 2018

3 July 2018: Q2 2018 Trading Update 21 August 2018: Q2 2018 Interim Results 23 September 2018: High Mortality at Farming Site A-81 Kolbanagjógv 28 September 2018: Financial Calendar 2019

Q4 2018

2 October 2018: Q3 2018 Trading Update 6 November 2018: Q3 2018 Interim Results 16 November 2018: Temporary Closure of FO-125 Glyvrar to Export to Russia 3 January 2019: Q4 2018 Trading Update 13 January 2019: CFO resigns 15 February 2019: New CFO appointed 19 February 2019: Q4 2018 Interim Results and Full Year 2018 19 February 2019: Key Information Regarding Cash Dividend for Bakkafrost 22 February 2019: Aut. no. FO 125 Glyvrar Open for Export to Russia

All market announcements are available on www.bakkafrost.com and www.newsweb.no.

Financial Calendar for 2019


5 April 2019
Annual General Meeting

6 May 2019
Presentation of Q1 2019

12 June 2019
Capital Markets Day 2019

20 August 2019
Presentation of Q2 2019

5 November 2019
Presentation of Q3 2019

All quarterly presentations will take place at Hotel Continental, Stortingsgaten 24/26, Oslo, Norway,

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.

AGM: Annual General Meeting
Glossary 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
FOF: Fishmeal, Oil and Feed
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
TGW: Tonnes Gutted Weight
USP: Unique Selling Points
VAT:
VAP:
Value Added Tax
Value Added Products; Value Added Production
WACC:
WFE:
Weighted Average Cost of Capital
Whole Fish Equivalent

Bakkafrost P/F • Bakkavegur 9 • PO Box 221 • FO-625 Glyvrar Tel +298 40 50 00 • Fax +298 40 50 09 • [email protected] • www.bakkafrost.com

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