Grieg Seafood
Annual Report 2018

Plain-text annual report

ROOTED IN NATURE FARMING THE OCEAN FOR A BETTER FUTURE We are sea farmers. We live by and for the ocean. In cold and clear waters we produce salmon to people all over the world. Our fish is healthy for humans and sustainable for the planet. This is our tiny way of making the world a better place. 2 Grieg SeafoodAnnual report 20183 Our history and our future 5000 B.C.E First fish farms reported in China. 1850 The first wild salmon hatcheries were established in Norwegian salmon rivers. 1969 The brothers Ove and Sivert Grøntvedt released the first salmon smolts in pens in the sea at the island Hitra in Norway. 1970s Commercial salmon farming of chinook, coho and sockeye is established around Sechelt in British Columbia. 2011 2010 Grieg Seafood British Columbia is certified by BAP (Best Aquaculture Practices). Together with Bremnes Seas- hore, Grieg Seafood establis- hes the sales company Ocean Quality. 2008 Grieg Seafood is listed at Oslo Stock Exchange. Grieg Seafood Rogaland is certified by GLOBALG.A.P (Good Agricultural Practices). Grieg Seafood aquires Hjaltland Ltd in Shetland, the beginning of Grieg Seafood Shetland. 2007 2015 2013 The Norwegian Govern- ment launches «green licences”, with stricter environmental standards. Grieg Seafood has 8 green licences today. Grieg Seafood Shetland is certified by GLOBALG.A.P. The Norwegian Government launches “development licenses”. Grieg Seafood has applied with the offshore farming project Blue Farm. 2017 Grieg Seafood launches its GSF2020 improvement program: a production target of 100 000 tonnes in 2020, with a cost at or below industry level. Grieg Seafood harvests 63 000 tonnes. 2016 Grieg Seafood Finnmark is certified by GLOBALG.A.P. Grieg Seafood Finnmark recei- ved its first ASC certifications. 4 Grieg SeafoodAnnual report 2018Our history and our future 1973 The Norwegian Parliament adopts a license system for the growing aquaculture industry, with the aim of strengthening local communities along the coast. Since then, salmon farms have contributed with jobs and revenues to small, coastal communities in all production countries. 1990s Vaccines against diseases are introduced. As a result, the salmon farming industry has reduced the use of antibiotics in salmon farming significantly. 1992 Grieg Seafood Salmon (trading company) and Bioinvest (salmon farming investor) are established. 1996 Grieg Seafood decides to invest in Rogaland. 2006 Grieg Seafood merges with the Volden Group and establishes Grieg Seafood Finnmark. 2001 Grieg Seafood acquires Scandic Marine Ltd. in British Columbia and establishes Grieg Seafood BC. 2000nds The Norwegian Government and the industry develops the standard NS9415 to secure safe facilities and prevent escapes. 2018 Grieg Seafood harvests 75 000 tonnes. Grieg Seafood achieves an A- score from the Carbon Disclosure Project (CDP). Grieg Seafood scores 12th place on the SHE Index. 2019 Grieg Seafood aims to harvest 83 000 tonnes. 2020 Grieg Seafood scores 8th place on the SHE Index. Grieg Seafood aims to harvest 100 000 tonnes. 2030 Grieg Seafood aims to have reduced CO2 emissions per kilo with 30 percent (with 2017 as a base year). 5 PA R T 01 Grieg Seafood at a glance MAIN ACHIEVEMENTS KEY FIGURES THE GSF 2020 PROGRAM FOR SUSTAINABLE GROWTH CEO LETTER FARMING THE OCEAN FOR A BETTER FUTURE OUR SCOREBOARD OUR ORGANIZATION GROUP MANAGEMENT TEAM 10-11 12-13 14-17 18-21 22-29 30-31 32-33 34-37 Content 6 Grieg SeafoodAnnual report 2018Content PA R T 0 2 PA R T 0 3 Our progress Operational results OUR CERTIFICATIONS 40-41 PRESENTATION OF THE BOARD 168-169 HEALTHY OCEAN 42-65 BOARD OF DIRECTORS´ REPORT 170-185 • • • • • Fish health and welfare Sea lice control Escape control Limiting local emissions Interaction with wild life SUSTAINABLE FOOD • • • Safe and healthy food Sustainable feed Reducing carbon emissions • Waste management 44-49 50-55 56-57 58-59 60-61 66-89 68-73 74-77 78-81 82-83 PRINCIPLES OF CORPORATE GOVERNANCE 186-199 GSF GROUP ANNUAL ACCOUNTS 200-265 GSF ASA ANNUAL ACCOUNTS 266-289 AUDITOR´S REPORT AUDITOR´S SUSTAINABILITY STATEMENT 290-295 296-299 PROFIT & INNOVATION 90-127 • • • • • • The global salmon market Ocean Quality and our market Economic productivity Profitable growth The Grieg Seafood shares Analytical information PEOPLE • • • • Creating attractive jobs Keeping our employees safe Transparency, integrity and anti-corruption Data security and privacy LOCAL COMMUNITIES • Local value creation 92-93 94-95 96-99 100-109 116-119 120-127 128-147 130-133 134-137 138-141 142-143 148-165 150-159 7 8 Grieg SeafoodAnnual report 2018Part 01 Grieg Seafood at a glance Content PART 01 Grieg Seafood at a glance MAIN ACHIEVEMENTS KEY FIGURES THE GSF 2020 PROGRAM FOR SUSTAINABLE GROWTH CEO LETTER FARMING THE OCEAN FOR A BETTER FUTURE OUR SCOREBOARD OUR ORGANIZATION GROUP MANAGEMENT TEAM 10-11 12-13 14-17 18-21 22-29 30-31 32-33 34-37 9 Main achievements 2018 GROUP HIGHLIGHTS ROGALAND 16 293 Harvest volume (tonnes GWT) 13.5 EBIT per kg (NOK) COMPLETED Expansion of smolt facility completed 0 No sea lice treatment for five months 5 Five sites currently being monitored and fed from our pilot Precision Farming operational center 1st The first ever solar panel and wind mill on a fish farm 74 623 Harvest volume (tonnes GWT) 14.72 EBIT per kg (NOK) 22 % Return on capital employed (ROCE) A- Awarded by the Carbon Disclosure Project on actions related to climate change 12 > 8 Climbing on the SHE Index due to our gender balance in the management team 10 Grieg SeafoodAnnual report 2018Part 01 Grieg Seafood at a glance Main achievements 2018 FINNMARK SHETLAND BRITISH COLUMBIA 29 774 11 924 16 632 Harvest volume (tonnes GWT) Harvest volume (tonnes GWT) Harvest volume (tonnes GWT) 20.0 EBIT per kg (NOK) 2.8 EBIT per kg (NOK) COMPLETED 94% 17.5 EBIT per kg (NOK) STARTED Expansion of smolt facility completed Superior share of salmon Expansion of smolt facility started 2 0 Two new sites granted Zero impact on wild life 4 Total of four sites ASC certified 0% None of the analyzed samples from the wild salmon river, the Alta river, were farmed salmon 1st Skuna Bay is the preferred salmon of choice for top chefs throughout North America 7.2 % Improved growth rate in the Esperanza area due to algae mitigation and digital monitoring 11 Key figures 2018 KEY FIGURES (NOK 1 000) 2018 2017 2016 2015 2014 2013 2012 2011 2010 Sales revenues 7 500 316 7 017 456 6 545 187 4 608 667 4 099 543 2 404 215 2 050 065 2 047 000 2 446 800 EBITDA EBIT 1 334 473 1 105 533 1 341 662 261 311 483 820 484 330 -29 818 345 820 686 944 1 098 818 904 400 1 167 745 47 742 343 104 348 293 -191 162 205 613 639 754 EBIT after fair value adjustment 1 354 916 812 937 1 683 486 80 951 219 367 615 743 -93 099 -189 567 847 383 Profit/loss for the year 997 120 600 899 1 222 331 4 366 144 395 430 985 -147 188 -123 158 631 039 Cash flow from operations 819 841 708 877 953 113 367 282 156 541 317 282 202 733 215 406 594 731 Gross investments 733 034 552 821 254 852 322 168 311 698 163 961 189 539 324 186 241 804 Total assets 8 142 490 7 152 615 6 768 038 5 935 777 5 351 599 4 590 593 4 070 279 4 172 197 4 057 628 NIBD according to covenants requirement 1 689 537 1 283 606 906 319 1 568 878 1 566 242 1 445 005 1 529 976 1 443 690 1 046 640 NIBD incl. Factoring 2 236 320 1 763 786 1 399 981 1 907 109 1 761 802 1 445 005 1 529 976 1 443 690 1 046 640 Equity (incl. minority) 3 883 511 3 347 905 3 206 951 2 237 511 2 241 451 1 988 557 1 513 230 1 690 150 1 982 405 EBIT/kg 14.72 14.45 18.04 0.73 5.30 6.00 -2.73 3.42 9.96 Harvest volume (tonnes GWT) 74 623 62 598 64 726 65 398 64 736 58 061 70 000 60 082 64 214 Market price of salmon (NOK/kg) * 60.76 60.88 63.13 42.09 40.30 39.59 26.58 31.99 37.26 NIBD/EBITDA Equity % 1.3 1.2 0.7 6.3 3.3 3.0 -51.3 4.2 1.5 48 % 47 % 47 % 38 % 42 % 43 % 37 % 41 % 49 % Return on Capital Employed (ROCE) 22 % 24 % 33 % 1 % 10 % 12 % -6 % 7 % 20 % Dividend per share (NOK) Earnings per share (NOK) 4.00 8.81 4.00 1.50 0.50 - - - 1.35 0.25 5.02 10.74 -0.06 1.26 3.90 -1.33 -1.11 5.65 Total market value OSE (NOK 1 000) 11 423 023 8 067 580 9 122 785 3 461 522 3 182 367 2 735 719 1 379 026 463 397 2 210 908 Number of employees (full-time equivalent) 769 707 654 681 686 626 640 589 578 Tonnes = tonnes gutted weight equivalent (GWT) unless otherwise specified. * Average of weekly prices FPI NOK 12 Grieg SeafoodAnnual report 2018Part 01 Grieg Seafood at a glance Key figures 2018 PRICE FISH POOL (NOK/KG) EBIT/KG GWT FIGURE HARVEST VOLUME 2018 (TONNES GWT) FIGURE EBIT VS. PRICE (NOK) 80 60 40 20 0 -10 2010 2011 2012 2013 2014 2015 2016 2017 2018 FIGURE HARVESTED VOLUME HARVEST VOLUME (1 000 TONNES GWT) 80 60 40 20 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 * EBIT before fair value adjustment of biological assets 11 924 16 293 16 632 29 774 FIGURE SALES REVENUES 2018 (NOK 1 000) 799 904 959 604 1 075 272 1 671 334 FIGURE EBIT* 2018 (NOK 1 000) 33 751 219 637 290 864 594 917 ROGALAND FINNMARK BRITISH COLUMBIA SHETLAND 13 The GSF 2020 program for sustainable growth In 2016, we launched our growth program to utilize existing farming licenses. The growth target is 100 000 tonnes in 2020, with a cost at or below industry level. With this program, we are also building a platform for sustainable growth beyond 2020. 14 Grieg SeafoodAnnual report 2018Part 01 Grieg Seafood at a glance The GSF 2020 program FIGURE OUR GROWTH JOURNEY: HARVESTED TONNES 63 000 2017 75 000 2018 82 000 2019 100 000 2020 WITH COST AT OR BELOW INDUSTRY AVERAGE FIGURE OUR STRATEGIC FOCUS AREAS SUSTAINABILITY Post-smolt strategy Digitalization in salmon farming Biosecurity and fish welfare Expansion opportunities OUR STRATEGIC FOCUS AREAS POST SMOLT STRATEGY Our post smolt strategy will enable us to keep fish longer on land before releasing it into the sea. While an average smolt released into the sea in 2014 was 90 grams, the average smolt in Rogaland will be 500 grams in 2020. Bigger smolt improves biosecurity because each salmon has less time in sea, with reduced exposure to biological risks. It also increases smolt release flexibility and allows us to fallow for longer periods if needed. Further, post smolt improves salmon survival rates because each salmon is more robust when entering the sea. Post smolt also allows for a more efficient production cycle. It takes less time to reach harvest size in the sea, which frees up capacity on farms and reduces the number of active sea sites. As such, it reduces the need for capital expenditure in seawater production. The result is lower environmental footprint per kilo, better fish health, increased productivity, and lower costs. 15 Grieg Seafood Annual report 2018 DIGITALIZATION When digitalizing salmon farming, we apply advanced sensors, big data, artificial intelligence, and automation, with the aim of gene- rating better farming decisions. Today, we have simplified and standardized data acquisition. Farmers are starting to get access to real-time data from the pens to support decision-making. The future will allow us to use big data analytics to predict events in advance, to improve decision-making and omit negative occurrences. We call it Grieg Seafood (GSF) Preci- sion Farming. We will open integrated full-scale operations centers for remote farming operations in all regions. The centers will gather and analyze new and historical data, support decisions through conti- nuous data analysis, centralize and improve feeding operations, and keep an overview of all technical infrastructure. Our digitalization efforts will improve insight, provide better control for the farmers, increase resource utilization, and improve the area management. We believe it will allow us to find new connections between the fish and the environment, which may impact farming decisions. The result is reduced environmental impact, improved fish welfare, improved productivity, and lower cost. SUSTAINABILITY DRIVERS SUCCESS FACTORS • License to operate • Higher volume • Superior quality • Reduced cost • Engaged employees • Preferred partner • Sea lice control • Escape control • Disease control • Survival • Minimal sea lice medication • Wild life management • Carbon emissions • HSE • Work satisfaction • Certifications • Local value creation 16 Part 01 Grieg Seafood at a glance The GSF 2020 program BIOSECURITY AND FISH WELFARE EXPANSION OPPORTUNITIES We pursue a systematic, long-term approach to fish welfare. The key is investment and further development of preventative measu- res against dangers to the fish in the sea, such as sea lice, harmful plankton, low oxygen levels, diseases, and low sea water tempe- ratures. Prevention will reduce handling and stress for the fish. It will also reduce our environmental footprint, for instance by reducing the number of treatments needed. The result is stronger growth, high harvesting quality, increased survival rates, and lower cost. We look for more sites and new locations in existing regions, which will allow us to improve flexibility, biosecurity, and fish welfare. We take part in new growth initiatives such as development licenses in Norway, and look for joint ventures and cooperation with farmers in existing areas. Increasing production time on land through our post smolt strategy will also give us more options. Expansion opportunities give us more flexibility in production, which helps us to reach our targets on volume, cost, quality, fish welfare, and environmental impact. FINANCIAL TARGETS • ROCE: 12 % • 100 000 tonnes in 2020 • Cost at/below NOK 37.9/kg • NIBD/EBITDA < 4.5 • NIBD/harvest volume: NOK 20/kg • Dividend of 25-35 % of net profit FIGURE SUSTAINABILITY DRIVES RESULTS In salmon farming, when we are in it long-term, there is no contradiction between sustainability and profit. In fact, sustai- nability drivers such as sea lice control and survival directly impact success factors like cost or volume. As such, to reach our financial targets, our sustainability drivers need to perform well. 17 CEO LETTER Building a platform for sustainable growth 18 Grieg SeafoodAnnual report 2018Part 01 Grieg Seafood at a glance CEO letter “We are only at the very beginning of our journey to digitalize salmon farming and to utilize the power of big data and artificial intelligence.” ANDREAS KVAME CEO Grieg Seafood I am pleased to report that 2018 was another good year for Grieg Seafood. Throughout the year, we significantly advanced our busi- ness, delivered solid financial results, and took important steps to position the Company for continued sustainable growth. Harvest volumes increased by 20 percent and reached 75 000 tonnes for the year. Finnmark, Rogaland and British Columbia reached their 2018 targets on volume, cost and smolt transfers to sea. Shetland ended slightly behind target. All in all, we are in a strong position to reach our 2020 targets of 100 000 tonnes with a cost at or below industry level. POST-SMOLT ON TRACK Throughout 2018, we have focused on four key strategic priorities; post-smolt, digitalization, biological control and fish welfare, as well as expansion opportunities. In 2018, we made progress in the development of our post-smolt capabilities, upgrading our smolt facilities to produce bigger smolt in Rogaland, Finnmark and British Columbia. Construction finished at our first post-smolt only facility in Rogaland, which targets production of smolts weighing up to one kilo, with an average weight of 500 grams. That will improve robustness before the fish is released into the sea, and it limits each salmon’s exposure to sea lice and other possible diseases in the open pens. So far, the results from post-smolt in sea are promising. FIRST RESULTS FROM DIGITALIZATION We have started to reap the first results from our investments into digitalization. In British Columbia, feeding days increased due to mitigating actions against toxic algae blooms and low oxygen levels, enabled by sensor technology and surveillance. On our farms in Esperanza, where toxic algae blooms can be a challenge, growth rate improved with 7 percent in 2018. Opening our first pilot for an operational center in Rogaland was another milestone. We are now running sensor pilots in every region to collect standardized data from our farms, which will enable us to compare an increasing number of production- and environmental parameters between sites daily, driving learning and production control. We are only at the very beginning of our journey to digitalize salmon farming and to utilize the power of big data and artificial intelli- gence. We believe digitalization has the potential to transform the industry. New data-driven knowledge about connections between the fish and the environment in the sea will allow us to increasingly farm salmon on nature’s premises. I am proud that Grieg Seafood is driving digital aquaculture. IMPROVED BIOLOGY Biological control is key to increased harvest volumes, lower cost, lower environmental impact and better fish welfare. Although there are regional differences, biological control is steadily improving, and preventative efforts against diseases, sea lice and toxic algae blooms are starting to show results. However, there is still a long way to go before we have solved these challenges permanently. In Shetland, biological control remains a challenge and we are not satisfied with the situation. We have therefore initiated several targeted measures to improve performance in this region. MORE SITES WITH SOCIAL LICENSE TO OPERATE We received two new sites in Finnmark in 2018. To be able to expand with more sites, we need to strengthen our social license to operate. In the aquaculture industry, we operate in the commons, and the fjords where we farm belong to all. To obtain formal permission from authorities and follow regulations is not enough. We also need to earn our communities’ trust. We achieve that by behaving ethically and responsibly, by always doing what we can to keep our footprint on the environment low, and by contributing sufficiently to local value creation. To make it easier for our stakeholders to keep us accountable also on such parameters, we are for the first time this year integrating our sustainability report and annual report. Going forward, we will continue our efforts to improve relations and honest dialogue with our local communities. 19 SUSTAINABILITY IS CORE BUSINESS Sustainability lays the foundation for our business. In our view, there is no contradiction between sustainability and financial performance. For instance, when we achieve low sea lice levels with preventative methods, we avoid sea lice treatments that are stress- ful for the fish, that can potentially affect the marine eco-system, and that is expensive. It is our utmost belief, that healthy oceans, sustainable food and contributions to local communities are prere- quisites for profitability. By driving forward improvements to our farming operations, we aim to create value for all our stakeholders. We take our responsibility in reaching the United Nations Develop- ment Goals. In 2018, we were proud to receive the second highest grade by the Carbon Disclosure Project, which scores companies based on their work to cut carbon emissions. Sustainability parameters such as sea lice levels and reduced survival directly impact cost and volume and are therefore monito- red daily throughout the Company. Other KPIs related to sustaina- bility are reviewed monthly. Going forward, we aim to certify all our farms with Aquaculture Stewardship Council (ASC) certifications to ensure external and independent auditing of our operations. AN ENERGIZED ORGANIZATION Grieg Seafood’s dedicated employees deserve all the credit for our achievements in 2018. After completing our culture project in 2017, the organization is energized with a new drive. We are developing a culture of sharing. People are using Workplace to discuss challen- ges and learn from best practice across regions. We will build upon this momentum going forward. It is early days of our growth journey, and we are preparing to go beyond our 2020 goals. We must digitize operations. We must think about which skillsets we need to develop internally and which we need to hire to complement what we have. We need to explore new business models and to pursue further growth opportunities. Constant lear- ning will be the new norm. I am excited to be a part of this Company and I am looking forward to the next step of our journey. Grieg Seafood has been around for a quarter of a century. That is a respectable age in the salmon farming business. Still, in my mind we are only at the end of the beginning. 70 percent of the globe is covered by water, and yet only two percent of our food comes from the ocean. The road ahead is paved with growth opportunities. We are on a set direction. We are on a clear mission. We are farming the ocean for a better future. 20 Grieg SeafoodAnnual report 2018Part 01 Grieg Seafood at a glance CEO letter 21 Farming the ocean for a better future 70 percent of the earth is covered by the ocean. Today, however, we only get about two percent of our food from the sea. The ocean can provide much more healthy nutrition to people on all continents. Fish also has a low carbon footprint and needs few inputs from scarce resources like fresh water or fertile land. 22 Grieg SeafoodAnnual report 2018Part 01 Grieg Seafood at a glance Farming the ocean for a better future LAMB SALMON CHICKEN 68 percent PORK SALMON PORK CHICKEN 9.8 CO2e CATTLE FIGURE EDIBLE YIELD FIGURE CARBON FOOTPRINT Edible yield measures how much of the animal that is actually used for human consumption. Salmon has a high degree of edible yield compa- red to other animal proteins. Salmon has a low carbon footprint compared to other animal proteins. 6-10 Because there are limits to the amount of wild fish that can be sustaina- bly harvested, the growth of seafood in peoples’ diets must come from aquaculture. Sustainable farming of fish and other marine species has an enormous potential globally. Though we have made great progress in finding more sustainable fish farming methods over the last decades, many challenges remain. In Grieg Seafood, we see it as our responsibility to advance food production below water while keeping the ocean and the planet healthy. 2.7-5 1.2-1.5 FARMED SALMON 1.7-2 CHICKEN PORK CATTLE FIGURE FEED CONVERSION RATIO Feed conversion ratio measures the productivity of different protein produ- ction methods. Salmon needs 1.2-1.5 kg to increase its bodyweight by 1 kg. 23 THE UNITED NATIONS DEVELOPMENT GOALS To promote sustainable development, Grieg Seafood strives to find the right balance between environmental, social and economic considerations in our operations. The 17 United Nations Sustai- nable Development Goals guide countries’ and companies’ efforts to do so. Our production is in line with several of the 17 goals, but Grieg Seafood will focus particularly on the goals where we can have the greatest impact. THE GRIEG FOUNDATION Our largest shareholder, the Grieg Group, contri- butes to sustainable development in a broader perspective. The Grieg Foundation owns 25 % of the Group, and channels a share of the Company’s profit into charitable projects across the world. In 2018, the Grieg Foundation donated NOK 46 million to such projects. A significant part of this money comes from Grieg Seafood. OUR STRETCH GOALS 2 - Zero Hunger: As the salmon farming industry is driving develop- ment in global aquaculture, we contribute to a sustainable marine food system. Sustainable farming methods, practices, biological and technical innovation, research, new knowledge and governmental management developed for the salmon farming industry can be transferred to the production of other marine species in other parts of the world. As such, we need to find solutions to our challenges not only to make our own farming more sustainable, but also to advance the practices of fish farming industries in other countries. That way, we can truly contribute to zero hunger. 13 – Climate Action: Farmed fish is one of the animal proteins with the lowest carbon footprint. Salmon farmers must still do our part to reach the targets of the Paris Climate Agreement. We can decre- ase the carbon footprint of our salmon even further. 14 – Life below water: We work to conserve and sustainably use the oceans, seas and marine resources for sustainable development. We have a responsibility to protect marine biodiversity, and we strive to find new ways to reduce our environmental footprint and improve the welfare of our fish. 17 – Partnerships for the goals: We cannot reach the goals we have set alone. We collaborate with authorities, researcher institutions, other salmon farmers, NGOs, students, suppliers and others to advance sustainable aquaculture. We share knowledge, expertise and technology. We seek to be honest, exchange ideas and to learn from our surroundings. WE ARE ALSO COMMITTED TO 4 – Quality Education: We must ensure that our employees receive the right training and development to match the competencies the Company needs at all times. 5 – Gender Equality: A diverse workforce with people of different backgrounds is not only our social responsibility. It is also key to profitable growth. 8 - Decent Work and Economic Growth: We provide jobs with good and fair conditions in rural areas. We contribute to economic growth to our local communities in Norway, the UK and Canada. 9 – Industry, innovation and infrastructure: We take part in rese- arch and innovation to find new solutions to our challenges. 16 – Peace, justice and strong institutions: We will do business in a way that is inclusive, just and accountable, and that promotes strong societies and institutions. 24 Grieg SeafoodAnnual report 2018 Part 01 Grieg Seafood at a glance Farming the ocean for a better future WHO WE ARE OUR VISION ROOTED IN NATURE FARMING THE OCEAN FOR A BETTER FUTURE OUR VALUES OPEN We are open with each other. We share knowledge, ideas and learn from each other. We meet new perspectives with an open mind. We are always honest – also in diffi- cult situations. Our managers have an open door, and are always open for ways to improve. We are open and transparent towards society. That is the only way we can earn their trust. We proactively share honest information about our operations with the public, the authorities and the media – even before they ask. We invite the community to our facilities, participate in the public debate and engage in dialogue with other users of the fjords. AMBITIOUS Every day, we are dedicated to do our job the best possible way. We never settle for the average. We walk the extra mile. We always strive to improve. We think big and set ambitious goals for everything we do. We are not afraid of making bold decisions, even if they are tough and out of our comfort zone. We embrace change and innovation. We prioritize our commitments and carry them out. Our ambitious goals always aim to make Grieg Seafood more profitable. Only then can we develop the salmon farming industry further. CARING We do not only treat each other with respect, we care. We care about our people, we let them flourish and develop their talents. We foster a caring environment – even in difficult situations and in times of hard decisions. We care about our fish and the nature we use to produce healthy salmon. We constantly work to control biology and reduce our impact on the environment. We will pass healthy fjords and salmon on to future generations. We care about our communities. We recognize that the fjords belong to them, and we take their concerns seriously. We create opportunities and lasting value for society. We are good neighbours. 25 Grieg Seafood Annual report 2018 OUR APPROACH TO SUSTAINABLE BUSINESS In our long-term perspective, clean seas, healthy fish and economic profit are no contradictions. It is our task to make these considerations go hand in hand. Our overall target goes beyond short-term profitability. With our five pillars, we are committed to sustainable and long-term value creation for all of our stakeholders. FARMING THE OCEAN FOR A BETTER FUTURE HEALTHY OCEANS SUSTAINABLE FOOD PROFIT & INNOVATION PEOPLE • Fish health and • Safe and healthy • Seafood demand • Creating attractive welfare food • Economic produ- jobs • Sea lice control • Sustainable feed ctivity • Keeping our LOCAL COMMUNITIES • Local value crea- tion and ripple-ef- fects • Escape control • Reducing carbon • Profitable growth • Limiting local emissions • Interaction with wild life emissions • Waste manage- ment • Precision farming • Research and innovation employees safe • Local procurement • Transparency, integrity and anti-corruption • Data security and privacy • Sponsorships • Transparency and dialogue REPORTING ON OUR PROGRESS This is an integrated report where we are reporting on our progress on all of our pillars. On profit related topics, we follow the guidelines of the Oslo Stock Exchange (OSE). On sustainability parameters, we are inspired by the Global Reporting Initiative (GRI) and the Global Salmon Initiative (GSI), the Sustainable Stock Exchanges (SSE) initi- ative and the FAIRR Index. 26 Part 01 Grieg Seafood at a glance Farming the ocean for a better future OUR MATERIALITY MATRIX FOR SUSTAINABILITY REPORTING On topics related to sustainability, we have conducted a priority analysis in line with the GRI Standards. The identified sustai- nability aspects are based on environ- mental, social and economic impact that our stakeholders think Grieg Seafood can have, in both positive and negative ways. The aspects are also assessed according to the impact on Grieg Seafood’s long- term performance. The materiality analy- sis is based on stakeholder dialogues and evaluations by the global and regional management teams. S E I T R A P L A N R E T X E R O F T N A T R O P M I 9 8 7 6 5 4 3 2 1 Escape control Food safety Local emissions Sealice control Esthetics Energy efficiency Fish health Wildlife Anti-corruption HES Work environment Open Sustainable feed Predictability R&D Optimal use of areas Diversity Charities Climate effective administration 1 2 3 4 5 6 7 8 9 IMPORTANT FOR GRIEG SEAFOOD RISK MANAGEMENT Risk management is our culture, ethical values, behavior, and understanding of risk. Risk management is what we do every day to provide reasonable assurance to our stakeholders that we will achieve our goals. Risk management involves identifying what types of risk exposure we face, measuring those potential risks, proposing means to hedge, insure or mitigate the risks, and estimating the impact of various risks on our production and future earnings. In accordance with the COSO ERM framework, the foundation for our risk management is our vision, values, and our strategy. This defines what we are trying to achieve and how we want to conduct business. We aim to have a culture of risk awareness, which means that risk management and controls are systematic, and embed- ded in our procedures. Our Board of Directors defines the Group's overall risk appetite and tolerance level, and is ultimately respon- sible for the governance of risk management. The Group mana- gement team ensures the effectiveness of relevant risk reducing measures, while managers at all levels exercise risk awareness and make risk conscious decisions in their everyday management. Risk management aids decision-making, contributing to efficient resource allocation and continuous improvement. This is how we enhance our business and achieve our goals. We address risk within strategic goal achievement, the efficiency of our operations, financial reporting, and compliance with laws and regulations. Some of our main risks, in particular risks related to biology, climate and our employees, are congruent with our mate- riality matrix. Please read Part 2 in this Annual Report for more information on our efforts related to the material aspects. 27 TRANSPARENCY AND STAKEHOLDER DIALOGUE NATIONAL & INTERNATIONAL AUTHORITIES LOCAL AUTHORITIES AND COMMUNITIES STAKEHOLDER ORGANIZATIONS care about local employment, contributions to the local business sector and public life as well as sustainability challenges. They also care about co-existence between salmon farmers and other local actors. Our business depends on consent from local authorities and communi- ties. Dialogue with local communities are done with special interest groups locally, open meetings or dialogue through the media. We recognize public concern for the oceans, invite them to our farms and participate in the public debate about salmon farming. We try to find solutions to accommodate other interests as much as possible. In areas with indi- genous nations, dialogue and relati- ons with indigenous representatives are especially important. EMPLOYEES care about health and safety, a good working environment, and personal development. They are also concerned with fish welfare and environmental issues. We strive to understand our employ- ees’ wishes and expectations. We have several initiatives related to training, education and development, including collaboration with schools, apprenticeship programs and initi- atives to develop competencies and skills. Every year, our global mana- gement team convenes to discuss what should be the hallmarks of Grieg Seafood´s culture. We also engage in dialogue with the trade unions. focus on our impact on the environ- ment, biodiversity in the ocean, sustainable feed and food health and safety. We collaborate and have a dialogue with organizations and actors that constructively seek to improve the industry. That includes several environmental organizations and research institutions. SHAREHOLDERS care about long-term performance and returns, both on financial and sustainability related parameters. We keep a continuous, open and honest dialogue with shareholders about strategy and results. This inclu- des regular meetings with the Board of directors. SUPPLIERS are concerned with our integrity and that we are a fair and predicta- ble partner. We work continuously with suppliers to ensure that they comply with our Code of Conduct, to ensure a common understanding of ethics, sustainabi- lity and delivery of goods and services. This particularly pertains to our suppliers of fish feed and staffing. Here we especially focus on suppli- ers´ compliance with various sustai- nability parameters. care about sustainability challen- ges, balanced regulation and long- term value creation. We have an open dialogue with offi- cial authorities in the countries where we operate, and collaborate on all aspects. We aim to accommodate all requests for meetings and dialogue. We recognize public concern for the oceans, invite them to our farms and participate in the public debate about salmon farming. We try to find soluti- ons to accommodate other interests as much as possible. INVESTORS AND ASSET MANAGERS care about long-term performance and returns, both on financial and sustainability related parameters. We make an effort to keep a conti- nuous, open and honest dialogue with potential investors and asset managers. That happens through the annual report, quarterly reports, road shows and Capital Markets Updates. CUSTOMERS are concerned with food safety, health attributes, quality, certifica- tes and sustainability challenges. frequent We have surveys and dialogue with our customers, and strive to meet their expectations. 28 Grieg SeafoodAnnual report 2018Part 01 Grieg Seafood at a glance Farming the ocean for a better future KEY PARTNERS THE GLOBAL SALMON INITIATIVE (GSI) GSI was established in 2013 and is a group of 17 companies which together hold over 50% of the global salmonid production. GSI member companies have committed to cooperation and transparency, to produce a sustainable and healthy product. A product that meets a growing population´s need for protein, whilst minimizing negative environmental impacts, and positively contributing to a better society. The CEOs of the member companies convene regularly, and the initiative has become a forum for sharing best practices and to address key challenges. GSI has developed industry-specific performance indicators. BELLONA The Bellona Foundation is a Norwegian, independent non-profit organization that aims to meet and fight the climate challenges, by identifying and implementing sustainable environ- mental solutions. They work towards reaching a greater ecological understanding, protection of nature, the environment and health. Bellona is engaged in a broad range of current nati- onal and international environmental questions and issues around the world. THE SEAFOOD INNOVATION CLUSTER The cluster aims to foster strategic collaboration, initiate partnerships and facilitate collabo- ration processes in the whole seafood value chain, to solve challenges and make the industry more sustainable. The cluster is a Norwegian Centre of Expertise. 29 Our scoreboard HEALTHY OCEAN ASPECT Survival rate* TARGET 93 % Rogaland Finnmark Shetland British Columbia Use of antibiotics (gr per tonne LWE) No use of antibiotics Rogaland Finnmark Shetland British Columbia Sea lice treatments** (gr per tonne LWE) Group target of 50 % reduction from 2015 (8.1) - 2018 Rogaland Finnmark Shetland British Columbia Escape incidents Zero escape incidents Rogaland Finnmark Shetland British Columbia Carbon emission (kgCO2e per tonne GWT) High quality product (measured as superior share) 30 % reduction (from 2017) in emission/tonnes GWT 93 % superior share SUSTAINABLE FOOD PROFIT & INNOVATION PEOPLE Return on capital employed Farming cost per kg (NOK) Harvest volume (tonnes GWT) Absence rate Rogaland Finnmark Shetland British Columbia Rogaland Finnmark Shetland British Columbia 12 % p.a. 37.90 in 2020 100 000 tonnes in 2020 Below 4.5 % Harassment Workplace culture Equal workplace Zero harassment cases Above average score in Great Place to Work survey Climb on the SHE Index Support our local communities Collaborate and contribute to local community LOCAL COMMUNITIES * Survival rate calculated according to the GSI standards. ** Amount of active pharmaceutical ingredients (APIs) used (gr) per tonne of fish produced (LWE). **Amount of active pharmaceutical ingredients (APIs) used (gr) per tonne of fish produced (LWE). 30 1 (200 fish) 2 (1 446 fish) 2 (22 212 fish) 2016 93 % 94 % 83 % 90 % 0 0 0.8 294.9 2.6 5.2 0.2 2.5 0.3 0 0 na 85 % 88 % 93 % 76 % 33.2 % 39.7 64 726 3.4 % 6.1 % 2.7 % 1.6 % 0 na na yes 2018 STATUS REFERENCE 2017 91 % 95 % 89 % 93 % 0 0 1.7 18.0 0.9 0.2 1.0 5.9 0.1 0 0 0 0 420 79 % 78 % 93 % 81 % 3.2 % 4.4 % 3.2 % 0.9 % 0 na na yes 23.9 % 43.4 62 598 92 % 96 % 83 % 88 % 0 0 13.9 150.3 1.2 1.1 0.8 3.2 0.3 0 0 0 459 73 % 85 % 94 % 84 % 22.0 % 43.1 74 623 4.7 % 5.4 % 2.3 % 1.8 % 0 89 % yes 12th > 8th place • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • Page 48 Page 49 Page 55 Page 57 Page 80 Page 70 Page 97 Page 101 Page 101 Page 136 Page 141 Page 132 Page 132 Page 150-159 Grieg SeafoodAnnual report 2018Our scoreboard ASPECT Survival rate* TARGET 93 % HEALTHY OCEAN Use of antibiotics (gr per tonne LWE) No use of antibiotics British Columbia Rogaland Finnmark Shetland Rogaland Finnmark Shetland Rogaland Finnmark Shetland Rogaland Finnmark Shetland British Columbia Rogaland Finnmark Shetland British Columbia Rogaland Finnmark Shetland British Columbia Sea lice treatments** (gr per tonne LWE) Group target of 50 % reduction from 2015 (8.1) - 2018 British Columbia Escape incidents Zero escape incidents British Columbia SUSTAINABLE FOOD Carbon emission (kgCO2e per tonne GWT) 30 % reduction (from 2017) in emission/tonnes GWT High quality product (measured as superior share) 93 % superior share PROFIT & INNOVATION PEOPLE Return on capital employed Farming cost per kg (NOK) Harvest volume (tonnes GWT) Absence rate 12 % p.a. 37.90 in 2020 100 000 tonnes in 2020 Below 4.5 % Harassment Workplace culture Equal workplace Zero harassment cases Climb on the SHE Index Above average score in Great Place to Work survey Support our local communities Collaborate and contribute to local community LOCAL COMMUNITIES Part 01 Grieg Seafood at a glance Our scoreboard 2016 93 % 94 % 83 % 90 % 0 0 0.8 294.9 2.6 5.2 0.2 2.5 0.3 0 1 (200 fish) 2 (1 446 fish) 0 na 85 % 88 % 93 % 76 % 33.2 % 39.7 64 726 3.4 % 6.1 % 2.7 % 1.6 % 0 na na yes 2017 91 % 95 % 89 % 93 % 0 0 1.7 18.0 0.9 0.2 1.0 5.9 0.1 0 0 0 0 420 79 % 78 % 93 % 81 % 23.9 % 43.4 62 598 3.2 % 4.4 % 3.2 % 0.9 % 0 na na yes 2018 STATUS REFERENCE 92 % 96 % 83 % 88 % 0 0 13.9 150.3 1.2 1.1 0.8 3.2 0.3 0 0 2 (22 212 fish) 0 459 73 % 85 % 94 % 84 % 22.0 % 43.1 74 623 4.7 % 5.4 % 2.3 % 1.8 % 0 89 % 12th > 8th place yes • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • Page 48 Page 49 Page 55 Page 57 Page 80 Page 70 Page 97 Page 101 Page 101 Page 136 Page 141 Page 132 Page 132 Page 150-159 The colours indicate • if we are on target to reach our goal • if we are on track to meet our target • or if we are not satisfied with the result 31 Our organization BRITISH COLUMBIA DALLAS, TEXAS HARVEST VOLUME 2018 HARVEST VOLUME TARGET 2020 38 000 29 774 25 000 16 293 17 000 11 924 20 000 16 632 ROGALAND FINNMARK SHETLAND BRITISH COLUMBIA FIGURE HARVEST VOLUME 2018 AND TARGET VOLUME 2020 (1 000 TONNES GWT) 32 Grieg SeafoodAnnual report 2018Part 01 Grieg Seafood at a glance Our organization SHETLAND FINNMARK BERGEN HEADQUARTER ROGALAND MANCHESTER BEIJING SHANGHAI 33 Group management team 34 Grieg SeafoodAnnual report 2018Part 01 Grieg Seafood at a glance Group management team GROUP MANAGEMENT ANDREAS KVAME Chief Executive Officer (from 2015) Andreas Kvame has international experience from change management and impro- vements in the aquaculture industry from a number of companies. He has previously worked as CEO in Scanbio AS, and director of sales and supply in Mowi, where he was also responsible for the integration of Stolt Seafarms, Panfisk and Fjord Seafood. He is educated within agriculture and aquaculture. Number of shares 31.12.2018: 39 165 (0.04%) Number of options 31.12.2018: 600 000 ATLE HARALD SANDTORV Chief Financial Officer (from 2009) Atle Harald Sandtorv has comprehensive experience within mergers and acquisitions, with responsibility of pursuing growth and structural changes. His previous experience includes CFO in Bennex and Tide. Sandtorv holds a master's degree in business and economics. Number of shares 31.12.2018: 24 208 (0.02%) Number of options 31.12.2018: 276 044 KNUT UTHEIM Chief Operational Officer Farming (from 2014) Knut Utheim has 30 years of experience within the aquaculture industry, with focus on salmon farming and biology. He has previously worked as regional director in Mowi and as COO of farming in Stolt Seafarm, among others. Utheim has an aquaculture degree. Number of shares 31.12.2018: 23 507 (0.02%) Number of options 31.12.2018: 300 000 KATHLEEN O. MATHISEN Chief Human Resource Officer (from 2016) Kathleen O. Mathisen has extensive experience with business-driven HR activities with focus on the human capital in the organization, mainly from the international offshore oil and gas industry. She has previously worked as vice president HR at Dof Subsea, among others. She has several management courses and is currently doing an MBA in leadership and sustainability. Number of shares 31.12.2018: 3 456 (0.00%) Number of options 31.12.2018: 200 000 35 REGIONAL MANAGEMENT MARVIN D. “ROCKY” BOSCHMAN Regional Manager Grieg Seafood British Columbia (from 2014) Rocky Boschman has been working in the salmon farming industry for more than 30 years. He has held various management positions, including production manager at Stolt Seafarm and operations manager at Mowi. He also held the position as saltwa- ter production director in Grieg Seafood BC. Boshcman has an MBA and a bachelor's degree in marine biology. Number of shares 31.12.2018: 3 295 (0.00%) Number of options 31.12.2018: 200 000 ALEXANDER KNUDSEN Regional Manager Grieg Seafood Rogaland (from 2008) Alexander Knudsen has more than 20 years of experience from various positions within the aquaculture industry. Knudsen worked at Øvrebø Fisk, which was acquired by Grieg Seafood in 1997, and has held several positions at Grieg Seafood Rogaland since. He has a degree in economics and business administration. Number of shares 31.12.2018: 22 165 (0.02%) Number of options 31.12.2018: 300 000 ROY-TORE RIKARDSEN Regional Manager Grieg Seafood Finnmark (from 2014) Roy-Tore Rikardsen has 20 years of experience from the aquaculture industry. He has held various positions, including production manager seawater at Lerøy Aurora, regi- onal manager in Akva Group and sales consultant at Ewos. Rikardsen has an engine- ering's degree within environment and marine technology. Number of shares 31.12.2018: 19 565 (0.02%) Number of options 31.12.2018: 300 000 GRANT CUMMING Regional Manager Grieg Seafood Shetland (from 2016) Grant Cumming has 18 years of experience from salmon farming, with various positi- ons, including site manager at Mowi and production manager at Orkney Seafoods. He started in Grieg Seafood Shetland in 2005 as production manager. He has also been lecturing in aquaculture. Cumming has a zoology degree and a master's degree in mariculture science. Number of shares 31.12.2018: 3 425 (0.00%) Number of options 31.12.2018: 200 000 36 Grieg SeafoodAnnual report 2018Part 01 Grieg Seafood at a glance Group management team OTHER MEMBERS OF THE GROUP MANAGEMENT TEAM KRISTINA FURNES Group Communication Manager (from 2019) Kristina Furnes has six years of experience within strategic communications, PR, public affairs, journalism and governmental management. Her previous positions include client director in the communications agency Geelmuyden Kiese and freelance journa- lism. Furnes has a master's degree in political science and government. NINA WILLUMSEN GRIEG Manager Business Development (from 2017) Nina W. Grieg has 10 years of experience within strategy and operations. Her positi- ons include advisory and project managements roles from Accenture, PwC and Grieg Shipbrokers. She started in Grieg Seafood in 2015. Grieg holds a master of science in technology, industrial economics and technology management. Number of shares 31.12.2018: 0 Number of options 31.12.2018: na TROND KATHENES Chief Digital Officer (from 2011) Trond Kathenes has more than 20 years of experience from strategy development and execution, ICT management, and business process improvements, and is a recognized driver for change. He has held positions such as partner of @dvice Human Resour- ces and Conferit, CEO of Global Quality Manning, ICT manager at Rieber& Son and business development manager at Capgemini. He has an education within strategy and operations. Number of shares 31.12.2018: 0 Number of options 31.12.2018: na For more details of the group management team, please visit our website: https://www.griegseafood.no/grieg-seafood-asa/management/ 37 38 Grieg SeafoodAnnual report 2018Part 02 Our progress Content PART 02 Our progress OUR CERTIFICATIONS 40-41 PROFIT & INNOVATION 90-127 HEALTHY OCEAN • • • • • Fish health and welfare Sea lice control Escape control Limiting local emissions Interaction with wild life SUSTAINABLE FOOD • • • Safe and healthy food Sustainable feed Reducing carbon emissions • Waste management 42-65 44-49 50-55 56-57 58-59 60-61 66-89 68-73 74-77 78-81 82-83 • • • • • • The global salmon market Ocean Quality and our market Economic productivity Profitable growth The Grieg Seafood share Analytical information PEOPLE • • • • Creating attractive jobs Keeping our employees safe Transparency, integrity and anti-corruption Data security and privacy 92-93 94-95 96-99 100-109 116-119 120-127 128-147 130-133 134-137 138-141 142-143 LOCAL COMMUNITIES 148-165 • Local value creation and ripple-effects 150-159 39 OUR CERTIFICATIONS AND SPECIAL LICENSES It is important both for our local communities and our customers to know that our farming practices are sustaina- ble. To reassure them, we are certifying our farms by independent bodies. In Norway, we also have some special farming licenses with specific requirements attached. CERTIFICATE/ LICENCES WHAT ASC GLOBALG.A.P Aquaculture Stewardship Council (ASC) was founded in 2010 by World Wide Fund (WWF) and IDH Sustai- nable Trade Initiative in order to establish global standards for sustainable seafood production. ASC standards set requirements for processes and margi- nal values to minimize negative environmental and social effects from fish farming. Global Good Agricultural Practices (GlobalG.A.P) is a voluntary international standard for food production, both in agriculture and aquaculture. The standard comprises food safety, animal welfare, sustainability, employment and traceability. GlobalG.A.P is parti- cularly important for customers in Europe. STATUS AIM The following sites from Finnmark have received ASC certification: Sarnes, Hesten, Mårsanjarga and Vinnalandet. ASC certification on all sites in Norway, Canada and the UK. All farms in Norway and the UK certified. Maintain certi- fication on all farms in Norway and the UK. BAP Best Aquaculture Practices is a voluntary standard for aquaculture that includes the key elements in responsible and sustainable aquaculture, by establis- hing standards for good practice in all productions stages of fish farming. BAP is particularly important for customers in the United States. All farms in Canada certi- fied. GREEN LICENSES Green Licenses in Norway have stricter environ- mental criteria. The sea lice limit is half of regular licenses, it has stricter criteria for escape prevention technologies, and the amount of medical treatments permitted per generation is limited. Grieg Seafood has eight green licenses in Finnmark. TEACHING LICENSES Teaching licenses in Norway are given to universities, colleges or high schools with educational tracks related to aquaculture. Salmon farming companies can rent teaching licenses from the educational institution. Part of the training will then take place at their salmon farms. Grieg Seafood is renting one teaching license from Nordkapp High School in Finnmark, and one teaching license from Strand High School in Rogaland. Maintain certification on all farms in Canada. Maintain all of our eight green licenses in Finn- mark. Maintain our two licenses in Finnmark and Rogaland. BROODSTOCK LICENSES The purpose is to produce roe or milk from salmon with specific traits, such as special strains or other qualities that provide high breeding value. Grieg Seafood has three broodstock licenses in Erfjord in Rogaland. Maintain our three licenses. R&D LICENSES The purpose is to provide permits to important rese- arch projects that can bring the Norwegian aquacul- ture industry forward. Grieg Seafood has one R&D license in Rogaland. Maintain our research license. 40 Grieg SeafoodAnnual report 2018Part 02 Our progress Our certifications 41 ROOTED IN HEALTHY OCEAN It is our responsibility to keep the ocean clean and healthy, and to ensure that our farmed salmon can live in co-existence with other marine species. Recognizing that we do leave a footprint, we must always do what we can to reduce our impact. 42 Grieg SeafoodAnnual report 2018Part 02 Healthy Ocean Intro 43 Fish health and welfare Good fish health and welfare is both an ethical responsibility and the most important measure we can to do ensure good growth, higher harvesting quality and lower costs. OUR PRINCIPLES Good fish health implies that the highest possible number of fish is happy, grows normally and survives throughout the life cycle. We have a preventative, systematic and long-term approach to fish health and welfare, doing what we can to ensure that our fish is robust, healthy and happy from early life. That will make the fish more able to cope with stress, parasites and other external influences, which reduces disease outbreaks and the need for medical treatments. We collaborate with neighboring fish farmers to prevent and contain diseases. In case sea lice treatments are needed, we must find the correct balance between the welfare of our fish, potential impact on the local environment and avoid parasite resistance to existing treatments. We do our best to avoid using antibiotics in all forms. Head office must approve use of any antibiotics, to ensure that it is used only as a last resort. Cleaner fish should have just as good health and welfare as our salmon. 44 Grieg SeafoodAnnual report 2018Part 02 Healthy Ocean Fish health and welfare HOW WE WORK TO IMPROVE Preventative efforts throughout the production cycle 0-0.5 MONTHS 9-14 MONTHS Selection of high-quality roe with qualities that fit the conditions where the fish will be farmed. Top mana- gement is coordinating roe purchasing, to ensure a common, high standard. Vaccine strategies to prevent disease outbreaks. Our post-smolt strategy helps us to control the environment of the fish longer, which makes the fish more robust before being released into the sea. 0 M O N T H S 2-28 MONTHS 10-28 MONTHS Different feed programs for each stage of the salmon’s life cycle, to optimize health and welfare. We are parti- cularly concerned with optimizing nutritious feed in the early stages of our salmon’s life. Regional plans for fish health, as the local challenges are different. Preventative sea lice strategies, with the aim of avoiding sea lice treatments that may be stressful to the fish. Management agreements with other fish farmers in our areas, to maintain best practice and avoid possible contamination. 2 8 M O N T H S 45 Fish welfare efforts • Enough space for the fish in our facilities. For example, a regular sea water pen is 97.5 % water and 2.5 % fish biomass in Norway. • Procedures to avoid stressing the fish when possible, for example when handling, transporting or treating the fish. • Harvesting procedures in accordance with regulations to avoiding suffering. The fish is euthanized by stunning. • There are ongoing fish health and welfare training programs for all employees. • We are looking into implementing welfare indicators from the Fish- well project in our farming, a research project that compiled a manual for fish farmers on what indicators to use to assess farmed salmon welfare. Grieg Seafood participated in creating the manual. Hygiene efforts • PRC screenings for early detection of parasites, viruses or bacteria. • Regional plans for infection prevention. • Disinfection of equipment, boats and working clothes, especially if equipment is transferred between facilities. • Daily removal of dead or sick individuals, which are disposed and used for biofuel, fertilizers or animal feed. • Fallowing periods. • Monitoring of environmental conditions that may affect the fish, such as temperature, oxygen levels and water quality. In our fresh water facilities, we adjust these factors to ensure healthy growth conditi- ons for the fish. • Daily monitoring and registration of fish condition and behaviour. • Regular fish health inspections on all sites by authorized fish health personnel, according to national regulations. • Regions with specific challenges may do additional monitoring. In Rogaland, for example, gill health scores are collected twice a week in periods exposed to amoeba gill disease (AGD). Monitoring and inspections 46 Grieg SeafoodAnnual report 2018Part 02 Healthy Ocean Fish health and welfare Additional efforts • Cooperation between our regions to learn from best practice inter- nally and externally. • Finnmark focuses on careful handling of the fish in cold water as well as losses caused by cardiomyopathy syndrome (CMS) and bruises. • BC focuses on using big data and artificial intelligence to prevent mortality from toxic algae outbreaks and low oxygen levels. • Shetland focuses on improving our gill health program where we monitor water quality and gill health, as well as algae control. • Rogaland focuses on improving Pancreas disease (PD) immunity with a new effective vaccine. Efforts to improve health and welfare of cleaner fish • Selection and breeding efforts to ensure that the cleaner fish is as robust and healthy as possible. • Vaccination programs. • Screening before release into the pens. • A separate feed in the pens, tailor-made for the cleaner fish. • Tailor-made, artificial kelp forests in the pens where the cleaner fish can hide, avoid stress, rest and sleep. • More focus on pen cleaning. • Cleaner fish are either farmed or wild fish where harvesting quotas are regulated by authorities. 47 RESULTS FIGURE SURVIVAL PERCENTAGE, ROLLING 12 MONTHS 96 95 94 93 92 91 89 83 83 2016-2017 2018 93 90 % 3 9 : T E G R A T 88 ROGALAND FINNMARK SHETLAND BRITISH COLUMBIA *Reduced survival is reported according to the standards of the Global Salmon Initiative, and defined as: Total number of mortalities in sea last 12 months – total number of culled fish due to illness or similar and not included in the harvested number)/(closing number of fish in sea the last month + total number of mortalities in sea the last 12 months + total number of harvested fish the last 12 months + total number of culled fish (due to illness or similar and not included in the harvested number)) X100 FINNMARK We reached our survival target. ROGALAND We missed our target by 1 %. Fish health has improved in the region. At the end of 2018, only two sites were inflected with pancreas disease. At the end of 2017, seven sites were infected with pancreas disease. SHETLAND Unfortunately, we got a hit back to 2016 levels. Mortality was caused by the diseases winter ulcers and furunculosis, gill- and heart dise- ases as well as mechanical treatments against sea lice. We are not satisfied with the results and have implemented mitigating efforts. For instance, we are working on improving smolt health and robust- ness and reduce the number of mechanical treatments. CANADA 2018 was acceptable overall but a toxic algae bloom incident in the fall gave us a lower survival rate. We have improved our algae prevention actions with good results, which we believe will lower the impact of future algae blooms. 48 Grieg SeafoodAnnual report 2018 Part 02 Healthy Ocean Fish health and welfare FIGURE CAUSES FOR REDUCED SURVIVAL FIGURE USE OF ANTIBIOTICS MAIN CAUSE NUMBER OF FISH BIOMASS TONNES REGION 2016 2017 2018 INFECTIOUS Pancreas Disease Gill infections Bacterial disease NON-INFECTIOUS Harmful algae Treatments Poor water conditions 463 304 202 422 304 033 369 932 192 397 80 748 1 277 856 570 910 515 364 General health and welfare measures, a preventive and targeted approach to sea lice and disease, mitigation against algae and low oxygen levels are ways we work to reduce mortality from these causes. Rogaland Finnmark Shetland British Columbia 0 0 0.8 294.9 0 0 1.7 18.0 0 0 13.9 150.3 Amount of active active pharmaceutical ingredient (API) used (in grams) per tonne of fish produced (LWE) We are satisfied that we this year as well did not use any antibiotics in Norway, due to good vaccines and fish health efforts. In British Columbia, use of antibiotics is too high. The main reasons are Yellow Mouth disease, SRS and Furunculosis. The environment and the size of the fish affect the amount of antibiotics used. To reduce the number, we plan to install infrastructure that will allow us to lower water temperature and salinities. We also pursue non-therapeutic means to manage disease such as vaccines and a healthy diet. In Shetland, use of antibiotics unfortunately also increased, because of Furunculosis and winter-ulcer disease. Our general efforts to improve fish health is also aimed at decreasing the need for antibiotics. 49 Sea lice control Controlling the sea lice levels on our sites is one of the most important measu- res the industry can take to protect the wild salmon, particularly when the wild salmon is still at the smolt stage. Too much sea lice can also harm the farmed salmon’s health and welfare. Further, sea lice treatments are costly, stressful for the fish, resource intensive and can reduce quality. For these reasons, we aim to keep sea lice levels low at all times. OUR PRINCIPLES Sea lice levels shall stay below the legal limit of 0.5 mature female lice on our fish farms in Norway. We aim to achieve the same levels throug- hout the Company, even though the legal limits are higher in Canada and Shetland. On our green licenses, the sea lice limit is 0.25. Between April and June, when the wild salmon smolt swim out of the rivers and pass the salmon farms, the sea lice limit decreases to 0.1 mature female lice per site in Norway. Our main approach to sea lice control is prevention. We aim to keep sea lice levels low with various preventative measures applied at all times. When the sea lice limit rises above 0.3 mature female lice at a site, it is Company policy to apply additional measures. If we need to use sea lice treatments, we favour non-chemical delou- sing methods, to avoid affecting the environment and other species in the ocean. However, when selecting treatment, fish welfare and potential resistance to sea lice treatments are also considered. If, as a last resort, we need to use medical treatments, we revolve the use of various medicines to avoid resistance to the treatments. We collaborate with neighbouring fish farmers to control sea lice in our areas. 50 Grieg SeafoodAnnual report 2018 Part 02 Healthy Ocean Sea lice control HOW WE WORK TO IMPROVE Our approach to sea lice control 1 BREEDING, FEED, VACCINE 2 NON-MEDICAL CONTROL WITHOUT HANDLING OF THE FISH 3 CLEANER FISH 4 NON-MEDICAL CONTROL WITH HANDLING 5 MEDICINES 1 We use roe that has proven more resis- tant against sea lice when available. 2 We use sea lice skirts, to prevent the sea lice from entering the pens. We have tested sea lice lazers, that can shoot 3 sea lice every second without harming the fish. 3 We use lump suckers and wrasse, who eat sea lice. Rogaland in particular is working hard to understand how to use wrasse effectively. We use lump suckers on all green licences in Finnmark and work for extension use at all sites. At Shetland we do also use lump suckers if we can get good quality at the right time of the year. 4 We use mechanical treatments, such as heated water, to avoid affecting the environment. The methods are selected when conditions are favourable. 5 Only as a last resort do we use medical treatments. 51 Other sea lice efforts • All regions have comprehensive plans and strategies for sea lice control. • Systematic monitoring of sea lice levels. 1. In Norway and the UK, we count sea lice every week at water temperatures above four degrees, and every other week at water temperatures below four degrees. 2. In BC, we follow local regulations where counts depend on sea lice levels. In BC, farmed salmon usually catches sea lice from the wild salmon when they pass farms on their way out to the ocean. Here, unlike Norway, the wild salmon population greatly outnumbers the farmed salmon population. • We collaborate with other salmon farmers through Area Based Management, to control sea lice in all of our areas. • We have meeting between the various regions to learn best practice sea lice management from each other. • Long and synchronized fallowing periods is the most important prevention method to reduce the sea lice pressure on the next gene- ration. • We take part in the Aqua Cloud artificial intelligence project, which aims to be able to predict sea lice levels in advance and use preven- tative methods in cases of outbreaks. • Our post-smolt strategy will also reduce the time that each fish spends in sea, another measure to reduce sea lice exposure per fish. 52 Grieg SeafoodAnnual report 2018Part 02 Healthy Ocean Sea lice control Efforts to reduce environ- mental impact of sea lice treatments • While we try to avoid using medical sea lice treatments at all, there are some instances when it is necessary. In such cases we try to do it with as much care for the environment as possible. • There is some evidence that shrimp and crustaceans are susceptible to a type of medicine, flubenzurons, or so-called chitin inhibitors, used in-feed to fight sea lice. In order to secure responsibly low emission levels locally, we have imposed a restrictive use of these agents, especially chitin inhibitors. We adhere to the recommended advice for using these agents. • We also have procedures to prevent the release of water contai- ning treatment medicines against sea lice in areas close to shrimp fields or spawning grounds, in compliance with regulations from the Norwegian Environment Agency. • We follow closely ongoing research projects that look into potential impact from sea lice treatments on other marine species. 53 RESULTS FIGURE SEA LICE LEVELS ROGALAND FIGURE SEA LICE LEVELS FINNMARK 0.5 0.4 0.3 0.2 0.1 0 2018 2017 2016 0.5 0.4 0.3 0.2 0.1 0 2018 2017 2016 JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC In Rogaland, the sea lice trend unfortunately increased because of reduced effect of mechanical and medical treatments. At the same time, Rogaland experienced some success in their work with preventative methods in 2018. By planning and using wrasse effectively, the company managed again to avoid any treatments between July and November 2018. We have several initiatives aimed at increasing sea lice control. Post smolt will decrease time spent in sea and reduce sea lice pressure per fish. In Rogaland, we are also testing out whether we can use artificial intelligence to predict sea lice levels in advance, and by that improve targeted control. Finnmark has a very low level all year around and in 2018 we had good results with of our targeted preventive methods. We will conti- nue this focus and hard work. FIGURE HYDROGEN PEROXIDE TREATMENTS API (kg/tonne produced) 2016 2017 2018 Rogaland Finnmark Shetland British Columbia 18.4 42.4 76.0 0.0 10.8 13.4 82.7 9.2 3.5 14.5 32.6 5.8 Use of hydrogen peroxide is decreasing, except for Finnmark where it increased slightly. We use preventative methods against sea lice and avoid using hydrogen peroxide when possible. Hydrogen peroxide is comprised of water with an extra oxygen molecule. It has been considered a sea lice treatment that does not impact the environment. At the moment, research is looking into whether hydrogen peroxide affects other species in the ocean. Grieg Seafood is following the research. 54 Grieg SeafoodAnnual report 2018Part 02 Healthy Ocean Sea lice control FIGURE SEA LICE LEVELS SHETLAND FIGURE SEA LICE LEVELS BC 8 6 4 2 0 2018 2017 2016 8 6 4 2 0 2018 2017 2016 JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC Shetland worked hard to decrease levels of sea lice in 2018, which seemed to stabilize at a slightly lower level. We need to work hard to get the levels even lower in 2019. BC is yearly heavily influenced by the sea lice pressure from wild salmon in the autumn. Going forward, we will test out preventative methods during this period, such as sea lice skirts, with the aim of stabilizing the situation. FIGURE ACTIVE SUBSTANCES USED FOR TREATMENTS IN BATH Rogaland Finnmark Shetland British Columbia IN FEED Rogaland Finnmark Shetland British Columbia 2016 2017 2018 Amount of active pharmaceutical ingredients (APIs) used (grams) per tonne of fish produced (LWE). 1.88 0.02 1.99 0 0 0.90 5.70 0 0 0.72 2.98 0 Use of bath treatments has decreased, as they are less effective against sea lice because of less sensitivity. We also use little sea lice treatments distributed through feed. The exception is Rogaland, where use of chitin inhibitors increased in 2018. Medical treatments are used as a last resort. We are primarily focusing on preventa- tive solutions like cleaner fish, sea lice skirts, post smolt or digital prediction. 2016 2017 2018 TARGET REACHED 3.32 0.14 0.47 0.28 0.15 0.06 0.22 0.14 1.09 0.08 0.21 0.32 Grieg Seafood set a target to reduce use of chemical substances for sea lice treatments by 50 % between 2015 (8.09 API g/tonne) and 2018. We achieved our goal and have reduced our use of chemical substances by 66 % measured as API g/tonne net produced in Grieg Seafood Group. 55 Escape control Escaped farmed salmon may mix genetically with the wild salmon stocks, and should therefore be avoided. Escapes are also costly for salmon farming companies. OUR PRINCIPLES We have zero tolerance for escapes from our farms in all regions. HOW WE WORK TO IMPROVE • High technical standards on sites. We are implementing the NYTEK standard on all facilities, to avoid escapes during harsh weather. • Procedures to avoid escapes during operations. • Regular inspections to control compliance by vessels, moorings and facilities. • Inspections before and after harsh weather. • We strive to ensure that employees regulary attend courses on escape prevention. New employees also receive risk and procedural training within their first week, and do not carry out work operations alone until they acquire necessary training. 56 Grieg SeafoodAnnual report 2018Part 02 Healthy Ocean Escape control RESULTS FIGURE FISH ESCAPE INCIDENTS Region Rogaland Finnmark Shetland British Columbia 2016 2017 2018 0 1* 2** 0 0 0 0 0 0 0 2*** 0 * 200 fish escaped in this incident ** Two incidents where 829 and 617 fish ecaped each time *** Two incidents involving 500 and 21 712 individuals. The 2018 incident where 500 individuals escaped was caused by a mistake in a well boat operation, while the incident where 21 712 individuals escaped was caused by a rift in the net in one of our cages. The rift was caused by nagging between net and our mooring system. Both incidents are analyzed in detail and measures are taken. 57 Limiting local emissions Local emissions from salmon farming may affect the environment in the ocean under or around the pens. Local emissions can be excess feed, faeces from the fish or copper from the fish net. OUR PRINCIPLES In line with the precautionary approach, we try to limit local emissions as much as possible. With the current production methods in open pens, some organic emissions must be anticipated. The impact from such emissions must be kept below limits and levels considered acceptable by national authorities. Our footprint should never be irreversible. 58 Grieg SeafoodAnnual report 2018Part 02 Healthy Ocean Limiting local emissions HOW WE WORK TO IMPROVE Reducing excess feed • We are working to reduce excess feeding by using underwater cameras, so that we can stop feeding exactly when the fish is full. • We are in a process of centralizing feeding stations, where we can develop specialized feeding expertise. • One of many KPIs in employee bonuses is about avoiding excess feeding. Reducing impact from faeces • Local regulations impose regular fallowing periods, so that the environment under and around the pen can restore. If the local environment is not sufficiently restored according to independent monitoring, we must extend the fallowing period before releasing new fish into the pens or reduce the production at the site. Reducing other emissions Research projects on local emission RESULTS • We are supporting and testing copper free antifouling solutions. • In Rogaland, Grieg Seafood and other salmon farming companies have engaged in an independent, environmental monitoring program, to ensure that local emissions do not affect the rest of the environ- ment in the fjords significantly. • In Finnmark we are also taking part in research to find out whether salmon farming is somehow affecting the local cod population. • The environmental monitoring from 2018 shows that more than 90 percent of all sites in Norway have good or very good seabed conditi- ons, according to the Norwegian Ministry of Fisheries. • The 2018 risk report for the aquaculture industry in Norway, publis- hed by the Norwegian Institute of Marine Research, indicates that the environmental condition is good. More monitoring is, however, needed. 59 Interaction with wild life Farms are often located in areas abundant with birdlife and marine mammals. Salmon farming companies must do what we can to avoid conflicts with wild animals. OUR PRINCIPLES HOW WE WORK TO IMPROVE We try to arrange operations and facilities in a way that minimize our impact on local wild life. • We use equipment that minimize risk of injury to wild life where relevant. For example, we use protection on the pens to prevent marine mammals from injury if they are in contact with the farm. It is on our agenda to invest in more equipment that is gentle to wild animals. • We generally only neutralize animals that are injured, and choose alternative ways to protect farms against intruders. • Potential conflicts with wild animals is evaluated when we consider new sites. 60 Grieg SeafoodAnnual report 2018Part 02 Healthy Ocean Interaction with wild life RESULTS FIGURE BIRDS AND MARINE MAMMALS Region Birds Marine mammals Birds Marine mammals 2017 2018 Rogaland Finnmark Shetland British Columbia 20 18 0 0 0 0 1 0 24 1 0 0 0 0 0 0 The table shows the ratio of recorded cases of dead birds and sea mammals, divided by the number of active sites. In 2018 we had a reduction in dead birds due to measures taken. We are following up measures further in 2019. 61 OUR STORIES To farm salmon in co-existence with wild salmon With farms close to one of the world’s most infamous wild salmon rivers, the Alta river in northern Norway, it is Grieg Seafood’s responsibility, to use farming methods that minimize impact on the wild salmon population. Photos: Grieg Seafood Finnmark 62 Grieg SeafoodAnnual report 2018Part 02 Healthy Ocean Our stories “All industries and activities that can af- fect the wild salmon must take their part of the responsibility. That includes us in the salmon farming industry.” ROGER KARLSEN Area Manager Alta Grieg Seafood Finnmark PREVENTATIVE SEA LICE AND ESCAPE CONTROL Grieg Seafood is mainly working on combating sea lice through preventative measures. The Company seeks to avoid treatments that stresses the fish and may cause mortalities, that can make an impact on the environment and that drive production cost. “We work on a range of preventative measures to keep the sea lice levels constantly low. We use skirts around the pens to prevent the sea lice from entering. We use cleaner fish who eat the sea lice naturally. We also fallow over a longer period of time on some sites, which may reduce sea lice levels as well,” Karlsen explains. Only when all of these measures fail, does the Company apply mechanical treatments to remove the sea lice. Medical treatments are used as a last resort. Preventing escapes also needs constant work and focus. Grieg Seafood has zero tolerance for escapes. Escapes may not only be harmful to the wild salmon, it is also an economic cost for the company. “Here in Finnmark, we have not had an escape since 2016,” says Karlsen. He explains that stricter regulations have caused invest- ments in stronger equipment and new monitoring routines on the farms. “We need constant focus on preventing escapes. It is about training, awareness and risk management before we conduct operations,” he elaborates. “All industries and activities that can affect the wild salmon must take their part of the responsibility. That includes us in the salmon farming industry,” says Roger Karlsen. Today, he is the Area Manager for the Alta farms in Grieg Seafood Finnmark. But his interest in salmon started long before he entered the aquaculture industry many years ago. “I caught my first wild salmon when I was seven years old in the river Måselva in Troms, where my mother comes from,” Karlsen explains. That was the beginning of a lifelong passion for salmon. “Since then, I have caught wild salmon almost every year.“ AIMING FOR CO-EXISTENCE The number of wild Atlantic salmon returning from the ocean to Norwegian rivers has decreased significantly compared to a few decades ago. A combination of many factors and industrial acti- vities have caused the decline, including impact from the salmon farming industry. Salmon farming can mainly affect the wild salmon populations in two ways. First, escaped farmed salmon may genetically mix with the wild salmon in the rivers. Second, if farms have high levels of sea lice, the wild salmon may catch sea lice when they pass the farms. “The smolt is particularly vulnerable for sea lice when they are on their way out to the ocean,” says Roger Karlsen. Historically, the salmon farming industry has admittedly not always been serious enough in it’s efforts to avoid impact on wild salmon. That has changed. “Our farmed salmon must be able to live in co-existence with the wild salmon. Particularly here in Alta. Because the wild salmon river here is so special, the responsibility on our shoulders is even bigger,” Karlsen elaborates. 63 GENERATES MORE KNOWLEDGE Grieg Seafood and the rest of the salmon farming industry in Alta have, together with the local municipality, wild salmon management actors and research institutions, started Kompetanseklynge Laks, a cluster to promote sustainable salmon farming. “The aim of the cluster is to generate knowledge about salmon farming that can help decision makers make good and fact-based decisions,” says Per-Arne Emaus, senior researcher at Akvaplan- niva and Chairman of the Board at Kompetanseklynge Laks. Avoiding impact on the wild salmon population is a main goal for many of the projects initiated by the cluster. The organization spends 3 - 4 million Norwegian kroners annually to research inte- ractions between wild and farmed salmon. “We have, for example, tracked where the wild smolt swims on their way out of the Alta river and towards the sea,” Emaus explains. The project generated it’s first conclusions in 2018. “According to the findings so far, the smolt pass one salmon farm on the way towards the sea, at a time with low sea lice numbers. It uses an average of three days to get from the Alta river to the ocean,” says Emaus. LITTLE FARMED SALMON IN WILD SALMON RIVERS The salmon farming industry in Alta is also monitoring the number of farmed salmon in the Alta river and the Repparfjord river. The monitoring is organized together with Norwegian Institute for Nature Research, the management of the Alta rivers, and the West Finnmark Hunting and Fishing association. “In this project, we encourage sports fishermen to send samples of fish shells from the salmon they catch to the Norwegian Institute for Nature Research. They analyze whether the fish is farmed or wild salmon,” says Roger Pedersen, Public Relations Manager in Grieg Seafood Finnmark. “In 2018, none of the analyzed samples from the Alta river were farmed salmon, and 1.1 percent of the samples from the Reppar- fjord river were farmed salmon,” he elaborates. Pedersen says that Grieg Seafood will continue to seek new ways of promoting co-exstence between the wild salmon and farmed salmon industry. “These results do not in any way indicate that we are done with our work to prevent impact on the wild salmon. That continues every day on every farm. But it is good to know that we are on the right track.” 64 Photo: The Alta river in Finnmark Grieg SeafoodAnnual report 2018Part 02 Healthy Ocean Our stories 65 ROOTED IN SUSTAINABLE FOOD We work to make practices more sustainable along the entire value chain. Focus areas expand from safe and healthy food, traceability and feed to carbon emissions and waste management. 66 Grieg SeafoodAnnual report 2018Part 02 Sustainable Food Intro 67 Safe and healthy food Salmon is an important source for the vital Omega 3-fatty acids DHA and EPA. Humans can not produce this fat ourselves and it must be supplied through our diet. Our farmed salmon has no traces of illegal drugs and no organic pollutants or heavy metals above the threshold. OUR PRINCIPLES Our salmon is safe to eat and healthy for our bodies. Full traceability and strict quality control at every stage of the production. Open communication about our work methods and standards with customers. 68 Grieg SeafoodAnnual report 2018Part 02 Sustainable Food Safe and healthy food HOW WE WORK TO IMPROVE Traceability Regulations • The production management program Fishtalk provides documen- tation and full traceability from insertion of roe until the fish are harvested. Fishtalk also provides a complete overview of all feed used and any treatments applied. • EU Directive 96/23 EC imposes a monitoring program for aqua- culture, to ensure that food does not contain hazardous substance residues above legal limits. Since the program began in 1998, the levels of residues have remained significantly below the recommen- ded maximum limits. • We have Hazard Analysis and Critical Control Point (HACCP) systems at processing plants, approved by national Food Safety Authorities. HACCP is a management system in which food safety is addressed through the analysis and control of biological, chemical, and physical hazards from raw material production, procurement and handling, to manufacturing, distribution and consumption of the finished product. Standards and certifications • The certifications BAP and GLOBALG.A.P. cover the entire supply chain. • Our sales company, Ocean Quality, is certified according to GLOBALG.A.P., Chain of Custody, and ASC Chain of Custody. • Grieg Seafood Shetland operates according to standards that include The British Retail Consortium, Protected Geographic Federation, and Kosher. 69 Grieg Seafood Annual report 2018 • Before harvesting the fish, we review a full analysis of each location to assess the levels of environmental pollutants, residual foreign substances and bacteria. • High hygiene standards and continued hygiene focus on processing plants. • Our GSF Group Quality Network has an ongoing review of challenges regarding hygiene at our processing plants. Microbiology is the main focus of this group, especially fighting Listeria. • Monthly reporting on Listeria. • Upon detecting Listeria on equipment, end products or at customers, action plans are executed in the form of extra thorough cleaning and modification of equipment. • We are working on developing a common approach to monitoring, with weekly reporting and customized action plans. Hygiene RESULTS FIGURE SUPERIOR SHARE FIGURE NUMBER OF CLAIMS REGION Rogaland Finnmark Shetland British Columbia 2016 85 % 88 % 93 % 76 % 2017 79 % 78 % 93 % 81 % 2018 73 % 85 % 94 % 84 % REGION Rogaland Finnmark Shetland British Columbia 2018 172 265 270 518 Although Grieg Seafood Shetland has had challenges with gill-related diseases, the share of superior quality fish has increased due to focus on fish welfare and treatments. The share of superior quality salmon both in Finnmark and BC has increased compared to last year, despite challen- ges with harmful algal blooms in BC. The quality share in Rogaland was impacted by pancrease disease. For information on how we classify the quality of our salmon, see page 123. Main reasons for claims are melanin, texture and pale fish. Throughout the production cycle, we are working to optimize farming so that the fish has as little stress and good welfare as possi- ble, amongst other things to increase quality and avoid claims. 70 Part 02 Sustainable Food Safe and healthy food THE VALUE CHAIN FOR SAFE AND HEALTHY FOOD 1 Purchases 2 Fish farming • Quality criteria for feeds • Preventive health measures and treatment • Traceability through our production system Fishtalk • Traceability through our production system Fishtalk • GLOBALG.A.P. certification 3 Harvesting • Preventive hygienic and quality measures • Traceability through our production systems Fishtalk and Maritech • GLOBALG.A.P. certification 4 Sales & distribution 5 Customers • Risk assessment and preventive measures • Systems to register and follow up • Standards for transport and storage • ASC Chain and Custody • GLOBALG.A.P. certification • Communication about approach customer feedback • Approved HACCP system • Food Safety Authority monitors residue substances in fish • GLOBALG.A.P. certification 71 Salmon and health Salmon is safe and healthy food. Fish and seafood contains a number of necessary nutrients to the human body. VITAMIN B12 Vitamin B12 is essential when the body grows new cells. Because we constantly need a lot of red blood cells, you can develop anemia if you lack this nutrient. VITAMIN D Vitamin D is necessary to maintain the correct balance of calcium in your body. It is also important to build and maintain your skeleton. The body can only produce vitamin D itself when the skin is exposed to direct sunlight, or if your diets includes natural sources of vitamin D. Fatty fish and fish liver contains vitamin D. Source: salmonfacts.com 72 Grieg SeafoodAnnual report 2018Part 02 Sustainable Food Safe and healthy food PROTEIN SELENIUM Protein builds and maintains all cells in our body. The proteins consist of various amino acids, and the ones the body cannot produce itself are called essential amino acids. They must be provided through our diet. Selenium is important for the body's immune system because it helps to fight damaging chemical processes in the body. It also seems like selenium protects us against pollutants and heavy metals. OMEGA-3 ACIDS Omega-3 acids prevent and slow down the development of cardio vascular diseases. These fatty acids are also among the vital building blocks for our brain. IODINE Iodine is important for you to main- tain a normal metabolism. Iodine deficiency can lead to metabolic changes, which may cause reduced growth and mental retrogression. VITAMIN A Vitamin A sees to give you a healthy sight and a strong immune system. The vitamin is also essential for healthy development of a fetus and has a positive impact on our ability to reproduce. 73 Sustainable feed Fish feed is the most important and costly input in production of salmon. Sustainable sourcing has long been on the agenda, and lack of sustainably fished marine ingredients has made feed producers substitute marine fish oil and fish meal with plant based ingredients. As the aquaculture industry continues to expand, we must source new feed ingredients to grow sustainably. OUR PRINCIPLES Input factors in fish feed, both marine ingredients and plant based ingredients, should come from sustainable sources. We comply with the ASC standard for how much fish meal and fish oil we have in our feed. FIGURE FEED INGREDIENTS BEANS 10% FISHMEAL 15% FISHOIL 11% GUAR 7.5% SOY 12.5% WHEAT 20% RAPESEED OIL 24% 74 Grieg SeafoodAnnual report 2018Part 02 Sustainable Food Sustainable feed HOW WE WORK TO IMPROVE Requirements for feed suppliers Developing more sustai- nable feed • We demand that 100 % of marine ingredients comply with the sustai- nability standard set by Marine Stewardship Council (MSC), Iceland Responsible Fisheries Management (IRFM) Certification Programme, Alaska Responsible Fisheries Management Programme, or Inter- national Fishmeal and Fish Oil Organization Responsible Supply Standard. • We demand that no marine ingredients come from illegal, unrepor- ted and unregulated fisheries. • We demand that 100 % of soy ingredients are certified by the sustai- nability standards Proterra or Round Table on Responsible Soy • In our supplier code of conduct, we require our suppliers to minimize their environmental impact, with a particular emphasis on use of limited resources and deforestation. Our suppliers are expected to identify and monitor their impact, and implement measures where needed. • We are on the steering committee for the development of a new global ASC standard for fish feed. • We cooperate with other players in the industry, such as the GSI, to encourage feed producers to increase focus on sustainable ingre- dients. • We encourage our suppliers to participate in the International Fish- meal and Fish Oil Organization (IFFO), and their work with a standard for responsible resource use. • We are in dialogue with suppliers of alternative ingredients, such as insect meal. • We are partner to an R&D project, CO2 Bio, that uses CO2 from the oil and gas industry to produce algae as an alternative fish feed ingre- dient. 75 RESULTS FIGURE FISH MEAL FFDRM FIGURE FISH OIL FFDRO FDDRM Norway UK BC - Canada 2016 2017 2018 FDDRO 2016 2017 2018 0.56 0.83 0.62 0.73 1.12 0.46 0.54 0.76 0.46 Norway UK BC - Canada 1.61 2.04 1.90 1.75 1.89 1.48 1.64 2.09 1.88 ASC DEMAND: 2.52 NORWAY UK BC - CANADA 3 0 3 0 ASC DEMAND: 1.2 2016 2017 2018 2016 2017 2018 The use of wild fish we need to produce sufficient fishmeal and fish oil for one kilo farmed salmon, which is below the ASC limit. We still have low use of fish meal and oil in our feed with a positive trend in Norway, and on fish meal in Shetland. Our FFDRm numbers shows that we are a net producer of marine protein in 2018 in all regions. Usage of fish oil is stable in Norway. The increase in Canada and UK are caused by a change in feeding strategy, where we use more energy dense feed. We are still below ASC demand. 76 Grieg SeafoodAnnual report 2018Part 02 Sustainable Food Sustainable feed 77 Reducing carbon emissions Though farmed salmon has a low carbon footprint compared to other protein sources, there is potential to reduce emissions from production further. OUR PRINCIPLES We must do our part in reducing greenhouse gas emissions to reach the Paris Climate Accord. Our target is to cut 30 % GHG emissions per kilo by 2030, from a 2017 baseline year. 78 Grieg SeafoodAnnual report 2018Part 02 Sustainable Food Reducing carbon emissions HOW WE WORK TO IMPROVE • We have a plan to reduce our emissions. • Our largest direct source of emissions is from the use of fuels for our boats, vehicles and on-site energy production from generators. We are testing out a variety of new technologies to reduce the carbon footprint from these sources, such as switching diesel engines used on sites with battery packs or hybrid solutions. • We are also testing out renewable solutions. In Rogaland, we have equipped one of our farms with a wind mill and solar panel. • Our preventative approach to sea lice control will also reduce our carbon footprint, as treatments cause emissions. • We have tested out methods to chill the salmon after harvesting, which made it possible to avoid ice in packaging and reduced the carbon foot- print per kilo packed salmon. We will invest in this equipment in the years to come. • We evaluate carbon emissions and sustainability before making investments. • We keep a regular dialogue with our suppliers of feed, goods and services, and we discuss with them what they do to reduce their green- house gas emissions. Some of our suppliers already have their own greenhouse gas reduction targets, and going forward, we encourage others to clarify their goals. • We are working to include scope 3 in GHG emis- sions in our reporting. • The Grieg Seafood head office is certified by Eco-lighthouse. The certification evaluates energy use, supply management, waste management, transport use, water discharge, system criteria and work environment. 79 RESULTS FIGURE GREENHOUSE GAS EMISSIONS TOTAL EMISSIONS EMISSION/TONNES REGION SCOPE Scope 1 ROGALAND Scope 2 location based Total (scope 1+2) Scope 1 FINNMARK Scope 2 location based Total (scope 1+2) Scope 1 SHETLAND Scope 2 location based Total (scope 1+2) Scope 1 BRITISH COLUMBIA Scope 2 location based ASA TOTAL GROUP Total (scope 1+2) Scope 1 Scope 2 location based Total (scope 1+2) Scope 1 Scope 2 location based Total scope 1 + location based scope 2 2017 3 753 420 4 173 4 540 567 5 107 8 071 2 264 10 335 5 974 768 6 742 0 5 5 22 338 4 024 26 362 2018 3 721 456 4 177 7 134 420 7 554 9 813 2 741 12 554 9 143 783 9 926 0 4 4 29 811 4 404 34 215 2017 2018 229 224 857 702 256 254 1 053 597 420 459 Our total greenhouse emissions increased by 30 % compared to last year, while production increased by 19 %. Measured as C02 equivalents pr tonne harvested, the increase is 9 %. In Rogaland, total emissions has been stable from 2017 to 2018, but due to lower harvest, the emissions per kg increased. In Finnmark, total emission increased, which is mainly due a reclassification of consumption of marine gas oil of 2 146 tCO2e from Scope 3 to Scope 1. The effect of emission per kg was subdued by a 30 % increase in harvested volume. On Shetland, both total emisson and emission per kg increased from 2017 to 2018, a development we are not satisfied with. The increase in total emission in BC is related to higher production, while the emission per kg is reduced due to significant higher harvest volume in 2018. We are growing and targeting higher production and harvest volumes. We expect an increase in our total emissions going forward, but will continue to work towards our goal of a reduction per kg. 80 THE CARBON DISCLOSURE PROJECT Grieg Seafood received the score A- by the Carbon Disclosure Project (CDP), which ranks companies A – F according to their efforts to reduce carbon emissions. For more information, visit www.cdp.net Grieg SeafoodAnnual report 2018Part 02 Sustainable Food Reducing carbon emissions FIGURE GREENHOUSE GAS EMISSIONS 40 000 4 404 29 811 1 E P O C S P U O R G F S G L A T O T D E S A B N O I T A C A O L 2 E P O C S P U O R G F S G L A T O T 4 024 22 338 2017 2018 Our greenhouse gas emissions are reported according to the Green- house Gas Protocol Corporate Standard (GHG protocol) using the operational approach. Scope 1 emissions are those that are directly emitted by Grieg Seafood’s activities and include emissions from combustion of fossil fuels for generators, heating and our owned vehicles. Emissions are calculated based on recorded energy costs using local energy prices. We also have a relatively small usage of hydrofluorocar- bons for cooling that are included in scope 1. All Scope 1 emissions factors used are from DEFRA (Department for Environment Food and Rural affairs (UK Government)). Scope 2 emissions are indirect emissions relating to generation of the electricity by third parties that we consume on our sites. Emis- sions are reported as location based and market based emissions according to the GHG protocol. Location based factors are from the International Energy Agency (IEA) using 3 year rolling averages and market based factors are from RE-DISS(Reliable Disclosure Systems for Europe) apart from Canada that is from Green-E. Underlying data is collected from financial costs and on site meters. 0 81 Waste management Our waste should always be disposed properly according to regulations, and recycled when possible. OUR PRINCIPLES We are conscious about not polluting the environment where we farm our salmon. As much waste as possible should be recycled and fed back into the circular economy. We are working on developing a principle on plastic use. HOW WE WORK TO IMPROVE • Fish trimmings and dead fish are disposed sepa- rately and processed into fish silage. It may then be used for new purposes, like feed, bio fuel, or fertilizer. • Fish sludge from smolt facilities may be recycled and used as fertilizer, which we do in Rogaland today. In the other regions, we release the sludge into recipient with sufficient ecological carrying capacity. We are working on ways to use fish sludge for useful purposes in the other regions as well. • Most of the tanks in our fresh water facilities are Recirculating Aquaculture Systems (RAS), which recycle 90 – 97 % of the water . • We engage in annual beach clean-ups around farms. • Old farming equipment is safely removed and we work to get a good recycling system in place. 82 • We have a partnership with the environmen- tal organization Bellona to find ways to recycle plastic in the Company. They are engaged in a pilot project in Finnmark, with the aim of imple- menting the project in all regions: 1. Developing new products that can be recycled 100 %, such as sea lice skirts and artificial kelp forests for the cleaner fish 2. Removing lead ropes and reducing use of ropes generally 3. Recycling waste 4. Developing plastic accounting, with an over- view of how much plastic we have purchased, and how much of that is recycled. The aim is to purchase less plastic and recycle more. Grieg SeafoodAnnual report 2018Part 02 Sustainable Food Waste management OUR RESULTS We have worked to improve waste management over the last years, and are heading in the right direction. Still, though, we have a way to go in some areas. Reducing and recycling plastic, for example, is an area where we have just started working with our pilot in Finnmark. It will be developed in 2019. 83 OUR STORIES Skuna Bay Salmon - fit for a President Skuna Bay Salmon has become popularized among top chefs throughout the United States. It has even made its way into the White House. Photos: Grieg Seafood BC 84 Grieg SeafoodAnnual report 2018Part 02 Sustainable Food Our stories “Skuna Bay has become the preferred salmon of choice for top chefs throughout North America.” ANDY CHEUNG Brand Manager Skuna Bay Grieg Seafood’s premium brand from British Columbia is as hand-crafted as farmed salmon may be. Every fish is meticulously selected, impeccably hand-cleaned, chilled and carefully placed into a fully recyclable cardboard carton. “Skuna Bay has become the preferred salmon of choice for top chefs throughout North America. The brand has become synony- mous with ‘the perfect fish’,” says Andy Cheung, Brand Manager for Skuna Bay at Ocean Quality Canada. “Premium-grade salmon from the British Columbia farm-sites are inspected at the processing plant to meet the Skuna Bay Standard. We evaluate size and external factors as well as firmness, thickness and texture of the fillet.” At the end, every box is individually labeled. “Before shipping the boxes, we identify the specific farm site the fish was harvested from and the packing date. The individual who packaged and sealed the carton even adds his or her signature,” Cheung explains. Ocean Quality is Grieg Seafood’s sales company, jointly owned with Bremnes Seashore. The company’s head office is in Bergen, but they also have offices in the UK and Canada, taking care of Grieg Seafood’s fish from the processing plant and all the way to the customers. AT OBAMA’S INAUGURATION DINNER The White House served Skuna Bay Salmon on the menu for the Inauguration Dinner to former President and First Lady of the United States, Barack and Michelle Obama. “The brands unique closed chain of custody, tamperproof system and traceability made it possible for Skuna Bay to be selected for this important event. The system ensures that Skuna Bay Salmon is delivered to the chef untouched and provides the highest level of food safety and security,” says Cheung. Chefs are willing to pay a premium for such quality and attributes. The Skuna Bay brand, though small in volume, contributes signifi- cantly to Grieg Seafood’s revenues in Canada. “Most months, Skuna Bay accounts for approximately only five % of the volume and delivers roughly 25 % of our margins,” says Adam OBrien, General Manager for Skuna Bay at Ocean Quality Canada. SKUNA BAY PARTNERSHIPS Skuna Bay continues their partnership with the James Beard Foundation as a founding member of the Sustaina- ble Seafood Impact Program. JBF’s Sustainable Seafood Partnership leverages the expertise of seafood purveyors who are committed to offering sustainable seafood options and are willing to serve as public advocates for sustainable seafood in the market. Skuna Bay is now partnering up with the Women Chefs and Restauranteurs (WCR) organization. The WCR advocates to advance women across the culinary industry through Education, Promotion, Connection and Inspiration. Skuna Bay will send a female salmon farmer, one of six in the world, to provide an educational editorial feature at the 2019 National Conference. 85 SUSTAINABILITY AND SOCIAL RESPONSIBILITY Stewardship of the ocean and environment is integral to Skuna Bay’s success. CHEFS Chef José Andrés has incorporated Skuna Bay Salmon onto his menu throughout the seasons at Zaytinya in Washington, DC. Chef Julian Serrano of LAGO at the Bellagio in Las Vegas has used Skuna Bay Salmon as a crudo on their small plates menu. Though not a current user of the brand, Chef Thomas Keller of world-renowned restaurant, The French Laundry, has incorporated Skuna Bay Salmon into his menus in recent years. Chef Elizabeth Falkner has been a long-time supporter of Skuna Bay Salmon. Falkner is an Award-winning Chef known for Citizen Cake and Orson in San Francisco as well as various appea- rances on network cooking reality shows. She is currently a consulting chef and President on the Board of Directors for Women Chef and Restau- ranteurs. Chef Joseph “JJ” Johnson, currently a partner at the Henry at Life Hotel in Manhattan, has incorpo- rated Skuna Bay Salmon throughout his various restaurant concepts. Johnson will include Skuna Bay Salmon on the menu of his next concept, FIELDTRIP, launching Spring 2019 in Harlem, New York. Chef Ed Brown has worked in some of the most celebrated kitchens in the world and has been a steady advocator of Skuna Bay Salmon. As President of Restaurant Services for Restaurant Associates and owner of Ed’s Chowder House in New York City, Brown has consistently kept Skuna Bay Salmon on his menus. “Chefs increasingly want to learn more about the sustainable nature of the products they purchase. In our case, they care about farming practices, co-existence with wild salmon, environmentally-friendly packaging and sustainability certifications.” says OBrien. Cheung and OBrien both emphasize that transparency along the value chain is an absolute must. “Chefs have come to expect a certain level of social responsibility from their vendors, as well as transparency of their practices,” says Cheung. To meet these expectations, Ocean Quality developed a ‘technical training’ trip for Chefs and buyers to tour Grieg Seafood’s farms in British Columbia, meet the Craftsman Farmers, and learn first- hand from the source how Skuna Bay is meticulously selected, prepared and packaged. “For those who can’t make their way to the farms, we bring our Craftsman Farmers to them. Chefs from the city are always astonis- hed at the Craftsman Farmers level of personal care and attention to detail in raising of the fish and the measures taken to protect the environment.” EXPANDING THE PRODUCTION LINE The US salmon market is expected to grow more than five percent annually in the coming years. Ocean Quality sees many expansion opportunities for Skuna Bay. “One of our latest addition to the brand line is our Gold River Perfect Portion program, for the short-on-time chef. They receive pre-cut, pin-boned portions of Skuna Bay Salmon. We are also testing a ready-to-cook portion program for the retail market,” Cheung explains. “Our vision for the future of Skuna Bay is a slow and steady evolution. We need to cultivate, nurture and expand our reach to nationwide availability in the USA and beyond,” says Obrien. He emphasizes that Skuna Bay will never compromise on quality to reach those targets. “Our promise to the end customer needs to remain as one which reinforces their certainty of our high-quality standard.” www.skunasalmon.com 86 Grieg SeafoodAnnual report 2018Part 02 Sustainable Food Our stories 87 OUR STORIES Looking to unconventional ways to cut carbon emissions At Grieg Seafood we know that cutting carbon emissions and long-term profit go hand in hand, so we’ll consider any solution that benefits the planet. Photos: Grieg Seafood Rogaland 88 Grieg SeafoodAnnual report 2018Part 02 Sustainable Food Our stories “We are working to get our sites connected to the electric power grid here as well, but many are so far away from the grid that we need other alternatives.” JOSTEIN IVERSEN Technical Coordinator Grieg Seafood Finnmark "A windmill and a solar panel on a salmon farm. That is something I never imagined,” says Ørjan Hadland. He is a team leader at the Nordheimsøy farm, where Grieg Seafood Rogaland has installed the first ever solar panel on the roof and a windmill on the side of the feeding station. The aim is to partly substitute the diesel generator with renewable energy. The idea came from master student Helleik Syse and meteorolo- gist Siri Kalvig, who at the time was an Associate Professor at the University of Stavanger. “Not all farms are situated in places close to the electric grid. This project is a pilot aimed at testing out whether windmills and solar panels can be used as an effective alternative,” says Helleik Syse. SAVES THOUSANDS OF LITERS OF DIESEL Most farms in Grieg Seafood Rogaland are already connected to the electric power grid on land. A few sites, however, still get their energy from diesel generators. Nordheimsøy is one such farm. “Our aim is to be able to shut down the diesel engines when we leave work in the afternoon. The battery on the site, which has been charged all day from the windmill and solar panel, can then provide the farm with the energy it needs during the night,” explains Ørjan Hadland. He says they hope to save 36 000 liters of diesel annually. REDUCES HALF OF EMISSIONS WITH A NEW HEAT PUMP Grieg Seafood Finnmark is also taking similar measures to reduce emissions. “We are working to get our sites connected to the electric power grid here as well, but many are so far away from the grid that we need other alternatives,” says Jostein Iversen, Technical Coordina- tor at Grieg Seafood Finnmark. He explains that diesel generators are not only bad for the environ- ment, they are also costly and increase the need for maintenance on farming equipment. “We are now investing in hybrid solutions for the far-off sites, where the diesel engines charge large batteries when they are running. With such solutions, we are able to reduce use of the generator with 85 percent,” Iversen says. However, one investment makes a bigger difference than all other efforts at the farms. “Our new heat pump at the Adamselv fresh water facility allows us to cut 2 275 tonnes of CO2 equivalents annually. That is about half of Grieg Seafood Finnmark’s total carbon emission. It is like removing more than 1 200 cars from the roads,” Iversen explains. CLIMATE FRIENDLY DINNER “Combining the windmill and the solar panel will make it possible to cut carbon emissions with almost 98 tonnes of CO2 equivalents a year from this farm only,” Hadland states. Farmed salmon has always had a small carbon footprint compared to other production of proteins. That does not mean, however, that the industry should stay out of the race to cut emissions. “If we are to reach the targets of the Paris Climate Accord, all indus- tries have to pull their weight. We have to take our part of that responsibility,” says Liv Marit Aarseth, Public Relations Manager at Grieg Seafood Rogaland. “As we continue to seek more new solutions for cutting emissions, farmed salmon can be an even more climate friendly dinner alter- native in the years to come.” 89 ROOTED IN PROFIT & INNOVATION Without a profitable business, we will not be able to farm healthy salmon to people all over the world. To achieve attractive financial results, our farming methods need to be both cost-effective and sustainable. 90 Grieg SeafoodAnnual report 2018Part 02 Profit & Innovation Intro 91 The global salmon market Grieg Seafood is a part of a global salmon market. Aiming to be a leading player in the aquaculture industry, we supplied approximately 3 % of the global harvest volume of Atlantic Salmon in 2018, aiming to grow this to almost 5 % by 2020. GLOBAL MARKET DEVELOPMENT IN 2018 The global harvest of Atlantic Salmon increased by 5.4 % in 2018, continuing its upward trend. Global sales of Atlantic farmed salmon are estimated to be 2 418 000 tonnes WFE (whole fish equivalent), up from 2 294 000 tonnes in 2017. The largest contributors to the increase in supply comes from Chile, Norway, and Canada, with an increase of 113 000, 45 000, and 6 000 tonnes, respectively. The Chilean industry has mustered an impressive recovery and growth after its difficulties in 2016, while Norway has seen incremental growth in harvest volumes as farmers have adapted to challen- ging biological conditions over the past few years. The UK and the Faroe Islands on the other hand experienced a reduction in harvest volumes of, respectively, 24 000 and 9 000 tonnes. It is estimated that consumption in all major markets increased in 2018, except for Japan which decreased by 8 %. The largest relative increases in consumption were found in the USA and Russia with 9 % and 32 %, respectively. Salmon spot prices noted on Fish Pool have been relatively stable throughout 2018, however there was a notable price hike from March to May. Prices normalized during the second half of 2018 and ended the year on similar levels as 2016 and 2017. Over the last five years the average price of Atlantic Salmon has increased notably, with the main increase from 2015 to 2016 and onwards. The 12 months average Fish Pool Index for 2018 was NOK 60.76 compared to NOK 60.88 in 2017. 92 FIGURE ATLANTIC SALMON CONSUMPTION EU 44% OTHER 30% RUSSIA 4% JAPAN 2% USA 20% FIGURE ATLANTIC SALMON HARVEST OTHER 8% NORWAY 52% CANADA 6% UK 6% CHILE 28% Grieg SeafoodAnnual report 2018Part 02 Profit & Innovation The global salmon market GLOBAL MARKET EXPECTATIONS Kontali estimates an increase in harvest volumes of Atlantic Salmon by 6 % worldwide, from 2 418 000 tonnes in 2018 to 2 561 000 tonnes in 2019. This is estimated to be driven by a 5 % increase in Norway, 3 % in Chile, 17 % in the UK and 1 % in Canada. At year end 2018 the consensus is that the global demand for Atlan- tic Salmon will remain high, and with the limited possibilities for increase in harvest volumes, prices will remain high. Future prices on Fish Pool are high and indicate an expectation of salmon prices in the range of NOK 55-65 both in 2019 and 2020. Looking further ahead, there is a consensus in the market of a modest organic growth in the existing open pen coastal industry. This development will primarily be driven by the opening of new sites and areas for farms, new and improved technologies and farming practices, and better cooperation both between industry players and with authorities. In addition to this incremental growth, more experimental attempts at producing salmon, either offshore or on land, may supplement the traditional salmon farming industry with additional volumes in the long run. For the past 25 years, literally all new supply volume of fish has come from aquaculture. Wild fishing has long been facing issues of smaller catch, quotas, and other sanctions from different autho- rities. Since 1990 the volume of farmed fish has multiplied more than six-fold, with salmon making up less than 2.5 % of the volume. In line with the ongoing global megatrends of health and sustainabi- lity there has been an increased interest in the health and potential environmental benefits that can be gained from sustainable aqua- culture. At the moment, Europe is the largest and most mature market for Atlantic Salmon, consuming more per capita than other continents. There are, however, countless ongoing initiatives to introduce salmon to ever new consumers across the world. An increase in consumption per capita in large markets and growing economies such as the USA, Brazil, China, and India is expected to contribute to increased demand for Atlantic Salmon over time. FIGURE FISH POOL MONTHLY AVERAGES (NOK/KG) 80 60 40 20 0 JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV 2018 2017 2016 2015 2014 DEC 93 Ocean Quality and our market By focusing on sustainable farming, good fish health and welfare, we can provide the healthy, tasty, and high-quality product that our customers demand. OUR PRINCIPLES Our operations span the entire value chain from egg to harvest, primary processing, packaging, and sales. Our farming regions sell their fish to Ocean Quality, who resells our salmon to third parties for further processing or to other customers for consumption as is. Ocean Quality aims to be a preferred and reliable global supplier. 94 Grieg SeafoodAnnual report 2018Part 02 Profit & Innovation Ocean Quality and our market OCEAN QUALITY OUR MARKET EXPECTATIONS Ocean Quality is the sales organization of Grieg Seafood (60 % ownership) and Bremnes Seashore (40 % ownership) and is headqu- artered in Bergen. The Ocean Quality Group also has sales compa- nies on Shetland and in North America with the purpose of selling the salmon harvested by Grieg Seafood in these regions. In 2018, Ocean Quality sold 114 720 tonnes of salmon, an increase in volume of almost 9 % compared to 105 500 tonnes last year. Grieg Seafoods salmon accounts for 65 % of the total volume. We expect the market to remain strong in 2019. The year started well, with high market activity. The market now seems to have returned to normal levels, both in terms of prices and frozen stock, and retailers as well as other customers are eager to develop closer cooperation with the salmon producers. Expected sales volume in 2019 for Ocean Quality is 133 200 tonnes, corresponding to an incre- ase of 16 % compared to 2018, with Grieg Seafoods harvest making up 82 000 tonnes. OUR MARKET DEVELOPMENT IN 2018 In 2018, the Grieg Seafood Group (including Ocean Quality) had a turnover of NOK 7 500 million, corresponding to an increase of NOK 483 million (6.9 %) from 2017. Continental Europe is by far our most important market, representing 51 % of our turnover. The market distribution of sales varies year over year, depending on the harve- sted volumes across our regions. The main change in our share of sales was an increase to the USA from 9 % in 2017 to 14 % in 2018 due to record high harvest volumes in Grieg Seafood British Columbia. At the same time, sales directed to the Asian market were down, from 18 % in 2017 to 14 % in 2018. Grieg Seafood has hedged approximately 20 % of the 2019 volumes by entering into fixed price contracts. The market clearly trends towards increased demand for certified and specialty products. Grieg Seafood works on a continuous basis to adapt to changing customer preferences, one example being our efforts to increase the number of ASC certified sites. We are also committed to increa- sing our sales of high-quality products like the Skuna Bay brand from Grieg Seafood British Columbia, and Kvitsøy Salmon from Grieg Seafood Rogaland. The Skuna Bay salmon is currently sold to gourmet restaurants in major American cities, while the majority of the Kvitsøy salmon is currently sold to the Italian and Spanish markets. Please read our article about the Skuna Bay salmon on page 85. OCEAN QUALITY IS COMMITTED TO HIGH STANDARDS Reliable year-round supply according to customer requirements. Fresh and healthy products. Traceability and food safety. Quality control and sustainability of raw materials. Fish health, welfare, and environmental care. FIGURE OUR MARKET 2018 OTHER 4% ASIA 14% USA 14% UK 17% EU 51% 95 Economic productivity By focusing on sustainability and driving forward improvements to our farming operations, we aim to create value for all our stakeholders. OUR PRINCIPLES Improving sustainability is key to increasing our profits. By focusing on reducing our environmental impact and improving fish welfare, we aim to increase harvest rates and reduce production cost. We aim to provide our shareholders with a competitive return on capital invested and have set a ROCE target of 12%. Our investments reflect our growth strategy: digi- talization, post-smolt, biosecurity and fish welfare, including a continuous evaluation of expansion oppor- tunities. 96 Grieg SeafoodAnnual report 2018Part 02 Profit & Innovation Economic productivity OUR RESULTS Profit and loss Grieg Seafood Group achieved a good performance in 2018. We reached our expected harvest volume of 74 623 tonnes, an increase of approximately 20 % compared to 2017. The average spot price for 2018 was NOK 59.22 per kg, up by NOK 0.05 per kg compared to last year. The Groups operating income increased by NOK 483 million and came to NOK 7 500 million. In addition to a strong market for our product, the results were achieved by maintaining a strict focus on sustainability and driving forward improvements to our farming operations. Total cost excluding depreciation and write down was NOK 6 216 million, an increase of NOK 284 million compared to 2017, which mainly relates to higher harvest volume. EBIT for the Group before fair value adjustment of biological assets ended at NOK 1 099 million, an increase of almost 22 % compared to last year. The EBIT per kg of NOK 14.72 was positively affected by the harvest volume and high spot prices, however cost related to Pancreas Disease (PD), Harmful Algal Bloom (HAB) and gill diseases during the year had a negative impact in terms of high cost and lower price achievement. By improved monitoring of biological conditions at the sea, we believe we were able to reduce the negative impact of the incidents we experienced during the year. Total farming cost per kg for the Group was NOK 43.1 compared to NOK 43.4 in 2017. FIGURE KEY FIGURES NOK MILLION Revenues EBITDA EBIT 2014 4 100 484 343 2015 4 609 261 48 2016 6 545 1 342 1 168 2017 7 017 1 106 904 2018 7 500 1 334 1 099 Harvest volume (tonnes GWT) 64 736 65 398 64 726 62 598 74 623 EBIT/ kg (NOK) Return on Capital Employed (ROCE) 5.30 10 % 0.73 1 % 18.04 14.45 14.72 33 % 24 % 22 % 97 Grieg Seafood Annual report 2018 Cash flow OPERATING ACTIVITIES The Group had a net positive cash flow from operations of NOK 820 million in 2018, compared to NOK 709 million last year. The change in working capital during the year was negative at NOK -309 million, mainly related to increased biomass in accordance with our growth strategy, and increased trade receivables as a result of high sales volume towards the end of the year. INVESTING ACTIVITIES Net cash flow from investing activities totaled NOK 593 million in 2018, compared to NOK 547 million last year. The largest investment in 2018 was the expansion of our smolt facility Adamselv in Finnmark, Norway, and our smolt facility and operations center in Rogaland, Norway. Access to high quality smolt is key to ensuring production growth. By producing larger and more robust smolt, we reduce exposure to risks like sea lice and diseases, which increase survival rates and reduce cost. At Adamselv, the smolt capacity has been expanded from 800 to 1 600 tonnes, to be fully utilized in 2020. In Rogaland, through Tytlandsvik Aqua, our capacity is 1 500 tonnes of smolt up to 1 000 gram. Our investments also included a new license in Finnmark and establishment of new locations, as well as ordinary maintenance efforts. FIGURE INVESTMENTS 2018 FIGURE INVESTMENT LEVEL NOK MILL 1 000 TONNES 800 600 400 200 0 5% 3% 24% 34% DIGITALIZATION IN SALMON FARMING MAINTENANCE 34% BIOSECURITY AND FISH WELFARE EXPANSION OPPORTUNITIES POST-SMOLT STRATEGY 98 76 72 68 64 60 56 2014 2015 2016 2017 2018 GROSS INVESTMENT MAINTENANCE LEVEL HARVEST VOLUME (GWT) Part 02 Profit & Innovation Economic productivity Financing activities Financial position and liquidity Net cash flow from financing activities was NOK 361 million in 2018 compared to NOK 393 million last year. The Group´s interest-bearing debt, including finance leases, had a net increase of NOK 307 million during the year. We carried out a refinancing of the syndicated loan in February 2018, which resulted in increased loan facilities and limit of indebtedness with regards to finance leases and factoring. The factoring agreement is concluded by Ocean Quality AS in Norway and the UK to ensure early settlement of trade receivables. Further- more, financing activities was negatively affected by payment of dividends to shareholders and non-controlling interest totaling NOK 466 million. At 31 December 2018, the book value of total assets was NOK 8 142 million, up from NOK 7 153 million at the same time in 2017. The increase is related mainly to investments and biological assets including fair value of biological assets. Total equity amounted to NOK 3 884 million, corresponding to an equity ratio of 48 % at year end. The return on capital employed (ROCE) was 22 %, compared to our target of 12 %. The Group had a good level of free liquidity and unutilized credit facilities at the end of the year, with an available bank credit frame of NOK 793 million. Net interest-bearing debt excluding factoring debt (NIBD) was NOK 1 690 million, and factoring amounted to NOK 573 million at year end, compared to NOK 1 284 million and NOK 501 million, respectively, at year end 2017. The increase in NIBD reflects our investment activities. The NIBD/harvest volume ratio was 22.3 at year end 2018, compared to 20.2 last year. NIBD/EBITDA ratio came to 1.3 at year end 2018 compared to 1.2 last year. 99 Profitable growth By combining skilled and motivated people, new technology, and to increasingly farm salmon on nature’s terms, we aim to ensure sustainable and profitable growth in the years ahead. OUR PRINCIPLES With various focus areas to reduce our environmental impact, fish welfare will be improved, and as a result, harvest volume will increase and production cost will be reduced. We target a harvest volume of 100 000 tonnes, with a production cost at or below weighted industry average of NOK 37.90 per kg, in 2020. For Rogaland and Finn- mark, the target is NOK 36.00 per kg. We believe that improving sustainability is key to increasing profits in the salmon farming industry. HOW WE WORK TO IMPROVE • Improve the utilization of our current capacity. • Produce larger size smolt to reduce production time in sea, thereby reduce exposure to biological challenges to increase fish welfare and survival rates. • Optimize feeding by using advanced sensor systems, real time monitoring, and automation. • Continuous monitoring of environmental para- meters combined with big data and artificial intelligence to predict biological conditions. 100 Grieg SeafoodAnnual report 2018Part 02 Profit & Innovation Profitable growth RESULTS FIGURE TARGETING GROUP COST OF NOK 37.90/KG IN 2020 GROUP COST EXCL HQ GRIEG SEAFOOD ROGALAND/FINNMARK 50 40 30 20 10 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 ESTIMATE 2020 ESTIMATE FIGURE GROUP HARVEST TONNES GWT 120 000 100 000 80 000 60 000 40 000 20 000 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 ESTIMATE 2020 ESTIMATE 101 Grieg Seafood Rogaland Grieg Seafood Rogaland AS farms salmon in Rogaland on the west coast of Norway. The company has 19 seawater license equivalents and two licenses for land-based production of smolt. We also operate our own brood stock activity in Erfjord. All our salmon harvested in this region is processed and packed at our own facilities. As our operations are located across six municipalities in Roga- land, we contribute significantly to the value creation in the local communities. For more information on our initiatives in the local communities, please refer to page 154. OPERATIONAL PRIORITIES Grieg Seafood Rogaland aims to reduce the production time in sea from 18 to 12 months, with an average smolt size increasing to 500 grams in 2020. Larger smolt size will significantly reduce seawater production time, making the fish less exposed to challenges such as sea lice and PD. At the end of 2018, we completed the expansion of the smolt facility Tytlandsvik Aqua, our co-investment with Bremnes Fryseri and Vest Havbruk, to produce large size smolt of 700 to 1 000 grams. We expect to receive 1 000 tonnes of large size smolt from Tytlandsvik in 2019. Our sites Rogaland are located in a yellow area in the recently intro- duced "traffic light" system. The yellow light is a consequence of high sea lice density and a fear that this could negatively affect wild salmonid stocks. Please see page 62 for more information on impact of fish farming on wild salmon. We use cleanerfish as a preventive measure for sea lice and did not perform any sea lice treatment between July and November. Pancreas Disease (PD) has also been a challenge in Rogaland, negatively affecting feeding and reducing growth rates. At year end 2018, two out of 13 sites were affected by PD, compared to seven out of 12 sites at the same time last year. This is expected to improve cost level, harvest weight, and quality going forward. As part of our precision farming strategy, we launched our first integrated operations center in Rogaland in September. Five sites are currently being monitored and fed from this facility. Precision farming will ensure better feeding, leading to reduced costs and increased growth. We aim to have full coverage of all sites from our operations center by the end of 2019. Please read more about Precision Farming on page 110. 102 OPERATIONAL RESULTS Our harvested volume in 2018 was 16 293 tonnes, a decrease from 18 111 tonnes in 2017. The reduction in harvest volume was prima- rily linked to issues with sea lice and PD, particularly in the first half of 2018. Revenue amounted to NOK 960 million, an average price of NOK 58.9 per kg. Strong production in the second half of the year has resulted in a good standing biomass as of year end, with fewer sites affected by PD. Overall for 2018, Rogaland reports a survival rate of 92 % (calculated according to the GSI definition). The cost per kg of harvested salmon increased compared to last year, due to operational challenges related to sea lice and PD, average harvest size of fish, and total harvest volumes. At year end the biological situation was stable and improved compared to last year at the same time. High standing biomass at year end gives cause for optimism regarding harvest volumes and cost per kg of harvested fish going forward. The EBIT per kg before fair value adjustments amounted to NOK 13.5, compared to NOK 21.7 in 2017. 1 We have 18 license numbers, but one of our licenses is double which in practice means we have 19 licenses. In addition, we have a long-term rental agreement with Rogaland County for one license, which means that we in total make use of 20 license equivalents. Grieg SeafoodAnnual report 2018Part 02 Profit & Innovation Profitable growth KEY FIGURES 2018 16 293 13.5 TONNES GWT HARVESTED EBIT/KG (NOK) 19 • 2 145 SEAWATER LICENSES • FRESH WATER LICENSES EMPLOYEES RESULTS EBIT AND HARVEST ROGALAND ROGALAND 2014 2015 2016 2017 2018 Harvest (tonnes GWT) 12 778 15 236 18 367 18 111 16 293 Revenue (NOK million) 572.6 661.2 1 140.4 1 150.2 959.6 EBIT (NOK million) EBIT / kg (NOK) 77.8 6.1 83.5 5.5 466.8 393.1 219.6 25.4 21.7 13.5 20 000 16 000 12 000 8 000 4 000 0 HARVEST (TONNES GWT) EBIT/KG (NOK) 2014 2015 2016 2017 2018 30 25 20 15 10 5 0 103 Grieg Seafood Finnmark Grieg Seafood Finnmark AS farms salmon in Finnmark, the northernmost county in Norway. Of the company´s 27 sea water licenses, four are "green licenses" subject to stricter environmental measures. Our salmon harve- sted is in general processed and packed at our local facility in Alta. Our operations are located across five municipalities in Finnmark, contributing significantly to local value creation. For more infor- mation on our initiatives in the local communities, please refer to page 152. At the end of the year, the construction work to increase the smolt capacity at Adamselv from 800 to 1 600 tonnes was completed. The new capacity will be fully utilized in 2020. This is an important step in our strategy of continued growth, safeguarding survival rates, and lowering of costs through stocking of larger smolt. OPERATIONAL PRIORITIES As in all our regions, we focus on improving fish welfare and safe- guarding survival rates. Camera surveillance and sensor technology are utilized to continuously monitor the environment. As a result of our efforts towards sustainable production, we have achieved ASC certification of four sites in Finnmark. Flexibility is a requirement to achieve better utilization of our capa- city, and we are continuously looking for opportunities to ensure access to new, good locations. During 2018, we applied for four new locations in Finnmark and received approval of two of these locations. The biological conditions have been favorable in Finnmark in 2018, with stable and low sea lice levels. We utilized our option to increase our MAB limits with 470 tonnes, in accordance with the Norwegian traffic light system. OPERATIONAL RESULTS The volume harvested in 2018 was 29 774 tonnes, an increase of 30 % compared to 2017. Favorable farming conditions, with low seawa- ter temperatures, and a continuous focus on fish welfare, contri- buted to a survival rate of 96 % (calculated according to the GSI definition). Revenues amounted to NOK 1 671 million, an average of NOK 56.1 per kg. The cost per kg salmon harvested decreased compared to 2017. The strong biological performance, combined with high production volume, enabled us to utilize our equipment and personnel effici- ently, bringing down the average cost per kg. The EBIT per kg before fair value adjustments amounted to NOK 20.0, compared to NOK 15.4 in 2017. 104 Grieg SeafoodAnnual report 2018Part 02 Profit & Innovation Profitable growth KEY FIGURES 2018 29 774 TONNES GTW HARVESTED 27 • 1 • 4 • 2 SEAWATER LICENSES • FRESH WATER LICENSE • ASC-CERTIFIED SITES • NEW SITES 20.0 EBIT/KG (NOK) 247 EMPLOYEES RESULTS EBIT AND HARVEST FINNMARK FINNMARK 2014 2015 2016 2017 2018 Harvest (tonnes GWT) 26 470 19 481 22 104 22 831 29 774 Revenue (NOK million) 975.3 797.9 1 244.3 1 265.2 1 671.3 EBIT (NOK million) 205.9 124.0 447.1 351.9 594.9 EBIT / kg (NOK) 7.8 6.4 20.2 15.4 20.0 35 000 30 000 25 000 20 000 15 000 10 000 5 000 0 HARVEST (TONNES GWT) EBIT/KG (NOK) 2014 2015 2016 2017 2018 25 20 15 10 5 0 105 Grieg Seafood Shetland Grieg Seafood Shetland Ltd farms salmon on Shetland and the Isle of Skye in Scotland. We are the largest salmon producer on Shetland, with 17 active seawater sites (13 on Shetland and four on the Isle of Skye) and one fresh- water site. We process our salmon at our own facility in Lerwick. Our operations contribute significantly to local value creation. For more information on our initiatives in the local communities, see page 158. OPERATIONAL PRIORITIES The aquaculture industry in Shetland has over time endured various biological challenges. We cooperate closely with other sea farmers in the region to establish a long-term, stable, and sustai- nable marine biology. Whole farming areas operate with fallowing periods, and sea lice counting and treatment activity is coordinated between farmers. Over the last four years, we have cut production from 27 to 17 sites, focusing our production on the best sites with the strongest biological control. We have implemented routines and systems for monitoring and mitigation of algae-related issues. Other prioritized measures to ensure strong biosecurity, improved fish welfare, and control of the sea lice situation include the use of aeration systems, cleaner fish, sea lice skirts, and fresh water treatments. We also focus on improving smolt quality, to ensure a more robust and healthy fish which is essential for good growth, which will reduce cost going forward. OPERATIONAL RESULTS The volume harvested in 2018 was 11 924 tonnes, compared to 12 056 tonnes in 2017. Revenues amounted to NOK 800 million, with an average of NOK 67.1 per kg. Biological challenges related to algal bloom, gill-related diseases, sea lice, and winter ulcers affected the survival rate, which came to 83 % (calculated according to the GSI definition). Combined with efforts to mitigate these challenges as well as write downs due to reduced survival, the cost per kg salmon harvested was high in 2018. By improving our smolt quality and continue focusing in initiatives to improve biosecurity and fish welfare, we expect cost to be reduced going forward. The EBIT per kg before fair value adjustments amounted to NOK 2.8, compared to NOK 5.7 in 2017. 106 Grieg SeafoodAnnual report 2018Part 02 Profit & Innovation Profitable growth KEY FIGURES 2018 11 924 TONNES GWT HARVESTED 17 • 1 2.8 EBIT/KG (NOK) 192 ACTIVE SEAWATER SITES • FRESH WATER SITE EMPLOYEES RESULTS EBIT AND HARVEST SHETLAND SHETLAND 2014 2015 2016 2017 2018 Harvest (tonnes GWT) 19 231 16 370 13 541 12 056 11 924 Revenue (NOK million) 852.5 773.5 859.8 745.9 799.9 EBIT (NOK million) 81.1 -164.9 176.6 EBIT / kg (NOK) 4.2 -10.1 13.0 68.7 5.7 33.8 2.8 25 000 20 000 15 000 10 000 5 000 0 HARVEST (TONNES GWT) EBIT/KG (NOK) 2014 2015 2016 2017 2018 15 10 5 0 -5 -10 -15 107 Grieg Seafood British Columbia Grieg Seafood BC Ltd farms salmon on the east and west side of Vancouver Island, and along the Sunshine Coast north of Vancouver. The company has 20 seawater licenses and one license for land-based production of smolt. We do not process our own salmon. All of our sites are located in traditional First Nation territories, and our relationships with the Mowachaht Muchalat and Tlowitsis First Nations are good and very important to us. For more information on our initiatives in local communities and how we work with First Nations, see page 156 and 160. OPERATIONAL RESULTS The harvest volume was 16 632 tonnes in 2018. After some years of reduced smolt stocking and biological challenges stemming from HAB, the volume is increasing. Revenues amounted to NOK 1 075 million, with an average of NOK 64.7 per kg. OPERATIONAL PRIORITIES Access to high quality smolt is key to ensuring production growth with sustainable biology. We are expanding the capacity of our Gold River smolt facility from 500 to 900 tonnes. When the expansion takes full effect in 2020, we will be self-sufficient in terms of smolt deliveries. Harmful Algal Bloom (HAB) is a main biological risk in this region. We continuously monitor and analyze algae movements and oxygen levels and have implemented aeration systems to allow feeding in difficult situations. We believe that our improvements to sea produ- ction will contribute to improved survival rates during these events, although sudden and massive blooming will still be a risk. For more details on how we intend to improve our growth with big data, please read our story on page 112. The cost per kg of salmon harvested was on a similar level compa- red to 2017 and is still high. The cost is impacted by reduced survival rates of 88 % (calculated according to the GSI definition) from previous HAB incidents and corresponding write-downs. Going forward we expect to realize considerably lower production cost due to our measures within monitoring and analyzing sea water conditions. At year end the biological situation was stable, with the generations affected by HAB harvested. The biomass in sea is lower at year end 2018 than it was at year end 2017, and we expect a lower harvest volume in 2019. The EBIT per kg before fair value adjustments amounted to NOK 17.5, up from NOK 12.5 in 2017. 108 Grieg SeafoodAnnual report 2018Part 02 Profit & Innovation Profitable growth KEY FIGURES 2018 16 632 TONNES GWT HARVESTED 20 • 1 17.5 EBIT/KG (NOK) 148 SEAWATER LICENSES • FRESH WATER LICENSE EMPLOYEES RESULTS BRITISH COLUMBIA 2014 2015 2016 2017 2018 Harvest (tonnes GWT) 6 257 14 311 10 715 9 600 16 632 Revenue (NOK million) 277.8 573.9 611.2 580.3 1075.3 EBIT (NOK million) EBIT / kg (NOK) -47.8 -7.6 13.3 0.9 80.5 7.5 120.2 290.9 12.5 17.5 EBIT AND HARVEST BRITISH COLUMBIA 18 000 15 000 12 000 9 000 6 000 3 000 0 HARVEST (TONNES GWT) EBIT/KG (NOK) 2014 2015 2016 2017 2018 20 15 10 5 0 -5 -10 109 OUR STORIES Driving digital aquaculture It is only a matter of time before big data combined with tools like artificial intelligence and machine learning will transform how we farm salmon. Grieg Seafood Precision Farming is all about providing the farmers with facts and information, supporting them in making better farming decisions. Photos: Grieg Seafood Rogaland 110 Grieg SeafoodAnnual report 2018Part 02 Profit & Innovation Our stories "Our digital platform combining data analytics and smart algorithms will support farmers with real-time data that can improve decision-making." TROND KATHENES Chief Digital Officer Grieg Seafood “Grieg Seafood Precision Farming will help us learn more about the relationship between the fish and the environment in and around the farm,” says Trond Kathenes. He is the Chief Digital Officer of Grieg Seafood. “With the new digital solutions, we can learn why some pens have slower growth than others, and under which conditions they will perform better,” he elaborates. “Until now, farmers have made decisions on experience-based competence. That has proven successful in many ways. Talented practitioners in the industry have taken salmon farming to the fore- front of the global aquaculture industry,” he says. FISH WELFARE AND SEA LICE CONTROL In the long term, the Grieg Seafood aims to control a variety of farming tasks from the center. Big data and artificial intelligence can help optimize both fish welfare and sea lice control. Going forward, a digital platform, combining data analytics and smart algorithms, will support farmers with real-time data that can improve decision-making in everyday farming. “It will allow us to predict an event in advance, enabling us to take measures proactively,” Kathenes explains. Together with other salmon farming companies, Grieg Seafood is transferring data daily to the AquaCloud project initiated by the NCE Seafood Innovation Cluster. Utilizing IBM Watson analytics, the AquaCloud service is able to predict the sea lice exposure on site level one, two and three weeks in advance. Grieg Seafood’s digitalization journey started back in 2011. The company has simplified five different IT environments down to one, and has harmonized the type and the way it collects data. Now, Grieg Seafood has comparable data throughout the group. “We hope to be able to predict incidents in advance and avoid the event entirely. With such knowledge, we may perhaps be able to add sea lice skirts to the pens when it is predicted that sea lice are coming, and avoid sea lice treatments,“ Strømskag explains. “Today we can analyze different parameters that influence how our salmon grows,” says Kathenes. A CULTURE OF CURIOSITY Digital aquaculture will create new tasks for people at the farms. OPTIMIZING GROWTH In 2018, Grieg Seafood opened a pilot for a Farming operational center at Finnøy in Rogaland. In 2020, the company aims to esta- blish a full-scale operational center in the neighborhood. “We will not need less employees as a result of increasing digi- talization. Our people at the farms will rather do different things, such as maintenance and calibration of technical equipment,” says Trond Kathenes. The operational center will automatically acquire and analyze data on the environmental conditions in and around the farms, such as temperature, oxygen, salinity and currents. The center will also monitor and operate the infrastructure onboard the barges. “Our goal is to detect biological challenges at an early stage and implement mitigating measures. That will allow us to optimize the environment around the fish to keep appetite and growth at high levels for as much time as possible,” says Roy Evan Strømskag, manager at the operational center. He believes digital success is about getting people, processes and technology to work smarter and better together, fulfilling the goals of the business. “We need to foster a culture of curiosity, where people ask different type of questions and are challenged in different ways than before.” 111 OUR STORIES Improved growth with big data Grieg Seafood is starting to see results from years of investments into digital infrastructure. In British Columbia, big data has helped reduce starvation days and improved fish health and welfare. Photos: Grieg Seafood BC 112 Grieg SeafoodAnnual report 2018Part 02 Profit & Innovation Our stories "Early detection of toxic algae’s allows us to put in place mitigating actions quickly and avoid mortality." LIAM PECK Environmental Monitoring Specialist Grieg Seafood British Columbia Along the coast of British Columbia, toxic algae blooms may suddenly enter inlets and cause spiking mortality rates on the farms. “Feeding the fish when there is harmful plankton in the water is very stressful for the salmon. In the worst cases it causes immediate mass mortality, and even when this doesn’t happen, we could see effects of a bloom months after it occurs from gill related issues,” says Liam Peck, Environmental Monitoring Specialist at Grieg Seafood British Columbia. MITIGATES PLANKTON DAMAGE There are hundreds of thousands of plankton species in BC waters. Only a few, however, are harmful to the fish. Although farmers are well trained and well versed in species recognition, the most harmful ones are often the most difficult to identify. “The default action of the farmers is to feed, but that should only be done when it is safe. In some cases, however, there may be uncer- tainty or apprehension about what may be in the water. As such, many feeding days may be lost simply because farmers don’t want to take a risk without a system to support their decision. These lost feed days impact growth negatively,” Peck continues. Grieg Seafood BC has collected data on harmful algae for years, and is now using a data platform and satellite images to find our whether plankton may be headed towards a site. “Our goal is to roll out a machine learning platform to help the farmers make decisions about whether plankton in the water are in fact harmful, and in turn to avoid unnecessary fasting days. In addition, early detection of toxic algae will allow us to put in place mitigating actions proactively instead of reactively to avoid mortality. The next step to predict harmful plankton occurrences in advance and give the farmers another tool to farm better. We are working on that now”, Peck says. MOBILE-APP MONITORING Feeding when oxygen levels are low is stressful for fish, and it has been difficult to detect such conditions in traditional farming. “Now we have installed oxygen sensors across almost all our farms, most of which have sensors in every pen. We are able to monitor oxygen levels real-time on an app on our computers and phones from wherever we are. Similarly to algae monitoring, this platform helps us initiate appropriate mitigating actions when oxygen levels drop, and to stop feeding only when there is actually a water situa- tion that require us to do so,” Peck continues. In the Esperanza area, where toxic algae blooms can be a challenge, the number of fasting days was reduced by 41 percent on Grieg Seafood’s farms in 2018. The growth rate improved with 7.2 percent. Mainly because of new, digital decision-making support. Grieg Seafood is now implementing the same monitoring system in Shetland. 113 We take part in research to develop the industry further FISH GLOBE We work with FishGLOBE, a company that has developed, built and is testing a new patented solution for closed aquaculture. The vision is to develop new cost-effective solutions that makes it possible for the aquaculture industry to expand. The business concept is to offer a solution to the salmon farmers that make farming more profitable, more sustainable and with improved fish welfare. 114 CO2 BIO We work with CO2Bio, a research project that will develop a sustai- nable, bio-based Omega-3 produ- ction based on the use of CO2 and algae. The purpose of CO2Bio AS is to develop a new and profitable business model based on CO2 already captured at Mongstad, a hub for Norwegian oil and gas industry. Grieg SeafoodAnnual report 2018Part 02 Profit & Innovation Research AQUA CLOUD The AquaCloud platform, launched by the Seafood Innovation Cluster, is a cloud-based- platform that aims to help fish health managers and researchers to improve the industry’s chal- lenges with sea lice. AquaCloud represents a new innovation platform that will bring together expertise from fish health managers, resear- chers and data scientist to give new insights from the massive amount of data generated by the industry every day. CTRL AQUA We work with Centre for Resear- ch-Based Innovation in Closed-Con- tainment Aquaculture to develop technological and biological innova- tions to make closed-containment aquaculture systems (CCS) a reliable and economically viable technology. The result will be used in strategic parts of the Atlantic salmon produ- ction cycle, contributing significantly to solving the challenges limiting the envisioned growth in aquaculture. BLUE FARM The concept, Blue Farm, is a large concrete flouter based on offshore and maritime engineering, drawing on expertise from the oil and gas industry in Rogaland.We have applied for development licenses in Norway together with Blue Farm AS and other partners to test the concept, which will enhance both sustaina- bility and production capacity. The application was initially rejected, but we have appealed the decision. 115 IBM WATSON We use IBM Watson to analyze the data that we are collecting from our operations. The aim is to learn about new, previously unknown connections between our salmon and the ecosys- tem around it. The Grieg Seafood shares We aim to deliver an attractive return to our shareholders and contribute to the correct pricing of our shares. To achieve this, we proactively share honest information about our operations. OUR PRINCIPLES Our ambition is to create shareholder value and deliver competitive returns relative to comparable investment alternatives. Our dividend should average 25 % - 35 % of the Group's net profit after tax adjusted for fair value appraisals. 116 Grieg SeafoodAnnual report 2018Part 02 Profit & Innovation The Grieg Seafood shares OUR SHARES AND SHAREHOLDERS Grieg Seafood was listed on the Oslo Stock Exchange on 21 June 2007 under the ticker GSF. We have only one class of shares, and all shares carry the same rights. At 31 December 2018 the Company had 110 433 576 shares outstanding at a nominal value of NOK 4.0 per share (excluding own shares). As of 31 December 2018, we had 5 123 shareholders, with our ten largest investors holding 69.6 % of our shares. Domestically based shareholders own the majority of the Company, with Per Grieg jr and his immediate family controlling 53.4 % of the outstanding shares as of 31 December 2018. A further 5.4 % is controlled by OM Holding AS, and 3.4 % by Folketrygdfondet as of year end 2018. Grieg Seafood ASA holds a total of 1 228 424 own shares as of 31 December 2018. For a detailed breakdown of our 20 largest share- holders and their movements, please refer to note 17 in the Group Accounts. Our shareholders reside in all parts of the world, with a clear concentration in Europe. Over the last five years Grieg Seafood has experienced a substantially increased interest from investors, and we have more than doubled the share of foreign shareholders since 2013. Apart from our majority shareholder, the Grieg family, based in Bergen Norway, there is a majority of foreign shareholders, split between the EU, the UK, and the USA. FIGURE GEOGRAPHICAL OWNERSHIP 2013 FIGURE GEOGRAPHICAL OWNERSHIP 2018 UK 2.2% EU 7.1% USA 2.1% OTHER 0.3% USA 6.6% UK 9.0% EU 10.6% OTHER 0.8% NORWAY 88.3% NORWAY 73.0% 117 Grieg Seafood Annual report 2018 THE RETURN ON OUR SHARES THE LIQUIDITY OF OUR SHARES From May 2016 and onward, the liquidity of our shares has incre- ased significantly compared to prior years. This development was triggered by Mowi ASA realizing a set of old forward contracts, acquiring nearly 29 million shares in Grieg Seafood ASA, and immediately selling them in the market. Following this release of shares into the open market, the Grieg Seafood share has ranked approximately 25th in terms of trading volume among the shares on the Oslo Stock Exchange from 2016 to 2018. In 2018 a total of 116 million shares were traded, with a median of 411 341 shares per trading day. Our ambition is to create shareholder value and deliver competi- tive returns relative to comparable investment alternatives. The return on our shares is a combination of dividend and share price appreciation. The Grieg Seafood share price increased by 42 % in 2018. The closing price at 31 December 2018 was NOK 102.30 compared to NOK 72.25 at year end 2017. Our dividend yield was 3.9 % in 2018, and adjusted for dividend of NOK 4.00 per share, the total return on our share was 46 % in 2018. By comparison, the Oslo Stock Exchange Total Return Index (OBX) and the Oslo Stock Exchange Seafood Index (OBSFX) produced a return of -0.5 % and 53 % respe- ctively. Over the past five years, the salmon farming industry has experi- enced a tremendous increase in profitability and valuation. Driven by high demand and increased prices, the Grieg Seafood share has yielded a return over the last five years of 367 % compared to 410 % for the OBSFX, and 48 % for the OBX. Since the release of shares following the exercise of forward contracts in 2016 (see below), the return of the Grieg Seafood share has substantially outperformed the Seafood Index. FIGURE FIVE YEAR RELATIVE SHARE PERFORMANCE VOLUME GSF OBSFX OBX 3 2.5 2 1.5 1 0.5 0 02.01.14 02.01.15 02.01.16 02.01.17 02.01.18 02.01.19 160 140 120 100 80 60 40 20 0 118 Part 02 Profit & Innovation The Grieg Seafood shares KEY FIGURES 2014 2015 2016 2017 2018 Number of shares at year-end (incl own shares) 111 662 000 111 662 000 111 662 000 111 662 000 111 662 000 Number of shares traded Number of shareholders Total value of shares traded per day (NOK million) Average number of shares traded per day Median number of shares traded per day Share price 31.12 (NOK) Average share price (NOK) Lowest closing price (NOK) Highest closing price (NOK) Price/Earnings ratio Price/Book ratio* Pay-out ratio (%)** Dividend yield (%)*** Return on Capital Employed (ROCE) 13 108 181 8 251 926 167 281 077 143 109 533 116 144 510 1 028 1.34 52 433 32 100 28.50 26.06 21.80 29.80 79.17 1.42 0 % 0.0 % 10 % 1 156 0.94 33 008 19 562 31.00 28.24 23.10 33.60 -114.81 1.53 139 % 1.6 % 1 % 4 390 31.64 661 190 317 820 81.70 52.69 26.70 84.45 11.38 2.81 -556 % 1.8 % 33 % 4 433 40.68 570 158 486 933 72.25 71.49 58.00 85.10 12.26 2.41 56 % 5.5 % 24 % 5 124 42.07 466 444 411 341 102.30 92.24 66.20 129.50 14.61 2.95 68 % 3.9 % 22 % * P/E is calculated as Profit after tax, excluding non-controlling interest and fair value adjustments, divided on total number of shares. **P/B is calculated as Profit after tax, excluding non-controlling interest and fair value adjustments, divided on equity to controlling interest. *** Pay-out ratio is calculated as the dividend paid out in a year divided by the earnings before fair value in the prior accounting year. DIVIDEND AND DIVIDEND POLICY INVESTOR RELATIONS We aim to provide our shareholders with a competitive return on invested capital through payment of dividends in addition to share price increases. The dividend payout should follow 25 % - 35 % of the Group's net profit after tax, adjusted for the impact of fair value adjustments on biological assets. At the same time, the Group's net interest-bearing debt per kg harvested salmon should remain between NOK 15 and 20. Dividends declared and paid may be adjusted to satisfy the targeted debt level. For the fiscal year 2017, NOK 4 was paid out per share, correspon- ding to a pay-out ratio of 68 % on the 2017 profit after tax. The high pay-out ratio reflects a sound financial position and strong financial performance. In June 2019, the Annual General Meeting will decide the dividend for the fiscal year 2018. For more information about key figures and trading statistics, please visit the Oslo Stock Exchange's web page www.oslobors.no – Grieg Seafood (GSF). Grieg Seafood provides information to, and communicates with, the capital market participants, including shareholders, potential investors, analysts, portfolio managers, investment banks, and others that are interested in our share. Investor relations activities are primarily aimed at giving the market a correct picture of our activities and future prospects. In connection with the release of our quarterly financial results, we arrange presentations to contribute to greater understanding of our operations. In addition, we hold meetings with existing and potential investors. In 2018, we held our first Capital Markets Update, where we presented our Company’s goals, strategy, operations, financial developments and outlook. Investors, analysts, media and other stakeholders were invited. For more information and dates of our Annual General Meeting and quarterly presentations in 2019 see details on our web site www.griegseafood.com 119 Analytical information and alternative performance measures Our ambition is to be open and transparent towards all stakeholders. That is the only way we can earn their trust. Through sharing of honest and relevant information about our operations and the salmon farming industry, we aim to contribute to an improved understanding and correct pricing of our shares. 120 Grieg SeafoodAnnual report 2018Part 02 Profit & Innovation Analytical information VALUE CREATION VALUE DRIVERS Creating shareholder value is a prerequisite for company growth and survival. Return on Capital Employed (ROCE) is our ultimate financial performance indicator. We also believe there is an inter- dependency between sustainability and financial results. We need good financial results to develop our operations sustainably, but also sustainable operations to safeguard our long-term financial results and performance. This lays the foundation for our strategy – to create stakeholder value through sustainable production of Atlantic salmon at the lowest possible cost. With ROCE as the starting point, we break down our performance based on the profitability of our product (EBIT per kg before fair value adjustment) and the development in invested capital (fixed assets and working capital). Our EBIT performance is driven by a multitude of operational factors affecting revenue and costs. Producing salmon takes two to three years from egg to harvest, and the costs of a harvested fish is accumulated through the produ- ction period, and do not impact the profit and loss statement (apart from fair value adjustment) before the fish is harvested. Although EBIT per kg (before fair value adjustment) is an important external benchmark measure for our regions, our operational focus is not on the cost of the harvested fish, but on the development of the cost drivers affecting our production volume and cost of salmon to be harvested in the future. VALUE CREATION IN GRIEG SEAFOOD BREEDING SMOLT PRODUCTION FARMING PRIMARY PROCESSING SALES AND DISTRIBUTION Breeding actitity in Erfjord in Rogaland Current annual capacity of 4 500 tonnes smolt, to be increased to 8 500 tonnes by 2020 63 grow-out sites 75 000 tonnes GWT harvested in 2018, we target 100 000 tonnes in 2020 60% ownership in sales company Ocean Quality 121 FIGURE ROCE AND EBIT/KG 40% 30% 20% 10% 0% 35 25 20 15 10 5 0 2014 2015 2016 2017 2018 EBIT BEFORE FAIR VALUE/KG RETURN ON CAPITAL EMPLOYED (ROCE) FIGURE ACHIEVED PRICE FOR GSF 75 65 55 45 35 25 2014 2015 2016 2017 2018 FISHPOOL GSF SHETLAND GSF FINNMARK GSF BRITISH COLUMBIA GSF ROGALAND FIGURE REVENUE DRIVERS REGIONS IN 2018 Survival rate (GSI) Superior quality share ROGALAND FINNMARK SHETLAND BRITISH COLUMBIA 92 % 73 % 96 % 85 % 83 % 94 % 88 % 84 % 122 Grieg SeafoodAnnual report 2018Part 02 Profit & Innovation Analytical information Revenue drivers HARVEST VOLUME How much salmon we harvest depends on the number of smolt put to sea, and how well that fish performs in terms of growth and survival. In line with our growth ambitions, we transferred approximately 26 million smolt to sea in 2018. Fish growth and survival rates can be affected by innumerable factors in sea, but certain factors are of key importance: • • • • Seawater temperatures Seawater conditions Diseases and health issues Sea lice We strive to produce the highest quality salmon at a competitive price, overcoming the challenge of the factors above. By effectively preventing and combatting sea lice and health issues, and understanding our salmon’s behavior, we work continuously to improve survival and growth rates. Our total production volumes are limited by our farming licenses, which contain restrictions (Maximum Allowed Biomass, MAB) on the amount of live biomass we can have in sea at any time. In Shetland and British Columbia, the limitations are only imposed on a per site basis, while the Norwegian system also introduces limitations on defined areas and per company. Effective utilization of farming licenses, equipment, and personnel requires sophisticated and detailed planning of stocking and harvest across sites and regions. QUALITY Diseases, winter sores and other biological issues may affect the quality of our product. Salmon quality categories are relatively standardized. We categorize the quality of our salmon as superior, ordinary or production grade. "Superior" quality salmon has a positive overall impression with good meat quality and no exterior damage or faults. Downgraded salmon has from minor to significant external and/or internal faults or damage and is there- fore lower priced. In Norway, downgraded salmon is priced according to standard rates of deductions. For salmon classified as "ordinary", the standard deduction is NOK 1.50-2.00 per kg GWT. For salmon classified as "production grade", the deduction is NOK 5.00 -15.00 per kg GWT, depending on the extent of faults and damages. In other countries, the price deductions compared to "superior" salmon are less standardized, but the same principles apply. As other companies in the salmon farming industry may use other quality categories and criterias for grading their salmon, the quality share may not be comparable between the companies. PRICES Our main product, whole gutted salmon, is largely traded as a commodity, and the prices achieved largely reflect the general market price. Our achieved prices will, to some extent, deviate from the market price, based on the quality, sales contracts, and our ability to place our salmon effectively in the market. Our ambition is to sell our salmon at or above market prices, and we measure our relative price achievement as achieved price divided by the relevant reference price. There are several reference prices for salmon available. In Norway, Fish Pool ASA provides historic price information as well as future salmon derivative prices FCA Oslo. In the US, Urner Barry provides reference prices for North American salmon in Seattle, and Chilean salmon in Miami. Market prices are correlated across regions, but significant short-term variations between markets are not uncommon. 123 The cost of inputs of producing a live salmon from roe to harvest is the main portion of total costs in our operations. In addition, the cost of harvesting and processing our salmon, as well as general administration, make up our total operational cost. We track our performance, both internally and externally, through the cost of harvested salmon per kg. Most important is tracking the cost drivers influencing the cost of salmon to be harvested in the future, namely growth and survival. SALMON SURVIVAL A vast number of factors can affect salmon survival rates, for example diseases, algal blooms, water conditions, predation, and sea lice treatment. In recent years, approximately one out of five of the smolt stocked have been lost during the seawater growth phase throug- hout the industry. The number of fish lost per generation varies immensely across locations and regions. For salmon generations fully harvested in 2018, our survival rates showed wide variations between regions. Grieg Seafood Finnmark produced a survival rate as high as 96 % (calculated according to GSI definition), with the total survival rate in Grieg Seafood being 91 % in 2018. Accounting wise, we expense mortality exceeding a threshold level, deemed to be extraordinary, either by month or for the generation to date. Costs associated with "normal" mortality is kept in the book value of the remaining inventory, contributing to an increased cost when the fish is harvested and sold. SALMON GROWTH Our profitability is influenced by how quickly the salmon grows, and how efficient feed is converted into fish. Water temperatures, biological conditions, farming practices, and fish survival are key drivers for salmon growth. Higher seawater temperatures increase growth, but also increase biological risks in the form of diseases and algal blooms. This may again result in lost feeding days, lower growth and reduced survival. Through introduction of improved sensor technology, use of advanced image analysis and other technologies, we continuously improve at making better-informed decisions concerning feeding and prote- ctive measures. Efficient conversion of feed is crucial to achieve our future cost targets. Feed accounts for approximately 40 % of our total cost per kg harvested fish. Strong and healthy fish, combined with high feed quality and good feeding practices, is key in achieving low production costs. We measure our farming performance through feed conversion rates (amount of fish feed used to produce one kg of live salmon) and relative growth indexes (achieved growth compared to own and feed supplier expectations). Salmon growth, survival rates, and in turn EFCR (economic feed conversion rate), are strongly connected to fish health, disease, and sea lice. Treatments, starvation, and reduced appetite impact growth negatively, and reduce harvest volumes and increase cost per kg harvested fish. COST OF HARVESTED SALMON Our cost base consists mainly of feed, smolt, salaries, treatments, administration, well boats, harvesting costs, and depreciation. In recent years the industry has faced acute challen- ges with sea lice and diseases. This has caused an increase in costs both related to direct treatment, and in increased investments in equipment and technologies. This development has had a noticeable effect on the breakdown of the cost factors in the industry. In terms of total production costs per kg however, the reduction in harvested volumes, either due to lower survival rates, or lowered average harvest sizes, has had a significantly larger impact than the direct costs. As production costs per kg has increased the recent years, the directly variable cost of feed has become a smaller part of the total incurred costs per kg produced salmon. At the same time, other costs such as salaries, health costs, and maintenance, have become a larger share of the total. Cost drivers 124 Grieg SeafoodAnnual report 2018 Part 02 Profit & Innovation Analytical information Over the past years we have seen an increase in total costs across all our farming regions. In addition to an increase in health costs related to disease and sea lice treatments, the smolt cost and depreciation have increased due to expansion of our smolt facilities and various technological equipment. In Shetland we have experienced issues of reduced mortality, low harvest volume and in turn high costs per kg. Excluding Shetland our cost per kg of harve- sted salmon was reduced from 2017 to 2018, and we see a positive trend going into 2019. In Norway, Grieg Seafood has reduced the gap in production costs to the other large producers and are on track to the ambition of producing at an industry average of costs by 2020. FIGURE COST OF HARVESTED FISH NOK PER KG 40 36 32 28 24 20 2014 2015 2016 2017 2018 GRIEG SEAFOOD GROUP FIGURE PRODUCTION COST 2016-2018 32.6% 2018 2017 2016 43% 14.9% 4.3% 5.2% FEED COST ADMIN SMOLT OTHER DEPRECIATION Cost capitalized to inventory Excl harvesting cost FIGURE ECONOMIC FEED CONVERSION GRIEG SEAFOOD GROUP BRITISH COLUMBIA FINNMARK ROGALAND SHETLAND 1.8 1.6 1.4 1.2 1.0 2014 2015 2016 2017 2018 125 KEY PERFORMANCE INDICATORS AND ALTERNATIVE PERFORMANCE MEASURES (APM) We believe that the figures in our financial statements only partially reflect the underlying performance of our operations. We therefore continuously work to develop key operational performance indicators and alternative performance measures that we believe better describe our performance. The APMs listed below have been consistently applied over time with one exception: the calculation of net interest-bearing debt for covenant purposes. From the first quarter of 2016, we removed Bremnes Fryseri AS' (non-controlling interest) share of bank in Ocean Quality AS from the calculation. APM DEFINITION AND CALCULATION REASON FOR APPLYING APM EBIT = EBIT before fair value adjustment of biological assets Operating profit incl. amortization and depreciation excl. fair value adjustment of biological assets. Unless otherwise specified, EBIT before fair value adjustment of biological assets is shortened to EBIT (earnings before inte- rest and taxes). This also applies to all key figures where EBIT is a component, inclu- ding: EBIT before fair value adjustment provides a more informative result as it does not consider future gains or losses on fish not yet sold. The fair value adjustment has a non-operational nature and can affect the comparability of our performance from period to period. EBIT before fair value adjustment is gene- rally considered the industry measure for profitability. EBIT-margin (%) EBIT/ kg GWT ROCE Operating profit before amortization and depreciation excl. fair value adjustment of biological assets. Unless otherwise specified, EBITDA before fair value adjustment of biological assets is shortened to EBITDA. This also applies to all key figures where EBITDA is a component. including: EBITDA-margin (%) NIBD/EBITDA The equity ratio is calculated both with and without consolidation of Ocean Quality Group.. The bank syndicate equity covenant definition is exclusive Ocean Quality, solely considering Grieg Seafood companies both with regards to equity and total liabilities. EBITDA before fair value adjustment provi- des a more informative result as it does not consider future gains or losses on fish not yet sold. The fair value adjustment has a non-operational nature and can affect the comparability of our performance from period to period. The equity ratio is applied to measure the solidity according to the Group's covenant requirements. EBITDA = EBITDA before fair value adjustment of biological assets EQUITY RATIO EXCLUDING OCEAN QUALITY 126 Grieg SeafoodAnnual report 2018 Part 02 Profit & Innovation Analytical information APM NIBD ROCE DEFINITION AND CALCULATION REASON FOR APPLYING APM NIBD/EBITDA is a measure of solidity and one of the covenants in our bank agree- ment. When calculating NIBD/EBITDA NIBD is calculated according to method 2 and EBITDA is before fair value adjustment of biological assets and consolidation of Ocean Quality Group. ROCE measures the return on invested capital. Fair value adjustment of biological assets is extracted as this reflects future gains or losses on fish not yet sold which can affect the comparability of performance from period to period. Net interest-bearing debt (NIBD) compri- ses long-term and current debt to financial institutions after deducting cash and cash equivalents. NIBD is calculated in two ways: 1) For external reporting purpose: including all long-term and current debt to credit institutions excl. factoring debt. 2) For covenant calculation as required by the bank syndicate: as in method 1 but cash and cash equivalents are reduced with an amount corresponding to Bremnes Fryseri AS’ 40% share of Ocean Quality AS’ bank deposits. NIBD calculated according to method 2 above is used for calculation of: NIBD/EBITDA Please refer to calculation in note 10. Return on capital employed is calculated using values before fair value adjustment of biological assets. The ROCE is calculated as follows: EBIT before fair value adjustment of biolo- gical assets divided by average annual NIBD plus average annual equity before fair value adjustment of biological assets. The average annual values for NIBD and equity are calculated as Opening balance plus Ending balance divided by 2. NIBD is excluding Ocean Quality (refer to method 2 under NIBD above). EPS Adjusted for fair value of biological assets Adj EPS (Adjusted earnings per share) is calculated as net profit after taxes minus non-controlling interests plus/minus fair value adjustment of biological assets net of tax effects divided by the number of shares. We extract the fair value adjustment of biolo- gical assets to avoid future gains or losses on fish not yet sold due to its non-operati- onal nature. Adjusted earnings per share is used to calculate the dividend payout ratio (dividend paid per share relative to adjusted earnings per share). 127 ROOTED IN PEOPLE Every single day, whether it is sunny, stormy or freezing cold, our fantastic employees are out there working hard in the hatcheries, on the farms or at the harvesting plants. Their passion and dedication are driving Grieg Seafood forward. 128 Grieg SeafoodAnnual report 2018Part 02 People Intro 129 Creating attractive jobs To reach our goals and to solve our challenges, we need the best people regardless of gender or background. A good work environment is key to attract and retain the best talents. OUR PRINCIPLES Our people are our DNA and essential to the successful delivery of our strategy. A good working environment creates attractive jobs. Our target is to attract the best skills, and to be the preferred employer, regardless of industry. We embrace diversity and employ the most competent, regardless of where people come from. We have a fair and transparent recruitment process. Our employees have the right to be organized. We live by our values – Open, Ambitious, and Caring. 130 Grieg SeafoodAnnual report 2018 Part 02 People Creating attractive jobs HOW WE WORK TO IMPROVE • Through the use of new technology and our digital efforts within Precision Farming, we aim to stand out from the crowd and offer exciting positions. Sensor technology, big data, and analy- tics demands further development and training of our employees, and will also attract people with skills and background other than aquaculture. • By being more flexible and creative, we work to attract more female workers to balance the gender gap. We have a fair and transparent recruitment process and strive to have both female and male candidates in our final inter- views. We report on the SHE Index because we believe that transparency creates trust. • Our pay and benefits policies are based on a bi-annual survey to ensure that we always pay market price or above for all jobs. We have an employee share program and share our profit with our employees. All our employees are part of our bonus program. “THE PATH TOWARDS GENDER EQUALITY IN THE FISH FARMING INDUSTRY” A thesis written by four young female students revealed that the organizational conditions within Grieg Seafood are faci- litated to encourage women to reach managing positions, something which other companies in the industry ought to learn from. • We measure our employee satisfaction and working environment on a regular basis. In 2018, we conducted the Great Place to Work survey for the first time in Norway. We will continue to improve our achievements and will include all our global entities in our next survey. • We hold quarterly feedback meetings to discuss important initiatives with our union representa- tives to encourage good and constructive dialog. • We use our values, Open, Ambitious, and Caring, every day by challenging things that do not support our common culture. We believe that our employees build the culture and our Company. • We focus on internal communication and are proud to say that we were among the first in implementing Workplace by Facebook in our industry worldwide. Through Workplace, our common communication platform, all our employees have been given a voice and an oppor- tunity to participate actively in discussions, and to share knowledge and information across borders. 131 RESULTS FIGURE GREAT PLACE TO WORK Great Place to Work assesses and evaluates organizations and the practices that underpin workplace culture based on the experience of employees. Grieg Seafood received a score of 89 %. The average score of Norwegian companies was 76 %, the best score being 92 %. FIGURE THE SHE INDEX 2018 The SHE Index scores companies based on the gender balance in management teams on different levels, as well as the companies´ policies to improve female representation in management. In 2018, we came 12th on the SHE Index, climbing to the 8th place in February 2019. 89 percent SCORE FOR GRIEG SEAFOOD NORWAY 12th 8th 2018 RANKING 2019 RANKING 132 Grieg SeafoodAnnual report 2018Part 02 People Creating attractive jobs THREE IMPORTANT TASKS FOR MAKING CHANGES TOWARDS AN EQUAL WORKFORCE Bold leadership Top management have defined policies, strategies, goals and practices. Measuring equality targets openly A diverse leadership team that sets, shares and measures equality targets openly. An empowering environment One that trusts employees, respects individuals and offers equal opportunities. 01. 02. 03. 133 Keeping our employees safe Accidents can be prevented by working on procedures, culture, or by improving equipment quality. We never compromise on health and safety. OUR PRINCIPLES Our mission is to provide a safe work place, while ensuring compliance and minimizing future potential liabilities. We have a zero-tolerance philosophy for accidents. Health and safety are serious and important matters for Grieg Seafood, and this must be felt by our employ- ees every day. 134 Grieg SeafoodAnnual report 2018 Part 02 People Keeping our employees safe HOW WE WORK TO IMPROVE • We have systematic efforts to safeguard our employees´ health, safety and environment (HSE). • We have implemented a set of guidelines, proce- dures, and processes as important instruments to identify risk in an early phase. The aim is to prevent and manage work-related injuries, sick- ness, accidents, and fatalities. • Monitoring, reviewing, and revising procedures and policies is a continuous process to keep our employees safe. • We focus on a good culture of security, where our employees have a personal understanding of risk and consequences, by proactively involving all our managers and employees in our HSE work. • To ensure that all our employees understand and follow our Safety Management Principles, each and every one: 1. is encouraged to commit to take responsibility for their own personal safety in everything they do. 2. understands the importance of working for the safety of others. 3. needs to engage and communicate with collea- gues to support safe behavior and compliance. • We have introduced a safety excellence program, Brainsafe, in Grieg Seafood BC, which will be evaluated for global implementation. • An employee Health & Wellness program was launched in BC during the year, focusing on impro- ving our employees´ physical and mental health. The effect on the organization will be followed closely going forward. • Our HSE standard is based on our regions´ regu- lations and emphasis is placed on preventing injuries and diseases. This is how we work on a daily basis. In particular, we try to organize our work environment to be fit for both genders. • On a monthly basis, we monitor and review inci- dents and accidents together with our employees and union representatives. SAFETY MANAGEMENT PRINCIPLES All locations shall establish annual safety targets with action plans (what, who, when). All locations shall have high standards of housekeeping. All managers shall carry out safety walks (Walk - Observe - Communicate). All employees shall participate in safety meetings on a regular basis. The use of personal protective equipment and lite jackets shall be specified for employees, contractors, and visitors. A risk assessment with respect to safety shall be made for all jobs, equipment, and potenti- ally hazardous materials. All accidents and near-misses shall be repor- ted and investigated, to include root-cause analysis, and with the subsequent implemen- tation of corrective actions within reasonable time. Conduct annual audits of the systematic HSE work. All Regions shall have safety procedures, to help facilitate a safety focus throughout the organization. A program for systematic and regular safety training shall be in place. 135 RESULTS FATALATIES 0 Grieg Seafood Group had no fatalities in 2018. FIGURE NUMBER OF EMPLOYEES FEMALE MALE TOTAL ROGALAND FINNMARK SHETLAND BRITISH COLUMBIA ASA 0% 29 52 33 33 10 116 195 159 115 14 100% 145 247 192 148 24 756 The ratio between male and female employees are similar between the regions, while the management and support functions at Grieg Seafood ASA has the highest share of female employees. We report on the SHE Index to be transparent about our organization and to improve our gender balance. FIGURE TYPE OF WORKER PERMANENT TEMPORARY CONTRACTOR ROGALAND FINNMARK SHETLAND BRITISH COLOMBIA ASA 125 197 173 148 23 0% 20 4 50 19 1 100% 1 4 Temporary workers consists mainly of seasonal workers and apprenticeships. Most of our apprentices are offered a permanent position with us after the apprenticeship is over. Contractors are mainly used in Norway during peak periods of harvesting. 136 Grieg SeafoodAnnual report 2018Part 02 People Keeping our employees safe FIGURE ABSENCE RATE SHORT TERM LONG TERM 6.00% 3.08% 3.14% 1.51% 2.32% 1.73% 0.52% 0.80% 1.01% 0.12% ROGALAND FINNMARK SHETLAND BRITISH COLUMBIA ASA Main types of injuries are accidents related to being struck by objects, incidents when handling work equipment, slips, trips, and falls. The absence rate that has increased since 2017 are mainly caused by longterm absence. We also believe that we have a more accurate representation based on our new time capture system implemented in 2018. Shetland's short term absence rate has dropped compared to last year, as a result of the employees taking advantage of time off in lieu. FIGURE H1-FACTOR/LTIR REGIONS Rogaland Finnmark Shetland British Columbia ASA H1-FACTOR/LTIR ABSENCE RATE 2016 2017 2018 2016 2017 2018 9 13 10 72 0 11 24 13 16 0 24 18 24 38 0 3.42 % 6.10 % 2.67 % 1.58 % 0.30 % 3.17 % 4.40 % 3.15 % 0.88 % 1.00 % *H1.factor/LTIR: number of injuries leading to absence divided by the total number of work hours, multiplied by 1 000 000. 4.65 % 5.40 % 2.25 % 1.81 % 0.12 % 137 Transparency, integrity and anti-corruption Strong business integrity and ethical conduct is essential to become a world leader and preferred provider of sustainably produced salmon. OUR PRINCIPLES We have zero tolerance for bullying, unwanted sexual attention and harassment. We expect all employees to follow our Code of Business Conduct. We expect our suppliers to follow our Supplier Code of Conduct. We aim to be recognized by our stakeholders as a dependable, reliable, and competent partner. 138 Grieg SeafoodAnnual report 2018 Part 02 People Transparency, integrity and anti-corruption NON-DISCRIMINATION Always show respect for individuals as individuals and do not treat people as members of a class (race, ethnicity, national or other origin, disability, age, gender, sexual orientation, language, religion, or any other characteristic). Base employment decisions on job qualifications (e.g. educa- tion, prior experience) and merit. Positive discrimination is tolerated in order to achieve equality and diversity. Provide a work environment free from harassment and bullying. Consult with higher-level management, if a conflict arises between these provisions and the laws, customs or practices of a particular area. CARE FOR PEOPLE - FAIR EMPLOYMENT All activities shall be conducted with respect for individuals as individuals and without discrimination. We do not tolerate any form of forced labor and are committed to the abolition of child labor. SEXUAL HARASSMENT All our employees have the right to be treated with dignity and respect. Sexual harassment in the workplace will not be permitted or accepted. Sexual harassment may include unwelcome physical, verbal or non-verbal conduct, but may appear in other forms as well. Definition of sexual harassment Sexual harassment is unwanted conduct of a sexual nature. The unwanted nature of sexual harassment distinguishes it from behavior that is welcome and mutual. 139 HOW WE WORK TO IMPROVE • We implemented new online ethical guidelines in 2018. All our employees are required to complete our Code of Business Conduct program, ensuring that they are familiar with our ethical standards, applicable laws, and regulations. • We pay special attention to the regulations pertai- ning to our industry in addition to anti-corrup- tion regulations, competition law, and workers’ rights, as we believe these areas are of critical importance to our operations. • Our Code of Business Conduct and the culture we have built start from the top - with our Board of Directors and our owners. We have built a culture of zero tolerance for bullying, unwanted sexual attention, and harassment which we are proud of, and we aim to keep it this way. • We comply with internal and external requ- irements for integrity and ethical business practices. We maintain our whistleblower proce- dure through an external service provider, EY. Our whistleblower channel is available to all employees at the Workplace and through our intranet. • We have implemented a Supplier Code of Conduct. We will not work or do business with anyone that does not comply to a complete set of employee rights in accordance with international and national conventions. Decent work is a prere- quisite for sustainable development, and we work systematically to avoid social dumping associa- ted with our production, including our partners. • We define the requirements and conditions for our suppliers and partners to ensure that all hired personnel receive proper training, compe- titive wages, and good working conditions as if they were employed in Grieg Seafood. • Integrity is hard to develop, which is why we have worked close with our employees to create a common understating of what it means for us. With integrity, we do not just mean compliance with laws and regulations, but also a continuous awareness of the effect of our strategies, activi- ties, and results on our surroundings and stake- holders. • We strive to maintain good dialogue both inter- nally and externally to ensure that our choices and decisions are well-founded and understood by all our employees and other stakeholders. • We lead by example. Group members and local management are encouraged not to take on ownership or board positions in companies that Grieg Seafood has commercial relations or competes with. All relations that may involve conflict of interest are reported to ensure that business decisions are made by impartial staff members. 140 Grieg SeafoodAnnual report 2018Part 02 People Transparency, integrity and anti-corruption RESULTS 100 percent 1 0 0 EMPLOYEES WHO HAS COMPLETED OUR CODE OF CONDUCT PROGRAM INCIDENT OF NON-COMPLIANCE NO FINES PAID DURING THE YEAR HARASSMENT INCIDENTS NON-COMPLIANCE: In January 2018, Ocean Quality AS was suspended from exporting Norwegian salmon to China because incorrect shipment documentation had been provided to the Norwegian Food Safety Authorities. Individuals in Ocean Quality had violated internal guidelines and deliberately re-used earlier declarations. A complete review of internal routines was performed, new routines put in place and two employees had to leave their positions. The suspension from the Chinese market was lifted in October 2018. FINES PAID: Salmon farming is a highly regulated industry and all companies must act in accordance with local laws and regulations. During 2018, Grieg Seafood has no cases of non-compliances resulting in fines. 141 Data security and privacy Protection of privacy and personal data is a human right. We protect the information we have been trusted with. OUR PRINCIPLES HOW WE WORK TO IMPROVE • The introduction of the General Data Protection Regulation (GDPR) is not a project with a start and an end – it is an ongoing process that impacts our way of handling personal data. • We have developed policies and guidelines for data security and privacy that apply to all regions according to the GDPR standard. The regulation gives all our employees more control of their own personal data and ensures that the information is protected. We take our responsibility for protecting the infor- mation we have been trusted with by our employees seriously and handle it with respect. OUR EMPLOYEES' RIGHT Declarations of Consent Right to access personal information Right to erase personal information Right to transmit information to new employer Right to be informed Right to correct erroneous information Right to limited processing of information Right to oppose processing of information Right to breach notification 142 Grieg SeafoodAnnual report 2018Part 02 People Data security and privacy 143 OUR STORIES Empowering our colleagues creates more engagement Behind the 2018 results are more than 700 hardworking and dedicated employees, in all our four regions. Grieg Seafood Shetland has used the Scandinavian leadership model to get its people to do their best for the business. Photos: Grieg Seafood Shetland 144 Grieg SeafoodAnnual report 2018Part 02 People Our stories “Our people are our DNA. Without them onboard, we will never be able to achieve any targets or strategies” KATHLEEN MATHISEN Chief Human Resources Officer Grieg Seafood “Our people are our DNA. Without them onboard, we will never be able to achieve any targets or strategies,” says Kathleen Mathisen, Chief Human Resources Officer at Grieg Seafood. “It is important for the Company that we do not only increase employee competence in the various disciplines that we need, but also that they develop on a personal level,” she elaborates. Over the last years, Grieg Seafood Shetland has focused on develo- ping its managers on both a professional and personal level. The company is the result of mergers and acquisitions, of many small farmers on Shetland. Naturally, all of them brought their own culture and expectations into the company. That made collaboration and team work problematic. “It was challenging for people from all these different backgrounds to get invested in the common goals of the Company,” says Jon Walden, Fresh Water Production Manager in Grieg Seafood Shet- land. DELEGATING DECISION-MAKING Since 2013, the company has run annual AFF courses, a leaders- hip- and organizational development program, originating at the Norwegian School of Economics. “We identified improvement projects in the organization and have worked on developing managers through these projects,” says Henning Lampe-Olsen, senior consultant at the AFF program. He has been engaged in the courses, at Grieg Seafood Shetland from the beginning. The Company has run several rounds of the program, as new managers and employees have come along. “An important principle is to delegate decision-making as far down in the organization as possible. More employees get more responsi- bilities and are held to account. That makes more people engaged in the company goals and strategies,” Lampe-Olsen states. Jon Walden, who took part in the first round of the course, explains that delegation of decisions has freed up more time to follow-up management responsibilities properly. “It takes energy and time to manage people in a healthy way. Back in the days, I got this job on a short notice. I didn’t know how to manage people, and that was the case for many others in the company as well. The AFF course has provided us with management tools, which have improved our management ability significantly,” Walden says. “For example, we are now aware that as managers, everything we do sends a message. How we behave, what we say and what we do is important. We must act in a way that motivates our people. That has changed the Company culture,” he elaborates. APPLICABLE TO REAL WORKPLACE PROJECTS Working in groups, where people’s competences are acknowledged and where everybody is properly listened to, is another central part of the AFF program. “We were pushed out of our comfort zone and learned to get comfortable when speaking to groups. In my opinion, the success of the program was to allow us to practice speaking to our peers in a semi-formal setting,” says Niall O’Rourke, the Factory Manager at Shetland. Each year, several real improvement projects are identified and implemented, throughout the course. For instance, team leader positions in the factory, have been removed and replaced with a single factory floor supervisor, Health, Safety and Environment resources have been increased and a new induction programme is put in place. “The program enabled us to apply knowledge and practice to real workplace projects. The fact that the projects could be monito- red throughout the program was beneficial. It has provided the Company with a base for new projects and more importantly the experience to see it through,” O’Rourke says. 145 “The factory has made major savings since AFF and continues to use the principles from the program to form future projects.” put in place. WORK IN PROGRESS Employees in Grieg Seafood Shetland have surely noted the diffe- rence. “Before the first course started, the staff at the farms were asked what they thought about management. To say the least, we did not get a very good grade. At the end of the session, they repeated the survey, and the score we got increased significantly,” Walden explains. “Since then, we regularly refresh the course, and put new managers through it. We still have a way to go, but we keep improving. Good management will always be an essential work in progress.” 146 Grieg SeafoodAnnual report 2018Part 02 People Our stories 147 ROOTED IN LOCAL COMMUNITIES We are grateful to our local communities for giving us permission to farm salmon in their fjords. In return, we do not only do what we can to ensure local biodiversity and sustainable farming methods. We also contribute to vibrant local communities in the areas where we operate. 148 Grieg SeafoodAnnual report 2018Part 02 Local Communites Intro 149 Local value creation We contribute to our local communities in many ways. We create full-time, well-payed jobs in rural areas, support local businesses and sponsor recreational activities for children, youth and adults alike. OUR PRINCIPLES We use local suppliers as often as we can. We hire local apprentices and support aquaculture schools and training. We engage in local environmental projects related to our fish farming. We support sports and cultural activities in our local communities. Good relations and a good dialogue with our local communities is important to Grieg Seafood. 150 Grieg SeafoodAnnual report 2018Part 02 Local Communites Local value creation 151 Grieg Seafood Annual report 2018 Grieg Seafood Finnmark Grieg Seafood Finnmark supports 45 local sports teams, cultural initiatives or other activities for local children and youth. For example: BUL sports team Alta where the 2 000 members, mostly children, engage in sports activities like foot- ball, cross country skiing or handball. The Finnmark Race, Europe’s 1 200 km dog-sled race crossing the Finnmark plateau. 152 Part 02 Local Communites Local value creation 220 LOCAL EMPLOYEES Many belong to the Sami Indigenous Nation. 18 250NOK LOCAL PROCUREMENT OF GOODS AND SERVICES 11 NUMBER OF APPRENTICES ENGAGEMENTS IN LOCAL ENVIRONMENTAL PROJECTS 300 LOCAL SUPPLIERS 126MNOK FROM THE AQUACULTURE FUND to municipalities where GSF Finnmark operates. 1 70 ! COLLABORATION WITH NORDKAPP HIGH SCHOOL ABOUT A TEACHING LICENSE NUMBER OF FORMAL ENGAGEMENTS WITH THE LOCAL COMMUNITY Such as farm visits, participation at local confe- rences, dialogue meetings. CONTRIBUTIONS TO INFRASTRUCTURE PROJECTS AROUND THE FARMS For example, we will install fiber to the site Vedbotn, which will provide internet to the community around the site. The Alta Chess Club, which provides an opportunity for children and youth to learn and compete on the national level. Nordkapp Film Festival, where Grieg Seafood amongst other things has established a scholarship for youth who want to develop a film project. 153 Grieg Seafood Annual report 2018 Grieg Seafood Rogaland Grieg Seafood Rogaland supports five local sports teams, cultural initiatives or other activities for local children and youth. For example: 4H, an organization whose goal is to develop an active and socially committed youth with respect for nature and other people. The diving club Slettaa Dykkerklubb, a very active club in our area. They do a great job picking up garbage from the sea bed and assisting in rescue operations at sea. 154 Part 02 Local Communites Local value creation 160 LOCAL EMPLOYEES 6 446NOK LOCAL PROCUREMENT OF GOODS AND SERVICES 4 250 LOCAL SUPPLIERS 83MNOK NUMBER OF APPRENTICES ENGAGEMENTS IN LOCAL ENVIRONMENTAL PROJECTS FROM THE AQUACULTURE FUND to municipalities where GSF Rogaland operates. 1 13 ! COLLABORATION WITH STRAND HIGH SCHOOL ABOUT A TEACHING LICENSE NUMBER OF FORMAL ENGAGEMENTS WITH THE LOCAL COMMUNITY CONTRIBUTIONS TO INFRASTRUCTURE PROJECTS AROUND THE FARMS Such as farm visits, participation at local confe- rences, dialogue meetings. Grieg Seafood Roga- land attempts to participate in school and student projects when asked. For example, GSF Rogaland have established WFI antennas close to all their farms, which also benefits our neighbors. The old fishing boat called The Swan with a donation for maintenance and operation so that children and youngsters can learn about our coastal culture. The boat is also used for recreation, and is adapted for wheelchair users. CISV, an international youth exchange program. The goal is to promote cultural understanding and peace. 155 Grieg Seafood Annual report 2018 Grieg Seafood British Columbia Grieg Seafood BC supported 120 initiatives for education, health and well-being, indigenous peoples, environmental activities, arts and sports. For example: Support for Indigenous sports teams from remote coastal communities so that they and their families, grandparents and Elders can attend all-Indigenous soccer and basketball tournaments. Support to four coastal salmon enhancement orga- nizations committed to helping the return of wild salmon to British Columbia’s rivers and streams. Led by volunteers from nearby communities, the organi- zations are responsible for cleaning up streams which have been clogged with branches and operating small hatcheries which rear wild salmon smolts for release into the Pacific Ocean. 156 Part 02 Local Communites Local value creation 150 LOCAL EMPLOYEES 56 NUMBER OF FORMAL ENGAGEMENTS WITH THE LOCAL COMMUNITY Such as farm visits, participation at local conferences, dialogue meetings. 10% EMPLOYEES WITH INDIGENOUS BACKGROUND 13 ENGAGEMENTS IN LOCAL ENVIRONMENTAL PROJECTS Renovating an old church used by the Mowachaht Muchalaht First Nation and located on Nootka Island. The Land of Maquinna Cultural Society will build an interpretive centre to hold the Nation’s artifacts and records of its community’s history. Each November, male employees of Grieg Seafood BC let their beards grow for the month. They fundraise for support to the Movember Foundation which raises money for research into mens’ health. Grieg Seafood BC matched the donation. 157 Grieg Seafood Annual report 2018 Grieg Seafood Shetland Grieg Seafood Shetland support 23 local sports teams, cultu- ral activities or education related initiatives for local children and youth. For example: The Shetland Folk Festival, bringing folk musicians from all over the world to Shetland for a week of music. The 5 km fun run in Skye. 158 Part 02 Local Communites Local value creation 186 LOCAL EMPLOYEES 18 57.9MGPB LOCAL PROCUREMENT OF GOODS AND SERVICES 334 LOCAL SUPPLIERS 2 0.028GBP CONTRIBUTION PER KG SALMON HARVESTED to the Scottish Government NUMBER OF APPRENTICES ENGAGEMENTS IN LOCAL ENVIRONMENTAL PROJECTS ! CONTRIBUTIONS TO INFRASTRUCTURE PROJECTS AROUND THE FARMS For example, GSF Shetland has installed common use fuel tank in Dunvegan to assist all pier users, including local fishermen. A wild salmonid monitoring program with Skye and Wester Ross Fisheries Trust. The project funds a three year PhD looking into the factors which may affect the survival of the wild salmonids around Skye, including farmed and wild fish interactions. The Shetland Junior football team, including a girls team. 159 OUR STORIES Farming salmon with respect for the indigenous land and peoples Grieg Seafood operates many farms in British Columbia, but they are not owned by the Canadian Government. Photos: Grieg Seafood BC 160 Grieg SeafoodAnnual report 2018 Part 02 Local Communites Our stories “For millennia, sustainable harvest of the nature has given our people food, shelter and medicines.” CHIEF SMITH TOGETHER WITH MARILYN HUTCHINSON Director of Indigenous and Community Relations Grieg Seafood BC “Nature means everything to us,” says John Smith, Chief of the Tlowitsis Nation, counting 450 members today. They are one of 603 First Nations in Canada, one-third of which are located in British Columbia. “Grieg Seafood supports the implementation of UNDRIP. We view the new policy as an opportunity to form relationships with more nations, and to strengthen our existing relationships,” Marilyn Hutchinson says. “For millennia, the sustainable harvest of nature has given our people food, shelter and medicines,” Chief Smith explains. ESTABLISHES PARTNERSHIPS Three of Grieg Seafood’s farms, Noo-la, Wa-kwa and Tsa-ya, are located in the Clio Channel, which is a part of the Tlowitsis’ tradi- tional territory. While wild Pacific salmon has always been a vital part of the British Columbia’s working and Indigenous history, the first fish farms were established in the 1970s by the Norwegian salmon farming industry. The way it was done is not without controversy. “The industry got permission from the government, but none of the parties consulted with Indigenous communities. They did not think about that back then. For First Nations, the real owners of the territories, the lack of consultation was a breach of trust,” says Marilyn Hutchinson, Director of Indigenous and Community Rela- tions at Grieg Seafood British Columbia. RECOGNIZES UNDRIP Canada, like Norway and many other states with Indigenous peoples, pursued assimilation policies via a residential school system until 1969. Children were taken away from their families and Indigenous languages were banned. Today, the Government of Canada has a different attitude. In 2017, it announced that it will implement the United Nations Declaration on the Rights of Indigenous Peoples (UNDRIP), which Canada had only previously accepted on paper. In 2022, the Government of British Columbia will require a salmon farming company to have a federal permission licence and an agreement with the Nation in whose traditional territory the farms are located. The Tlowitsis Nation is one of the Nations that has a partnership with Grieg Seafood. “Working with the industries provides economic support and helps us improve the future for our communities. We have worked with the logging industry before, and now we are working with the salmon farming industry,” says Chief Smith. A partnership usually contains financial contributions, training programs, support for Indigenous initiatives and assistance for Indigenous aquaculture projects. Partnerships also provide assu- rance that Grieg Seafood does not employ practices that harm the wild salmon. “Wild Pacific salmon is at the very heart of Indigenous cultures here in British Columbia. It has not only been important as food, it also has social and ceremonial meaning. It is crucial that our farming practices allow wild salmon and farmed salmon to co-exist. Taking care of the wild salmon is a part of respecting First Nations,” explains Hutchinson. Grieg Seafood is involved in several wild salmon preservation projects in the region. The Nootka Sound Watershed Society is one such initiative, which brings Indigenous groups, authorities, eNGOs and industries together to protect, restore and enhance the wild salmon in the Nootka Sound and Esperanza Inlet areas. The Society engages in wild salmon hatchery programs in the Gold River and the Burman River, performs habitat status assessments on local watersheds and has constructed a side channel to the Conuma River to boost wild salmon spawning. “In the end, however, the most important action we can do is to ensure that our environmental footprint is as low as possible. We have worked a lot on that,” says Hutchinson. 161 WORKING IN ANCESTRAL TERRITORY At the Noo-la farm, Grieg Seafood employee Marvin Antoniuk is looking for sick fish in the pens, a part of the daily routine to ensure good fish welfare. He belongs to the Tlowitsis Nation and is now working in his ancestors’ traditional territory in the Clio Channel. Around 10 percent of Grieg Seafood’s employees in British Columbia are Indigenous persons. “My mother is buried not too far from here, and I can feel her presence all over the territory. This land is very dear to me. I enjoy working with the fish here, and I think we must continuously work to improve our practices,” Antoniuk says passionately. Today, the Tlowitsis people do not live on their traditional territory. On behalf of his community, Chief John Smith has bought 600 acres of land in Campbell River, a town on Vancouver Island close to the Tlowitsis territory. “It is time to rebuild the Tlowitsis community,” he says. “I want our people to be able to come home.” UNITED NATIONS DECLARATION ON THE RIGHTS OF INDIGENOUS PEOPLES (UNDRIP), ARTICLE 28 1. Indigenous peoples have the right to redress, by means that can include restitution or, when this is not possi- ble, just, fair and equitable compensation, for the lands, territories and resources which they have traditionally owned or otherwise occupied or used, and which have been confiscated, taken, occupied, used or damaged without their free, prior and informed consent. 2. Unless otherwise freely agreed upon by the peoples concerned, compensation shall take the form of lands, territories and resources equal in quality, size and legal status or of monetary compensation or other appropriate redress. 162 Grieg SeafoodAnnual report 2018 Part 02 Local Communites Our stories 163 OUR STORIES Keeping Shetland’s shores clean today, for a better tomorrow With 900 miles of coastline to protect, Grieg Seafood Shetland is committed to keeping the islands’ beaches clean, through the annual Voar Redd Up. Photos: Grieg Seafood Shetland 164 Grieg SeafoodAnnual report 2018Part 02 Local Communites Our stories “As users of the sea we are aware that a lot of debris on the beaches comes from the fisheries industries, including salmon farming.” GRANT CUMMING Managing Director Grieg Seafood Shetland REINFORCES GOOD PRACTICE By participating in the Voar Redd Up each year, Grieg Seafood’s employees get to see the impact of their operations which affects how they work each day on their farms. “As an industry we know we can have an impact on the amount of beach litter on our shores,” Cumming says. “If we don’t tidy up and secure equipment on our sites properly, it can quickly become flotsam and beach litter in a windy and exposed location like Shet- land.” “When we are cleaning beaches near our fish farms, it lets us see how effective we are at minimising impact on the environment, and this helps to reinforce good practise.” Working smarter and more responsibly is why Cumming and his Grieg Shetland team will continue to play a big part in the Voar Redd Up each year. It’s a good team-building event that strengthens community ties while making a difference on Shetland’s shores. "For thousands of years Shetlanders’ lives have been bound to the sea. Because of this, one of Grieg Seafood Shetland’s priorities is to protect the ocean and the shores that line it. Grieg Seafood Shetland began participating in the Voar Redd Up in 2016, which is the UK’s most successful community litter pick. Over 20 percent of Shetland’s population takes part each year. Grant Cumming, Managing Director of Grieg Seafood Shetland, says the event is a perfect fit for Grieg’s values and its employees. “As users of the sea we are aware that a lot of debris on the beaches comes from the fisheries industries, including salmon farming,” Cumming explains, “and therefore we believe we have a moral duty to be involved in helping in the clean up.” WORKING TOGETHER The Voar Redd Up is organized through the Shetland Amenity Trust, which Grieg Seafood works with not only for the clean up, but also for wildlife reporting. Roughly 70 Grieg Seafood employees participate in the Voar Redd Up each year alongside hundreds of community volunteers across regions such as Wadbister, Scalloway, Gonfirth, Setterness, and Whalsay. In two areas of Shetland, Grieg Seafood donates the use of their vessels to allow the retrieval of litter from beaches that are only accessible by boat. This gesture has gone a long way with some of the locals. “Working side-by-side with community volunteers has allowed us to build new relationships with individuals who are particularly concerned about the environment,” Cumming says. “We all have the same goal, which is clean oceans and beaches, and we take our responsibility to the environment seriously.” 165 166 Grieg SeafoodAnnual report 2018Part 03 Operational results Content PART 03 Operational results PRESENTATION OF THE BOARD BOARD OF DIRECTORS´ REPORT PRINCIPLES OF CORPORATE GOVERNANCE GSF GROUP ANNUAL ACCOUNTS GSF ASA ANNUAL ACCOUNTS AUDITOR´S REPORT AUDITOR´S SUSTAINABILITY STATEMENT 168-169 170-185 186-199 200-265 266-289 290-295 296-299 167 Grieg Seafood Annual report 2018 Presentation of the Board 168 Part 03 Operational results Presentation of the Board PER GRIEG JR. Chair (from 2009) Per Grieg jr has been actively involved in Grieg Seafood ASA since the foundation in 1992 and has played a major role in building the Grieg Seafood Group. He has established numerous companies within several sectors and has held several directorships. He is currently the CEO of Grieg Aqua. Grieg Jr. holds a master degree in marine technology, and in business and economics. Number of shares 31.12.2018: 58 961 996 (52.80%) WENCHE KJØLÅS Board member, Chair of the Audit Committee (from 2009) KARIN BING ORGLAND Board member, Member of the Audit Committee (from 2013) Wenche Kjølås has held several top posi- tions and directorships within a variety of industries. Past positions include CFO of Grieg Logistics and Kavli Holding AS, and board member of Cermaq ASA and Dof ASA. She is currently the CEO of Grieg Maturitas AS. Kjølås has a master in business and economics. Number of shares 31.12.2018: 7 000 (0.01%) Karin Bing Orgland has a long career with extensive experience from the finan- cial sector and is a professional board member. She has held different mana- gement positions within DnB, including group executives vice president corporate and personal banking. Current board positions include GIEK and Storebrand ASA. Orgland has a master in business and economics. Number of shares 31.12.2018: 0 ASBJØRN REINKIND Deputy Chair (from 2011) SOLVEIG M. R. NYGAARD Board member (from 2018) TORE HOLAND Board member (from 2018) Asbjørn Reinkind has extensive experi- ence from the food industry and branded products as well as from aquaculture. Previous positions include CEO of Denja, Toro and Rieber & Søn, and Hydro Seafood Group. Reinkind presently holds board positions in amongst others the Biomar Group and Grilstad AS. He has a master in business and economics, and further education from IMD and Insead. Number of shares 31.12.2018: 120 000 (0.11%) Solveig Nygaard has been working with fish health for 40 years and is a specialist in fish diseases. Nygaard has exten- sive experience from a variety of fish health projects, and various companies, including as CEO of FoMAS. Nygaard holds a degree in veterinary medicine, with additional education in business administration. Number of shares 31.12.2018: 0 Tore Holand has 30 years of experience from key positions in the aquaculture industry. Former positions include CEO of Midt-Norsk Havbruk and CFO of Sinka- Berg-Hansen and Arnøylaks. He has held numerous board positions in companies within salmon farming, and currently holds board position in amongst other Sisomar and Hydromerd. Holand holds a degree in fishery economics, catch and aquaculture. Number of shares 31.12.2018: 0 None of the board members have share options. For more details of the Board of Directors, please visit our website: https://www.griegseafood.no/grieg-seafood-asa/directors/ 169 Grieg Seafood Annual report 2018 Board of directors' report 170 Part 03 Operational results Board of directors' report GRIEG SEAFOOD'S VISION AND AMBITIONS The Grieg Seafood Group is one of the world's leading salmon farmers. The Group has licenses for seawater farming and land based smolt production in Finnmark and Rogaland in Norway, British Columbia in Canada, and Shetland in the UK. In 2018, the Group harvested a total of 75 000 tonnes Atlantic Salmon. The entire production is sold through the sales company Ocean Quality. The Group was established in 1992 and has over the years grown to become a leading indus- try player through continuous focus on business development. The Group's vision "Rooted in Nature – farming the ocean for a better future", describes how the Group intends to make a difference and what it aims to accomplish. It also encompasses the foundation for the Group's operational development – healthy ocean, sustainable food, profitable growth and innovation, good jobs for everyone, and local value creation. Short term, the Group aims to harvest 100 000 tonnes in 2020 with cost at or below industry average and is simultaneously building a platform for sustainable growth for the longer term. The ambition is built on four strategic focus areas: post-smolt initiatives, digitalization in salmon farming, biosecurity and fish welfare, in addition to continuous evaluations of expansion opportunities. HIGHLIGHTS 2018 • Earnings driven by highest harvest volume ever on continued strong prices. • Harvest volume of 75 000 tonnes as expected. • Paid dividends of NOK 4.00 per share due to good profitability during the past two years. • High financial flexibility due to strong solidity and liquidity. • Seawater production in Norway lower than normal due to low seawater temperatures. • Production on Shetland impacted by biological challenges throughout the year. • Harmful algae bloom in BC reducing survival and increasing cost. • New operations center opened in Rogaland to improve overall operational performance. • Smolt expansion projects in Finnmark and Rogaland completed. • Launched share saving program for employees. • Awarded A- by the Carbon Disclosure Project on actions related to climate change. 171 OPERATIONAL REVIEW AND SEGMENTS 2018 was a strong year for Grieg Seafood in which the expected harvest volume of 74 623 tonnes was reached, an increase of close to 20 % compared to 2017. This was achieved by maintaining a strict focus on sustainability and driving forward improvements to the farming operations. Improved utilization of seawater licenses through a higher and more stable biomass has been the most important factor to increase production and harvest volume. Tools such as oxygen sensors and digital assisted feeding are a vital part of our strategy and growth initia- tives. Better prediction and industrial monitoring of both feeding and biological development ensure a stable growth according to plan. 2018 started with a strong biomass situation for the industry, in general. However, the Norwegian winter turned out to be the coldest in years, which affected both growth and harvest weight, leading to losses on the spring-release. The spot price fluctuated from week to week throughout the year, while the contract prices were more stable. Contract prices were in general somewhat higher than spot prices during the year. The contract share was 34 % in 2018 in Norway. As a result of an efficient Ocean Quality sales organization, the Group was able to achieve prices above spot, even with a high share of spot sales. Access to equipment and measures to timely and effectively address biological challenges has increased costs recent years, and a proactive approach is therefore required to minimize the consequences. Grieg Seafood’s objective is to ensure sustainable growth in the years ahead by combining skilled and motivated people, new technology, and to increasingly farm salmon on nature’s terms. In the first half of 2018, seawater production in Norway was low due to Pancreas Disease (PD) and low seawater temperatures, while through the fall, biological conditions impro- ved, and production increased. Actions taken in 2017 to improve growth in BC have been successful, but BC was challenged with Harmful Algal Bloom (HAB) through the second and third quarter this year, which gave a lower seawater production. Also on Shetland, seawater growth has been low due to biological challenges related to sea lice and algae. The industry is facing increased biological challenges in general, with sea lice being the most prevalent cause. This has made it difficult to increase production and harvest in the UK in recent years. Smolt production was good during the year. The Group continues to follow its growth strategy and transferred 26 million smolt to sea during 2018, which was the same as 2017. Good access to feed raw materials and a strong NOK/USD contributed to a stable feed price throughout 2018. Feed prices are sensitive to marine and vegetable raw material prices, seasonal variation, fish catch, and production. ROGALAND Harvest volume in Rogaland in 2018 was 16 293 tonnes, in line with the production plan and down 10 % compared to 2017. Sales revenues amounted to NOK 959.6 million, compared to NOK 1 150.2 million in 2017. The reduction in revenues is mainly explained by lower harvest volumes. In addition, low quality and reduced weight on harvested volumes due to 172 Grieg SeafoodAnnual report 2018Part 03 Operational results Board of directors' report PD resulted in lower prices achieved. EBIT before fair value adjustment of biological assets for the year was NOK 219.6, or NOK 13.48 per kg. Comparable figures for 2017 were NOK 393.1 million and NOK 21.70 per kg. Seawater production in the beginning of the year was influenced by low seawater tempe- ratures, in addition to challenges related to PD. However, the PD situation has improved, and towards the end of the year two of 13 sites had confirmed PD, compared to seven of 12 sites at the end of 2017. This is expected to contribute to improve harvest weight and quality going forward. Escalating treatment costs and preventive measures to mitigate biological challenges have contributed to increased harvest cost. Grieg Seafood has over time invested in increased capacity of non-chemical treatments, and is well equipped and prepared to handle possible incidents going forward. Grieg Seafood Rogaland did not carry out any sea lice treatment between July and November 2018. The biological performance has improved, the utilization of the MAB (maximum allowed biomass) has increased and the average survival rate in sea (calculated according to the GSI definition) was 92 %, slightly below target of 93 %. Larger smolt is an important part of the production strategy and will secure growth and improve biosecurity. Shorter time in the sea reduces fish exposure to biological issues such as sea lice and PD. The ambition is to reduce production time in the sea from 18 to 12 months, by increasing average smolt size to 500 grams by 2020. Through the new smolt facility, Tytlandsvik Aqua, Grieg Seafood will increase its smolt capacity with 1 500 tonnes by 2020. Grieg Seafood Rogaland expects to receive 1 000 tonnes of smolt from this facility in 2019. The digitalization project is going forward, and in September the new integrated operations center was opened. The project involves utilization of real-time sensor data for decision support. Centralizing tasks, including feeding and camera surveillance, also frees up time for employees to focus on fish welfare. Full coverage of all sites in Rogaland is expected by the end of 2019. FINNMARK Harvest volume in Finnmark in 2018 was 29 774 tonnes, above expectations and up 30 % from 2017. Sales revenue for the year was NOK 1 671.3 million compared to NOK 1 265.2 million in 2017. EBIT before fair value adjustments ended at NOK 594.9 million, or NOK 19.98 per kg, compared to NOK 351.9 million and NOK 15.42 per kg, respectively, in 2017. Production and biological performance were strong, with a survival rate of 96 % (calculated according to the GSI definition). A majority of the harvest volume was skewed towards the second half of the year which was favorable considering the price development during the period. As for Rogaland, access to high quality smolt is key to ensure production growth and impro- ved biosecurity for Grieg Seafood Finnmark. The company has over time initiated several efforts to improve smolt quality, and towards the end of 2018, the expansion of the smolt facility in Adamselv completed, increasing the smolt production capacity by 800 tonnes. The number of smolt released to sea has increased and is expected to yield higher growth and reduced costs going forward. The first batch of smolt is already in production, and we expect the capacity to be fully utilized in 2020. Operational flexibility is an important premise to achieve high utilization of the production capacity, and Grieg Seafood Finnmark works continuously towards local communities and 173 authorities to ensure access to new, good locations. During 2018, the company applied for four new locations in the region and received approval for two of these. In addition, Grieg Seafood Finnmark has entered into an agreement with the County Council of Finnmark to operate a restricted license of 780 tonnes. The Finnmark region provides beneficial biological conditions for salmon farming. Seawater temperatures are favorable and interconnectivity between sites is low. However, focus on good fish welfare and safeguarding survival rates remains, and camera surveillance and sensor technology are utilized to continuously monitor the environment. Sea lice skirts and cleaner fish are the main measures utilized to prevent sea lice. However, despite somewhat higher treatments towards the end of the year, sea lice are not considered a significant biological challenge in Finnmark. BRITISH COLUMBIA Grieg Seafood British Columbia (BC) harvested 16 632 tonnes in 2018 compared to 9 600 tonnes in 2017. Harvest volume in 2018 was positively impacted by the strong biological performance in 2017, while the 2017 volume was impacted by limited biomass available due to low smolt stocking and losses from algal blooms in 2015/2016. Sales revenues for 2018 were NOK 1 075.3 million compared to NOK 580.3 million in 2017. EBIT before fair value adjustment of biological assets was NOK 290.9 million, or NOK 17.49 per kg, compared to NOK 120.2 million and NOK 12.50 per kg, respectively, in 2017. Biological performance was good during the first half of the year, with good production in sea and corresponding low costs. However, overall operational performance was impacted by incidents of HAB in the second and third quarter. Algal bloom is an inherent risk to salmon farming in British Columbia and Grieg Seafood has a relentless focus on this challenge to secure stable sea production. Grieg Seafood BC uses technology to monitor and analyze algae movements and oxygen levels, providing vital data for improved decision making. Use of aeration systems have improved survival rates during HAB incidents in addition to allowing for feeding in marginal situations. Combined with feeding hubs and advanced feeding systems, this contributes to optimized feeding. The survival rate during the year was 88 % (calculated according to the GSI definition), and combined with downgrades from HAB issues and early maturity during the second half of the year, cost per kg increased. This was partly offset by good price achievements on salmon with high average harvest weight. Smolt production in 2018 was stable and according to plan. Access to high quality smolt is key to improve biology and ensure sustainable growth, and the company is expanding its smolt capacity with the aim of being self-sufficient in terms of smolt deliveries by 2020. SHETLAND Harvest volume in Shetland in 2018 was 11 924 tonnes, compared to 12 056 tonnes in 2017. Volume was negatively impacted by incidents of gill diseases, sea lice, and algal blooms. Total revenues amounted to NOK 799.9 million, compared to NOK 745.9 in 2017. Despite gill issues, quality on harvested salmon was good, and supported by a GBP appreciation towards NOK, the price achievement was good. EBIT before fair value adjustment of biological assets for 2018 was NOK 33.8 million or NOK 2.83 per kg, compared to NOK 68.7 million and NOK 5.70, respectively, in 2017. 174 Grieg SeafoodAnnual report 2018Part 03 Operational results Board of directors' report The weaker result is due to biological challenges, where complex gill-related diseases resul- ted in high mortality, early harvest, size variations, and reduced quality of fish harvested. The survival rate for 2018 ended at 83 % (calculated according to the GSI definition). The aquaculture industry in Shetland and on the Isle of Skye has over time endured biologi- cal challenges and the farmers are now collaborating to mitigate these challenges. Entire farming areas now operate with a three-month fallowing period, and sea lice counting and treatment activities are coordinated between farmers. Grieg Seafood Shetland collabora- tes closely with the other fish farmers in the region to establish a long-term, stable, and sustainable marine biology. Grieg Seafood is further taking several actions to improve its situation. The company focuses its production on the best sites with the best biological control. Routines and systems similar to those in BC have been implemented for monitoring and mitigation of algae-related issues. The sea lice level remained high during the year. Use of aeration systems, fresh water treat- ments, sea lice skirts, and cleaner fish are all initiatives to improve biosecurity. Good smolt quality is essential for fish welfare, growth, and cost going forward. The smolt provided from the company’s own facility does not fulfill requirements and various initiatives to improve smolt quality is initiated. SALES – OCEAN QUALITY All Grieg Seafood’s salmon is sold through the sales company Ocean Quality (OQ). The company also sells fish from Bremnes Fryseri AS, including fresh, processed, and frozen salmon. Ocean Quality handles marketing, sales, and distribution. Through sales companies in Norway, the UK, and Canada, Ocean Quality sells the fish to Asia, the USA, and Canada, with Europe being the dominant market, representing 68 % of total sales in 2018. During its eight years of operation, Ocean Quality has established good customer relations and is therefore able to deliver solid profitability back to the salmon producers. Total sales volume in 2018 was 114 720 tonnes, compared to 105 501 tonnes in 2017. Overall demand for Atlantic Salmon remained strong in 2018, with demand for branded and certified high-quality products increasing, including the Grieg Seafood’s brands; Skuna Bay and Kvitsøy. During the year, Grieg Seafood achieved ASC certification at four sites in Finnmark, and is continuously working towards additional certifications. In January 2018, Ocean Quality Norway received a decision from the Norwegian Food Safety Authority to stop all export of Norwegian Salmon to China due to incorrect shipment docu- mentation. Grieg Seafood Group has zero tolerance for non-compliance to regulations, and new control routines were implemented. Exporting to China was resumed during the fall. 175 FINANCIAL REVIEW GROUP ACCOUNTS The consolidated financial statements are prepared in accordance with International Finan- cial Reporting Standards (IFRS). PROFIT AND LOSS Grieg Seafood’s 2018 harvest volumes were 74 623 tonnes, compared to 62 598 tonnes in 2017. The higher volumes combined with continued strong prices generated revenues of NOK 7 500.3 million, up from NOK 7 017.5 million in 2017. The higher harvest volume is a result of Grieg Seafood’s overall growth strategy and is mainly related to higher utilization of current production capacity in addition to improved biology and better fish health. The global supply of Atlantic Salmon has flattened, while underlying demand has strengthe- ned. This resulted in a shortage of salmon and high prices, a situation expected to persist. However, short term price fluctuations may occur, and to offset effects of possible fluctua- tions, Grieg Seafood has adopted a policy ensuring that some 20–50 % of all production in the coming years is hedged at fixed prices. In 2018, the share of fixed price contracts in Norway was 34 %. EBIT for the Group before fair value adjustment of biological assets ended at NOK 1 098.8 million in 2018, compared to NOK 904.4 million in 2017. EBIT per kg was NOK 14.72, compa- red to NOK 14.45 in 2017. EBIT per kg was positively affected by the increased harvest volume and high spot prices. However, PD, HAB and gill diseases had a negative impact during the year, both in terms of higher cost and lower price achievement. Total farming cost per kg for the Group was NOK 43.10, NOK 0.7 above targeted of NOK 42.40 for. This includes write-downs due to extraor- dinary mortality of NOK 2.78 per kg. Fair value adjustments of biological assets were positive by NOK 256.1 million during the year, and the EBIT after fair value adjustment came to NOK 1 354.9 million. In 2017, fair value adjustments of biological assets were NOK -91.5 million, and EBIT after fair value adjustment amounted to NOK 812.9 million. Net financial items were negatively affected by currency losses on loans and receivables during the period and came to NOK -78 million, bringing pre-tax profit to NOK 1 276.9 million. In 2017, net financial items were negative by NOK 14.5 million and pre-tax profit was NOK 798.5 million. Taxes for the year amounted to NOK -279.8 million, bringing the profit for the period to NOK 997.1 million. Taxes in 2017 was NOK -197.6 million and net profit ended at NOK 600.9 million. FINANCIAL POSITION The Group's recognized asset value as at 31 December 2018 was NOK 8 142.5 million, compared to NOK 7 152.6 million at the end of 2017. Goodwill amounted to NOK 109.0 million, while the value of licenses was NOK 1 121.6 million. 176 Grieg SeafoodAnnual report 2018Part 03 Operational results Board of directors' report The value of property, plant, and equipment amounted to NOK 2 292.9 million. Investment in non-current tangible assets are mainly related to expansions of the smolt capacity in Finnmark and Rogaland. In addition, the Group has made investments in digitalization, central feeding operations, and in capacity for handling of biological issues. The investment also includes capacity increase in Finnmark made possible by the “traffic light system”. Fair value adjustment of biological assets was positive due to higher expected sales prices than accrued production costs. The equity of the Group as at 31 December 2018 amounted to NOK 3 883.5 million, compared to NOK 3 347.9 million in 2017. The equity share at the end of the year was 48 %, compared to 47 % last year. FINANCING AND FUNDING The Group's net interest-bearing liabilities were NOK 2 236.3 million at year end 2018. The amount includes factoring liabilities of NOK 573.4 million. In 2017 the comparable figure was NOK 1 763.8 million, whereof factoring amounted to NOK 500.9 million. Net interest-bearing liabilities according to the bank covenants were NOK 1 689.5 million (NOK 1 283.6 million in 2017). The bank syndicate consists of Nordea and DNB. During the year, the Group's syndicate loan agreement was refinanced. Two term loans of NOK 600 million and EUR 60 million were established, in addition to a revolving credit facility of NOK 1 000 million and an overdraft facility of NOK 100 million. NOK 1 285 million of the former loan was fully repaid, and new loans and credit facility were established. At the end of the year, NOK 307.0 million of the revolver and overdraft facility was utilized. NOK 1 025.0 million was repaid in 2018. The new loan agreement also allows the Group to utilize up to NOK 600 million in leasing. The majority of the Group's new feed barges and operational equipment is financed by leasing. At the end of 2018, lease liabilities amounted to NOK 360.4 million. According to the loan covenants, the equity share is calculated excluding Ocean Quality, amounting to 53 %, compared to 52 % in 2017. CASH FLOW Net cash flow from operations increased from NOK 708.9 million in 2017 to NOK 819.8 million in 2018. The increase is mainly related to higher profit. The change in working capital is negative, mainly related to build up of biomass. Net cash flow from investment activities amounted to NOK 592.5 million, compared to NOK 546.7 million in 2017. Investment in non-current assets and intangible assets amounted to NOK 733.0 million, where of NOK 169.2 was financed by leasing. Last year, the investment was NOK 552.8 million, where of NOK 9.6 million was financed by leasing. In line with the growth strategy, the Group has invested substantially in smolt production, biosecurity, and digitalization. Net cash flow from financing was NOK -360.6 million, compared to NOK -393.4 million in 2017. As mentioned above, utilization of the credit facility increased in 2018. The increased utilization is related to build-up of biomass and investments. Dividends of NOK 466.5 million were paid in 2018, or NOK 4.00 per share, whereof NOK 24.8 million is from Ocean Quality to non-controlling interests. Net change in cash and cash equivalents was NOK -133.2 million. Available cash at 31 December 2018 was NOK 137.9 million. 177 GRIEG SEAFOOD ASA PROFIT FOR THE YEAR The parent Company’s financial statements are prepared according to Norwegian accounting principles (NGAAP). The parent Company recorded an operating loss of NOK -61.7 million in 2018, compared to NOK -44.7 million in 2017. The decrease is mainly due to higher cost from exercising options compared to 2017. In 2018, Grieg Seafood refinanced the syndicate loan into two currencies, NOK and EUR. The EU is the largest market, and the EUR loan would act as a hedge against currency fluctuation. By the end of the year, the NOK had depreciated against the EUR, providing a net unrealized currency loss of NOK 16.1 million. The Company provides loans to subsidiaries in foreign currency. The appreciation of the GBP and CAD towards NOK in 2018 resulted in a net loss of NOK 4.2 million compared to a currency gain of NOK 22.3 million in 2017. Accrued dividend from Ocean Quality in the amount of NOK 20.1 million (NOK 25.4 million in 2017) and Group contributions from subsidiaries in the amount of NOK 611.0 million (NOK 534.5 million in 2017), contributed to a positive financial result. Interest expenses from external financing have increased slightly in 2018. This is due to increased funding compared to 2017. The Group has been in compliance with covenants throughout the year, which has a positive effect on the interest margin. The equity ratio at year-end was 41 % , similar as last year. During the year, there have been two dividend payments of NOK 2.00 per share. Total payment for the year was NOK 441.7 million, or NOK 4.00 per share. The last payment was according to proxy approved on the AGM (Annual General Meeting) on 12 June 2018. The parent Company´s net cash flow from operations in 2018 was NOK -174.6 million, compared to NOK -120.3 million in 2017. Cash flow from investing activities was NOK 500.9 million (NOK 609.9 million). The decrease is due to increased deposits to subsidiaries in 2018. Net cash flow from financing activities was NOK -478.0 million (NOK -715.5 million). In 2018, dividends were paid while loans to subsidiaries were repaid. There was a net change in cash and cash equivalents of NOK -151.7 million. Available cash at 31 December 2018 was NOK 5.8 million. ACCOUNTING RESULTS AND ALLOCATIONS – GRIEG SEAFOOD ASA The aim of the Group is to offer competitive return on invested capital to the shareholders through a combination of dividends and share price appreciation. The Group´s dividend strategy is that the dividend over time should average 25-35 % of the Group's net profit after tax, adjusted for the impact of fair value adjustment of biological assets. At the same time, the Group’s net interest-bearing debt per kg harvested salmon should remain between NOK 15–20. Based on the good cash flow and strengthened balance, the Board proposes a dividend for the fiscal year 2018 at the same level as last year and 178 Grieg SeafoodAnnual report 2018Part 03 Operational results Board of directors' report with the same payout profile. The Board will recommend to the Annual General Meeting to approve a dividend of NOK 2.00 per share and at the same time seek approval for an autho- rization to pay out dividend based on the annual financial statements for 2018. The parent Company, Grieg Seafood ASA, recorded a profit for 2018 of NOK 415.4 million, which the Board proposes to the Annual General Meeting to allocate as follows: Provision for dividends Transfer to retained equity Total allocated NOK 220.9 million NOK 194.5 million NOK 415.4 million GOING CONCERN Forecasts based on conservative salmon prices indicate a positive and good cash flow going forward. Demand for salmon remains strong, and low supply and capacity growth is expected in Norway, the UK, and Chile. Accordingly, a strong market is likely in the time ahead. The trend towards higher consumption of fish is still strong in Europe, Asia, and the USA, which is expected to contribute to positive cash flow. The Group has more fish in sea at the end of 2018 than the prior year, which is a good starting point for increased harvest in 2019. This is also in line with Group strategy. Costs in 2018 were at the same level as prior years, mainly due to biological challenges, especially in Shetland and BC, as well as higher costs related to preventive measures. Continuous measures to improve operational efficiency have been and are implemented, which in turn will contribute to the lower cost of fish harvested. Strong cash flow both in 2017 and 2018 provides a good basis for down payment of debt. In 2018, the Group completed a refinancing to align the Group's financing with its growth ambitions. The Board is of the opinion that the financial statements give a true and fair presentation of the Group’s assets and liabilities, financial position, and financial results. Based on the above account of the Group’s results and financial position, and in accordance with the Norwegian Accounting Act, the Board confirms that the annual financial statements have been prepared on a going concern basis, and that the requirements for so doing are met. RISK AND RISK MANAGEMENT The group is exposed to risks in numerous areas, such as biological production, change in salmon prices, the risk of political trade barriers, as well as financial risk such as changes in interest rates, exchange rates, and liquidity. The Group’s internal controls and risk exposure are subject to continuous observation and improvement, and the task to reduce risk in different areas has a high priority. The mana- gement has established a framework for managing and eliminating most of the risk that can prevent the Group from attaining its goals. For further information see the risk management section and the principles of corporate governance in this Annual Report. 179 FINANCIAL RISK The Group operates within an industry characterized by high volatility, which entails greater financial risk. The financial risk is managed by a central unit at the Group’s head office. 2018 provided a good financial market for the aquaculture industry, with good access to liquidity in the market. The Group has renegotiated its syndicated bank loan agreement, which will secure the working capital needed to achieve stated growth targets. The agreement matures in five years. Financial and contractual hedging is a matter of constant consideration, in combi- nation with operational measures. The management draws up rolling liquidity forecasts extending over five years. These forecasts are based on conservative assumptions for salmon prices and form the basis for calculating liquidity requirements. This forecast also forms the basis for financing needs. At the end of 2018, the Group had NOK 793 million in available liquidity. The revolving credit is flexible, as it can be drawn upon within a month, or for a longer period, depending on the Group´s need for liquidity. CURRENCY RISK In converting the operating income and balance of foreign subsidiaries, the Group’s major currency exposure is to CAD and GBP. The strategy is to reduce the currency risk by funding the business in their local currencies. All long-term loans from the parent company to subsidiaries are in local currency. Such loans are regarded as a net investment, as they are not repayable to the parent company. The subsidiaries will always require long-term funding. The currency effect of the net investment is included in the consolidated statement of comprehensive income (OCI) for the Group. Income and currency risk have been transferred to the sales company, Ocean Quality. The production companies sell in local currencies to the sales company, which hedges its transa- ctions against currency fluctuations related to CAD/USD, EUR/NOK, GBP/EUR and USD/NOK and, if required, other currencies. At year-end, contracts are concluded until the first quarter of 2021. Long term foreign currency contracts are hedging instruments, where unrealized currency gain or losses is recognized through other comprehensive income (OCI) in the statement. The currency situa- tion is continuously assessed against the volatility of the currencies. The remaining net exposure is frequently monitored. INTEREST RATE RISK The Group is exposed to interest rate risk through its loan activities and to fluctuating inte- rest rate levels in connection with financing of its activities in the various regions. The Group's existing loans are based on floating rates, but separate fixed rate contracts have been entered into to reduce interest rate risk. It is the Group´s policy to have between 20-50 % of its interest-bearing debt hedged through interest rate swap agreements. A given proportion shall be at a floating rate, while consideration will be given to entering and exiting hedge contracts for the remainder. The interest rate swap agreement changes with the three months NIBOR. LIQUIDITY RISK In line with the Group's growth strategy, to harvest 100 000 tonnes in 2020 and ensure sustai- nable growth, the interest-bearing liabilities have has increased. The Group has invested substantial amounts during the year and built up biomass, as well as paid out dividend. The refinancing this year has made the Group financially equipped to carry out further invest- ments in increased smolt stocking and new locations for sea production. 180 Grieg SeafoodAnnual report 2018Part 03 Operational results Board of directors' report At year end, the Group had a good level of free liquidity. Ocean Quality has factoring agree- ments for its operations in Norway and UK, implying transfer of credit-insured receivables to the factoring company. This enables early settlement of trade receivables. The factoring agreement is a financial arrangement, as the factoring company does not take on credit risk. Management monitors the Group’s liquidity reserve, which comprises a loan facility and bank deposits, as well as cash equivalents based on expected cash flows. This is carried out at Group level in collaboration with the operating companies. The management and the Board seek to maintain a high equity ratio to be well positioned to meet financial and operational challenges. Considering the dynamic nature of the industry, the Group aims to maintain flexibility of funding. OPERATIONAL RISK The greatest operational risk is related to biological developments with regards to both the smolt and the aquaculture operations. Book value of live fish in the balance sheet at year end was NOK 3 195 million. To reduce risk, the Group focuses on production of Atlantic Salmon as its main product. Training of employees and establishing good internal routines to reduce operational risk is a priority. The aquaculture industry has experienced major issues with sea lice and algae in recent years. The Group collaborates actively with authorities and other aquaculture players to implement measures and initiate activities to reduce biological risk. One of the initiatives is joint fallowing and zoning. A digitalization process has been initiated across the Group to facilitate operational improvements. Through utilization of sensor technology, the ambition is to reduce the algae challenges in BC and on Shetland. The introduction of sensor technology to monitor algal blooms enables the Group to determine at an early stage the type of algae and the appropriate feeding response. This is of vital importance as different types of algae has various effect on the salmon. With regards to sea lice, which are developing resistance to pharmaceuticals, there is an ongoing development from pharmaceutical to mechanical treatment. In preventing sea lice, use of wrasse is also a proven remedy, and has provided good results in Rogaland. The Group has a zero-tolerance policy for escapes. Grieg Seafood Shetland reported two escape incidents during the year, with 22 212 escaped fish. Salmon price developments are highly volatile, with great fluctuations within relatively short time spans. However, there has been a stable increase in the demand for salmon over recent years, while the growth in supply has been limited. This development is expected to continue going forward. Supply is also impacted by other factors, such as government regulations, sea temperatures, outbreaks, diseases, and other indirect and direct factors, which affect production and hence also supply. MARKET RISK There are several issues that could affect the trade flows of salmon in 2019. The Brexit outcome represents an uncertainty for the Scottish industry and the Norwegian exporters. If the UK leaves the EU, the salmon industry will experience operational and economic changes for the trade between the UK and the rest of the world. Nearly 70 % of the Scottish salmon was destined for other markets than the domestic in 2018. For Grieg Seafood Shetland, 40 % of the volume in 2018 was going to other markets. However, the Board believe potential problems around an exit will be temporary, but some challenges must be assumed in the adaptation. For further information about financial risks (currency, interest rate, credit, and liquidity), refer to note 3 to the Group financial statements. 181 CORPORATE AND SOCIAL RESPONSIBILITY Sustainability lays the foundation for Grieg Seafood’s operations – it is the license to operate and the motivation to perform. Sustainability is also core business, driving results and gene- rating value for all stakeholders. Grieg Seafood’s overarching goal is to sustainably produce food in the ocean, expressed in the Company’s vision "Rooted in nature – farming the ocean for a better future". This sustainability strategy is built on five pillars: • • • • • Rooted in healthy oceans Rooted in sustainable food Rooted in profit and innovation Rooted in people Rooted in local value creation The pillars define our focus areas, founded in external expectations to the Company and the Company’s own goals and ambitions. The Board is proud of the award where the Company received the second highest grade, A-, by the Carbon Disclosure Project for its work to cut carbon emission. The Company’s reporting on corporate social responsibility is based on several standards, such as the Global Reporting Initiative (GRI) and the Global Salmon Initiative (GSI). The sustainability strategy is described in Part 1, while the measures and results are presented in Part 2 of this Annual Report. RESEARCH AND DEVELOPMENT – ACHIEVING SUSTAINABLE GROWTH Innovation and research in biology and technology is a prerequisite for sustainable farming, maintaining healthy oceans, and farming profitability going forward. Grieg Seafood continuously allocates resources for research and development. Through active participation in national research projects and local test and trial projects in the regions, the Group contributes to industry development. Active projects report on progress throughout the year. The project plan is reviewed annually, summarizing completed projects and prioritizing new. The Group's R&D focus is towards operational projects contributing to short and long-term solutions to biological and technical challenges and improved operational efficiency. The projects are numerous and broad, covering areas from fish health and fish welfare to effective use of large units, feeding control, and optimization of smolt production in large recirculation units. EMPLOYEES To reach goals and to solve challenges, Grieg Seafood needs the best people, regardless of gender or background. The Group has a majority of male employees and managers. In total (including Ocean Quality) 819 people were employed at 31 December 2018 in the Group, whereof 641 were men and 178 were women. The employment policy facilitates the main- tenance and recruitment of qualified employees of both genders. A good work environment is key to attract and retain the best talent. 182 Grieg SeafoodAnnual report 2018Part 03 Operational results Board of directors' report Human resources are managed locally according to local rules and instructions, and in accor- dance with Group guidelines. The Company continuously works to strengthen global routines and guidelines for HR and HSE-work throughout the Group and works actively to reduce sick leave and the number of HSE incidents. The working environment is considered to be good. To strengthen the Company’s culture and encourage loyalty among employees, Grieg Seafood launched a new share saving program, giving employees the opportunity to become share- holders in the Company. It is the Board’s intention that the program shall be a continuing part of the Company’s employee incentive scheme. The Board wishes to thank the employees for their effort in 2018. The Company’s employee policy is described in detail under the section “Rooted in people” in this Annual Report. CORPORATE GOVERNANCE Grieg Seafood ASA has adapted The Norwegian Code of Practice for Corporate Governance, last revised on 17 October 2018, and seeks to comply where applicable with this Code of Practice. The Company’s compliance with corporate governance is disclosed in the corporate gover- nance statement in this Annual Report and on the website www.griegseafood.com. POST-BALANCE SHEET EVENTS In February 2019, the European Commission Director General Competition performed an inspection at Grieg Seafood Shetland to explore potential anticompetitive behavior in the salmon industry. Grieg Seafood aims to be open, transparent and forthcoming and will provide all necessary information requested by the European Commission in its investigation. Currently, there is no new information. OUTLOOK Profitability in the salmon farming industry is volatile, and there will always be uncertainty related to the assessment of future prospects. In 2018, sea lice levels above expectations reduced harvest weights and overall volume growth. Going forward, improved competence and increased capacity for disease treatments and sea lice handling, as well as increased use of large smolt, are some of the initiatives expected to improve biology. For 2019 global supply of Atlantic Salmon is expected to increase 4–6 %. Underlying demand for Atlantic Salmon is strong. A growing Asian middle class, which is both able and willing to purchase high-quality food, and has stronger preferences for healthy and sustainably produced food in the US and Europe, drives demand. Demand is expected to absorb increased supply, supporting continued strong prices going forward. So far in 2019, prices are up compared to last year, while outlook for increased harvest volume in the fall is expected to dampen prices somewhat during second half of the year. Grieg Seafood has a clear ambition of sustainable growth going forward. To fulfill this ambition, several opportunities will be pursued, including acquisitions, joint ventures, and development of new concepts. The Company’s application for ten development licenses for the offshore fish farming concept “Blue Farm” was rejected in 2018. The decision is appea- 183 led. However, short term, improved utilization of current capacity is Grieg Seafood’s priority for growth. Flexibility in use of existing sites allows for a higher capacity utilization while also providing for better biology. The Group continuously works with local communities and authorities to secure access to new, good locations. Another priority is the Company’s post-smolt strategy. Larger smolt are more robust and resilient and require less production time in the sea. This will drive growth, improve biology and fish welfare, and ultimately reduce cost. Being self-supplied is a priority. Capacity expan- sions are ongoing, and the Company expects to see positive results from this already in 2019. In 2018, a the new "the traffic light system" for the regulation of future growth of the Norwe- gian salmon farming industry was implemented. The system defines 13 production areas along the coast. Depending on the sanitary situation, an area can be allowed for up to 6 % growth. Finnmark is considered a “green area”, giving Grieg Seafood the opportunity to acquire additional production capacity. Rogaland however, is a yellow area, with expansion opportunities currently on hold. Consequently, access to sufficient amounts of large smolt becomes even more important to secure growth. For 2019 and 2020, Grieg Seafood targets harvest volumes of 82 000 and 100 000 tonnes, respectively. The stocking of larger smolt is important to ensure future growth, and in 2019 Grieg Seafood plans to stock 26 million smolt. Throughout 2018, initiatives to improve operational efficiency are already providing promising results. This work will continue across the organization and combined with a continuous development of competences and the building of a culture for knowledge sharing, the Board has high expectations for the development of Grieg Seafood going forward. STATEMENT FROM THE BOARD OF DIRECTORS AND CEO We hereby confirm that the financial statements for the period from 1 January to 31 Decem- ber 2018 to the best of our knowledge have been prepared in accordance with applicable accounting standards and give a true and fair view of the Group and of the Group’s assets, liabilities, financial position, and overall results. We also confirm that the Board of Directors’ Report gives a true and fair view of the development and performance of the business and the position of the Company and the Group, as well as a description of the principal risks and uncertainties facing the Company and the Group. Bergen, 11 April 2019 The Board of Directors of Grieg Seafood ASA ASBJØRN REINKIND Vice Chair PER GRIEG JR. Chair WENCHE KJØLÅS Board Member KARIN BING ORGLAND Board Member SOLVEIG M.R. NYGAARD Board Member TORE HOLAND Board Member ANDREAS KVAME CEO 184 Grieg SeafoodAnnual report 2018Part 03 Operational results Board of directors' report 185 Grieg Seafood Annual report 2018 Principles of Corporate Governance Adopted by the Company’s Board of Directors on 20 April 2007 and updated on 11 April 2019. 186 Part 03 Operational results Principles of Corporate Governance 1. IMPLEMENTATION AND REPORTING ON CORPORATE GOVERNANCE 1.1 PRESENTATION OF CORPORATE GOVERNANCE The responsibility for ensuring that the Company has good corporate governance rests with the Board. The Board and management review and annually evaluate the Company’s principles for corporate governance. The Company’s Corporate Governance is based on the Norwegian Code of Practice for Corpo- rate Governance (NUES) as recommended by the Norwegian Corporate Governance Board on 17 October 2018. The Grieg Seafood Group follows the current recommendation from NUES and has updated existing rules and defined values in accordance with changes in NUES 2014. The Company complies with these recommendations according to the “follow or explain principle”. This means that the Company should explain all points where the recommen- dations are not followed. The Annual Report offers a full report on the Company's principles for corporate governance, which is available on www.griegseafood.com 2. BUSINESS 2.1 GRIEG SEAFOOD ASA The Company's business is defined in the Company's Articles of Association section 3: “The object of the company is to engage in the production and sale of seafood and in naturally related activities, including investment in companies engaged in the production and sale of seafood and in other naturally related activities”. The Company is established and registered in Norway and is required to comply with Norwe- gian law, including laws and regulations pertaining to companies and securities. 2.2 GRIEG SEAFOOD ASA’S VISION AND OVERALL OBJECTIVES Grieg Seafood’s vision is: «Rooted in nature - farming the ocean for a better future», crea- ting value for shareholders and other stakeholders through sustainable and cost-efficient growth. Focus areas to meet targets are post-smolt strategy, digitalization, biosecurity and fish welfare, in addition to capacity expansions. The Board of Directors has established objectives and strategies and risk profiles for the business within the scope of the definition of its business, to create value for its sharehol- ders. The Company’s objectives, strategies, and risk profile are subject to annual review by the Board. The Company aims to comply with all relevant laws and regulations and with the Norwegian Code of Practice for Corporate Governance. This also applies to all companies which are controlled by the Group. In as far as it goes, this document of principle therefore applies to all Companies of the Group. 187 2.3 MANAGEMENT OF THE GROUP Control and management of the Group is divided between the shareholders, represented through the General Meeting, the Board of Directors and the Group CEO, and is exercised in accordance with prevailing company legislation. Divergences from this Code of Practice: None. 3. EQUITY AND DIVIDENDS 3.1 EQUITY At any given time, the Group shall have a level of equity and capital structure which is appro- priate in relation to the Group’s cyclical activities. The Board requires that equity consistently stays in accordance with current loan terms, as a minimum. At 31 December 2018, the Company's consolidated equity was NOK 3 884 million, equivalent to 48 % of total assets, and a debt-to-equity ratio of 1.11. The Board of Directors considers the current capital structure to be satisfactory in relation to the Company’s objectives, stra- tegy, and risk profile. 3.2 DIVIDEND The Group’s objective is to give the shareholders a competitive return on invested capital through dividend payments and value appreciation of the share, at a level at least the same as for other companies with comparable risk. The future dividend will depend on the Group’s future earnings, financial situation, and cash flow. The Board believes that the dividend paid should develop in pace with the growth of the Group’s profits, while at the same time ensuring that equity is at a healthy and optimal level. In addition, the Board must ensure that there are adequate financial resources to prepare the way for future growth and investment and taking into account the wish to minimize capital costs. The Board of Directors at Grieg Seafood has adopted a dividend policy whereby the average dividend, over a period of several years, should correspond to 25-35 % profit after tax, adjusted for the accounting effect of fair value adjustment of biological assets. Furthermore, it is reasonable that the Company's net interest-bearing debt per harvested kg is between NOK 15-20. Based on this, the size of the dividend could be corrected both up and down according to the 25 - 35 % share of profit after tax. During the year, the Company has paid out dividend of NOK 4.00 per share. This corresponds to a pay-out ratio of 68 % of net profit after tax adjusted for fair value adjustments on the previous year’s accounts. 3.3 BOARD AUTHORIZATION The Board can request the AGM to grant a general mandate to pay out dividends in the period until the next AGM. The Board´s proposal must be justified. The dividend will be based on the Group's current policy in accordance with clause 3.2. Dividends should be awarded based on the last financial statements approved within the scope of the Public Companies Act. Upon granted authorization, the Board determines from which date the shares are traded ex-dividend. 188 Grieg SeafoodAnnual report 2018Part 03 Operational results Principles of Corporate Governance The Board has general authorization to increase the Company’s share capital through share subscription for a total amount not exceeding NOK 44 664 800 divided into not more than 11 166 200 shares of nominal value NOK 4.00 each. The authorization covers merger deci- sions as provided for in the Norwegian Public Limited Companies Act, Section 13-5. The board is entitled to increase the share capital on several occasions and to itself determine the amount of the share capital increase in each case. As at 31 December 2018, no shares have been issued pursuant to this authorization. This authorization remains in effect until 30 June 2019. Divergences from the Code of Practice: The Code of Practice recommends that the mandate should be limited to specified purposes to make it possible for shareholders to vote sepa- rately on each mandate. The Board has general authorization to acquire the Company’s own shares in accordance with the provisions of Chapter 9 of the Norwegian Public Limited Companies Act for an aggregate nominal amount not exceeding NOK 44 664 800. The Company shall pay not less than NOK 4.00 per share and not more than NOK 150.00 per share when acquiring its own shares. As at 31 December 2018, no shares have been acquired pursuant to this authorization. This authorization remains in effect until the next AGM, but not later than 30 June 2019. The Company will observe the Code of Practice in respect of new proposals to authorize the Board to implement capital increases and acquire the Company’s own shares. Divergences from the Code of Practice: None. 4. EQUAL TREATMENT OF SHAREHOLDERS AND TRANSACTIONS WITH CLOSE ASSOCIATES 4.1 SHARE CLASS The Company has one class of shares, and all shares carry the same rights. At 31 December 2018, the Company had 111 662 000 outstanding shares, including own shares. 4.2 OWN SHARES If the Company trades in its own shares, the Code of Practice on equal treatment for share- holders and transactions with close associates shall be observed. As at 31 December 2018, the Company held 1 228 424 of its own shares. 4.3 APPROVAL OF AGREEMENTS WITH SHAREHOLDERS AND OTHER RELATED PARTIES All transactions of no lesser significance between the Company and a shareholder, Board member, or a senior employee or their related parties, shall be subject to a value assess- ment by an independent third party. If the consideration exceeds one twentieth of the Compa- ny’s share capital, transactions of this kind shall be approved by the General Meeting, in so far as this is required under Section 3-8 of the Norwegian Public Limited Companies Act. 189 There were no transactions with related parties in 2018 pursuant to the requirement above. For more details see note 14, 17 and 22 in this Annual Report. Divergences from the Code of Practice: None. 4.4 CAPITAL INCREASES In the event of a waiver of the shareholders’ preferential subscription right, the Code of Practice shall be observed. There were no capital increases in 2018. 5. SHARES AND NEGOTIABILITY There are no limitations with regards to owning, trading, or voting on the Company’s shares. All shares are freely negotiable to all parties. Divergences from the Code of Practice: None. 6. GENERAL MEETINGS The shareholders represent the Company’s highest decision-making body through the General Meeting (AGM). The Board of Directors will make its best efforts with respect to the timing and facilitation of General Meetings to ensure that as many shareholders as possible may exercise their rights by participating in General Meetings, thereby making the General Meeting an effective forum for the views of shareholders and the Board of Directors. The Company’s AGM shall be held each year before the end of June. The AGM shall consi- der and, if thought fit, adopt the annual financial statements, the annual report, and the dividend, as well as deciding on other matters which under current laws and regulations pertain to the AGM. The Board may convene an Extraordinary General Meeting (EGM) at whatever time it deems necessary or when such a meeting is required under current laws or regulations. The Company’s auditor and any shareholder or group of shareholders representing more than 5 % of the Company’s share capital may require the Board to convene an EGM. The Board calls General Meetings at least 21 days before the date of the meeting. During the same period, the notice of meeting and the documents pertaining to matters to be considered at the General Meeting shall be accessible on the Company’s web page. The same applies to the nomination committee’s recommendation. When documents are made available in this manner the statutory requirements for distribution to shareholders do not apply. Still, a shareholder may claim to receive documents concerning matters to be considered at the General Meeting. The deadline to register for the General Meeting is set by the Board in the notice, normally five days prior to the AGM date. Shareholders can vote on each individual matter, including on each individual candidate nominated for election. Shareholders unable to attend may vote by proxy. An authorisation form containing a vote option for each issue will be enclosed with the notice of meeting, and it will also be possible to give authorization to the chair of the Board or the Group CEO. 190 Grieg SeafoodAnnual report 2018Part 03 Operational results Principles of Corporate Governance The Company will publish the minutes of the General Meetings in accordance with the stock exchange regulations in addition to making them available for inspection at the Company’s registered offices. The chair of the Board, member of the Nomination Committee and the Group CEO will be represented at the meeting. The chair of the Board will normally preside at the meeting. The Board of Directors will ensure that the General Meeting also is able to appoint an inde- pendent presider if requested by the AGM. The Board shall not contact the Company’s shareholders outside the General Meeting in a manner which could be deemed to constitute differential treatment of shareholders or which could be in conflict with current laws or regulations. The nomination committee proposes Board candidates to the Annual General Meeting. In 2018, Grieg Seafood Group held its AGM on 12 June. The next AGM will be held on 13 June 2019. Divergences from the Code of Practice: The Code of Practice recommends that all the members of the Board of Directors and the Nomination Committee are present at the General Meeting. 7. NOMINATION COMMITTEE On 13 February 2009 the AGM approved a resolution to establish a nomination committee. This is described in Article 8 of the Articles of Association. At the same time, the AGM adopted instructions for the nomination committee. According to the instructions, the election committee through its work should take care of the interests currently embodied in the Norwegian Code of Practice for Corporate Governance. The present nomination committee was elected at the AGM on 12 June 2018, and compri- ses Elisabeth Grieg (chair), Helge Nielsen, and Yngve Myhre. Elisabeth Grieg was elected for two years while Helge Nielsen and Yngve Myhre were re-elected for one year. At least 2/3 of the members of the nominating committee shall be independent of the Board and may not be members of the Board. The Group CEO cannot be a member of the nomination committee. The nomination committee shall have meetings with the directors, Group CEO, and relevant shareholders. Details about the nomination committee members are available on the Company´s website. The nomination committee´s recommendation to the AGM should be submitted in good time and follow the summons to the AGM, no later than 21 days before the meeting. The recommendation of the nomination committee must include information about the candida- te´s impartiality, competence, age, education, and professional experience. Upon proposal for re-election, the recommendation should include additional information about how long the candidate has been a Board member, as well as details about participation in the Board meetings. All shareholders are entitled to submit proposals to the nomination committee for candidates for election to the board of directors and other appointments. Proposals must be submitted to the nomination committee no later than two months prior to the AGM. Information on how to propose candidates can be found on the Company’s website. When the recommendation comprises candidates to the nomination committee, it should include relevant information about these candidates. 191 Divergences from the Code of Practice: The Code of Practice recommends that all share- holders should be given the opportunity to submit proposals to the nomination committee for candidates for election to the Board of Directors and other appointments in a simple and easy manner. The Company will observe the Code of Practice in respect of new proposals to facilitate that all shareholders can propose candidate to the Board and the Nomination Committee. 8. BOARD OF DIRECTORS: COMPOSITION AND Independence 8.1 NUMBER OF BOARD MEMBERS Pursuant to the Articles of Association Section 6, the Company’s Board of Directors compri- ses up to seven members elected by the General Meeting. The chair of the Board is elected by the Board. In the event of a tied Board vote, the chair has the casting vote. The managing director is appointed by the Board and has both a right and a duty to attend Board meetings. The managing director is only entitled to vote on Board decisions if he is elected as a member of the Board. 8.2 ELECTION PERIOD All board members are elected by the AGM for a period of two years. Board members may be re-elected. 8.3 INDEPENDENT BOARD MEMBERS At 31 December 2018, the Board of Directors consisted of the following six members: Name Per Grieg jr. Role Chair Asbjørn Reinkind Vice chair Karin Bing Orgland Board member Wenche Kjølås Board member Tore Holand Board member Solveig M.R. Nygaard Board member Considered independent Served since Term expires 2018 Meeting participation % of shares in GSF per 31.12.18 No Yes Yes No Yes Yes 20.05.2009 AGM 2019 27.05.2011 AGM 2019 12.06.2013 AGM 2019 20.05.2009 AGM 2020 12.06.2018 AGM 2020 12.06.2018 AGM 2020 100 % 100 % 100 % 100 % 100 % 100 % 52.80 % 0.11 % 0.00 % 0.01 % 0.00 % 0.00 % The Company's annual report and the website provides information to illustrate the expertise of the members of the Board of Directors. An overview of the Board members’ ownership of shares in the Company appears in the relevant note to the accounts in this Annual Report. Divergences from the Code of Practice: None. 192 Grieg SeafoodAnnual report 2018Part 03 Operational results Principles of Corporate Governance 9. THE WORK OF THE BOARD OF DIRECTORS 9.1 DUTIES AND WORK PLAN The Norwegian Public Limited Liability Companies Act regulates the duties and procedures of the Board of Directors. In addition, the Board of Directors has adopted supplementary rules of procedures, which provides further regulation on inter alia the duties of the Board of Directors and the chief executive officer (CEO), the division of work between the Board of Directors and the CEO, the annual plan for the Board of Directors, notices of board proce- edings, administrative procedures, minutes, board committees, transactions between the Company and the shareholders, and confidentiality. The Board has overall responsibility for the management of the Group and for overseeing the daily management and business activities. The Company shall be managed by an effective Board of Directors (the Board) who has shared responsibility for the success of the Company. The Board represents and is accountable to the Company’s shareholders. The Board’s duties include drawing up the Group’s strategy and ensuring that the adopted strategy is implemented, effective supervision of the Group CEO, control and supervision of the Group’s financial situation, internal control, anti-corruption, and the Company’s responsi- bility to and communication with the shareholders. The Board shall initiate any investigations it considers necessary at any given time to perform its duties. The Board shall also initiate such investigation that is requested by one or more Board members. To ensure an unbiased and satisfactory consideration of matters under consideration, members of the Board of Directors and executive management cannot consider items in which they have a special and prominent interest. For cases under consideration the Board of Directors jointly assesses each Board member´s partiality. Divergences from the Code of Practice: None. 9.2 INSTRUCTIONS The Board has drawn up instructions for its members and the management, which contain a more detailed description of the Board’s duties, meetings, the Group CEO’s duties in rela- tion to the Board, the meeting schedule for the Board, participation, separate entries in the minutes and duty of confidentiality. The respective roles of the Board and the Group CEO are separate, and there is a clear division of responsibility between the two. The Group CEO is responsible for the Company’s senior employees. The Board underlines that special care must be exercised in matters relating to financial reporting and remuneration to senior employees. In matters of importance where the chair of the Board is or has been actively involved, Board discussions shall be chaired by the vice chair. Board members and senior employees shall inform the Board if they have any significant interest in a transaction to which the Company is a party. For further information, please refer to note 22 «Related parties» in the Grieg Seafood Group annual accounts for 2018. The instructions for the Board and Management were last revised by the Board on 20 September 2017. 193 9.3 ANNUAL ASSESSMENT Each year, the Board shall carry out an assessment of its work in the previous year. The assessment is based on results from questionnaires completed anonymously by each member of the board and members of group management 9.4 AUDIT COMMITTEE The Board has set up a sub-committee (audit committee) comprising a minimum of two and a maximum of three members elected from among the Board’s members and has drawn up a mandate for its work. The committee assists the Board in the work of exercising its supervisory responsibility by monitoring and controlling the financial reporting process, systems for internal control and financial risk management, external audits, and procedures for ensuring that the Company complies with laws and statutory provisions, and with the Company’s own guidelines. The audit committee currently consists of Karin Bing Orgland and Wenche Kjølås. 9.5 REMUNERATION COMMITTEE The remuneration committee is governed by a separate instruction adopted by the Board of Directors. The members of the remuneration committee are appointed by and among the members of the Board of Directors and shall be independent of the Company's executive management. At 31 December 2018, the remuneration committee consisted of the following members: Per Grieg jr. and Asbjørn Reinkind. The primary purpose of the remuneration committee is to assist and facilitate the decisi- on-making of the Board of Directors in matters related to the remuneration of the executive management of the Group, review recruitment policies, career planning and management development plans, and prepare matters relating to other material employment issues with respect to the executive management. The committee shall hold discussions with the Group CEO concerning his/her financial terms of employment. The committee shall submit a recommendation to the Board concerning all matters relating to the Group CEO’s financial terms of employment. The committee shall also keep itself updated on and propose guidelines for the determina- tion of remuneration to senior employees in the Group. The committee is also the advisory body for the Group CEO in relation to remuneration schemes which cover all employees to a significant extent, including the Group’s bonus system and pension scheme. Matters of an unusual nature relating to personnel policy or matters considered to entail an especially great or additional risk, should be put before the committee. The remuneration committee reports and makes recommendations to the Board of Directors, but the Board of Directors retains responsibility for implementing such recommendations. The composition of the committee is subject to assessment each year. Divergences from the Code of Practice: None. 10. RISK MANAGEMENT AND INTERNAL CONTROL The Board has a responsibility to ensure that the Group has proper risk management and internal control adaptable to statutory provisions for the Group. The Board conducts an annual evaluation of the most important risk areas and internal control. 194 Grieg SeafoodAnnual report 2018Part 03 Operational results Principles of Corporate Governance Internal control means activities carried out by the Group to organize its business activities and procedures in order to safeguard its own values and those of its customers, and to realize adopted goals through appropriate operations. The achievement of these goals also requires systematic strategy work and planning, identification of risk, choice of risk profile, as well as establishing and implementing control measures to ensure that the goals are achieved. The Group’s core values, external guidelines, and social corporate responsibility constitute the external outer framework of internal control. The Group is decentralized and conside- rable responsibility and authority are therefore delegated to the regional operating units. Risk management and internal control are designed to take account of this. Internal control is an on-going process that is initiated, implemented, and monitored by the Group´s Board of Directors, management and other employees. Internal control is designed to provide reasonable assurance that the Group’s goals will be achieved in the following areas: • • • Targeted, efficient, and appropriate operations. Reliable internal and external reporting. Compliance with laws and regulations, including internal guidelines. The audit committee updates the Board after each meeting. Each year the auditor carries out a review of internal control which is an element of financial reporting. The auditor’s review is submitted to the audit committee. The Group has established framework procedures to manage and eliminate most of the risk that could prevent a goal from being achieved. This includes a description of the Group’s risk management policy as well as all financial control processes. There is an ongoing risk assessment of the main transaction processes. Descriptions of the transaction processes are currently in preparation, with the aim of clarifying key controls and ensuring that these controls are in place. This means assessing all processes to determine the probability of divergences arising, and how serious the economic consequences would be of any such divergence. The establishment of controls in each region is aimed at reducing the likelihood of divergences arising with major economic consequences. The biological development in the course of producing smolt and farming in the sea poses the greatest risk in the Group. The Group therefore continuously and systematically works to develop processes that ensure animal welfare and reduce diseases and mortality, and so that "best practices" are being implemented at all levels. Control routines have been prepared, including conditions for the employees, as well as safeguarding against escapes, animal welfare, pollution, water resources and food safety. Referring to the sustainability report prepared annually, objectives, internal controls and measures are described within the Group's main focus areas. The Group’s activities entail various kinds of financial risk: Market risk (including foreign exchange risk, interest rate risk, and price risk), contract risk, credit risk and liquidity risk. The Group’s overall risk management plan focuses on the unpredictability of the capital markets and seeks to minimize the potential negative effects on the Group’s financial results. The Group uses financial derivatives to hedge against some risks. Risk management is drawn up at Group level and involves identifying, evaluating, and hedging financial risk in close cooperation with the Group’s operational units. The Board has established written principles for risk management related to foreign exchange and interest rate risk, price risk, and the use of financial instruments. The Board has established procedures for reporting within the Group. At the start of each year the Board adopts a budget for the year. Divergences from the budget are reported on 195 a monthly basis. Forecasts are drawn up for the next five years and updated every month. Every month, each region submits a report containing given Key Performance Indicators (KPIs). The main KPIs are: EBIT/kg, feed factor, number of smolt transferred to sea, produ- ction, production cost, harvest volume, harvest cost, and level of sea lice. Analyses are made and measured against budget figures and KPIs. Generational accounts for termina- ted generations will be updated on a monthly basis. The information form of the regions is summarized in a report submitted to the Board. Each quarter, the Group management holds meetings with the management of each region respectively. The aim of the meeting is to follow up the strategies and goals that have been set. Each quarter, a risk assessment covering biology, feed, market, finance, and compliance is prepared, including activities related to the GSF 2020 improvement program. These areas are considered to consitute the greatest risks for the Company. The risk assess- ment is reviewed by the Audit Committee in connection with quarterly reporting. Divergences from the Code of Practice: None. 11. REMUNERATION OF THE BOARD OF DIRECTORS Proposals concerning Board remuneration are submitted by the nomination committee. Remuneration to Board members is not linked to the Company’s results. None of the Board members have special duties in relation to the Company which are additional to those they have as Board members. No board members participate in any incentive or share programs. Board remuneration is shown in the financial statements of both the Company and the Group. Divergences from the Code of Practice: None. 12. REMUNERATION OF EXECUTIVE PERSONNEL 12.1 SENIOR EMPLOYEES The Group management consists of the Group CEO, the director of operations (COO), the financial director (CFO), and the HR director. The objective of the guidelines for determination of salary and other remuneration to senior employees within the Group is to attract people with the required competence and at the same time retain key personnel. The guidelines should also motivate the employees to work with a long-term perspective to achieve the Group´s goals. The determination of salary and other remuneration to the Group’s senior employees is therefore based on the following guidelines: • • Salary and other remuneration shall be competitive and motivating for each manager and for everyone in the senior management group. Salary and other remuneration shall be linked to value creation generated by the Company for the shareholders. 196 Grieg SeafoodAnnual report 2018 Part 03 Operational results Principles of Corporate Governance The principles used to determine salary and other remuneration shall be simple and under- standable to employees, shareholders and the public at large. The principles used to determine salary and other remuneration shall also be sufficiently flexible to allow adjustments to be made on an individual basis in the light of the results achieved and the contribution made by the individual to the development of the Group. The salary paid to the members of the senior management group consists of a fixed and a variable element. Under the bonus scheme the variable salary cannot exceed six times the monthly salary. Each year, information about the provisions of the bonus scheme is included in the Group declaration on the determination of salary to the senior management group, and appears in the financial statements for the Group, Note 14. The Company´s Board approved the allocation of cash options based on the General Assem- bly´s resolution for the framework of the share and cash options program. The last approval from the General Assembly was 7 June 2017. The Group CEO, CFO, COO, the HR director, and the four regional managers are included in the synthetic options program. The options agreements have been entered into within the scope of the resolution adopted by the General Assembly. Minutes of this General Assembly can be accessed from the Company’s web page. Remuneration to the Group CEO is determined at a meeting of the Board of Directors. The salary payable to the other members of the senior management group is determined by the Group CEO. The Group CEO shall discuss the remuneration which he/she proposes with the chair of the Board before the amount of remuneration is determined. General schemes for the allocation of variable benefits, including bonus schemes and options programs, are determined by the Board. Schemes which entail an allotment of shares, subscription rights, options, and other forms of remuneration related to shares or the development of the Company’s share price, are determined by the General Assembly. The Board´s declaration of management remuneration is a separate agenda paper of the General Assembly. The General Assembly votes separately on guidelines to guide the Board and remuneration comprising the synthetic options program. The Company has no divergences from the Code of Practice. 12.2 SEVERANCE PAY The Group CEO is entitled to 12 months’ severance pay after dismissal, and 12 months’ salary during illness. A severance pay agreement has also been established for the CFO and COO providing for 12 months’ severance pay after dismissal. Divergences from the Code of Practice: None. 13. INFORMATION AND COMMUNICATION 13.1 FINANCIAL INFORMATION The guidelines for reporting financial and other information to the securities market is defined within the framework established by securities and accounting legislation and the rules and regulations of the stock exchange. The Company also complies with the Oslo Stock Exchange Code of Practice for IR of 1 March 2017. 197 The Board of Directors has adopted an investor relations policy, to clarify roles and responsi- bilities related to financial reporting and regulate contact with shareholders and the investor market. This policy is based upon the key principles of openness and equal treatment of market participants to ensure they receive correct, clear, relevant, and up-to-date infor- mation in a timely manner. The IR policy is available on the Company’s website. In addition, the Board has adopted a separate manual on disclosure of information, which sets forth the Company's disclosure obligations and procedures. The Company shall at all times provide its shareholders, the Oslo Stock Exchange, and other stakeholders (through the Oslo Stock Exchange information system) with timely and accurate information. The Board shall ensure that the quarterly reports from the Company give a correct and complete picture of the Group’s financial and commercial position, and whether the Group’s operational and strategic objectives are being reached. Financial reporting shall also contain the Group’s realistic expectations of its commercial and performance-related development. The Company publishes all information on its own web page and through stock exchange/ press announcements. Quarterly reports, annual reports and stock exchange / press rele- ases are presented on an ongoing basis on the Company’s web page in accordance with the Company’s financial calendar. The Company shall have an open and active policy in relation to investor relations and shall hold regular presentations in connection with the annual and interim results. 13.2 SHAREHOLDER INFORMATION The Board shall ensure that information is provided on matters of importance for the share- holders and for the stock market’s assessment of the Company, its activities and results, and that such information is made publicly available without undue delay. Publication shall take place in a reliable and comprehensive manner and by using information channels which ensure that everyone has equal access to the information. All information shall be provided in English. The Company has procedures to ensure that this is done. The Board of Directors’ communication with shareholders and other stakeholders is delegated to the chair of the Board, or other appointed persons in specific cases. The chair of the Board shall ensure that the shareholders’ views are communicated to the entire Board. Divergences from the Code of Practice: None. 14. TAKE-OVERS 14.1 CHANGE OF CONTROL AND TAKEOVERS The Company has no established mechanisms which can prevent or avert takeover bids, unless this has been resolved by the General Meeting by a majority of two thirds of the votes cast and of the share capital represented. The Board will not use its authorization to prevent a takeover bid without the approval of the General Meeting after the takeover bid has become known. If a takeover bid is received, the management and the Board will ensure that all shareholders are treated equally. The Board will obtain a value assessment from a competent independent party and advise the shareholders whether to accept or reject the bid. The shareholders will be advised of any difference of views among the Board members in the Board’s statements on the takeover bid. 198 Grieg SeafoodAnnual report 2018Part 03 Operational results Principles of Corporate Governance The Board has in its Board meeting of 13 October 2015 adopted some core principles for how the Board will act in the event of any persuasion offers. These core principles are in accordance with the recommendation of NUES. Divergences from the Code of Practice: None. 15. AUDITOR The Board through its audit committee seeks to have a close and open cooperation with the Company’s auditor. Each year the audit committee obtains confirmation that the auditor meets the requirements of the Act on auditing and auditors concerning the independence and objectivity of the auditor. The Board of Directors ensure that the auditor’s schedule of audit work is submitted to the audit committee once a year. In particular, the audit committee considers whether, to a satisfactory extent, the auditor is performing a satisfactory control function. Both the Company management and the auditor comply with guidelines issued by the Finan- cial Supervisory Authority of Norway concerning the extent to which the auditor can provide advisory services. The Board invites the auditor to meetings which deal with the annual financial statements. The audit committee has an additional meeting with the auditor at least once a year to review the auditor’s report on the auditor’s view of the Group’s accounting principles, risk areas and internal control procedures. Moreover, each year the Board has a meeting with the auditor when neither the Group CEO nor anyone else from the management is present. The auditor also attends meetings of the audit committee to consider quarterly reports and other relevant matters. The auditor’s fee appears in the relevant note in this Annual Report showing the division of the fee between audit and other services. Divergences from the Code of Practice: None. Bergen, 11 April 2019 Grieg Seafood ASA ASBJØRN REINKIND Vice Chair PER GRIEG JR. Chair WENCHE KJØLÅS Board Member KARIN BING ORGLAND Board Member SOLVEIG M.R. NYGAARD Board Member TORE HOLAND Board Member ANDREAS KVAME CEO 199 Grieg Seafood Annual report 2018 ANNUAL ACCOUNTS Grieg Seafood Group Accounts 200 200 Grieg SeafoodAnnual report 2018Income statement AMOUNTS IN NOK 1 000 GRIEG SEAFOOD GROUP Sales revenues Other income Other gains and losses Share of profit from associates Raw materials and consumables used Salaries and personnel expenses Other operating expenses EBITDA before fair value adjustments of biological assets Depreciation property, plant and equipment Amortization licenses and other intangible assets EBIT before fair value adjustments of biological assets Fair value adjustment of biological assets EBIT after fair value adjustments of biological assets Financial income Financial expenses Net financial items Profit before tax Income tax expense Net profit for the year ALLOCATED TO Controlling interests Non-controlling interests PROFIT AVAILABLE TO SHAREHOLDERS IN PARENT COMPANY Earnings per share (NOK) Diluted earnings per share (NOK) Comprehensive income statement AMOUNTS IN NOK 1 000 GRIEG SEAFOOD GROUP Net profit for the year NOTE 6 6 6 5 7 15/16 11/20/24 9 8 3/7 23 23 13 18 18 NOTE NET OTHER COMPREHENSIVE INCOME TO BE RECLASSIFIED TO PROFIT/LOSS IN SUBSEQUENT PERIODS Currency effect on investment in subsidiaries Change in fair value of equity instruments Currency effect on loans to subsidiaries Cash flow hedges Tax effect Other comprehensive income for the period, net of tax 3 3 2018 7 500 316 25 853 26 157 -2 328 -3 852 855 -541 047 -1 821 623 1 334 473 -230 262 -5 393 1 098 818 256 097 1 354 916 18 874 -96 865 -77 991 1 276 925 -279 805 997 120 972 506 24 615 8.81 8.81 2018 997 120 -5 889 11 -4 193 15 026 -2 571 2 383 2017 7 017 456 21 771 -1 514 -550 -3 724 200 -482 827 -1 724 604 1 105 533 -196 237 -4 895 904 400 -91 463 812 937 42 333 -56 789 -14 457 798 480 -197 581 600 899 570 537 30 362 5.17 5.17 2017 600 899 16 729 -295 22 333 -24 821 409 14 355 Total comprehensive income for the period 999 503 615 254 ALLOCATED TO Controlling interests Non-controlling interests 968 766 30 738 595 332 19 922 201 Part 03 Operational resultsGrieg Seafood Group Accounts Statement of financial position AMOUNTS IN NOK 1 000 GRIEG SEAFOOD GROUP ASSETS Goodwill Deferred tax assets Licenses Other intangible assets Property, plant and equipment Investments in associates Equity instruments Other non-current receivables Total non-current assets Inventories Biological assets Trade receivables Other current receivables Derivatives and other financial instruments Cash and cash equivalents Total current assets Total assets NOTE 31.12.2018 31.12.2017 8 13 8/10 8/10 9 5 7/10 7/10 3/10/20 21 3/12 3/19 109 013 1 718 1 121 662 25 175 2 292 912 37 122 1 160 167 109 038 3 574 1 068 552 18 384 1 871 804 9 450 1 150 167 3 588 929 3 082 121 126 092 3 195 142 925 232 166 432 2 743 137 920 92 262 2 698 352 761 407 198 527 48 232 271 715 4 553 561 4 070 494 8 142 490 7 152 615 202 Grieg SeafoodAnnual report 2018 AMOUNTS IN NOK 1 000 GRIEG SEAFOOD GROUP EQUITY AND LIABILITIES Share capital Treasury shares Other equity Retained earnings Total controlling interests Non-controlling interests Total equity Deferred tax liabilities Cash-settled share options Loans Other non-current borrowings Finance lease liabilities Total non-current liabilities Overdraft facility Current portion of non-current borrowings Current portion of finance lease liabilities Factoring liabilities Cash-settled share options Trade payables Tax payable Public tax payable Derivatives and other financial instruments Other current liabilities Total current liabilities Total liabilities Total equity and liabilities NOTE 31.12.2018 31.12.2017 17 17 13 16 10 10 10/11 10 10 10/11 3/10 16 3 13 3/12 25 446 648 -4 914 84 152 3 308 166 3 834 053 49 458 3 883 511 877 639 8 493 1 298 713 14 047 292 358 2 491 251 46 597 107 109 68 083 573 377 9 010 649 352 130 287 29 346 5 905 148 663 1 767 729 446 648 -5 000 87 892 2 774 824 3 304 364 43 541 3 347 905 721 689 8 848 1 191 688 15 353 201 899 2 139 476 - 98 873 58 353 500 976 6 746 585 378 157 244 16 486 28 462 212 717 1 665 233 4 258 979 3 804 710 8 142 490 7 152 615 BERGEN, 11 APRIL 2019 GRIEG SEAFOOD ASA ASBJØRN REINKIND Vice Chair PER GRIEG JR. Chair WENCHE KJØLÅS Board Member KARIN BING ORGLAND Board Member SOLVEIG NYGAARD Board Member TORE HOLAND Board Member ANDREAS KVAME CEO 203 Part 03 Operational resultsGrieg Seafood Group Accounts Statement of changes in equity AMOUNTS IN NOK 1 000 GRIEG SEAFOOD GROUP Equity at 01.01.2017 PROFIT FOR 2017 Currency effect on investment in subsidiaries Currency effect on loans to subsidiaries Change in fair value of equity instruments Cash flow hedges Other comprehensive income Total comprehensive income 2017 Dividend paid Dividend paid to minority shareholders Total equity attributable to shareholders 2017 Total change in equity 2017 Equity at 31.12.2017 PROFIT FOR 2018 Currency effect on investment in subsidiaries Currency effect on loans to subsidiaries Change in fair value of equity instruments Cash flow hedges Other comprehensive income Total comprehensive income 2018 Sale of treasury shares Dividend paid Dividend paid to minority shareholders Total equity attributable to shareholders 2018 Total change in equity 2018 Equity at 31.12.2018 SHARE CAPITAL TREASURY SHARES* OTHER EQUITY** RETAINED EQUITY NON-CONTROLLING INTERESTS TOTAL 446 648 -5 000 63 098 2 645 935 56 270 3 206 951 - - - - - - - - - - - - - - - - - - - - 446 648 -5 000 - - - - - - - - - - - - - - - - - 86 - - 86 86 446 648 -4 914 570 537 30 362 600 899 16 729 16 973 -295 -8 613 24 794 24 794 - - - - - - - - 570 537 -441 648 - -441 648 - - - -10 439 -10 439 19 922 16 729 16 973 -295 -19 052 14 355 615 254 - -441 648 -32 651 -32 651 -32 651 -474 299 24 794 87 892 128 889 2 774 824 -12 729 140 955 43 541 3 347 905 -5 889 -3 271 11 5 409 -3 740 -3 740 972 506 24 615 997 120 - - - - - - - - 6 123 6 123 -5 889 -3 271 11 11 532 2 383 972 506 30 738 999 503 - - - - 2 528 -441 691 - -439 163 - - -24 821 -24 821 2 614 -441 691 -24 821 -463 898 -3 740 84 152 533 342 3 308 166 5 917 535 605 49 458 3 883 511 * The recognized amount equals the nominal value of the parent company's holding of treasury shares. ** Other equity, reclassified through OCI 204 Grieg SeafoodAnnual report 2018 AMOUNTS IN NOK 1 000 SPECIFICATION OF RETAINED EQUITY Book value at 01.01.2017 Changes in 2017 Changes in 2018 Book value at 31.12.2018 EFFECT OF SHARE- BASED REMUNERATION PURCHASE/ SALES OF TREASURY SHARES * ACCUMULATED INCOME EXCL. ACCUMULATED DIVIDEND TOTAL 1 094 - - 1 094 -13 036 - 2 528 -10 508 2 657 877 2 645 935 128 889 530 814 128 889 533 342 3 317 580 3 308 166 * The amount classified under "purchase of treasury shares" equals the cost price in excess of nominal value. See also Note 1. AMOUNTS IN NOK 1 000 SPECIFICATION OF OTHER EQUITY, RECLASSIFIED THROUGH OCI CHANGES IN FAIR VALUE OF EQUITY INSTRUMENTS CURRENCY EFFECT ON LOANS TO SUBSIDIARIES CURRENCY EFFECT ON INVESTMENT IN SUBSIDIARIES CASH FLOW HEDGES Book value at 01.01.2017 Changes in 2017 Changes in 2018 Book value at 31.12.2018 787 -295 11 503 47 400 16 973 -3 271 61 102 12 863 16 729 -5 889 23 703 2 048 -8 613 5 409 -1 156 TOTAL 63 098 24 794 -3 740 84 152 205 Part 03 Operational resultsGrieg Seafood Group Accounts NOTE 8/9 5 7 16 13 8/9 9 10 8 5 10 10 10 10 10 2018 1 354 916 235 655 4 992 2 328 -256 097 -241 400 -131 731 63 974 -64 607 -355 -147 833 819 841 1 295 -665 192 169 216 -67 842 -30 000 10 -592 514 -40 000 -985 000 1 180 284 -57 244 72 401 6 951 -466 512 -71 449 -360 569 -133 242 271 715 -554 137 920 2017 812 937 201 133 669 550 91 463 -384 223 3 904 91 844 51 831 4 234 -165 464 708 877 2 182 -548 641 9 600 -4 180 -10 000 4 295 -546 744 300 000 - - -157 144 -1 559 -7 597 -474 299 -52 787 -393 387 -231 253 503 613 -645 271 715 Cash flow statement AMOUNTS IN NOK 1 000 GRIEG SEAFOOD GROUP EBIT after fair value adjustment of biological assets Depreciation and amortization (Gain)/loss on sale of property, plant and equipment Share of profit from companies applying equity method of accounting Fair value adjustment of biological assets Change in inventories and biological assets excl. fair value Change in trade and other receivables Change in trade payables Change in other accruals Change in non-current, cash-settled share-option liability Taxes paid for the period Net cash flow from operating activities Proceeds from sale of property, plant and equipment Payments on purchase of property, plant and equipment Property, plant and equipment financed by leasing Payments on purchase of intangible assets Investment in associate companies Change in other non-current receivables Net cash flow from investing activities Repayment of non-current revolver credit facility Repayment of non-current syndicate loan Draw-down non-current syndicate loan (refinancing) Change in non-current interest-bearing debt and leases Change in factoring liability Other financial items Dividend incl. allocation to non-controlling interests Interest expense Net cash flow from financing activities Net change in cash and cash equivalents Cash and cash equivalents at 01.01. Currency translation of cash and cash equivalents Cash and cash equivalents at 31.12. 206 Grieg SeafoodAnnual report 2018 Notes NOTE 1 NOTE 2 NOTE 3 NOTE 4 NOTE 5 NOTE 6 NOTE 7 NOTE 8 NOTE 9 General information Accounting policies Financial risk management Critical accounting estimates and judgements Investment in associates Segment information Biological assets and other inventories Intangible assets Property, plant and equipment NOTE 10 Borrowings and finance leases NOTE 11 NOTE 12 Leases Classifications of financial instruments NOTE 13 Taxes NOTE 14 Declaration of salary and other remuneration to senior employees NOTE 15 Salaries and personnel expenses NOTE 16 Cash-based remuneration NOTE 17 Share capital and shareholder information NOTE 18 Earnings per share and dividend per share NOTE 19 Cash and cash equivalents NOTE 20 Trade receivables NOTE 21 Other current receivables NOTE 22 Related parties NOTE 23 Financial income and financial expenses NOTE 24 Other operating expenses NOTE 25 Other current liabilities NOTE 26 New accounting policies NOTE 27 Post-balance sheet events page 208 page 210 page 219 page 226 page 228 page 230 page 232 page 235 page 239 page 240 page 243 page 244 page 246 page 249 page 251 page 253 page 255 page 257 page 257 page 258 page 259 page 260 page 261 page 261 page 262 page 263 page 265 207 Part 03 Operational resultsGrieg Seafood Group AccountsNOTE 1 General information Grieg Seafood ASA is an integrated Norwegian seafood company engaged in salmon farming and processing. Grieg Seafood ASA is a public limited company registered in Norway. The head office is located at C. Sundtsgt. 17/19, Bergen. The Company was listed on the Oslo Stock Exchange on 21 June 2007 and has operations in Norway, the UK and Canada. The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by EU, and were approved by the Board of Directors on 11 April 2019. In the following, "Group" describes information relating to the Grieg Seafood Group, while "Company" refers to the parent company, Grieg Seafood ASA. The Group owns the company Ocean Quality AS together with Bremnes Fryseri AS on a 60%/40% basis. Grieg Seafood does not receive any of the profit from the sale of fish from Bremnes Fryseri AS, as earnings are based on a skewed distribution of profit based on the delivered volume from each shareholder. The share of profit and share of equity in Bremnes Fryseri AS are presented as non-controlling interests. Grieg Seafood Group comprised the following entities at 31 December 2018: Grieg Seafood Hjaltland UK Ltd, including all subsidiaries, and Ocean Quality UK Ltd are domiciled in the UK. Grieg Seafood BC Ltd and Ocean Quality North America Inc. are domiciled in Canada. Ocean Quality Premium Brands, Inc. (formerly named Ocean Quality USA Inc.) and Ocean Quality USA Inc. (new company, established in 2018) are domiciled in the USA. Ocean Quality (Shanghai) is domiciled in China, operating as a cost center and does not invoice any sale of fish. The remaining companies are domiciled in Norway. Grieg Seafood Hjaltland UK Ltd. and Grieg Seafood Canada AS are holding companies, which wholly own the production companies Grieg Seafood Shetland Ltd. and Grieg Seafood BC Ltd., respectively. Grieg Seafood ASA has a 60% stake in Ocean Quality AS and the other subsidiaries are wholly owned. Grieg Seafood Shetland Ltd ows the following, dormant companies (no activities in these companies): Grieg Seafood Isle of Sky Ltd, Collafirth Salmon Ltd, Hjaltland Hatcheries Ltd, Fish Holm Ltd, Lerwich Fish Traders Ltd, Shetland Product, Skelda Salmon Farms Limited and Vidlin Seafarms Ltd. Ocean Quality AS wholly owns Ocean Quality UK Ltd, Ocean Quality USA Inc., Ocean Quality (Shanghai) and Ocean Quality North America Inc., while the latter wholly owns Ocean Quality Premium Brands, Inc.. All amounts are stated in NOK thousand unless otherwise specified. 208 Grieg SeafoodAnnual report 2018Group structure Segment structure Grieg Seafood NOR NOR UK CAN ROGALAND FINNMARK SHETLAND BRITISH COLUMBIA Grieg Seafood ROGALAND AS Grieg Seafood FINNMARK AS Grieg Seafood SHETLAND LTD Grieg Seafood B.C. LTD Ocean Quality AS Ocean Quality AS Ocean Quality UK LTD Ocean Quality NORTH AMERICA INC Ocean Quality USA INC Ocean Quality USA INC Ocean Quality USA INC Ocean Quality PREMIUM BRANDS INC 209 Part 03 Operational resultsGrieg Seafood Group AccountsGrieg SeafoodASA60%Ocean Quality ASGrieg SeafoodROGALAND ASGrieg SeafoodFINNMARK ASGrieg SeafoodHJALTLAND UK LTDGrieg SeafoodSHETLAND LTDGrieg SeafoodCANADA ASOcean Quality UK LIMITEDOcean Quality NORTH AMERICA INC.Ocean Quality PREMIUM BRANDS, INC.Ocean QualityUSA INC.Ocean QualitySHANGHAI(INTERNATIONALTRADING COMPANY)100%100%100%100%Grieg SeafoodB.C. LTDNOTE 2 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 the periods presented, unless otherwise indicated. combination are initially measured at fair value at the acquisition date. Non-controlling interests in the acquired entity are measured from time to time either at fair value, or at their proportionate share of net assets of the acquired entity. BASIS OF PREPARATION The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU. The consolidated financial statements have been prepared under the historical cost convention, modified for biological assets, equity instruments, and financial assets/liabilities (including derivative instruments) at fair value through profit or loss. The preparation of financial statements in accordance with IFRSs requires the use of estimates. It also requires management to exercise its judgement in the process of applying the company’s accounting policies. Areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are material to the consolidated financial statements, are described in Note 4. NEW STANDARDS ADOPTED BY THE GROUP The Group has applied the following standards for the first time for the annual reporting period commencing 1 January 2018: • • IFRS 9 Financial Instruments IFRS 15 Revenue from Contract with Customers These standards did not have any significant impact on the financial statement. Due to the implementation of IFRS 9, the model for calculating loss allowance has changed. The changes have not had any effect on the estimated amount for losses. Please refer to Note 20 for further information. The new standard IFRS 16 Leases will be implemented from 1 January 2019. This standard will have a material impact on the Group’s financial statement, which are fully described in Note 26. Please refer to Note 26 for further information about the new standards. CONSOLIDATION PRINCIPLES SUBSIDIARIES Subsidiaries are all entities (including structured entities) over which the Group exercises control. Control over an entity arises when the Group is exposed to variability in the return from the entity and has the ability to impact this return by virtue of its influence over the entity. Subsidiaries are consolidated from the day control arises and deconsolidated when control ceases. The purchase method of accounting is applied for acquisitions. The consideration is measured as the fair value of any transferred assets, liabilities or issued equity instruments. The fair value of all the assets or liabilities resulting from contingent consideration agreements is included in the consideration. Identifiable assets and liabilities and contingent liabilities assumed in a business Costs relating to business combinations are expensed as they are incurred. In the case of multi-stage acquisitions, the proportion of ownership from any earlier purchases is restated at fair value at the date of control, with changes in value recognized through profit or loss. Contingent consideration classified as equity shall not be remeasured and its subsequent settlement shall be accounted for within equity. Other contingent consideration that is within the scope of IFRS 9 shall be measured at fair value at each reporting date and changes in fair value shall be recognized in profit or loss in accordance with IFRS 9. If it is not within the scope of IFRS 9 then it shall be measured at fair value at each reporting date and changes in fair value shall be recognized in profit or loss. Intragroup transactions, intercompany balances, and unrealized profits and losses between Group companies are eliminated. Reported figures from the subsidiaries are restated when this is necessary to achieve consistency with the Group's accounting policies. CHANGES IN SHAREHOLDINGS IN SUBSIDIARIES WITHOUT LOSS OF CONTROL Transactions with non-controlling owners of subsidiaries that do not involve loss of control are treated as equity transactions. When shares are purchased from non-controlling owners, the difference between the consideration and the proportionate percentage of net assets recognized in the subsidiary’s balance sheet relating to such shares is recognized in the parent company’s owners’ equity. Gains or losses on disposals of non-controlling owners are similarly recognized in equity. DIVESTMENT OF SUBSIDIARIES When the Group no longer has control, any residual ownership interest is measured at fair value with changes in value recognized through profit or loss. Thereafter the fair value is deemed to equate to cost, and the interest is recognized either as an investment in associates or as a financial asset. Amounts previously recognized in other comprehensive income relating to this company are treated as if the Group had disposed of the underlying assets and liabilities. This could mean that amounts that were previously recognized income are reclassified through profit or loss. in other comprehensive ASSOCIATES Associates are entities over which the Group exercises significant influence, but not control. Significant influence will generally exist when the Group has a shareholding of between 20% and 50% of the voting rights. Investments are recognized at cost at the time 210 Grieg SeafoodAnnual report 2018of acquisition, and the Group’s share of the results in subsequent periods is recognized through profit or loss. The amount recognized in the balance sheet includes any implicit goodwill identified at the date of purchase. Shares of profit or losses of associates that are closely linked to the Group´s operations and are thus part of the Group’s value chain, are classified on a separate line before the Group’s EBIT. In the event of a reduction in a shareholding in an associate where the Group exercises significant influence, only a proportionate share of amounts previously recognized in other comprehensive income is reclassified through profit or loss. The Group’s share of its associates’ post-acquisition profits or losses is recognized in the income statement and added to the value of the investment in the balance sheet. The Group’s share of other comprehensive income of the associate is recognized in the consolidated statement of comprehensive income plus the amount of the investment in the balance sheet. When the Group’s share of losses in an associate equal or exceeds its interest in the associate, including any other unsecured receivables for the entity, the Group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the associate. If necessary, the subsidiaries’ financial statements are restated to achieve consistency with the Group’s accounting policies. At the end of each accounting period, the Group determines whether there is any need to recognize an impairment of the investment in the associate. In such cases, the impairment amount is measured as the difference between the recoverable amount of the investment and its book value, and the difference is recognized in income on a separate line together with the item “Share of profit from associates”. In the event of any gains or losses on transactions between the Group and its associates, only the proportionate share relating to external shareholders is recognized. Unrealized losses are eliminated unless there is a need to recognize an impairment for the asset that was the subject of the transaction. Accounting policies of associates are changed when necessary to ensure consistency with the accounting policies adopted by the Group. Dilution gains and losses arising on investments in associates are recognized in the income statement. SEGMENT REPORTING Operating segments are reported in a manner consistent with internal reporting to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Group management. FOREIGN CURRENCY TRANSLATION The financial statements of each of the Group’s entities are generally measured using the currency of the economic area in which the entity operates (“the functional currency”). The consolidated financial statements are presented in Norwegian Kroner (NOK), which is the parent company’s functional and presentation currency. Transactions and balance sheet items Foreign currency transactions are translated into the functional currency using the exchange rates in force at the transaction date. Foreign exchange gains resulting from the settlement of such transactions that are not denominated in the entity´s functional currency, are recognized through profit or loss. Translation differences on monetary items (assets and liabilities), that are not denominated in the entity´s functional currency, are also recognized through profit or loss. Group companies The income statements and balance sheets of the Group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: The balance sheet is translated using the closing rate at the balance sheet date. • Income and expense items in the income statement are translated at average exchange rates for the period (if the average is not a reasonable estimate of the cumulative effects of using the transaction rate, the transaction rate is used). Translation differences are recognized in other comprehensive income and specified separately. • When a foreign operation is sold, the exchange difference, which in previous periods was recognized in other comprehensive income, is not accrued. The accumulated exchange difference on the sale of the foreign operation is hence reversed in other comprehensive income. Gains or losses on the sale are recognized on a basis of zero exchange difference in the net profit on ordinary activities. Goodwill and fair value adjustments of assets and liabilities on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and are translated using the closing currency rate at the balance sheet date. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated at historical cost less depreciation and impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the asset. Cost may also include gains or losses transferred from equity as a result of hedging the cash flow in foreign currency on the purchase of property, plant and equipment. Improvements are recognized in the asset’s carrying amount or as a separate asset when it is probable that future economic benefits associated with the improvement will flow to the Group and the cost of the item can be reliably measured. All other repairs and maintenance are recognized in the income statement during the financial period in which they are incurred. Land and buildings mainly comprise factories and offices. Land is not depreciated. Other operating assets are depreciated in accordance with the straight-line method so that the cost, or remeasured value, is written down to residual value over its expected useful economic life as follows: 211 Part 03 Operational resultsGrieg Seafood Group AccountsNOTE 2 CONT. • • • • Buildings/real estate 10–50 years Plants, barges, onshore power supply 5–30 years Nets/cages/moorings 5–25 years Other equipment 3–35 years The assets’ useful lives and residual values are estimated at each balance sheet date and adjusted if necessary. An asset’s carrying amount is written down to its recoverable amount if the carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are recognized on a net basis and represent the difference between the sales price and the carrying amount. INTANGIBLE ASSETS Intangible assets that arise internally within the Group are not recognized. Goodwill and licenses with an indefinite economic life are subject to annual impairment tests. Impairment tests are performed more frequently if indications of impairment exist. Amortized licenses are tested for impairment only if there are indications that future earnings do not justify the asset’s carrying amount. GOODWILL Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired entity at the date of acquisition. Goodwill on acquisitions of subsidiaries is classified as an intangible asset. Goodwill on the purchase of a share in an associate is included in “investments in associates”. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. For the purpose of impairment testing, goodwill is allocated to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose. LICENSES Fish-farming licenses with an indefinite useful life are not impairment annually, or more amortized but reviewed for frequently if there are indications that the balance sheet value may have decreased. The Group considers the following licenses to have indefinite useful lives: Licenses granted with an indefinite useful life, where the company has no other contractual restrictions relating to the use of the license. Licenses granted with a finite useful life, but where the license holders can renew the licenses without incurring considerable expenses. Licenses with a finite useful life are amortized over their useful lives. These relate to water licenses for hatcheries and some 212 specific seawater licenses. The following sections provide a description of licenses relating to the Norway, UK (Shetland) and Canada (BC) segments. Please refer to Note 8 Intangible assets for an overview of the number and types of licenses, as well as impairment testing. NORWAY The licensing regime for the production of salmon in Norway is enacted by the Norwegian Parliament through the Aquaculture Act. The Ministry of Trade, Industry and Fisheries grants permits for aquaculture (licenses). All aquaculture operations are subject to licensing and no one can produce salmon without permission from the authorities, see Aquaculture Act § 4. The aquaculture permit allows the production of salmon in limited geographic areas within the current determined limitations of the permit scope. The Aquaculture Act is administered centrally by the Ministry of Trade, Industry and Fisheries, with the Directorate of Fisheries as the supervisory authority. Regionally, several industry authorities jointly manage full administrative and supervisory responsibility within the regulating range of the Aquaculture Act. The county is the regional administrative body, while the Directorate of Fisheries serves as appellate body in locality and licensing matters. Seawater licenses Each license for salmon in the sea is subject to a production limit in the form of “maximum allowed biomass” (MAB). MAB does not directly limit the tonnes of fish produced within a year, but rather limits the biomass that can be kept in the sea at any time. Normally, a license has a limit of 780 tonnes MAB, while in Troms and Finnmark counties, a standard license has a limit of 945 tonnes MAB (provided all associated locations are situated in Troms and Finnmark), but in conjunction with the new traffic light system, Finnmark acquire additional production capacity and have now 964 tonnes MAB. See the Salmon Allocation Regulation § 15 (“laksetildelingsforskriften”). Such licenses are limited in number and only subject to application, following politically determined licensing rounds. Hatchery licenses Young salmon are defined as eggs, juveniles, parr or smolt to be released in another location, see Salmon Allocation Regulation § 4 f. Such licenses are not limited and thus subject to continuous application for new licenses or changes to existing licenses. In essence, it is not permitted to produce smolt over 250 grams; however, the regulations allow for applications to produce a certain percentage of fish up to 1 kg. Grieg Seafood has authorization up to 1 kg. R&D and broodstock licenses These licenses are not limited in number. Permits are means- tested, meaning that the applicant must demonstrate a need for the production of eggs, specific research projects or for educational purposes. Broodstock licenses include both a land and sea phase, i.e. the broodfish and egg production are covered by the same licensing process. Grieg SeafoodAnnual report 2018Harvesting cage licenses Licenses utilized for cage-setting of live fish for harvesting. These relate to specific locations. Duration and renewal The Ministry may in individual decisions or regulations specify further provisions on the content of aquaculture licenses, including relating to scope, time limitations, etc., see the Aquaculture Act § 5, second paragraph. Nonetheless, the preparatory work for the Aquaculture Act specifies that licenses are normally granted without a time limit. Grieg Seafood’s general food fish licenses and hatchery licenses are not time-limited under current regulations. After the reform in 2009, a number of licenses were time-limited, mainly for 15 years. As no government practices have been established relating to the renewal of broodstock licenses, the current understanding is that expiration of licenses allows for application for renewal based on demand. A license for harvesting cages is valid for ten years and must be renewed on expiration, provided that the license is still connected to an approved harvesting facility. Disposal and withdrawal All licenses can be transferred and mortgaged in accordance with the Aquaculture Act § 19. Transfers and mortgages must be recorded in a separate register (the Aquaculture Register). It is not permitted to rent out licenses or license capacity. The Aquaculture Act § 9 reviews the basis for withdrawal of an aquaculture license. This states that there must be significant breaches of the terms of an aquaculture license before it can be revoked. UK Grieg Seafood Shetland Ltd (GSF UK) has farms on both the west and east coasts of Shetland, as well as the west coast of Scotland. In order to operate farms in Scotland, the following five licenses must be in place: 1. Water Environment (Controlled activities) “CAR” license – issued by the Scottish Environment Protection Agency (SEPA) 2. Planning permission – issued by the local authorities (Town and Country Planning Act) 3. Crown Estate Lease/Permission (The Crown Estate Act 1961) 4. Aquaculture Production Business License (APB) – issued by Aqua Animal Health 5. Marine License (Navigation) – issued by the Scottish government For restrictions regarding production quantity, see table in Note 8. Duration and renewal 1. CAR license – requires periodic inspection and monitoring. If a substantial negative impact on the environment can be proven as a consequence of the operation, the production volume can be reducedor, as in a worst-case scenario, revoked. 2. Planning Permission – indefinite duration; however, if the plant is left unused for three consecutive years, the license may be withdrawn 3. Crown Estate Lease/Permission – 25 years’ duration. The normal procedure is to renew the licenses on expiration. 4. APB – indefinite duration subject to compliance with the license´s conditions. 5. Marine License – application for renewal required every six years. Renewal is normally a formality. BC Grieg Seafood BC Ltd (GSF BC) has farms on both the west and east coasts of Vancouver Island. In order to operate farms in British Columbia, Canada, the following three licenses must be in place: 1. Aquaculture license – issued by the Department of Fisheries 2. and Oceans License of Occupation (Tenures) – issued by the Ministry of Forest, Lands and Natural Resource Operations 3. Navigation Water Permit – issued by Transport Canada (Canadian public authorities) For restrictions regarding production quantity, see table in Note 8. Duration and renewal 1. Aquaculture license – duration of one year, renewal each year 2. is a formality. License of Occupation – duration of 2–20 years. Renewal is applied for on expiration. 3. Navigation Water Permit – duration of five years, but possible to apply for renewal. New renewal process in Canada West In June 2018, the Government of British Columbia announced a new policy regarding renewal of aquaculture licenses in the Broughton area. The new policy requires agreement with the local First Nations prior to applying for license renewal from Fisheries and Ocean Canada (DFO). The authorities want to cooperate with companies that have licenses where the production might conflict with the wild salmon and find alternative solutions such as moving the licenses to new areas. For Grieg Seafood BC, this is not a challenge. OTHER INTANGIBLE ASSETS Acquired customer portfolios and computer software licenses are recognized in the balance sheet at cost and amortized over their estimated useful lives. Customer portfolios are recognized in the balance sheet at cost at the date of purchase. Amortization is calculated using the straight-line method over the estimated useful life, as follows: • • Customer portfolios 6 years Computer software 3–10 years IMPAIRMENT OF NON-FINANCIAL ASSETS Assets with an indefinite useful life are not amortized but are tested annually for impairment. Assets that are subject to amortization are reviewed for impairment whenever there are indications that future earnings do not justify the carrying amount. 213 Part 03 Operational resultsGrieg Seafood Group AccountsNOTE 2 CONT. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non- financial assets, other than goodwill, that have suffered an impairment are reviewed for indicators of possible reversal of the impairment at each reporting date. FINANCIAL ASSETS/LIABILITIES Until 31 December 2017, the Group classified its financial assets and financial liabilities in the following three categories: • • • loans and receivables, assets available for sale, and at fair value through profit or loss From 1 January 2018, the Group classifies its financial assets and liabilities in the following measurement categories: at fair value through profit or loss or OCI, and • • at amortized cost The classification depends on the entity’s business model for managing the financial assets and the contractual terms of the cash flows. A financial asset is measured at amortized cost if both of the following conditions are met: • the asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows; and the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. • LOANS AND RECEIVABLES Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. These are classified as current assets, except for maturities greater than 12 months after the balance sheet date, which are classified as non-current assets. Loans and receivables are classified as ‘other receivables’ in the balance sheet. At each balance sheet date, the Group considers whether there is any objective evidence that the loans and receivables are impaired. Such objective evidence comprises, for instance: • breach of contract, such as a default or delinquency in payments, the probability that the borrower will become insolvent or be subject to financial reorganization. • Loans and receivables are carried at amortized cost using the effective interest method. EQUITY INSTRUMENTS Equity instruments are non-derivatives that are either designated in this category or not classified in any other category. These are recognized in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date. Equity instruments are stated at fair value. Changes in value are 214 recognized in the statement of total comprehensive income. investments When securities classified as equity instruments are sold or impaired, the accumulated fair value adjustments recognized in equity are recognized through profit or loss as “other financial income/losses from in securities”. Interest on securities classified as equity instruments calculated using the effective interest method is recognized through profit or loss. Dividends on shares classified as equity instruments are recognized through profit or loss when the Group’s right to receive dividends is established. The fair values of quoted investments are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), the Group establishes fair value using valuation techniques. These include recent transactions on market terms, reference to other instruments which are essentially the same and use of discounted cash flows and options models. The techniques used make maximum use of market and avoid company-specific information as much as possible. Investments are derecognized when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. Ordinary purchases and sales of investments are recognized on the trade-date – the date on which the Group commits to purchase or sell the asset. All financial assets that are not stated at fair value through profit or loss are initially recognized at fair value plus transaction costs. At each balance sheet date, the Group assesses whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of shares classified as equity instruments, a significant or prolonged decline in the fair value of the security below its cost is considered an indicator that the securities are impaired. If any such evidence exists for equity instruments the cumulative loss – measured as the difference between the cost and fair value, less any impairment loss on that financial asset previously recognized through profit or loss – is derecognized in equity and recognized in the income statement. Impairment losses recognized in the income statement on shares and corresponding equity instruments are not reversed through the income statement. Impairment testing of trade receivables is described below. FINANCIAL ASSETS/LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS, INCLUDING DERIVATIVES AND HEDGING Financial assets/liabilities classified as equity instruments are recognized at fair value, with changes in value recognized through profit or loss. The Group applies hedge accounting under IFRS 9 for non-current foreign currency forward contracts entered into in connection with physical future delivery contracts of fish to customers. Changes in value of foreign currency forward contracts which meet the Grieg SeafoodAnnual report 2018hedging criteria are recognized in other comprehensive income. Short-term foreign currency forward contracts are recognized at fair value through profit or loss. Derivatives are initially recognized at fair value on the date a derivative contract is entered into,and are subsequently stated at fair value on an ongoing basis. Changes in the fair value of derivatives entered into to hedge operating revenues are recognized in revenues. Other currency and interest derivatives are recognized net in the income statement under “other financial income/ financial expenses”. • classified in group 1) roe, fry and smolt. This fish is kept onshore. When the fish is large enough to be released to sea, they are classified in group 2) consumer products or biomass in sea. • Fish onshore (smolt) are recognized at accumulated cost. The best estimate of fair value is considered to be the accumulated cost because of very little biological transformation. This assessment must be seen in the light of the fact that smolt are currently released to sea at a stage when their weight is still relatively low. For fish in sea, the fair value is calculated by applying a cash- flow based present value model. With regard to financial contracts relating to sale and purchase agreements on Fish Pool, changes in unrealized gains and losses are recognized as a value adjustment of biological assets, while the book value is reported as a derivative in the balance sheet at the gross carrying amount of sales and contracts, respectively. Assets/liabilities in this category are classified as current assets/ current liabilities when they are intended to be disposed of within 12 months, otherwise as non-current assets/liabilities. INVENTORIES Inventories are stated at the lower of cost and net realizable value. Cost is determined using the first-in, first-out (FIFO) method. The net realisable value is the estimated sales price less the estimated costs of completion and sale. BIOLOGICAL ASSETS The accounting treatment of live fish by enterprises applying IFRS is regulated by IAS 41 Agriculture. IAS 41 comprises a hierarchy of methods for accounting measurement of biological assets at level 3. The basic principle is that such assets shall be measured at fair value less costs to sell. Fair value is defined in IFRS 13 as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date”. According to IFRS 13, the highest and best use of the biological asset establishes the valuation premises. Considering the industry’s common goal to harmonize the model, Grieg Seafood made adaptations to the model during Q4 2018. The previous calculation was based on a growth model which has been the standard model in the salmon industry, while the new calculation is cash-flow based (present value model). Changes to the model involve calculation techniques and do not represent a change in accounting policy. The changes in the new model affected profit or loss by NOK -45.4 million in Q4 2018. In the calculation model used for 2017, the estimated profit was recognized in a straight-line basis in parallel with the biological development, and historical carried expenses were added. As a result, the fair value was affected by company-specific factors, including the method of recording mortality. Biological assets comprise of live fish, smolt and fish in sea. The fish are divided into two main groups, depending on the stage of the life cycle. At the earliest stage of the life cycle, the fish are The fair value of fish in the sea is estimated for each location. In accordance with the principle for highest and best use, the Industry Group considers that the fish have optimal harvest weight when they have a live weight of 4.76 kg, which corresponds to 4 kg gutted weight. Fish with a live weight of 4.76 kg or more are classified as ready for harvest (mature fish), while fish that have still not achieved this weight are classified as not ready for harvest (immature fish). The cash flow-based present value model does not rely on historical and company specific factors. In a hypothetical market with perfect competition, a hypothetical buyer of live fish would maximum be willing to pay the present value of the estimated future profit from the sale of the fish when it is ready for harvest. The estimated future profit, considering all price adjustments and payable fees for completion, constitutes the cash flow. No deductions are made for sales expenses, as these are not observable on the market. Such expenses are also deemed immaterial. Incoming cash flow is calculated as a function of estimated volume multiplied by estimated price. For fish not ready for harvest, a deduction is made to cover estimated residual costs to grow the fish to harvest weight. The cash flow is discounted monthly by a discount rate. The discount rate comprises three main components: 1) the risk of incidents that influence cash flow, 2) hypothetical licence lease and 3) the time value of money. Please refer to the note on significant accounting estimates for more detailed information. When estimating the actual accumulated cost at the respective seawater facility, direct costs (fish feed and similar) are allocated to each group of fish, set into sea at the same location. Financial costs are not included in the costs of production. The sales price for fish in the sea are based on the forward price 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 limited, but Grieg Seafood’s opinion is that the observable forward prices must be seen as the best approach to a price for the sale of salmon. With regard to foreign countries, the most relevant price information available for the expected harvesting period is applied. For fish in the sea, the forward price in Norway is adjusted for historical differences in achieved prices between Norway and Canada/the UK. 215 Part 03 Operational resultsGrieg Seafood Group Accounts NOTE 2 CONT. The price/net sales value is adjusted for quality differences (superior, ordinary and prod.), and for logistics expenses and sales commissions. Estimated harvesting expenses are deducted. The volume (biomass) is based on the actual number of individuals in the sea at the balance sheet date, adjusted to cover estimated mortality up to harvest date and multiplied by the estimated harvest weight per individual at the time of harvest. The fish in sea is adjusted for gutting waste, as the price is measured for gutted weight. Budgeted harvesting and freight costs are applied. Foreign currency forward contracts associated with the date of harvesting are applied when translating the price into CAD and GBP. The change in the fair value of biological assets is recognized through profit or loss and presented as “fair value adjustment of biological assets”. Onerous contracts are contracts where the expenses of fulfilling the contracts are higher than the economic yield the company expects to gain by fulfilling the contracts. The Group enters into contracts related to future deliveries of salmon. As biological assets are recognized at fair value, the fair value adjustments of the biological assets will be included into the estimated expenses required to fulfil the contract. This implies that the Group may experience loss-making (onerous) contracts according to IAS 37 even if the contract price for physical delivery contracts is higher than the actual production cost for the products. If that occurs, a provision is made for the estimated negative value. Changes arising from physical delivery contracts are recognized as “fair value adjustment of biological assets”. The liability in the balance sheet is recognized as other current liabilities (see Note 7). Fish farming naturally comes with a certain level of loss of fish along the production cycle, and our budgets are typically produced with an inherent assumption of a 0.5-1% monthly mortality. The losses associated with normal levels of survival are not directly recognized in profit or loss. In periods where specific abnormal incidents lead to reduced survival, we immediately recognize write-downs of the biomass inventory, to better reflect the actual biomass in sea or on land. The write-down cost is recorded as they arise under raw materials and consumables used in the income statement. TRADE RECEIVABLES Trade receivables arise from the trading of goods or services within the ordinary operating cycle, and under normal terms of payment are initially recognized at nominal value. Trade receivables with longer terms of payment are discounted to present value. In line with IFRS 9, loss allowances are based on expected lifetime losses. The new IFRS standard requires loss provisions also for new and "fresh" loans, by making a write-down for expected credit losses based on expected default in the next twelve months. For receivables where the credit risk has increased substantially after the establishment, a write-down shall be made for the expected credit loss over the maturity of the receivables. The model for calculating loss allowance classifies the trade receivables into two 216 groups: normal risk and high-risk, based on their country of origin. Furthermore, the trade receivables are classified as credit-insured receivable or not. According to internal policy, 85% of all trade receivables must be credit insured. The provision is the difference between nominal and recoverable amount, which is the present value of estimated future cash flows, discounted at the original effective interest rate. Loss allowance is recognized as “other operating expenses” in the income statement. The new accounting standard has not had any significant effect on the amount of loss allowance. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash in hand, bank deposits, other short-term highly liquid investments with original maturities of three months or less. The overdraft facility is included in current borrowings in the balance sheet. SHARE CAPITAL Ordinary shares are classified as equity. Costs directly attributable to the issue of new shares or options, net of tax, are shown in equity as a deduction, net of tax, from the proceeds. BORROWINGS Borrowings are initially recognized at fair value when the funds are received, net of transaction costs incurred. Borrowings are subsequently stated at amortized cost applying the effective interest method. 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. DEFERRED TAX Deferred tax is provided for in full at nominal value, using the liability method, on temporary differences arising between the value of assets and liabilities for tax and accounting purposes. Deferred tax is determined using tax rates and laws that have been enacted or substantively enacted by the balance sheet date and that are expected to apply when the related deferred tax asset is realized or the deferred income liability is settled. Deferred tax assets are recognized to the extent that it is probable that future taxable income will be available, from which the temporary differences can be deducted. Deferred tax is calculated on temporary differences arising on investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not be reversed in the foreseeable future. EMPLOYEE BENEFITS PENSION OBLIGATIONS The company pays premiums to local, defined-contribution schemes for all employees. The company's pension schemes meet the requirements in the Mandatory Occupational Pension Act. Pension premiums are recognized in the income statement through operations on an ongoing basis. Employer’s social security contributions are expensed based on paid pension premiums. The Group companies Grieg Seafood Rogaland AS and Grieg Seafood Grieg SeafoodAnnual report 2018Finnmark AS have a contractual early retirement pension scheme (AFP). The financial commitments associated with this scheme are included in the Group’s pension expenses. The AFP early retirement scheme follows the rules for public sector AFP, and both companies are members of the Norwegian Confederation of Trade Unions(LO)/the Confederation of Norwegian Enterprise (NHO) scheme. The pension payment calculations are based on standard assumptions relating to the development of mortality and disability as well as other factors such as age, years of service and remuneration. Pension premiums are recognized in the income statement through operations as they arise. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognized even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. Provisions are measured as the present value of the expenditures expected to be required to settle the obligation, using a pre-tax discount rate that reflects the current market situation and the risks specific to the obligation. The increase in the provision due to the change in value because of passage of time is recognized as a financial expense. SHARE-BASED REMUNERATION The Group operates a share-based management remuneration scheme with settlement in cash, where individual employees are obliged to buy shares proportionate to their annual salary. The fair value of the employee services received in exchange for the grant of the options is recognized as an expense. The total amount to be charged over the vesting period is calculated on the basis of the fair value of the options granted, excluding the impact of any non-market vesting conditions (for example, profitability and sales growth targets). Non-market vesting conditions are included in assumptions about the number of options that are expected to vest. At each balance sheet date, the company revises its estimates of the number of options that are expected to be vested and recognizes the impact of the revision relative to original estimates, if any, in the income statement. The Black and Scholes option pricing model is used for valuation. The company´s obligations are recognized under non-current liabilities if the latest possible redemption date is more than one year into the future. TERMINATION BENEFITS Termination benefits are payable when employment is terminated by the Group before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group recognizes termination benefits when it is demonstrably committed to either terminating the employment of current employees according to a detailed formal plan without the possibility of withdrawal or providing termination benefits as a result of an offer made to encourage voluntary redundancy. PROFIT-SHARING AND BONUS SCHEMES The Group recognizes a provision where it has a contractual obligation or where there is a past practice that has created a constructive obligation. PROVISIONS Provisions (e.g. environmental improvements, restructuring costs and legal claims) are recognized when: • the Group has a present legal or constructive obligation as a result of past events; it is more likely than not that an outflow of resources will be required to settle the obligation; the amount of the obligation can be reliably estimated. • • Restructuring provisions comprise lease termination penalties and employee termination payments. Provisions are not recognized for future operating losses. REVENUE RECOGNITION Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services. Revenue is shown net of value added tax, returns, rebates and discounts and after eliminating intragroup sales. Revenue is recognized when it can be reliably measured, and it is reasonably certain that the economic benefits will be transferred to the company, that is when a Group entity has delivered products to the customer, the customer has accepted the products and collectability of the related receivables and when the risks and rewards have been transferred to the customer. Revenues from the Group are mainly generated from sale of fresh and frozen salmon, and processed fish. Furthermore, the Group also sells roe and ensilage, and harvest services to external companies, however these services constitute less than 1 % of total revenues. In terms of IFRS 15, there is only one performance obligation within each customer contract. The sales price is determined upon contract settlement and is based on available market price. The payment is settled upon delivery. INTEREST INCOME Interest income is recognized in the income statement based on the effective interest rate. If impairments are recognized for receivables, the carrying amount will be reduced to the recoverable amount. The recoverable amount is the estimated future cash flow discounted by the original effective interest rate. Following an impairment, interest income is recognized based on the amortised cost and original effective interest rate. DIVIDEND INCOME Dividend income from investments or equity instruments, is recognized when the right to receive payment is established. Dividend income from entities recognized under the equity method are not recognized but recorded as a reduction in the carrying value of the investment. LEASES FINANCE LEASES Leases, or other arrangements as described in IFRIC 4, relating to property, plant and equipment where the Group has substantially all the risks and control, are classified as finance leases. Finance leases are recognized in the balance sheet at the lease’s commencement at the lower of the fair value of the leased property and the present value of the aggregate minimum lease payments. Each lease payment is allocated between an instalment element and an interest element so as to achieve a constant interest 217 Part 03 Operational resultsGrieg Seafood Group AccountsNOTE 2 CONT. rate in the different periods of the outstanding lease obligation in the balance sheet. The lease obligation, less interest costs, is classified as other non-current liabilities. The interest expense is recognized in the income statement as a financial expense over the lease term so as to achieve a constant interest expense on the outstanding obligation in each period. The property, plant and equipment acquired under finance leases is depreciated over the shorter of the expected useful life of the asset and the lease term. OPERATING LEASES Leases, or other arrangements described in IFRIC 4, of which more than an insignificant portion of the risks and rewards of ownership are retained by the lessor, are classified as operating leases. Payments made under operating leases (net of any financial incentives from the lessor) are charged to the income statement on a straight-line basis over the term of the lease. DIVIDENDS Dividends payable to the company’s shareholders are recognized as a liability in the Group’s financial statements when the dividends are approved by the AGM. BORROWING COSTS Borrowing costs incurred during the construction of operating assets are capitalized during the period of time that is required to complete and prepare the asset for its intended use. Other borrowing costs are expensed in the income statement. flows resulting from the divestment of operations are presented under investing activities. The Group has prepared an overview of changes in the Group’s liabilities in accordance with IAS 7, Statement of Cash Flows. This includes changes due to cash flow (e.g. utilization and repayments of loans) and changes without cash flow effect such as acquisitions, sales, calculated interest rates and unrealized currency translation differences. Changes in financial assets are disclosed if cash flows have been, or will be, included in the cash flow from financing activities. This may be the case for instance for assets pledged as security for financial liabilities. These changes have been implemented starting with the annual financial statements for 2017. EARNINGS PER SHARE Earnings per share are calculated by allocating the profit for the year to the company’s shareholders based on a weighted average of the number of issued ordinary shares during the year. Diluted earnings per share are calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. CONTINGENT ASSETS AND LIABILITIES Contingent liabilities are defined as: • possible obligations resulting from past events whose existence depends on future events; obligations that are not recognized because it is not probable that they will lead to an outflow of resources entailing financial benefits from the company. obligations that cannot be measured with sufficient reliability. • • Contingent liabilities are not recognized in the annual financial statements apart from contingent liabilities resulting from the acquisition of an entity. Material contingent liabilities are disclosed, with the exception of contingent liabilities where the probability of the liability crystalizing is remote. Contingent liabilities acquired through the purchase of operations are recognized at fair value even if it is not probable that the liability will crystallize. The assessment of probability and fair value is subject to constant review. Subsequent measurement is at the higher of the amount initially recognized (less any amount recognized as revenue) and the amount according to the general provision measurement rules. Contingent assets are not recognized in the financial statement, but are disclosed if it is likely that a benefit will accrue to the Group. CASH FLOW STATEMENT The Group’s cash flow statement shows the overall cash flow broken down into operating, investing and financing activities using the indirect method. The cash flow statement illustrates the effect of the various activities on cash and cash equivalents. Cash 218 Grieg SeafoodAnnual report 2018NOTE 3 Financial risk management CAPITAL MANAGEMENT The Group aims to ensure sufficient access to capital to enable the business to develop in accordance with adopted strategies and thus continue to be one of the leading players in the sector. Historically, the industry has always been vulnerable to price fluctuations in the market. For this reason, accounting results may fluctuate considerably from year to year. Consequently, the Group also strives to ensure that the business maintains an appropriate level of disposable liquidity. The Group aims to provide a competitive return on invested capital to shareholders, by distributing dividends and increasing the share price. The Board aims to achieve an average long-term dividend corresponding to 25–30% of the Company's profit after tax, allowing for the effects of fair value adjustments of biomass on profits. However, all dividends must be assessed in the light of what is deemed to be a healthy and optimal level of equity. At 31 December 2018, the Group had interest-bearing liabilities, including finance leases and factoring of NOK 2 396 million, see Note 10. Funding mainly takes the form of bank loans. The level of liabilities and alternative forms of funding are subject to constant evaluation. FINANCIAL RISK FACTORS The Group is exposed to a number of financial risks; market risk (including foreign exchange risk, interest rate risk and price risk), credit risk and liquidity risk. The Group’s overall risk management program focuses on the volatility of the financial markets and seeks to minimize potential adverse effects on the Group’s financial performance. The Group uses financial derivatives to reduce certain risks. The Group identifies, evaluates and hedges financial risks in close cooperation with the Group’s operational units. The Board has established written principles for the management of foreign exchange risk, interest rate risk and use of the Group´s financial instruments. I) MARKET RISKS (i) Foreign exchange risk The Group operates internationally and is exposed to foreign exchange risk from various currency exposures, primarily CAD, USD, GBP and EUR. Foreign exchange risk arises from future commercial transactions, recognized assets, and liabilities and net investments in foreign operations. The Group enters into foreign currency forward contracts to manage this risk. TRADE RECEIVABLES AND TRADE PAYABLES (CURRENCY IN NOK 1 000) 2018 Trade receivables Trade payables 2017 Trade receivables Trade payables NOK USD EUR GBP CAD JPY OTHER CURRENCIES TOTAL 131 760 470 931 164 470 437 337 153 281 825 17 403 69 716 16 894 86 096 16 566 - 4 923 4 380 925 232 649 352 115 394 427 251 145 851 313 002 155 651 1 327 10 297 77 026 6 524 66 421 18 989 - 5 995 3 055 761 407 585 378 219 Part 03 Operational resultsGrieg Seafood Group AccountsNOTE 3 CONT. NET INTEREST-BEARING LIABILITIES (CURRENCY IN NOK 1 000) 2018 Cash and cash equivalents Interest-bearing liabilities * Net interest-bearing liabilities 2017 Cash and cash equivalents Interest-bearing liabilities * NOK USD EUR GBP CAD JPY OTHER TOTAL 81 372 10 418 1 320 16 683 1 667 216 106 755 888 220 -275 774 29 013 -8 229 1 585 844 96 336 886 899 -292 457 -37 242 -1 594 12 900 14 494 707 137 920 5 253 2 396 341 4 545 2 258 420 -259 213 -70 775 -6 325 401 404 201 645 1 451 3 528 271 715 1 599 795 54 555 238 431 143 019 - 14 391 12 940 4 909 2 055 100 1 381 1 783 386 Net interest-bearing liabilities 1 859 008 125 329 244 756 -258 384 -201 645 * Overview of interest-bearing liabilities, see Note 10 The Group has investments in foreign subsidiaries whose net assets are exposed to foreign currency translation risk. Currency exposure arising from the net assets of the Group’s foreign operations was previously primarily managed through borrowings denominated in the relevant foreign currencies. The base currency of the syndicated bank loan was previously solely in NOK, however after the renegotiation of the syndicate agreement in February 2018, the term loan was split into NOK 600 million and EUR 60 million. This was carried forward as a great proportion of the sales revenues are denominated in EUR, and hence the EUR loan would act as a hedge against currency fluctuation. Further, converting to EUR loan would reduce the interest cost. The parent company extends current and non-current loans to the subsidiaries denominated in these companies’ functional currency. All non-current loans are considered to be equity in these companies, as they will not be repaid. The currency effect of loans is recognized under "currency effect of net investments" in consolidated comprehensive income. The numerical effects for 2018 and 2017 are presented below. AMOUNTS IN NOK 1 000 CURRENCY EFFECTS ON LOANS TO SUBSIDIARIES Currency effect Tax effect (22 %) Net effect recognized in equity 2018 -4 193 923 -3 271 2017 22 333 -5 360 16 973 Sensitivity analysis A 10% appreciation of NOK against USD, CAD, GBP and EUR at the balance sheet date would be expected to have the following effects on net interest-bearing liabilities (in NOK 1 000). CURRENCY IN NOK 1 000 10% APPRECIATION AGAINST (Gain)/loss before tax in profit or loss on interest-bearing liabilities USD -9 634 EUR -88 690 GBP 29 246 CAD 3 724 220 Grieg SeafoodAnnual report 2018Forward currency contracts Hedge accounting has been applied to foreign currency forward contracts relating to non-current physical delivery contracts. The effect on profit is recorded in other comprehensive income. Current forward currency contracts are not subject to hedge accounting. Value changes in current forward contracts affect profit or loss, as these contracts are recognized at fair value through profit or loss, see accounting policies (Note 2). FORWARD CURRENCY CONTRACTS AT FAIR VALUE THROUGH PROFIT OR LOSS AMOUNT (CURRENCY IN 1 000) AMOUNT (CURRENCY IN 1 000) BOUGHT WEIGHTED HEDGING RATE 222 366 214 7 380 7 644 6 550 NOK NOK NOK NOK GBP CAD 1 756 3 515 22 866 546 700 8 781 7.9283 9.6164 10.6900 0.0740 10.9259 1.3410 MARKET RATE MATURITY INTERVAL * 8.6885 9.9483 09.01.2019 02.01.2019 - 07.01.2019 11.1213 02.01.2019 - 09.01.2019 0.0790 04.01.2019 - 09.01.2019 11.1213 02.01.2019 - 09.01.2019 1.3636 09.01.2019 - 01.02.2019 SOLD USD EUR GBP JPY NOK USD Total MARKET VALUE (NOK 1 000) 31.12.2018 -171 -121 -952 -98 146 -967 -2 162 *Maturity specified as an interval for multiple contracts HEDGING CONTRACTS THROUGH COMPREHENSIVE INCOME AT FAIR VALUE SOLD USD EUR JPY SEK CHF NOK Total AMOUNT (CURRENCY IN 1 000) AMOUNT (CURRENCY IN 1 000) BOUGHT WEIGHTED HEDGING RATE MARKET RATE MATURITY INTERVAL * MARKET VALUE (NOK 1 000) 31.12.2018 1 900 6 706 774 691 135 12 3 047 NOK NOK NOK NOK NOK GBP 16 583 66 926 58 437 131 107 275 8.7277 9.9806 0.0754 0.9727 8.8827 8.6885 9.9483 0.0790 0.9701 8.8280 02.01.2019 - 04.01.2019 02.01.2019 - 06.03.2020 04.01.2019 - 08.01.2021 02.01.2019 - 04.01.2019 03.01.2019 11.0810 11.1213 02.01.2019 - 04.01.2019 55 -72 -3 741 0 1 15 -3 743 *Maturity specified as an interval for multiple contracts FORWARD CURRENCY CONTRACTS AT FAIR VALUE THROUGH PROFIT OR LOSS AMOUNT (CURRENCY IN 1 000) AMOUNT (CURRENCY IN 1 000) BOUGHT WEIGHTED HEDGING RATE MARKET RATE MATURITY INTERVAL * MARKET VALUE (NOK 1 000) 31.12.2017 SOLD USD USD EUR GBP JPY CHF NOK NOK Total 4 625 5 613 13 084 1 905 157 323 13 61 580 9 496 CAD NOK NOK NOK NOK NOK DKK GBP 5 912 46 558 128 039 20 429 11 712 113 50 440 852 1.2782 8.2942 9.7856 10.7251 0.0744 8.4105 1.2209 11.1410 1.2543 8.2050 9.8403 05.01.2018 - 02.02.2018 02.01.2018 - 01.02.2018 02.01.2018 - 02.02.2018 11.0910 03.01.2018 - 12.01.2018 0.0729 8.4091 1.3218 04.01.2018 - 02.02.2018 16.01.2018 31.01.2018 - 31.07.2018 11.0910 03.01.2018 - 12.01.2018 *Maturity specified as an interval for multiple contracts 741 518 -758 -697 241 -0 4 578 -46 4 577 221 Part 03 Operational resultsGrieg Seafood Group AccountsNOTE 3 CONT. HEDGING CONTRACTS THROUGH COMPREHENSIVE INCOME AT FAIR VALUE AMOUNT (CURRENCY IN 1 000) AMOUNT (CURRENCY IN 1 000) BOUGHT WEIGHTED HEDGING RATE SOLD USD EUR GBP JPY SEK CHF NOK NOK Total 1 794 4 317 40 281 107 829 250 13 1 324 4 703 NOK NOK NOK NOK NOK NOK DKK GBP 14 705 41 949 428 146 8 143 249 113 1 000 437 8.1978 9.7172 10.6290 0.0755 0.9978 8.4016 1.3240 MARKET RATE MATURITY INTERVAL * 8.2050 9.8403 23.01.2018 - 09.02.2018 03.01.2018 - 09.02.2018 11.0910 17.01.2018 - 09.01.2019 0.0729 0.9996 8.4091 1.3218 19.01.2018 - 13.04.2018 03.01.2018 03.01.2018 03.01.2018 10.7599 11.0910 17.01.2018 - 27.09.2018 MARKET VALUE (NOK 1 000) 31.12.2017 -0 -376 -18 813 275 -0 -0 -2 148 -18 769 *Maturity specified as an interval for multiple contracts (ii) Interest rate risk Since the Group has no significant interest-bearing assets apart from bank deposits, its income and operating cash flows are largely independent of changes in market interest rates. The Group’s interest rate risk arises from borrowings. Borrowings at variable rates expose the Group to cash flow interest rate risk. Fixed-interest contracts are used to reduce this risk. The Group continuously monitors its interest rate exposure. The Group calculates the impact on profit or loss of a defined interest rate change. The same change in the interest rate is used for all currencies in each simulation. The scenarios are only run for liabilities that represent major interest-bearing positions. Sensitivity calculations show the following expected values: If the interest rate had been 1% higher (lower) throughout the year, all other factors remaining unchanged, the pre-tax profit would have decreased (increased) by NOK 20.0 million in 2018 and NOK 15.9 million in 2017 due to the floating rate of interest on loans and deposits. The sensitivity analysis is based on average net interest-bearing liabilities during 2018 and 2017, irrespective of concluded interest rate swap agreements. AMOUNTS IN NOK 1 000 SENSITIVITY CHANGE IN INTEREST RATE POINTS Effect on profit before income tax -/+ 1% 2018 -/+ 20 025 2017 -/+ 15 934 Interest rate swap agreements The purpose of the Group’s risk management activities is to establish an overview of the financial risk that exists at any given time and to provide more time to adapt to relevant developments. To this end, the Group has chosen to employ interest rate swap agreements to establish greater stability for the Group’s variable-rate loan interest expenses. The Group has decided that at any given time, a certain percentage of its variable interest-bearing liabilities should be hedged using interest rate swap agreements. A given proportion will always be at a floating rate, while the remainder will be subject to potential hedging. This situation is constantly reviewed in light of the market situation. The interest rate swap agreements have a duration of four years. The Company constantly evaluates whether these periods should be rolled over. AGREEMENT Fixed rate paid - floating rate received Fixed rate paid - floating rate received Total PRINCIPAL (NOK 1 000) 400 000 260 000 FIXED RATE (%) BASIS OF FLOATING RATE 1.69 1.28 Nibor 3 months Nibor 3 months MATURITY 27.03.2019 20.10.2021 Interest rate swap contracts assessed at market value excl. accrued interest MARKET VALUE 31.12.2018 (NOK 1 000) MARKET VALUE 31.12.2017 (NOK 1 000) -394 1 252 858 -3 965 -106 -4 071 Hedge accounting under IFRS 9 is not applied to interest rate swap agreements. Changes in value of interest rate swap agreements are recognized as fair value changes through profit or loss (see Note 23) and see description in accounting policies (Note 2). 222 Grieg SeafoodAnnual report 2018(iii) Price risk Financial salmon price contracts allow the buyer and seller to agree prices and volumes for future delivery. As at 31 December 2018, 17% of the estimated harvest volume in 2019 in Norway is hedged under fixed price contracts. The total share of fixed price contracts in 2018 was 34% in Norway. In the UK, 23% of the estimated harvest volume in 2019 is hedged under fixed-price contracts. The financial contracts are presented gross in the balance sheet with changes in value recognized through profit/loss as part of the Fair value adjustment of biological assets. As biological assets are recognized at fair value, the expected costs to meet contract terms will be included in the fair value adjustment. As at 31 December 2018, the Group had financial salmon contracts for 2019 totalling NOK 1.9 million, of which all were sales contracts. At year-end 2018, the Group had physical delivery contracts recognized as liability, totalling NOK 0.5 million. Fair value of financial derivatives The carrying value of derivatives and other financial instruments as at 31 December is shown below. The carrying value equals fair value. Positive values are classified as an asset, while negative values are classified as a liability in the balance sheet. AMOUNTS IN NOK 1 000 2018 2017 FAIR VALUE OF FINANCIAL DERIVATIVES ASSETS CURRENT LIABILITIES ASSETS CURRENT LIABILITIES Forward currency contracts at fair value through profit or loss Forward currency hedging contracts at fair value through comprehensive income Interest rate swap agreements Financial salmon contract - purchase contracts Financial salmon contract - sales contracts Total financial instruments at fair value - - 858 - 1 885 2 743 -2 162 -3 743 - - - -5 905 5 319 - - 231 42 683 48 232 -742 -18 769 -4 071 - - -23 581 II) CREDIT RISK Credit risk is managed at Group level. Credit risk arises from transactions involving derivatives and deposits in banks and financial institutions, as well as from transactions with customers, including trade receivables and fixed contracts. The Group has procedures to ensure that products are only sold to customers with satisfactory creditworthiness. The company normally sells to new customers solely against presentation of a letter of credit or against advance payment. Credit insurance is used when deemed necessary. For customers who have a reliable track record with the Group, sales up to certain previously agreed levels are permitted without any security. Factoring agreements have been concluded with Ocean Quality AS and Ocean Quality UK Ltd. regarding trade receivables. See further information about the factoring agreement in Note 10. All fish produced in the Group is sold to Ocean Quality Group, which in turn sells to external customers. The Ocean Quality Group secures the bulk of its sales through credit insurance and bank guarantees. The book value of financial assets represents the maximum credit exposure. The Group has implemented IFRS 9, effective from 1 January 2018, and in that regard the model for calculating loss allowance on trade receivables has changed. For further information about the model and loss allowance, please refer to note 20. AMOUNTS IN NOK 1 000 MAXIMUM CREDIT RISK EXPOSURE Trade receivables Other receivables Cash and cash equivalents Total NOTE 20 21 19 2018 925 232 166 432 137 920 2017 761 407 198 527 271 715 1 229 585 1 231 648 223 Part 03 Operational resultsGrieg Seafood Group Accounts NOTE 3 CONT. AMOUNTS IN NOK 1 000 CHANGE IN LOSS ALLOWANCE 01.01. Change in provision 31.12. III) LIQUIDITY RISK 2018 11 368 564 11 932 2017 8 378 2 990 11 368 The Group adopts a prudent approach to liquidity risk management, which includes maintaining sufficient cash and marketable securities, securing funding through sufficient credit facilities and maintaining the ability to close market positions when considered appropriate. Due to the dynamic underlying nature of the business, the Group aims to secure flexibility through available credit lines. The Group maintains a financing agreement through a 50/50 syndicate with DNB and Nordea, which was renegotiated in February 2018. The agreement includes a non-current credit facility of NOK 1 000 million and a bank overdraft facility of NOK 100 million. For further information about the agreement and other non-current liabilities, see Note 10. Management monitors the Group’s liquidity reserve, which comprises credit facilities (see Note 10) and cash and cash equivalents (Note 19), based on expected cash flows. This is generally carried out at Group level in cooperation with the operating companies. The following table shows a breakdown of the Group’s non-derivative financial liabilities, classified by maturity structure. The amounts in the table are undiscounted contractual cash flows. Note 10 shows the payment profile for the Group’s non-current liabilities. AMOUNTS IN NOK 1 000 31.12.2018 Non-current loan instalments Loan interest - floating Non-current credit facility Interest non-current credit facility < 3 MONTHS 3 MONTHS - 1 YEAR YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6 YEAR 7 YEAR 8 YEAR 9 YEAR 10 > 10 YEARS TOTAL 49 106 49 106 98 212 98 212 98 212 754 181 5 442 14 395 17 728 15 896 14 113 2 247 - - - - - 260 000 1 540 4 791 6 412 6 394 6 394 1 074 - - - - - - - - - - - - - - - - - - - - - 1 147 027 - 69 821 - 260 000 - 26 605 Finance leases 18 266 49 817 54 458 48 267 41 396 35 556 27 669 24 317 22 116 20 203 11 217 7 160 360 442 Interest finance leases 2 629 7 113 7 898 6 284 4 881 3 702 2 849 2 134 1 457 907 349 109 40 311 Trade payables 649 352 - Export credits - 8 897 Factoring liabilities 573 377 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 649 352 8 897 573 377 Total liabilities 1 299 712 134 119 184 706 175 052 164 995 1 056 761 30 518 26 451 23 574 21 110 11 566 7 269 3 135 832 224 Grieg SeafoodAnnual report 2018AMOUNTS IN NOK 1 000 31.12.2017 Non-current loan instalments Loan interest - floating Non-current credit facility Interest non-current credit facility < 3 MONTHS 3 MONTHS - 1 YEAR YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6 YEAR 7 YEAR 8 YEAR 9 YEAR 10 > 10 YEARS TOTAL 22 500 67 500 895 000 5 348 15 432 8 277 - - 300 000 1 403 4 287 2 853 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 985 000 - 29 056 - 300 000 - 8 543 Finance leases 15 730 42 622 48 685 34 867 28 208 22 215 19 276 13 904 10 378 8 389 6 107 9 871 260 251 Interest finance leases 1 927 5 087 5 317 4 024 2 993 2 220 1 560 1 118 792 529 321 169 26 057 Trade payables 585 378 - Export credits - 8 873 Factoring liabilities 500 976 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 585 378 8 873 500 976 Total liabilities 1 133 262 143 800 1 260 132 38 891 31 200 24 435 20 836 15 022 11 169 8 918 6 428 10 041 2 704 135 Available liquidity, available drawdowns on the credit facility, as well as positive cash flows from operations, are deemed to be sufficient to cover current and non-current liabilities. Fair value estimation (I) FINANCIAL INSTRUMENTS The fair value of financial instruments that are not traded in an active market is determined using valuation techniques (see Note 12). The Group uses different methods and makes assumptions based on market conditions at each balance sheet date. The fair value of forward foreign exchange contracts is determined using quoted forward exchange rates at the balance sheet date. The fair value of financial salmon contracts is determined using forward prices from Fish Pool. (II) TRADE RECEIVABLES AND TRADE PAYABLES The nominal value less write-downs for realized losses on trade receivables and trade payables is assumed to correspond to the fair value of these items. The fair value of financial liabilities is assumed to approximate to the book value, as virtually all these items are exposed to floating interest rates. (III) BIOLOGICAL INVENTORIES Fish in the sea are measured at estimated fair value. Consequently, the value of biological inventories is likely to vary more than the value of inventories based on cost. Fair value varies for a number of reasons, including volatility in pricing of Atlantic salmon and factors relating to production, unpredictability of biological production, changes in harvesting schedules, and changes in the composition of inventories. Grieg Seafood considers three components to be key parameters for valuation; price, monthly discount rate and estimated harvest biomass volume. In the following table is a sensitivity analysis, showing the change in the fair value of the biological assets, and hence the Group profit before tax, in the event of changes in these parameters. AMOUNTS IN NOK 1 000 SENSITIVITY ANALYSIS OF BIOMASS - EFFECT ON PRE-TAX PROFIT Change in discount rate +1% Change in discount rate -1% Changes in sales price +1 NOK/kg Changes in sales price -1 NOK/kg Changes in biomass volume +1% kg Changes in biomass volume -1% kg 2018 155 255 -139 099 57 516 -57 516 33 009 -33 009 2017 N/A N/A 34 808 -34 808 13 953 -9 389 225 Part 03 Operational resultsGrieg Seafood Group AccountsNOTE 4 Critical accounting and estimates and judgements CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS Management is required to make estimates and assumptions concerning the future, which affect which accounting policies are to be used and reported amounts for assets, liabilities and contingent liabilities in the balance sheet, as well as income and expenses for the accounting year in accordance with IFRS. Estimates and underlying assumptions are continuously evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be probable under the present circumstances. The final outcomes may deviate from these estimates. Changes in accounting estimates are recognized in the period in which the estimates are changed. The Group is involved in claims and complaints related to the sale of goods on a continuous basis. As of year-end there were no material ongoing issues. ESTIMATED IMPAIRMENT OF GOODWILL, LICENSES AND PROPERTY, PLANT AND EQUIPMENT The Group tests whether goodwill and licenses have suffered any impairment on an annual basis, in accordance with the accounting policy stated in Note 2. The recoverable amounts of cash-generating units are determined based on value-in-use calculations. These calculations require the use of estimates of future cash flows from the cash-generating unit, and the application of a discount rate in order to calculate the present value of future cash flows. Expectations of future cash flows will vary over time. Changes in market conditions and expected cash flows can result in losses due to future value decreases. The value of long-term growth in demand, changes in market competition, the strength of the production stage in the value chain and thus also expectations of the long-term profit margin are also of significance. The different parameters could variously affect the value of the licenses over time. Any change in these critical assumptions will result in related write-downs, or the reversal of write-downs of the value of licenses in accordance with the accounting policies described in Note 2. Please also refer to Note 8 for further comments on tests relating to value impairment. CLASSIFICATION OF LICENSES All licenses where the Group have no other contractual restrictions relating to use of the licenses have indefinite lives and, as such are not amortized. Also, licenses granted with a finite useful life, but where the license holders can renew the licenses without incurring considerable expenses are assessed as indefinite lives. However, the Group’s licenses in each country are subject to certain requirements and the Group risk penalties, sanctions or even license revocation if we fail to comply with license requirements or related regulations. Also, local government may change the way licenses are renewed. For further information, please see note 8. BIOLOGICAL ASSETS The Group’s biological assets comprise smolt and fish in the sea. Biological assets are measured at fair values less costs to sell. The measurement unit is the individual fish, however, for practical reasons, cash flows and estimates are carried out per locality. The fair value model assessed by the Group calculates the net present value of expected cash flow. Valuation is based on a number of different premises, many of which are non-observable. The premises are divided into the four following categories: 1. Sales price 2. Production cost 3. Volume 4. Discount rate For mature fish (ready for harvesting) at the balance sheet date, uncertainty mainly involves realized prices and volume. For immature fish (not ready for harvesting), level of uncertainty is higher. Price, volume, discount rate, and remaining production costs are the main uncertainty factors; however, uncertainty is also related to biological transformation and mortality prior to harvest date for the fish. Sales price Salmon sales prices are volatile. The sales price is based on forward prices and/or the most relevant pricing information available for the period in which the fish is expected to be mature (ready for harvesting). Changes in price assumptions have the greatest impact on the fair-value estimate. The market price constitutes the basis for calculating fair value for both mature and immature fish. The forward prices for superior Norwegian salmon weighing 3-6 kg gutted weight from Fish Pool are applied. For fish ready for harvest, the forward price for the following month is applied. For fish not ready for harvest the forward price for the month when the fish is expected to be harvested is applied. Fish harvested before optimal harvest weight of 4.0 kg gutted weight (4.76 kg live weight) an additional price adjustment is required. The price is adjusted for export margin and clearing costs. This accounts for both fish ready for harvest and not ready for harvest. 226 Grieg SeafoodAnnual report 2018Production cost The planned point of harvesting is assumed to be when the fish reaches a live weight of 4.76 kg, however, there may be uncertainty regarding the estimated growth rate. For immature fish the fair value is adjusted by the estimated remaining cost necessary to grow the fish to optimal harvest weight. Forecasted production costs include provisions for estimated feed prices, costs of treatment of lice and other costs to prevent biological accidents. Here, estimations are affected by uncertainty regarding the number of lice treatments to be carried out, the sea temperature and other conditions affecting growth and costs. Volume Estimated harvest volume is based on estimated number of fish at the balance sheet date less estimated future mortality multiplied by optimal harvest weight (4.76 kg). Actual harvest volume may differ from the estimated volume due to changes in biological conditions or due to special events, such as a mass mortality. Estimated number of fish is based on the number of smolt released to sea, and mortality is a given percentage of the fish in sea. The normal estimated harvest weight is assessed to be the live weight of fish that results in gutted weight of 4.0 kg. If there are any specific conditions at the balance sheet date resulting in the fish being harvested before they reach optimal weight, the estimated harvest weight is adjusted. Mortality during the period from the balance sheet date to the date when the fish reach harvest weight is estimated to be 1% of the number of incoming fish per month. Discount rate The sales income and remaining expenses are allocated to the same period as the fish is harvested. The cash flows from all localities where the Group has fish in the sea will then be distributed over the entire period it takes to farm the fish in the sea. With the current size of the smolt released and the frequency of the smolt releases, this period may be up to 18 months. The estimated future cash flow is discounted by a monthly rate, which was 6% at 31 December 2018. The discount rate takes into account both risk adjustment (risk related to volume, cost and price), compensation for the value of the licenses (hypothetical rent) and time value (tying up capital). The risk adjustment shall reflect the price discount a hypothetical buyer would demand as compensation for the risk assumed by investing in live fish rather than a different investment. The longer it takes to reach harvest date, the higher the risk that something may occur that will affect the cash flow. Three significant factors could have an impact on the cash flow; volume, costs and prices. The one thing all three factors have in common is that the sample space is asymmetrical. Due to limited access to licenses for farming fish, the license value is currently considered to be very high. For a hypothetical buyer of live fish to take over and continue to farm the fish, the buyer needs a license, locality and other permits required for such production. However, in a hypothetical market for the purchase and sale of live fish, one must assume that this would be possible. In that scenario, a hypothetical buyer would claim a significant discount to allocate a sufficient share of the returns to the buyer's own licenses. It is difficult to create a model that would allow a hypothetical annual lease cost to be derived from prices for sold licenses as the curve in the model would be based on projections of future profit performance in the industry. A discount must be made for the time value of the tied-up capital linked to the share of the present value of the cash flow allocated to the biomass. The buyer who is investing in live fish rather than some other type of investment, would claim compensation for the alternative cost. The production cycle for salmon in the sea currently takes up to 18 months. The cash flow will therefore extend over a similar period. Assuming a constant sales price throughout the period, the cash flow would decrease for each month, as costs are incurred to farm the fish to harvested weight. The cost increase for every month the fish are in the sea. As such, the effect of deferred cash flow is lower than what would be the case if the cash flow had been constant. This component is however deemed important due to the major values the stock of fish represents. Please refer to Note 2 and Note 7 for further information on estimation and calculation of fish values. Significant assumptions sensitivity The estimate of fair value of biomass will always be based on uncertain assumptions, even though the Group has built expertise in assessing these factors. There are three components to be key parameters for valuation; average price, estimated biomass volume and monthly discount rate. Please refer to Note 3 for a sensitivity analysis of these factors. 227 Part 03 Operational resultsGrieg Seafood Group AccountsNOTE 5 Investment in associates Associates that are closely related to the Group's operations and included in the Group´s value chain are classified on a separate line in EBIT when the relevant associates operate in the same position in the value chain as the Group. For 2018 and 2017, no investments were classified on a separat line after EBIT. In 2018, the Group, through Grieg Seafood Rogaland AS, has invested NOK 30 million in Tytlandsvik Aqua AS to acquire 33.33% of the company's shares. The remaining shareholdings are held by Bremnes Seashore AS (33.33%) and Vest Havbruk AS (33.33%). Through Tytlandsvik Aqua AS, the partners will secure increased and improved access to post smolt and are planning for an annual production capacity of 3 000 tonnes, of which Grieg Seafood's share of the volume is 50%. A total of approximately NOK 300 million has been invested in the facility, which was completed according to plan at the end of the year. The production started at the beginning of 2019. The investment in Tytlandsvik Aqua AS is classified on a separate line in the balance sheet, and the share of profit is included in EBIT. Recognized share of profit in 2018 was NOK -2.3 million and the book value was NOK 37 million at 31 December 2018. AMOUNTS IN NOK 1 000 ASSOCIATES CLASSIFIED AS OPERATIONS EQUITY INTEREST AT 31.12.2018 BOOK VALUE AT 01.01.2018 SHARE OF THE PROFIT FOR THE YEAR CHANGES IN THE PERIOD, REPAID CAPITAL BOOK VALUE AT 31.12.2018 Tytlandsvik Aqua AS 33.33% Total associates classified as operations 9 450 9 450 -2 328 -2 328 30 000 30 000 37 122 37 122 The share issue and shareholder agreement were signed on 1 June 2017. Value added relating to the investment has been allocated to hatcheries under construction, based on provisional accounting figures from Tytlandsvik Aqua as at 31 December 2017. TIME OF INVESTMENT EQUITY INTEREST Tytlandsvik Aqua AS Completed share issue through the year 01.06.2017 2018 Total ownership 16.67% 16.66% 33.33% Value added will be written down when the facility is completed and commissioned. VALUE ADDED TO PROJECT HATCHERY (NOK 1 000) 3 905 Tytlandsvik Aqua AS has the same financial year as the Group. The following table displays abridged, provisional financial information as at 31 December 2018 (100%). TOTAL ASSETS 260 973 TOTAL LIABILITIES 189 251 TOTAL EQUITY 71 722 OPERATING INCOME PRE-TAX PROFIT/LOSS 210 -4 128 AMOUNTS IN NOK 1 000 AT 31.12.2018 Tytlandsvik Aqua AS 228 Grieg SeafoodAnnual report 2018 AMOUNTS IN NOK 1 000 ASSOCIATES CLASSIFIED AS OPERATIONS EQUITY INTEREST AT 31.12.2017 BOOK VALUE AT 01.01.2017 SHARE OF THE PROFIT FOR THE YEAR CHANGES IN THE PERIOD, REPAID CAPITAL BOOK VALUE AT 31.12.2017 Tytlandsvik Aqua AS 16.67 % Total associates classified as operations - - -550 -550 10 000 10 000 9 450 9 450 The share issue and shareholder agreement were signed on 1 June 2017. Value added relating to the investment has been allocated to hatcheries under construction, based on provisional accounting figures from Tytlandsvik Aqua as at 31 December 2017. TIME OF INVESTMENT EQUITY INTEREST VALUE ADDED TO PROJECT HATCHERY (NOK 1 000) Tytlandsvik Aqua AS 01.06.2017 16.67 % 7 050 Value added will be written down when the facility is completed and commissioned. Tytlandsvik Aqua AS has the same financial year as the Group. The following table displays abridged, provisional financial information as at 31 December 2017 (100 %). AMOUNTS IN NOK 1 000 AT 31.12.2017 Tytlandsvik Aqua AS TOTAL ASSETS 20 730 TOTAL LIABILITIES 4 893 TOTAL EQUITY 15 837 OPERATING INCOME PRE-TAX PROFIT/LOSS 90 -5 154 229 Part 03 Operational resultsGrieg Seafood Group Accounts NOTE 6 Segment information The operating segments are identified on the basis of the reports which Group management (the chief decision-maker) uses to assess performance and profitability at a strategic level. Group management assesses business activities from a geographical perspective, based on the location of assets. The Group has only one production segment: Production of farmed salmon. Geographically, management assesses the results of production in Rogaland – Norway, Finnmark – Norway, BC – Canada and Shetland - UK. Group management evaluates the results from the segments based on EBIT before value adjustments of biological assets. The method of measurement excludes the effect of non-recurring costs, such as restructuring costs, legal costs on acquisition and amortisation of goodwill and intangible assets when amortisation is attributable to an isolated event which is not expected to recur. The measurement method also excludes the effect of cash-settled share options, as well as unrealised gains and losses on financial instruments. The Group’s customers are divided into different geographical markets. All sales from Norway, the UK and Canada go through the sales company Ocean Quality AS, which is also partly owned by Bremnes Fryseri AS. Grieg Seafood ASA owns 60% of Ocean Quality AS (see Note 1 for further information). Norway therefore shows the aggregate figures for the Norwegian market. Ocean Quality is fully consolidated and is part of the associated segment. The Group has implemented IFRS 15, effective from 1 January 2018. The implementation did not have a material effect on the financial statement. The Group's revenues mainly comprises revenues from sale of whole and prosessed fish and some ensilage. Furthermore, the Group also generates revenues from sale of roe and harvest services to external parties. Sales revenues are recognized when the goods are delivered and both title and risk have been transferred to the customer. This will normally be upon delivery. In 2018, sale of whole fish (fresh and frozen) constituted 93 % (2017: 95%) of the Group's total sales revenues, while processed fish constituted 7 % (2017:4%). AMOUNTS IN NOK 1 000 GEOGRAPHICAL MARKET UK NORWAY BC ELIM. SALES REVENUES 2018 SALES REVENUES 2017 EU UK USA Canada Russia Asia Other markets Total 220 393 3 572 354 534 129 94 099 223 - 46 429 2 758 767 764 309 63 868 - 701 095 309 025 - - 697 594 188 515 - 301 232 531 898 031 5 414 415 1 187 871 - - - - - - - - 3 792 746 1 301 892 792 002 252 606 - 1 048 755 312 313 7 500 316 51 % 17 % 11 % 3 % - 14 % 4 % 100 % 3 551 889 1 124 107 611 049 209 022 - 1 256 321 265 069 7 017 456 51 % 16 % 9 % 3 % - 18 % 4 % 100 % AMOUNTS IN NOK 1 000 NORWAY * BC UK TOTAL SALES REVENUES DISTRIBUTED BY PRODUCTS 2018 2017 2018 2017 2018 2017 2018 2017 Fresh whole fish Frozen whole fish Fresh processed fish Frozen processed fish Other products Total * Eliminations are included in this segment 5 287 188 5 400 795 910 697 519 091 767 753 742 326 6 965 638 6 662 212 21 253 18 217 - - 279 321 238 499 164 411 60 850 11 421 25 957 13 471 20 248 - 164 - 352 4 777 24 478 2 530 366 - 26 030 18 217 3 016 468 210 302 365 426 166 13 951 26 487 13 896 20 766 5 625 140 5 691 229 1 075 272 580 293 799 904 745 934 7 500 316 7 017 456 230 Grieg SeafoodAnnual report 2018Information reported to Group management from the reporting segments AMOUNTS IN NOK 1 000 GEOGRAPHICAL SEGMENTS Sales revenues Other income ** NORWAY ROGALAND NORWAY FINNMARK CANADA BC UK SHETLAND OTHERS/ ELIMINATIONS * GRIEG SEAFOOD GROUP 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 959 604 1 150 166 1 671 334 1 265 156 1 075 272 580 293 799 904 745 934 2 994 202 3 275 907 7 500 316 7 017 456 24 005 11 643 - 6 718 15 878 - 10 065 3 431 -24 095 -21 25 853 21 771 Other gain/losses ** 464 586 -1 615 262 -2 719 -24 295 2 308 29 732 -4 646 26 157 -1 514 -2 328 -550 - - - - - - - - -2 328 -550 -714 119 -731 218 -984 074 -845 442 -752 703 -425 686 -730 113 -634 209 -3 034 517 -3 295 075 -6 215 526 -5 931 630 267 626 430 627 685 645 426 694 335 728 154 583 80 151 117 464 -34 677 -23 835 1 334 473 1 105 533 -47 989 -37 563 -90 728 -74 758 -44 864 -34 421 -46 400 -48 808 -5 673 -5 583 -235 655 -201 133 219 637 393 064 594 917 351 936 290 864 120 162 33 751 68 656 -40 350 -29 418 1 098 818 904 400 Share of profit from associates Operating costs before depreciation and amortisation EBITDA before fair value adjustment of biological assets Depreciation, amortization and reversals EBIT before fair value adjustment of biological assets Harvesting volume (tonnes GWT) EBIT/kg (NOK) 13.48 21.70 19.98 15.42 17.49 16 293 18 111 29 774 22 831 16 632 9 600 12.50 11 924 12 056 2.83 5.70 74 623 62 598 14.72 14.45 Assets Total assets 1 799 591 1 616 948 2 454 923 2 068 196 1 293 051 1 283 521 1 141 181 1 253 714 1 453 744 930 236 8 142 490 7 152 615 1 799 591 1 616 948 2 454 923 2 068 196 1 293 051 1 283 521 1 141 181 1 253 714 1 453 744 930 236 8 142 490 7 152 615 Liabilities 661 483 511 473 851 729 767 531 520 559 797 428 956 532 931 516 1 268 676 796 762 4 258 979 3 804 710 Total liabilities 661 483 511 473 851 729 767 531 520 559 797 428 956 532 931 516 1 268 676 796 762 4 258 979 3 804 710 * Others/ eliminations A proportion of non-controlling interests (Bremnes Fryseri AS) is reported with ownership expenses and other posts as an elimination. A share of sales revenue and other operational expenses from non-controlling interests is eliminated on subordinated account lines in the column "Others/eliminations". Sales revenue from sales for Bremnes Fryseri AS amount to appr. NOK 2 364 million, while other operational expenses including cost of goods sold amounts to appr. NOK 2 136 million. Other items comprise the profit/loss from activities conducted by the parent company or other Group companies not geared for production. Internal transactions between the subsidiary and the parent company, as well as other posts relating to the parent company, are eliminated. ** Other income/gains/losses Other gains/losses include sales of shares and operating equipment, as well as foreign currency forward contracts recognised at fair value through profit or loss. Please refer to Note 5 for information on gains on sales of shares. Other income mainly relates to the settlement of insurance and other services not directly related to production. 231 Part 03 Operational resultsGrieg Seafood Group AccountsNOTE 6 CONT. GROUP EBIT EBIT before fair value adjustment of biological assets Fair value adjustment of biological assets (Note 7) EBIT after fair value adjustment of biological assets Net financial items (Note 23) Profit before tax Estimated taxes Profit for the year 2018 1 098 818 256 097 1 354 916 -77 991 1 276 925 -279 805 997 120 2017 904 400 -91 463 812 937 -14 457 798 480 -197 581 600 899 NOTE 7 Biological assets and other inventories TONNES NOK 1 000 2018 54 677 N/A 90 683 -5 061 -83 900 N/A N/A N/A 2017 45 626 N/A 83 605 -4 348 -70 206 N/A N/A N/A 2018 2017 2 698 352 -11 446 3 154 824 -207 716 -2 728 092 -682 089 N/A 971 309 2 459 625 24 095 2 773 680 -132 425 -2 284 225 -824 487 N/A 682 089 56 399 54 677 3 195 142 2 698 352 289 220 -142 398 8 363 -458 -41 028 256 097 -6 169 37 078 20 026 -91 463 Biological assets at 01.01. Currency translation differences Increase due to production Decrease due to abnormal mortality/loss Decrease due to sales Fair value adjustment at 01.01. Fair value adjustment in connection with business acquisition Fair value adjustment at 31.12. Book value of biological assets at 31.12. RECOGNIZED FAIR VALUE ADJUSTMENT Change in fair value adjustment of biological assets (1) Currency adjustment of fair value adjustment of biological assets Change in physical delivery contracts relating to fair value adjustment of biological assets (2) (see Note 25) Change in fair value of financial derivatives from salmon (Fish Pool contracts) (3) Total recognition of fair value adjustment of biological assets 232 Grieg SeafoodAnnual report 2018The biological assets are, in accordance with IAS 41, measured at fair value, unless the fair value cannot be measured reliably. Broodstock and smolt are measured at cost less impairment losses. Fair value of biological assets is, for 2018, calculated on a discounted cash flow- based present value model, which does not rely on historical cost. For 2017 the fair value was based on a growth model with proportionate allocation of expected net profit based on size of the fish and historical carried expenses added. Please refer to Note 2 for futher information. Recognized value adjustments of biological assets include: 1. Fair value adjustments of biological assets 2. Fair value (liability) change in loss contracts 3. Change in unrealized gains/losses from financial purchases/sales contracts (derivatives) from fish at Fish Pool Provisions allocated to future physical delivery contracts that require fair value adjustments are recognized as other current liabilities in the balance sheet. The contracts are calculated based on the same forward prices used for fair value calculation of biological assets. Value adjustment of financial derivatives from salmon are recognized in the balance sheet as derivatives and other financial instruments. Financial derivatives are calculated at market value. Please refer to Note 3 for further information. For further information on accounting policies for biological assets, please refer to Note 2 and Note 4. BASIS FOR VALUES 31.12.2018 Weighted price per kg GWT Source BC CAD 9.75 Fish Pool SHETLAND GBP 6.04 Fish Pool NORWAY NOK 60.58 Fish Pool Forward prices from Fish Pool as stated above are adjusted for expected quality reductions and stated before logistics expenses. The standard deduction for quality reduction is considered. Forward prices are weighted in relation to the intended harvesting period. The price for BC is based on the forward price in Norway adjusted for historical differences in price levels between Norway and Canada. The same principle applies to Shetland. Self-budgeted harvesting and logistics expenses are assumed. Forward exchange rates are used to translate prices into CAD and GBP in relation to the harvesting period. STATUS OF BIOLOGICAL ASSETS 2018 Biological assets onshore * Immature fish in sea, round weight < 4.76 kg Mature fish in sea, round weight > 4.76 kg Total 2017 Biological assets onshore * Immature fish in sea, round weight < 4.76 kg Mature fish in sea, round weight > 4.76 kg Total * Smolt production NUMBER OF FISH (1 000) BIOLOGICAL ASSETS (TONNES) ACCRUED COST OF PRODUCTION (NOK 1 000) FAIR VALUE ADJUSTMENT (NOK 1 000) BOOK VALUE (NOK 1 000) 23 668 33 409 351 57 428 17 132 31 753 112 48 996 712 53 624 2 063 56 399 465 53 654 559 54 677 153 451 2 006 654 63 728 2 223 833 118 789 1 878 468 19 006 2 016 263 - 944 047 27 262 971 309 - 677 719 4 370 682 089 153 451 2 950 701 90 990 3 195 142 118 789 2 556 187 23 376 2 698 352 233 Part 03 Operational resultsGrieg Seafood Group AccountsNOTE 7 CONT. Abnormal mortality - write-down Cost related to abnormal mortality will be immediately recognized in profit or loss and presented as "decrease due to abnormal mortality/ loss" in the table above. Normal mortality is classified as part of the production cost. The classification of mortality only affects the note presentantion, and hence not the fair-value calculation. The main causes of abnormal mortality during 2018, were harmful algal bloom, environmental issues in BC, gill disease and treatment losses in Shetland and pancreas disease (PD) in Rogaland. ABNORMAL MORTALITY - WRITE-DOWN 2018 Biological assets onshore * Immature fish in sea, round weight < 4.76 kg Mature fish in sea, round weight > 4.76 kg Total 2017 Biological assets onshore * Immature fish in sea, round weight < 4.76 kg Mature fish in sea, round weight > 4.76 kg Total * Smolt production AMOUNTS IN NOK 1 000 OTHER INVENTORIES Raw materials (feed) at cost price Roe Other (frozen fish, supplementary products) Total inventories Impairment of inventories recognized at year-end AMOUNTS IN NOK 1 000 COST OF RAW MATERIALS AND CONSUMABLES USED Inventories at 01.01. (inverted number) Raw materials and consumables used Inventories at 31.12. Total NUMBER OF FISH (1 000) BIOLOGICAL ASSETS (TONNES) AVERAGE SIZE (KG) ACCRUED COST OF PRODUCTION (NOK 1 000) 961 1 027 427 2 415 205 1 617 242 2 064 214 2 951 1 895 5 061 113 3 157 1 078 4 348 0.22 2.88 4.43 2.10 0.55 1.95 4.46 2.11 2018 63 453 10 090 52 549 126 092 205 2018 -92 262 -3 886 685 126 092 -3 852 855 23 602 112 926 70 109 206 638 6 854 93 630 22 963 123 445 2017 62 122 8 682 21 458 92 262 5 743 2017 -89 164 -3 727 298 92 262 -3 724 200 Raw materials and consumables used mainly comprises feed, roe, recognition of extraordinary mortality, and external purchase of fish in the sales company, Ocean Quality. 234 Grieg SeafoodAnnual report 2018 FISH FARMING LICENSES – INDEFINITE LIVES FISH FARMING LICENSES – FINITE LIVES OTHER INTANGIBLE ASSETS * NOTE 8 Intangible assets 2018 Book value at 01.01. Currency translation differences GOODWILL 109 038 -25 Additions Disposals Amortization Reclassifications Book value at 31.12. ACCUMULATED VALUES Acquisition cost Accumulated amortization Accumulated impairments Book value at 31.12. 1 044 786 -2 042 57 000 - - - 109 013 1 099 744 198 615 - -89 602 109 013 1 099 757 -13 - 1 099 744 * Other intangible assets mainly comprise software. 2017 Book value at 01.01. Currency translation differences GOODWILL 108 595 443 Additions Disposals Amortization Reclassifications Book value at 31.12. ACCUMULATED VALUES Acquisition cost Accumulated amortization Accumulated impairments Book value at 31.12. * Other intangible assets mainly comprise software. 1 035 881 8 905 - - - - 109 038 1 044 786 198 641 - -89 603 109 038 1 044 799 -13 - 1 044 786 - - - - - - - - 23 766 -506 - - -1 342 - 21 917 51 907 -29 990 - 21 917 18 384 1 10 843 - -4 051 - 25 175 50 885 -25 710 - 25 175 24 742 386 - - -1 362 - 23 766 52 414 -28 648 - 23 766 17 598 -1 4 180 -36 -3 533 175 18 384 40 042 -21 658 - 18 384 FISH FARMING LICENSES – INDEFINITE LIVES FISH FARMING LICENSES – FINITE LIVES OTHER INTANGIBLE ASSETS * TOTAL 1 195 975 -2 573 67 842 - -5 393 - 1 255 850 1 401 166 -55 714 -89 602 1 255 850 TOTAL 1 186 815 9 733 4 180 -36 -4 895 175 1 195 975 1 335 895 -50 319 -89 603 1 195 975 235 Part 03 Operational resultsGrieg Seafood Group AccountsNOTE 8 CONT. LICENSES The tables below provide an overview of the Group's licenses. See Note 2 for further information on licenses. Canada - BC All owners of industrial open net pens must be approved by Fisheries and Oceans Canada (DFO), who has regulated the industry since 2009. In June 2018, a change in the regulation regarding renewal of licenses requires that a company needs to obtain support from local First Nations in the area where the company has its licenses together with the DFO. The new regulation will be effective from 2022. Grieg Seafood BC already got a number of licenses approved by First Nations, however the company needs to apply for more. Each local First Nations establishes its own protocol and procedures for engaging with companies operating in its territory. Grieg Seafood BC are working with all local First Nations in their area of its operations and have positively engaged with all of them. The new regulation will contribute to a more sustainable future for local communities and workers. We expect that the changes will not affect the definition of indefinite useful life of licenses in Canada. CAPACITY NORWAY TONNES LICENSE CATEGORY TOTAL NUMBER UK FARM/AREA Bight of Foraness Boatsroom Voe Cole Deep Coleness Collafirth Delting Site 3 Corlarach East of Langa East of Papa Little Easter Score Holm Fish Holm Geo of Valladale (Urafirth) Gob na Hoe Hamar Sound Hamnavoe, Lunnaness Laxfirth Voe East (Site 2) Leinish Bay Linga (South of Linga) Muckle Roe East (Heights) North Havra North of Papa North Voe Olnafirth North (Site 2) Olnafirth South (Site 1) Papa, East Head of Scalloway Punds Voe Roe Sound Setter Voe Setterness North Setterness South Snizort South Voe of Gletness Spoose Holm (Oxna) Swining Voe Site 3 (Collafirth Ness) Taing of Railsborough Wadbister Inshore West of Burwick Total 236 CAPACITY TONNES 37 706 780 2 340 2 765 1 106 1 560 CAPACITY TONNES 1 100 3 300 3 000 4 400 4 100 1 500 3 600 4 100 4 000 1 500 4 100 3 900 1 000 1 500 900 1 500 3 600 3 000 1 500 3 900 2 500 58 000 41 1 3 3 2 2 Seawater licences R&D permit Broodstock Smolt Harvesting cage Education * CANADA FARM/AREA Ahlstrom Atrevida Barnes bay Bennet Point Conception Culloden Esperanza Gore Hecate Kunechin Muchalat N. Muchalat S. Newcomb Salten Site 13 Site 9 Streamer Point Tsa-ya Vantage Williamson Wa-kwa Total 2 100 216 2 178 752 1 200 1 602 1 643 1 750 2 500 1 910 809 2 021 738 1 910 942 1 700 2 299 350 1 496 1 332 1 920 300 1 000 1 500 960 350 987 2 500 2 358 2 125 750 1 500 1 920 1 043 800 1 923 51 384 * Finnmark and Rogaland are renting education licenses from Finnmark and Rogaland County respectively. Grieg SeafoodAnnual report 2018IMPAIRMENT TESTING OF GOODWILL AND LICENSES No impairments were recognized for goodwill or licenses in 2018 or 2017. Goodwill and licenses with indefinite economic lives are subject to an annual impairment test. Tests are performed more frequently where indications of impairment exist. Licenses with finite useful lives are tested for impairment only if there are indications of a decline in value. The estimated value in use is used as a basis for calculating the recoverable amount. An impairment is deemed to exist when the carrying value is higher than the recoverable amount. AMOUNTS IN NOK 1 000 CASH-GENERATING UNIT LOCATION BOOK VALUE OF RELATED GOODWILL British Columbia (BC) Finnmark Shetland Rogaland Total value Canada Norway UK Norway 10 167 - 78 384 20 463 109 013 BOOK VALUE OF LICENSES 158 775 356 814 471 100 134 972 TOTAL 168 942 356 814 549 484 155 435 1 121 662 1 230 676 Goodwill arises on the acquisition of the subsidiaries and is allocated to the Group’s cash-generating units (CGUs), which are identified by operating segment. An annual impairment test is carried out for goodwill and licenses. The recoverable amount of a CGU is determined based on value-in-use calculations. These calculations use pre-tax cash flow projections based on financial budgets from the respective cash-generating units over a three-year period. Cash flows beyond the three-year period are extrapolated using the estimated growth rates stated below. The estimated growth rate corresponds to expected inflation. ASSUMPTIONS USED FOR VALUE-IN-USE CALCULATIONS BC FINNMARK SHETLAND ROGALAND Budget period Increase in revenues in budget period EBITDA margin 1) EBITDA margin in terminal period Harvest growth – tonnes 2) Required rate of return 3) Growth rate 4) 3 years 7 % 3 years 17 % 19% -25% 38% - 42% 28 % 14 % 8.2 % 1.0 % 42 % 19 % 8.2 % 1.0 % 3 years 43 % 5% -18% 18 % 52 % 8.2 % 1.0 % 3 years 56 % 39% - 41% 41 % 58 % 8.2 % 1.0 % As stated above, the budget period/explicit period is three years. Impairment tests are initially based on the Group´s rolling four-year projections, which are also used in connection with the Group's liquidity planning. Consequently, it is important to apply conservative assumptions. The estimated increase in revenue for the budget period thus comprises the estimated revenue increase for 2020 compared to revenue for 2018. The estimated future price level is calculated using Fish Pool projections for future prices, taking into account quality reductions and shipping. The prices for 2019 and 2020 are assumed to be lower than Fish Pool projections. Other comments/explanations on assumptions applied in impairment testing are presented below. 1. Budgeted EBITDA margin. The margin increases during the budget period for all regions. Higher output is assumed in all regions 2. towards 2020. The growth rate in the harvested volume in the budget period (nominal growth rate) is measured against the 2018 volume. A corresponding increase in output is assumed over time. 3. Weighted required return on capital employed before tax. Cash flow forecasts are thus estimated before tax. 4. Weighted average growth rate used to extrapolate cash flows beyond the budget period. In the years after 2021, the annual reinvestment is assumed to be equal to annual depreciation. 237 Part 03 Operational resultsGrieg Seafood Group AccountsNOTE 8 CONT. EBITDA MARGIN IN THE BUDGET AND TERMINAL PERIOD The budgeted EBITDA margin is based on past performance, expected cost of production and expected market developments. An increase in gutted weight output is assumed towards 2020. The increased harvest volume assumes an increase in utilization of existing production capacity and licenses, reflecting the Group's smolt strategy. The Group expanded its smolt hatchery in Rogaland in 2017 and in Finnmark in 2018. A higher number and larger average size of smolt will contribute to higher growth and higher harvesting volumes. Larger smolt will also reduce the production time in the sea, which in turn will reduce the biological risk level, including mortality. An increase in smolt numbers will also improve overall utilization of locations and licenses. Finnmark was granted two new locations in 2018, which will be important for growth. In BC - Canada, an increase in harvesting volumes is based on improved production of smolt, more efficient monitoring of algae, and recirculation of fresh water from the deeper sea. Measures to secure the intake water have been successful. The Company is constantly striving to increase utilization of its favorable locations in Shetland in order to secure improved production. Measures being taken include delivering larger smolt with a lower number of days in the sea. Monitoring of algae, as well as recirculation of fresh water from the deeper sea, represent further important measures for Shetland. Overall, this will help to reduce the Company's cost per kilogram. Along with prolonged fallowing and utilization of the best locations, modification of the production cycle in the sea from 24 to 18 months will reduce biological risk. Together, the combined measures will help to reduce the Company's cost as measured per kilogram. The assumptions in the terminal year are based on the budget for 2021, but with some adjustments to reflect EBIT/kg in the benchmark and the Group’s own historical results. The applied discount rates are pre-tax and reflect specific risks relating to the relevant operating segments. SENSITIVITY ANALYSIS Value-in-use is sensitive to changes in the assumptions made, the most important of which are return and EBIT/kg requirements. A sensitivity analysis has been carried out based on these assumptions for all CGUs. An isolated requirement to increase the return rate by twopercentage point and reduce EBIT/kg by NOK 2 would result in a need to recognize impairments for the Shetland CGU of NOK 125 million and NOK 128 million, respectively. The other CGUs are not sensitive to equivalent changes in the same assumptions. For the Finnmark CGU, an isolated change in the price/kg of NOK 14.0 would result in a need to recognize an impairment of NOK 200 million. Similarly, an isolated increase in the WACC of 10% would result in a need to recognize an impairment of NOK 38 million in the BC CGU. 238 Grieg SeafoodAnnual report 2018NOTE 9 Property, plant and equipment 2018 Book value at 01.01. Currency translation differences Reclassification of non-current assets Additions * Disposals Depreciation Book value at 31.12. ACCUMULATED VALUES Acquisition cost Accumulated depreciation Accumulated impairments Book value at 31.12. Book value of finance leases included above Depreciation of finance leases included above BUILDINGS/ PROPERTY PROD. PLANTS AND BARGES NETS, CAGES AND MOORINGS OTHER EQUIPMENT 459 618 -433 - 40 576 -79 -22 515 477 168 722 823 -245 655 - 477 168 - - 767 920 -416 22 378 343 932 -3 969 -87 461 1 042 385 1 949 109 -866 833 -39 891 1 042 385 193 463 -14 821 459 139 -2 294 2 038 170 660 -2 481 -92 193 534 869 1 246 601 -711 732 - 534 869 105 648 -15 504 185 126 -905 -24 417 110 024 -3 243 -28 094 238 491 438 089 -199 766 168 238 491 113 201 -8 558 TOTAL 1 871 804 -4 048 - 665 192 -9 771 -230 262 2 292 912 4 356 622 -2 023 986 -39 723 2 292 912 412 312 -38 882 Of which book value of non-depreciable property 40 015 * Investments in 2018 related to expansion of the hatcheries in Rogaland and Finnmark, operations center in Rogaland, digitalization, new equipment such as aeration systems, algal monitoring and general maintenance. BUILDINGS/ PROPERTY PROD. PLANTS AND BARGES NETS, CAGES AND MOORINGS OTHER EQUIPMENT TOTAL 174 899 1 510 379 2017 Book value at 01.01. Currency translation differences Reclassification of non-current assets Additions * Disposals Depreciation Book value at 31.12. ACCUMULATED VALUES Acquisition cost Accumulated depreciation Accumulated impairments Book value at 31.12. Book value of finance leases included above Depreciation of finance leases included above Of which book value of non-depreciable property 386 340 4 570 - 89 833 - -21 125 459 618 682 758 -223 140 - 459 618 1 414 -40 40 395 581 945 8 217 - 252 895 -5 848 -69 288 767 920 1 587 184 -779 373 -39 891 767 920 128 113 -14 447 367 195 4 497 - 166 954 -628 -78 879 459 139 1 078 678 -619 539 - 459 139 68 720 -12 733 1 448 -253 38 958 -2 981 -26 945 185 126 356 630 -171 672 168 185 127 108 462 -10 137 '* Investments in 2017 related to expansion of the hatcheries in Rogaland and Finnmark, new equipment such as optilicer systems, nets and cages and general maintenance. 18 731 -253 548 640 -9 457 -196 237 1 871 804 3 705 251 -1 793 723 -39 723 1 871 804 306 709 -37 357 239 Part 03 Operational resultsGrieg Seafood Group AccountsNOTE 10 Borrowings and finance leases The company has a syndicated loan provided 50/50 by DNB and Nordea. To cater for major investment needs relating to the company's growth strategy in the period leading up to 2020, the company has renegotiated its syndicated bank loan before its original maturity in 2019. The company has set growth targets, including increased smolt capacity and new locations, which will entail an increased need for working capital. The new agreement includes two term loans of NOK 600 million and EUR 60 million, a revolving credit facility of NOK 1 000 million, alongside overdraft facilities of NOK 100 million. Repayments of NOK 50 million and EUR 5 million will be made for term loans of respectively NOK 600 million and EUR 60 million, split into half-yearly instalments. The drawdown rate of the EUR loan is 9.6691. The agreement has a term of five years and matures on 28 February 2023. The former syndicated loan and non-current credit facility, totaling NOK 1 285 million at 31 December 2017, was fully repaid, and new loans and credit facility were established. The agreement includes covenants, stipulating consolidated equity of 35% (in the Group, excluding Ocean Quality), a revolving NIBD/ EBITDA ratio of 5.0 if the book equity ratio is higher than 40% and 4.5 if the book equity ratio is between 35% and 40%. As at 31 December 2018, the NIBD/EBITDA for the Group excluding Ocean Quality was 1.3 and the equity ratio was 53%. Consequently, the Group fully complied with all covenants at the year-end. A factoring agreement has been concluded with Ocean Quality AS in Norway and UK. Credit-insured receivables are transferred to the factoring companies. This ensures early settlement of receivables. The Group retains the risk relating to trade receivables. Funding received from the factoring company before the counterparty has paid is recognized as factoring liabilities, which is interest-bearing. The factoring agreement includes covenants stipulating minimum book equity in Ocean Quality AS of 12% of the appropriated financing limit. As at 31 December 2018, Ocean Quality AS was in complience with the covenant. AMOUNTS IN NOK 1 000 NON-CURRENT LIABILITIES AND FINANCE LEASE OBLIGATIONS (INTEREST-BEARING) Non-current syndicated loan Non-current credit facility Finance lease liabilities Total NON-CURRENT LIABILITIES (NON-INTEREST BEARING) Subordinate loans Total Amortization effect of loans Total non-current liabilities CURRENT LIABILITIES (INTEREST-BEARING) Current portion of non-current borrowings Current portion of finance lease liabilities Overdraft facility Factoring liabilities Export loan Total current liabilities (interest-bearing) 240 2018 1 048 816 260 000 292 358 1 601 174 14 047 14 047 -10 102 1 605 119 2018 98 212 68 083 46 597 573 377 8 897 795 165 2017 895 000 300 000 201 899 1 396 899 15 353 15 353 -3 312 1 408 939 2017 90 000 58 353 - 500 976 8 873 658 202 Grieg SeafoodAnnual report 2018NET INTEREST-BEARING LIABILITIES Total non-current interest-bearing liabilities (see above) Total current interest-bearing liabilities (see above) Gross interest-bearing liabilities Cash and cash equivalents Loans to other companies Net interest-bearing liabilities Quote of factoring liabilities Quote of Bremnes' share of cash OQ AS (40%) Net interest-bearing liabilities according to covenants 2018 1 601 174 795 165 2 396 340 137 920 22 100 2 236 320 573 377 -26 595 1 689 537 2017 1 396 899 658 202 2 055 100 271 715 19 600 1 763 786 500 976 -20 797 1 283 606 PAYMENT PROFILE NON-CURRENT LIABILITIES 2019 2020 2021 2022 2023 LATER TOTAL Non-current syndicated loan Non-current credit facility Subordinated loan Finance leases Total 98 212 98 212 98 212 98 212 - - - - - - - - 754 181 260 000 - - - 14 047 68 083 54 457 48 268 41 395 35 556 112 683 1 147 027 260 000 14 047 360 442 166 295 152 669 146 479 139 607 1 049 737 126 730 1 781 517 Liabilities secured by mortgages/charges on assets ASSETS PLEDGED AS SECURITY Licences Property, plant and equipment Trade receivables Inventories and biological assets Total assets pledged as security 2018 2 396 340 2018 1 121 662 2 292 912 925 232 3 321 234 7 661 040 2017 2 055 100 2017 1 068 552 1 871 804 761 407 2 790 614 6 492 377 Pledges include shares in subsidiaries. The book value of these shares in the consolidated financial statements is NOK 0. DESCRIPTION OF LIABILITIES CURRENCY FIXED OR FLOATING INTEREST RATE EFFECTIVE INTEREST RATE FINAL MATURITY (MTH/YEAR) CURRENT PORTION NON- CURRENT PORTION CURRENT PORTION NON- CURRENT PORTION 2018 2017 GRIEG SEAFOOD ASA Non-current syndicated loan Syndicated loan- credit facility OCEAN QUALITY Export loans Factoring liabilities GRIEG SEAFOOD Finance leases Subordinated loan Total NOK Floating Price grid 02/2023 98 212 1 038 713 90 000 891 688 NOK Floating Price grid 02/2023 - 260 000 - 300 000 GBP Multiple currency Floating 5.5% 8 897 573 377 - - 8 873 500 976 - - 68 083 - 292 358 14 047 58 353 - 201 899 15 353 748 569 1 605 119 658 202 1 408 939 241 Part 03 Operational resultsGrieg Seafood Group Accounts NOTE 10 CONT. AMOUNTS IN NOK 1 000 BOOK VALUE OF GROUP LOANS BY CURRENCY 31.12.2018 NOK GBP EUR USD CAD OTHER Non-current syndicated loan Syndicated loan- credit facility Bank overdraft facility * Export loan Factoring ** Finance leases Subordinated loan Total * Other currency effects mainly relate to DKK ** Other currency effects mainly relate to JPY and SEK Average interest rate on loans and credit facility Average interest rate on EUR term loan 1 136 925 260 000 46 597 8 897 573 377 360 441 14 047 564 898 260 000 407 609 - - 572 027 - - - - - - - -415 913 21 318 47 413 -15 196 1 365 - 8 897 - - 79 965 344 579 - 122 346 294 874 59 341 8 897 14 047 - - - - - - - - - 16 851 6 967 - 2 400 284 1 657 051 -261 727 888 220 106 755 -15 196 25 183 2018 2.20% 1.21% 2017 2.21% N/A The effect of interest rate swaps is not taken into account in calculating the average interest rate on loans and credit facilities. BOOK VALUE AND FAIR VALUE OF BORROWINGS Loan (non-current and credit facility) Total The book value of other loans closely approximates to the fair value. BOOK VALUE FAIR VALUE 2018 1 298 713 1 298 713 2017 1 191 688 1 191 688 2018 1 298 713 1 298 713 2017 1 191 688 1 191 688 AMOUNTS IN NOK 1 000 LIABILITIES ARISING FROM FINANCING ACTIVITIES CHANGE IN LIABILITIES ARISING FROM FINANCING ACTIVITIES FINANCE LEASES MATURITY < 1 YEAR FINANCE LEASES MATURITY > 1 YEAR LOANS WITH MATURITY < 1 YEAR LOANS WITH MATURITY > 1 YEAR TOTAL At 31.12.2016 Change in factoring liabilities Repayment finance lease liabilities Repayment non-current syndicated loan Utilization non-current credit facility Draw down finance leases Foreign currency adjustments At 31.31.2017 Change in factoring liabilities Repayment finance lease liabilities Repayment non-current syndicated loan (former agreement) Draw down non-current syndicated NOK term loan incl. credit facility Draw down non-current syndicated EUR term loan Repayment non-current syndicated term loan (NOK and EUR) Draw down overdraft facility Repayment non-current credit facility Draw down finance leases Foreign currency adjustments At 31.12.2018 242 67 116 - -10 116 - - 930 423 58 353 - -8 652 - - - - - 18 376 6 68 083 250 452 601 025 1 000 963 1 919 556 - -1 559 -57 294 - - 8 670 71 - - - - 383 - - -90 000 300 000 - -610 -1 559 -67 410 -90 000 300 000 9 600 267 201 899 599 849 1 210 353 2 070 453 - 72 401 -60 401 - - - 72 401 -69 053 - - - - - 150 839 21 -90 000 -1 195 000 -1 285 000 50 000 48 212 46 597 - - 24 850 000 531 935 -49 174 - -40 000 - 14 749 900 000 580 147 -49 174 46 597 -40 000 169 216 14 800 292 358 727 082 1 322 863 2 410 387 Grieg SeafoodAnnual report 2018NOTE 11 Leases OPERATING LEASE COMMITMENTS – GROUP COMPANY AS LESSEE The Group leases offices, docks, berths, etc. with terms of 5–10 years. The Group also leases various well-boat services, as well as contracts for delousing and cleaning of nets. The term of the contracts is 2–5 years, with a prolongation option. The group has entered into new lease agreements for vessels in 2018, starting in 2019. The agreements have a duration for four and five years with annual payment of NOK 54 million and NOK 45 million, respectively. OVERVIEW OF FUTURE MINIMUM OPERATING LEASES WITHIN 1 YEAR WITHIN 2 YEARS WITHIN 3 YEARS WITHIN 4 YEARS WITHIN 5 YEARS WITHIN 6 YEARS WITHIN 7 YEARS WITHIN 8 YEARS WITHIN 9 YEARS WITHIN 10 YEARS LATER THAN 10 YEARS TOTAL Future minimum lease amount 177 079 107 162 69 488 46 933 39 087 29 168 6 271 6 187 6 187 3 520 27 807 518 888 Present value of future minimum lease payments (5% discount rate) 168 647 97 199 60 026 38 612 30 626 21 765 4 457 4 188 3 988 2 161 17 071 448 739 Lease payments charged in the year (see Note 26) 2018 195 785 2017 169 061 FINANCE LEASE COMMITMENTS – GROUP COMPANY AS LESSEE The Group has signed finance leases for barges, cage installations, plant, machinery and other equipment. The lease term for equipment of this kind is normally 7-8 years. The Group must give written notification if it wishes to terminate these agreements. OVERVIEW OF FUTURE MINIMUM FINANCE LEASES Future minimum lease payments Future financial expenses relating to finance leases Present value of finance leases WITHIN 1 YEAR WITHIN 2 YEARS WITHIN 3 YEARS WITHIN 4 YEARS WITHIN 5 YEARS WITHIN 6 YEARS WITHIN 7 YEARS WITHIN 8 YEARS WITHIN 9 YEARS WITHIN 10 YEARS LATER THAN 10 YEARS TOTAL 77 825 62 356 54 551 46 276 39 258 30 518 26 451 23 574 21 110 11 566 7 268 400 752 9 742 7 898 6 284 4 881 3 702 2 849 2 134 1 457 907 349 109 40 311 68 083 54 458 48 268 41 395 35 556 27 669 24 317 22 116 20 203 11 217 7 159 360 441 LEASED ASSETS RECOGNIZED AS FINANCE LEASES Book value of leased assets (equipment, vessels) Book value of lease commitment 2018 412 312 360 441 2017 306 077 260 251 243 Part 03 Operational resultsGrieg Seafood Group AccountsNOTE 12 Classifications of financial instruments FINANCIAL INSTRUMENTS AT 31.12.2018 FVPL 1) AMORTIZED COST FVOCI 2) TOTAL FINANCIAL ASSETS Equity instruments Trade receivables Other receivables Derivatives 3) Cash and cash equivalents Total financial assets FINANCIAL LIABILITIES Loans Overdraft facility Finance lease liabilities Factoring liabilities Export loan 4) Cash-settled share options Derivatives 3) Trade payables Total financial liabilities - - - 2 743 - 2 743 - - - - - 17 503 2 162 - 19 665 - 952 232 166 432 - 137 920 1 256 584 1 410 972 46 597 360 442 573 377 8 897 - - 649 352 3 049 637 1 160 - - - - 1 160 - - - - - - 3 743 - 3 743 1 160 952 232 166 432 2 743 137 920 1 260 487 1 410 972 46 597 360 442 573 377 8 897 17 503 5 905 649 352 3 073 045 FINANCIAL INSTRUMENTS AT 31.12.2017 FVPL 1) AMORTIZED COST FVOCI 2) TOTAL FINANCIAL ASSETS Equity instruments Trade receivables Other receivables Cash and cash equivalents Total financial assets FINANCIAL LIABILITIES Loans Finance lease liabilities Factoring liabilities Export loan 4) Cash-settled share options Derivatives 3) Trade payables Total financial liabilities - - - - - - - - - 15 594 9 693 - 25 287 - 761 407 198 527 271 715 1 150 - - - 1 150 761 407 198 527 271 715 1 231 648 1 150 1 232 798 1 297 041 260 251 500 976 8 873 - - 585 378 2 652 519 - - - - - 18 769 - 18 769 1 297 041 260 251 500 976 8 873 15 594 28 462 585 378 2 696 575 1) FVPL: Fair value through profit or loss. 2) FVOCI: Fair value through other comprehensive income. 3) The purpose of the derivatives is to reduce the Group´s exposure to changes in floating interest rates and exchange rates. See Notes 2 and 3 for further details. 4) Export loan is reported in "Current portion of non-current borrowings" in the balance sheet. 244 Grieg SeafoodAnnual report 2018CREDITWORTHINESS OF FINANCIAL ASSETS Credit risk attaching to financial instruments that have not matured or have not been written down is shown in accordance with the internal classification of historical information on breaches of credit covenants. Further information about credit risk is provided in Note 3. AMOUNTS IN NOK 1 000 TRADE RECEIVABLES COUNTERPARTIES WITH NO EXTERNAL CREDIT RATING Group 1 Group 2 Group 3 Total trade receivables BANK DEPOSITS AAA AA A Total bank deposits 2018 2017 1 204 838 932 85 096 925 232 2018 - 137 920 - 137 920 39 689 641 737 79 981 761 407 2017 - 271 715 - 271 715 Group 1 - new customers/related parties (less than 6 months). Group 2 - existing customers/related parties (more than 6 months) with no history of credit covenant breaches. Group 3 - existing customers/related parties (more than 6 months) with a history of one or more credit covenant breaches. All amounts due have been paid in full following the breaches. 245 Part 03 Operational resultsGrieg Seafood Group AccountsNOTE 13 Taxes AMOUNTS IN NOK 1 000 BREAKDOWN OF TAX EXPENSE Tax payable Norway Tax payable abroad Underprovision for tax previous year Change in deferred tax Norway - of this discontinued operations Change in deferred tax abroad Taxes TAX RECONCILIATION Profit before tax Taxes calculated at nominal tax rate Withholding tax Change in deferred tax liabilities because of tax rate change Utilization of loss carried forward, not previously recognized Tax losses carried forward not recognized Other permanent differences Taxes CHANGE IN BOOK VALUE OF DEFERRED TAX Balance sheet value at 01.01. Currency conversion Effect of equity transaction Tax effect of loans to subsidiaries (see Note 3) Other effects Change in deferred tax recognized in income in period Deferred tax liability at balance sheet date 2018 126 441 4 810 -4 065 85 450 - 67 170 279 805 1 276 925 301 823 1 012 -25 053 - -148 2 171 279 805 721 689 -3 637 5 765 923 279 152 620 877 639 2017 152 146 2 918 8 817 -18 308 - 52 008 197 581 798 480 200 019 1 226 -18 842 560 6 597 8 021 197 581 674 684 7 877 32 311 -5 360 7 178 4 999 721 689 Weighted average tax rate 21.91 % 24.74 % The nominal tax rate in Norway is 23%. The nominal tax rate for 2018 in Canada was 27% and on Shetland 19%. The significant tax effect is attributable to a change in the tax rate and other permanent differences. The following tables provide a breakdown of deferred tax. The tax effects of taxable and deductible temporary differences are shown separately. The Norwegian, Canadian and UK parts of the Group each have a net deferred tax position. Deferred tax liabilities and deferred tax assets within Norway, Canada and UK can be offset. 246 Grieg SeafoodAnnual report 2018AMOUNTS IN NOK 1 000 DEFERRED TAX LICENSES 2017 NON- CURRENT ASSETS BIOLOGICAL ASSETS RECEIVABLES /PENSIONS INVENTORIES DEFERRED CAPITAL GAIN CURRENT LIABILITIES Opening balance 01.01. 169 845 41 519 448 192 20 020 4 041 526 Recognized in income in the period Currency translation differences Other effects At 31.12. 2018 Recognized in income in the period Currency translation differences Other effects At 31.12. -3 781 11 670 38 170 10 727 -160 -178 1 181 - 530 - 3 265 -2 200 167 245 53 719 487 427 - 1 043 31 790 40 - 3 921 -1 925 9 411 153 813 -6 221 5 084 -385 - 12 - -2 226 -1 986 164 935 63 142 637 028 - 3 494 29 063 2 - 9 007 - 348 -76 - - 271 0 - - - 0 - - - 0 TOTAL 684 143 56 448 5 016 -1 157 744 450 160 085 -2 596 1 508 903 446 AMOUNTS IN NOK 1 000 DEFERRED TAX ASSET LOSS CARRY FORWARDS 2017 Opening balance 01.01. -7 761 Recognized in income in the period Currency translation differences Other effects Effect of business combinations At 31.12. 2018 Recognized in income in the period Currency translation differences Other effects Effect of business combinations At 31.12. -18 975 -644 2 974 3 610 -20 796 -3 869 -120 351 5 766 -18 669 NON- CURRENT ASSETS PENSIONS RECEIVABLES /PENSIONS LEASING OBLIGATIONS TAX CREDITS OTHER LIABILITIES TOTAL - - - - - - - - - - - 0 - - - - 0 - 0 - - - -1 562 -563 - - - -2 125 -0 - -0 - - -0 0 -135 -9 458 -1 338 -1 873 -22 749 -36 -33 - - - - -1 374 -2 041 -713 2 974 3 610 -26 336 701 -1 783 615 -3 130 -7 465 - - - -28 - - -1 424 -1 811 45 - - -714 361 -99 - -4 909 258 252 5 766 -27 526 247 Part 03 Operational resultsGrieg Seafood Group Accounts NOTE 13 CONT. Net deferred tax Deferred tax classified as non-current assets Deferred tax classified as non-current liabilities Tax payable classified as current liabilities NET CHANGE IN DEFERRED TAX RECOGNIZED IN INCOME: Change in deferred tax in Norway Change in deferred tax abroad Change in book value of deferred tax Change in the period for positions with net deferred tax Change in the period for positions with net deferred tax asset Change in book value of deferred tax 2018 875 920 1 719 877 639 130 287 2018 85 450 67 170 152 620 160 085 -7 465 152 620 2017 718 114 3 574 721 689 157 244 2017 -18 308 52 008 33 700 56 448 -22 749 33 700 Loss carried forward Deferred tax assets related to an allowable deficit are recognized in the balance sheet in so far as it is likely that these can be offset against future taxable profits. DEFERRED TAX ASSETS RELATING TO A TAX LOSS CARRIED FORWARD ARE DIVIDED AMONG THE FOLLOWING JURISDICTIONS: Norway UK Canada Total There is no time limit on the utilization of tax losses carried forward in Norway or the UK. 2018 -478 -18 191 - -18 669 2017 -5 266 -15 530 - -20 796 248 Grieg SeafoodAnnual report 2018NOTE 14 Declaration on the determination of salary and other remuneration paid to senior employees THE BOARD'S DECLARATION The Board of Grieg Seafood ASA has appointed a dedicated Remuneration committee; whose remit is to advise the Board on all matters pertaining the Company's compensation to the CEO and other incentive schemes for managers. The Board determines the salary and other remuneration paid to the CEO and approves remuneration schemes involving the granting of options to managers. The Board adopts guidelines and principles used to determine salaries and other remuneration paid to key personnel. MAIN PRINCIPLES OF THE GROUP´S REMUNERATION POLICY Grieg Seafood ASA’s performance is contingent on the Group´s ability to recruit and retain the highest qualified and most motivated employees. Grieg Seafood ASA´s remuneration policy is based on the principle that the Group shall offer its employees competitive compensation terms in accordance with local industry standards. Where appropriate, this may include incentive elements, where the basic salary shall reflect individual performance. The Group runs performance-related bonus schemes for its employees. The Remuneration committee determines the bonus basis each year. PRINCIPLES FOR REMUNERATION FIXED BASIC SALARY Remuneration for the management team must be competitive. The basic salary, which is determined by reference to job descriptions, competence levels, qualifications and seniority, comprises the main portion of management remuneration and consists of a fixed basic element and other fixed remuneration elements such as a fixed car allowance and similar benefits. ADDITIONAL BENEFITS Bonus scheme The Group has an annual bonus scheme based on a combination of earnings and personal performance targets. The bonus scheme incentivises employees to make continuous improvements in operations and the Group's profitability. The CEO has an annual maximum bonus of six times the monthly salary, while other Group managers can earn a bonus up to a maximum of five times salary. Pension schemes All the Norwegian Group subsidiaries comply with the Act relating to mandatory occupational pensions. The Group only operates defined contribution pension schemes. Foreign subsidiaries comply with their respective jurisdictions pertaining to employee pension schemes. The Group managers are members of the Group´s collective defined contribution pension scheme. As well as participating in the Company’s ordinary defined contribution pension scheme, the CEO has a separate salary compensation agreement for pension benefits exceeding 12G. Options A synthetic option scheme (hereafter referred to as a "cash option") for the Company’s management group was established in 2009. The cash options scheme requires participants to directly own shares throughout the entire programme period. Employees who are entitled to the options are required to use 50% of the net gain under the scheme to purchase shares until the ownership corresponds to 100% of their fixed annual salary. The gain under the cash option scheme cannot exceed 12 times the monthly salary per participant per year. The exercise price is increased by 0.5% each month. An option must be exercised no later than 24 months after the initial exercise date. At the year-end, the cash option scheme corresponded to a total of 2 376 044 shares, after the awarding of 1 800 000 options in 2017. The final exercise date for options awarded in 2017 is 31 May 2021. Severance pays The Group limits the payment of severance pay, though has paid such remuneration in specific cases. The CEO is entitled to a separate severance pay agreement in case of termination of employment comprising 12 months’ rolling severance pay calculated from the termination date. The termination date is deemed to be end of the notice period. The CEO has a period of notice of six months. The CFO and COO are entitled to 12 months´ severance pay from the termination date or date of change of position/employment. For other employees, individual contracts of employment apply, essentially based on conditions in the Norwegian Working Environment Act. 249 Part 03 Operational resultsGrieg Seafood Group AccountsNOTE 14 CONT. Benefits in kind Managers are normally granted benefits in kind typical for similar positions, such as a free newspaper, telephone and internet connection. GUIDELINES FOR DETERMINATION OF REMUNERATION PAID TO THE GROUP MANAGEMENT INTRODUCTION For details about remuneration paid to individual employees, please refer to the notes to the financial statements. For information about remuneration paid to Group management, see Note 15. For more information about options, see Note 16. DETERMINATION OF SALARY PAID TO THE CEO Remuneration paid to the CEO is determined each year by the Remuneration committee on the mandate of the Board. DETERMINATION OF SALARY PAID TO GROUP MANAGEMENT AND REGIONAL MANAGERS Remuneration paid to other Group managers and regional managers are determined by the CEO in consultation with the Remuneration committee. The Board should be informed about the decision afterwards. DETERMINATION OF INCENTIVE SCHEMES The Remuneration committee evaluates the options scheme and the exercise allocation within the framework of the AGM. Other incentive schemes, including bonus schemes, are determined by the Board. The Remuneration committee determines the minimum performance level for the bonus each year and informs the Board accordingly. The CEO awards incentive schemes and other benefits to Group management and regional managers within the framework of programs adopted by the Board. DETERMINATION OF REMUNERATION PAID TO MANAGERS IN OTHER GROUP COMPANIES Subsidiaries of the Group must comply with the main principle of the Group´s management remuneration policy, as described under the main principles. BOARD REMUNERATION Compensation paid to Board members is not performance-related. The Board members have not been granted options. Compensation paid to the Board is determined by the Annual General Meeting. Bergen, 11 April 2019 The Board of Grieg Seafood ASA 250 Grieg SeafoodAnnual report 2018NOTE 15 Salaries and personnel expenses AMOUNTS IN NOK 1 000 SALARIES AND PERSONNEL EXPENSES Salaries Social security costs Share options granted to directors and key employees ,incl. social security costs (see Note 16) Pension costs Other personnel costs Total 2018 412 680 32 545 15 173 20 402 60 247 541 047 2017 371 518 30 698 13 247 11 858 55 507 482 827 Average number of employees 769 707 The Board´s guidelines and principles for determination of remuneration and other benefits paid to key personnel are described in Note 14. Share savings program Grieg Seafood has established a share savings program for its employees in 2018. 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 NOK 20 000 per year. There is a 3 years lock-up period. The saved amount is deducted from the monthly net salary and used to purchase Grieg Seafood shares on behalf of the employees. The purchase will be made from transfer of Grieg Seafood's treasury shares or bought in the market. The purchase price and the number of shares acquired by the company will be reported in accordance with the applicable regulations. At 31 December 2018, the equity effect of the share savings program was NOK 2 614 million, of which loan to employees constitues NOK 2 092 million. AMOUNTS IN NOK 1 000 REMUNERATION PAID TO SENIOR OFFICERS IN 2018 Andreas Kvame (CEO) Atle Harald Sandtorv (CFO) Knut Utheim (COO) Kathleen O. Mathisen (CHRO) Total remuneration paid to senior officers SALARY BONUS RETAINED, NOT YET PAID OPTIONS EXERCISED DURING THE YEAR OTHER REMUNERATION 2 685 1 748 1 748 1 466 7 647 630 335 195 347 1 508 389 207 149 314 1 058 2 522 1 607 1 607 1 448 7 184 90 97 97 92 376 TOTAL 6 316 3 993 3 796 3 667 17 772 Recognized expenses arising from synthetic options not declared throughout the year are not included in the above statement. 251 Part 03 Operational resultsGrieg Seafood Group AccountsNOTE 15 CONT. AMOUNTS IN NOK 1 000 REMUNERATION PAID TO BOARD MEMBERS IN 2018 Per Grieg jr. 1) Wenche Kjølås 2) Karin Bing Orgland 2) Asbjørn Reinkind 1) Ola Braanaas (until 12.06.2018 ) 3) Solveig M.R. Nygaard (from 12.06.2018) Tore Holand (from 12.06.2018) Total remuneration including social security costs Recognized expenses arising from synthetic options not declared throughout the year are not included in the above statement. 1) Payment for work performed on the Remuneration Committee of NOK 17 115 is included in the remuneration paid to Per Grieg jr. and Asbjørn Reinkind. 2) Payment for work performed on the Audit Committee of NOK 51 345 is included in the remuneration paid to Wenche Kjølås and Karin Bing Orgland. 3) Payment for work performed on the Remuneration Committee of NOK 8 558 is included in the remuneration paid to Ola Braanaas. The amounts include social security costs. AMOUNTS IN NOK 1 000 REMUNERATION PAID TO SENIOR OFFICERS IN 2017 Andreas Kvame (CEO) Atle Harald Sandtorv (CFO) Knut Utheim (COO) Kathleen O. Mathisen (CHRO) Total remuneration paid to senior officers SALARY BONUS RETAINED, NOT YET PAID 2 498 1 596 1 596 1 272 6 962 1 133 505 276 281 2 195 630 335 195 347 1 508 OPTIONS EXERCISED DURING THE YEAR OTHER REMUNERATION 2 475 1 578 1 578 0 5 630 137 132 133 125 527 Recognized expenses arising from synthetic options not declared throughout the year are not included in the above statement. AMOUNTS IN NOK 1 000 REMUNERATION PAID TO BOARD MEMBERS IN 2017 Per Grieg jr. 1) Wenche Kjølås 2) Karin Bing Orgland Asbjørn Reinkind 1) Ola Braanaas 1) Total remuneration including social security costs Recognized expenses arising from synthetic options not declared throughout the year are not included in the above statement. 1) Remuneration for work performed on the Remuneration Committee of NOK 17 115 is included in payments to Per Grieg jr., Asbjørn Reinkind and Ola Braanaas. 2) Remuneration for work performed on the Audit Committee of NOK 51 345 is included in payments to Wenche Kjølås and Karin Bing Orgland. The amounts include social security costs. TOTAL 434 280 280 302 123 114 114 1 646 TOTAL 6 873 4 145 3 778 2 025 16 821 TOTAL 434 280 280 302 245 1 540 252 Grieg SeafoodAnnual report 2018NOTE 16 Cash-based remuneration (options) The Company has issued options to the management group and regional directors. The options’ strike price is the stock market price on the date of issue, rising by 0.5% per month until the exercise date. As at 31 December 2018, no equity options were available for vestment. Since 2009, an option scheme with settlement in cash has been established for the management and regional directors. The most recent allocation was in 2017, totalling 1 800 000 options. The final exercise date is 31 May 2021. The options have a term of two years, where 50% is vested each year. Employees taken on after the initial allocation of options are allocated options on taking up employment. The Black & Scholes option pricing model is used to calculate the market value. A brokerage firm is used to perform the calculations. The table below shows the movement in outstanding options during 2017 and 2018. OVERVIEW 2018 (TOTAL OPTIONS) Andreas Kvame (CEO) Atle Harald Sandtorv (CFO) Knut Utheim (COO) Kathleen O. Mathisen (CHRO) Others Total OPTION CATEGORY OUTSTANDING OPTIONS AT 31.12.2017 GRANTED OPTIONS EXERCISED OPTIONS EXPIRED OPTIONS OUTSTANDING OPTIONS AT 31.12.2018 OF WHICH CASH- SETTLED Cash settlement Cash settlement Cash settlement Cash settlement Cash settlement 658 272 311 274 352 366 300 000 1 329 634 2 951 547 - - - - - - 55 275 35 230 35 230 100 000 262 677 488 412 2 997 - 17 136 - 66 958 87 091 600 000 276 044 300 000 200 000 999 999 600 000 276 044 300 000 200 000 999 999 2 376 044 2 376 044 OPTION CATEGORY OUTSTANDING OPTIONS AT 31.12.2016 GRANTED OPTIONS EXERCISED OPTIONS EXPIRED OPTIONS OUTSTANDING OPTIONS AT 31.12.2017 OF WHICH CASH- SETTLED OVERVIEW 2017 (TOTAL OPTIONS) Andreas Kvame (CEO) Atle Harald Sandtorv (CFO) Knut Utheim (COO) Kathleen O. Mathisen (CHRO) Others Total Cash settlement Cash settlement Cash settlement Cash settlement Cash settlement 314 009 146 801 187 893 100 000 592 379 400 000 200 000 200 000 200 000 800 000 55 737 35 527 35 527 - 62 745 1 341 082 1 800 000 189 536 - - - - - - ALLOCATION: YEAR - MONTH EXPIRY DATE: YEAR - MONTH STRIKE PRICE NOK PER SHARE AT 31.12.2018 STRIKE PRICE NOK PER SHARE AT 31.12.2017 2015–06 2015–06 2016–12 2017–11 2017–11 Total 2018–06 2019–06 2019–06 2020–05 2021–05 - 31.60 - 88.78 88.78 29.76 29.76 84.12 83.62 83.62 Cash-based options available for settlement Weighted average exercise price on outstanding options (NOK per option) 658 272 311 274 352 366 300 000 1 329 634 2 951 547 OPTIONS 2018 - 576 044 - 900 000 900 000 658 272 311 274 352 366 300 000 1 329 634 2 951 547 2017 251 547 600 000 300 000 900 000 900 000 2 376 044 2 951 547 2018 2017 1 476 044 66.49 1 151 547 43.94 253 Part 03 Operational resultsGrieg Seafood Group Accounts NOTE 16 CONT. 2018 Former employees with expired options Andreas Kvame (CEO) Atle Harald Sandtorv (CFO) Knut Utheim (COO) Kathleen O. Mathisen (CHRO) Andreas Kvame (CEO) Atle Harald Sandtorv (CFO) Knut Utheim (COO) Kathleen O. Mathisen (CHRO) Other options allocated in 2015 Other options allocated in 2016 Other options allocated in 2017 Total NOK/OPTION AMOUNTS IN NOK 1 000 OPTION CATEGORY LISTED PRICE ON ALLOCATION CALCULATED VALUE PER OPTION ON ALLOCATION CALCULATED TOTAL VALUE ON ALLOCATION * TOTAL VALUE OF ALL OPTIONS AT 01.01.2018 CHANGE IN PROVISION CB-OB * EXERCISED OPTION 2018 ACC. COST RECOGNIZED IN EQUITY AT 31.12.2018 RECOGNIZED LIABILITY CASH SETTLEMENT AT 31.12.2018 Equity option Cash Cash Cash Cash Cash Cash Cash Cash Cash Cash Cash 25.50 25.50 25.50 79.00 83.00 83.00 83.00 83.00 25.50 79.00 83.00 3.36 3.97 3.97 3.63 2.26 2.79 2.79 2.38 3.60 3.34 2.35 1 342 4 255 -1 679 2 522 793 793 363 906 557 557 475 1 857 2 868 -223 -1 095 1 607 1 607 237 -237 1 448 147 1 563 90 90 77 967 1 040 821 - - - - 2 876 5 227 -2 200 2 859 669 441 -441 2 896 1 880 11 212 305 15 594 3 394 1 909 - 12 939 6 887 *) Amounts exclude social security costs NOK/OPTION AMOUNTS IN NOK 1 000 OPTION CATEGORY LISTED PRICE ON ALLOCATION CALCULATED VALUE PER OPTION ON ALLOCATION CALCULATED TOTAL VALUE ON ALLOCATION * TOTAL VALUE OF ALL OPTIONS AT 01.01.2017 CHANGE IN PROVISION CB-OB * EXERCISED OPTION 2017 ACC. COST RECOGNIZED IN EQUITY AT 31.12.2017 RECOGNIZED LIABILITY CASH SETTLEMENT AT 31.12.2017 2017 Former employees with expired options Equity option Andreas Kvame (CEO) Atle Harald Sandtorv (CFO) Knut Utheim (COO) Kathleen O. Mathisen (CHRO) Andreas Kvame (CEO) Atle Harald Sandtorv (CFO) Knut Utheim (COO) Kathleen O. Mathisen (CHRO) Other options allocated in 2015 Other options allocated in 2016 Other options allocated in 2017 Total Cash Cash Cash Cash Cash Cash Cash Cash Cash Cash Cash 25.50 25.50 25.50 79.00 83.00 83.00 83.00 83.00 25.50 79.00 83.00 3.36 3.97 3.97 3.63 2.26 2.79 2.79 2.38 3.60 3.34 2.35 *) Amounts exclude social security costs 254 1 342 2 935 1 320 2 475 793 793 363 906 557 557 475 1 699 2 298 41 - - - - 157 570 197 147 90 90 77 1 578 1 578 - - - - - 2 876 4 312 916 2 786 669 1 880 11 212 75 - 11 360 366 305 4 234 - - 8 416 6 887 6 887 - - - - - - - - - - - 6 887 - - - - - - - - - - - 2 575 1 634 1 773 - 1 709 1 057 1 130 898 3 027 - 3 699 17 503 4 255 1 857 2 868 237 147 90 90 77 5 227 441 305 15 594 Grieg SeafoodAnnual report 2018AMOUNTS IN NOK 1 000 ACCRUED COSTS RELATED TO CASH OPTIONS Change in provisions Exercised options during the year Total costs excl. social security costs Social security costs Total costs incl. social security costs 2018 1 909 12 939 14 848 325 15 173 2017 CLASSIFICATION IN FINANCIAL STATEMENTS 4 234 Other provisions for liabilities 8 416 Salaries and personnel expense / cash 12 650 597 Public taxes payable 13 247 Salaries and personnel expense Costs relating to cash-based remuneration in 2018 totalled NOK 15 173 thousand. This is recognized in the income statement as a personnel cost. Social security contributions are provided for on an ongoing basis based on the fair value of the options. As at 31 December 2018 outstanding options with the right to cash settlement were stated at NOK 17 503 thousand, of which NOK 8 493 thousand were classified as non-current liabilities. Issued options are cancelled on termination of employment. ESTIMATES USED TO CALCULATE ALLOCATION OF OPTIONS Anticipated volatility (%) Risk-free rate of interest (%) Estimated qualification period (years) The estimated qualification period for the options is based on historical data, and does not necessarily represent future developments. In order to estimate volatility, management has applied historical volatility for comparable listed companies. 41.49% 1.07% 1.56 NOTE 17 Share capital and shareholder information As at 31 December 2018, the company had 111 662 000 shares with a nominal value of NOK 4 per share. All shares issued by the company are fully paid-up. There is one class of shares and all shares confer the same rights. In June 2011, the company purchased 1 250 000 treasury shares at NOK 14.40 per share. 21 November 2018, the company sold 21 576 shares to employees for use in the share savings program. The sales price was NOK 121.56 per share, which provided a gain of NOK 107.16 per share. After the transaction the company have 1 228 424 treasury shares. SHARE CAPITAL AND NUMBER OF SHARES NOMINAL VALUE (NOK) TOTAL SHARE CAPITAL (NOK 1 000) NO. OF ORDINARY SHARES Holdings of treasury shares Sale of treasury shares to employees Total at 31.12.2018 4.00 4.00 4.00 446 648 -5 000 86 441 734 111 662 000 -1 250 000 21 576 110 433 576 255 Part 03 Operational resultsGrieg Seafood Group Accounts NOTE 17 CONT. THE LARGEST SHAREHOLDERS IN GRIEG SEAFOOD ASA 31.12.2018 31.12.2018 31.12.2017 31.12.2017 NO. OF SHARES SHAREHOLDING NO. OF SHARES SHAREHOLDING Grieg Aqua AS Grieg Holdings AS ** OM Holding AS Folketrygdfondet Ystholmen Felles AS (2017: Nye Ystholmen AS) State Street Bank and Trust Comp Verdipapirfondet Pareto Investment Verdipapirfondet Alfred Berg Gamba Grieg Seafood ASA Handelsbank Nordiska Sambolagsfond Euroclear Bank S.A./N.V. State Street Bank and Trust Comp Clearstream Banking S.A. JPMorgan Chase Bank, N.A., London The Bank of New York Mellon SA/NV The Northern Trust Comp, London Br Pictet & Cie (Europe) S.A. VPF Nordea Avkastning VPF Nordea Kapital UBS Switzerland AG JPMorgan Chase Bank, N.A., London Total –20 largest shareholders Other shareholders Total shares 56 018 799 50.17 % - 6 039 379 3 760 350 2 928 197 2 055 051 1 926 457 1 700 796 1 228 424 1 057 190 965 253 891 700 866 255 828 120 766 040 685 964 603 115 602 577 574 943 566 035 552 773 - 5.41 % 3.37 % 2.62 % 1.84 % 1.73 % 1.52 % 1.10 % 0.95 % 0.86 % 0.80 % 0.78 % 0.74 % 0.69 % 0.61 % 0.54 % 0.54 % 0.51 % 0.51 % 0.50 % - 55 801 409 - 49.97 % 5 164 379 2 949 137 2 928 197 2 602 761 1 915 000 1 700 796 1 250 000 - 1 038 097 2 602 761 1 286 414 1 477 767 518 635 559 802 92 506 648 523 674 006 587 369 745 897 4.63 % 2.64 % 2.62 % 2.33 % 1.71 % 1.52 % 1.12 % - 0.93 % 2.33 % 1.15 % 1.32 % 0.46 % 0.50 % 0.08 % 0.58 % 0.60 % 0.53 % 0.67 % 84 617 418 27 044 582 111 662 000 75.78 % 24.22 % 100.00 % 84 543 456 27 118 544 111 662 000 75.71 % 24.29 % 100.00 % SHARES CONTROLLED BY BOARD MEMBERS AND GROUP MANAGEMENT 31.12.2018 31.12.2018 31.12.2017 31.12.2017 NO. OF SHARES SHAREHOLDING NO. OF SHARES SHAREHOLDING BOARD OF DIRECTORS Per Grieg jr. * Asbjørn Reinkind (Reinkind AS) Wenche Kjølås (Jawendel AS) Karin Bing Orgland Solveig Nygaard Tore Holand GROUP MANAGEMENT Andreas Kvame (CEO) Atle Harald Sandtorv (CFO) Knut Utheim (COO) Kathleen O. Mathisen (CHRO) 58 961 996 120 000 7 000 - - - 39 165 24 208 23 507 3 456 52.80 % 0.11 % 0.01 % - - - 0.04 % 0.02 % 0.02 % 0.00 % * THE SHARES OWNED BY THE FOLLOWING COMPANIES ARE CONTROLLED BY PER GRIEG JR. AND FAMILY Grieg Aqua AS Grieg Holdings AS ** Nye Ystholmen AS Grieg Ltd AS ** Per Grieg jr. privately Total shares 56 018 799 - 2 928 197 - 15 000 58 961 996 50.17 % - 2.62 % - 0.01 % 52.80 % 58 961 996 120 000 7 000 - - - 35 000 21 793 18 200 - - 55 801 409 2 928 197 217 390 15 000 58 961 996 52.80 % 0.11 % 0.01 % - - - 0.03 % 0.02 % 0.02 % - - 49.97 % 2.62 % 0.19 % 0.01 % 52.80 % ** Grieg Holdings AS decided to transfer all Grieg Seafood ASA shares to Grieg Aqua AS through a demerger. Grieg Aqua AS was established when the demerger was completed. The process was formalized 3 December 2018. In addition, all Grieg Seafood ASA shares owned by Grieg Ltd AS was transferred to Grieg Aqua AS. Grieg Maturitas II AS, the parent company of Grieg Holdings AS and Grieg Ltd AS, is the sole shareholder of Grieg Aqua AS. Please refer to notification at www.oslobors.no for more information. 256 Grieg SeafoodAnnual report 2018NOTE 18 Earnings per share and dividend per share CALCULATION OF EARNINGS PER SHARE Profit for the year (majority share) (NOK 1 000) Number of shares at 01.01 Effect of treasury shares (see Note 17) Sale of treasury shares to employees Number of outstanding shares at 31.12 Adjustment for effect of share options Diluted number of outstanding shares at 31.12 Earnings per share (NOK) Diluted earnings per share (NOK) Proposed dividend per share (NOK) Dividend paid out according to Annual Report for 2017 Dividend paid out according to poxy approved on the AGM 12.06.2018 NOTE 19 Cash and cash equivalents AMOUNTS IN NOK 1 000 CASH AND CASH EQUIVALENTS Restricted deposits relating to employee tax deductions Other cash and bank deposits Total The Group's currency and interest rate exposure is described in Note 3. 2018 972 506 111 662 000 -1 250 000 21 576 2017 570 537 111 662 000 -1 250 000 0 110 433 576 110 412 000 0 0 110 433 576 110 412 000 8.81 8.81 2.00 5.17 5.17 2.00 2.00 2.00 2018 12 388 125 532 137 920 2017 13 493 258 221 271 715 257 Part 03 Operational resultsGrieg Seafood Group AccountsNOTE 20 Trade receivables AMOUNTS IN NOK 1 000 TRADE RECEIVABLES Gross amount of trade receivables Loss allowance Trade receivables at 31.12. AMOUNTS IN NOK 1 000 RECOGNIZED LOSSES Change in loss allowance Confirmed losses in the year Amounts received for previously written off trade receivables Total recognized losses on receivables 2018 937 163 -11 931 925 232 2018 564 1 547 -7 246 -5 135 2017 772 774 -11 368 761 407 2017 2 990 1 610 -272 4 328 Losses on receivables are classified as other operating expenses in the income statements. The Group has implemented IFRS 9, effective from 1 January 2018. As a result, the Group has changed the ECL (Expected credit loss) calculation model. Customers are categorized as high or low risk, depending on their country of origin and as credit insured or unsecured. The group of unsecured receivables also consist of some receivables that have other type of securities and hence, the risk of loss is considered as low and no loss allowance is calculated for these receivables. The risk evaluation is based on own experience and input from Credit Insurance Companies. Loss allowance is further calculated on a %-basis of the aging distribution (days past due). The Group also makes manual accruals if significant information implies that there is a higher risk of losses. For more information about credit risk, refer to note 3. AMOUNTS IN NOK 1 000 AGING PROFILE OF TRADE RECEIVABLES (TR) GROSS AMOUNT EXPOSED AMOUNT NOT YET DUE OVERDUE 0-30 DAYS OVERDUE 31-60 DAYS OVERDUE 61-90 DAYS OVERDUE > 90 DAYS OVERDUE > 1 YEAR TOTAL Regular/normal risk countries TR Credit insured 712 685 123 403 429 138 260 979 TR Unsecured 149 704 107 562 99 774 44 521 45 944 28 830 4 930 26 121 29 127 15 290 15 551 9 655 937 163 262 015 573 330 330 707 16 303 11 762 2 061 912 1 569 787 - 92 1 253 2 132 7 971 3 122 - 932 2 047 712 685 226 149 704 262 128 45 944 28 830 12 026 2 664 937 163 High risk countries Total TR Credit insured TR Unsecured 258 Grieg SeafoodAnnual report 2018AMOUNTS IN NOK 1 000 LOSS ALLOWANCE Regular/normal risk countries TR Credit insured TR Unsecured TR Credit insured TR Unsecured High risk countries Total GROSS AMOUNT EXPOSED AMOUNT NOT YET DUE OVERDUE 0-30 DAYS OVERDUE 31-60 DAYS OVERDUE 61-90 DAYS OVERDUE > 90 DAYS OVERDUE > 1 YEAR LOSS ALLOWANCE 123 403 107 562 4 930 26 121 215 1 000 58 611 - 262 015 1 885 393 1 343 93 1 159 2 988 77 281 22 565 945 24 107 5 751 887 628 1 096 - 838 2 047 226 262 128 3 384 4 054 441 4 052 2 562 2 664 11 931 In 2017, IAS 39 was applied for calculating loss allowance on trade receivables. The above specification is only prepared for the 2018 figures. The calculation was a rough estimate based on available information. AMOUNTS IN NOK 1 000 AGING PROFILE OF TRADE RECEIVABLES Gross amount trade receivables at 31.12.2017 NOT YET DUE OVERDUE 0-30 DAYS OVERDUE 31-60 DAYS OVERDUE 61-90 DAYS OVERDUE > 90 DAYS OVERDUE > 1 YEAR TOTAL LOSS ALLOWANCE 506 845 231 742 11 424 1 494 17 600 3 668 772 774 11 368 NOTE 21 Other current receivables AMOUNTS IN NOK 1 000 OTHER CURRENT RECEIVABLES Vat receivable Prepaid expenses Insurance claims Loan extended to Nordnorsk Smolt AS Changes in volume deviations, fixed-price contracts Current loans extended to non-controlling interests Other current receivables Total 2018 87 666 46 432 - 22 100 - - 10 234 166 432 2017 72 895 51 014 10 664 19 600 17 837 13 995 12 522 198 527 259 Part 03 Operational resultsGrieg Seafood Group AccountsNOTE 22 Related parties AMOUNTS IN NOK 1 000 2018 Total related parties as shareholders Total related parties as associates Total AMOUNTS IN NOK 1 000 2017 Total related parties as shareholders Total related parties as associates Total OPERATING INCOME OPERATING EXPENSES CURRENT BALANCES 38 110 - 38 110 259 786 338 260 125 4 113 - 4 113 OPERATING INCOME OPERATING EXPENSES CURRENT BALANCES 28 949 - 28 949 348 564 580 349 144 -74 989 - -74 989 The Group has transactions with companies controlled by Grieg Maturitas II AS, who is the parent company of Grieg Aqua AS, majority owner of Grieg Seafood. These services include: • ICT-related services and other functions such as catering, reception etc. are provided by Grieg Group Resources AS on an arm’s length basis. Grieg Seafood ASA rents its offices from Grieg Gaarden AS on an arm’s length basis. The regions purchased cleansing fish from Ryfylke Rensefisk AS, a company owned by Grieg Kapital AS. Purchase of roe and other operating services from SalmoBreed AS, which is a related party of a board member. Purchase of feed relating to operations from Biomar Group, which is a related party of a board member. Purchase of veterinary services from Fomas AS and SLab AS, which are a related parties of a board member. Purchase of equipment from Mørenot Group, which are a related parties of a board member. • • • • • • The Group also purchases services relating to operations from other related parties in associates. The board and management are related parties. See Note 16 on share-based options and Note 17 on shares controlled by board members and management. 260 Grieg SeafoodAnnual report 2018NOTE 23 Financial income and financial expenses AMOUNTS IN NOK 1 000 FINANCIAL ITEMS FINANCIAL INCOME Other interest income * Dividend Net change in fair value of derivatives Net currency gains Other financial income Total FINANCIAL EXPENSE Interest expense on external borrowings and leases ** Amortized interest cost Other interest expenses *** Net change in fair value of derivatives Net currency losses Other financial expenses Total 2018 2017 18 864 10 - - - 18 874 48 773 5 304 11 873 5 490 23 199 2 226 96 865 16 563 -0 4 578 20 554 639 42 333 42 847 1 814 9 940 - - 2 188 56 789 Net financial items decreased by NOK 64 million compared to last year, mainly driven by currency losses on loans and receivables and losses on derivatives. * The majority of other interest income comprises cash discounts from non-controlling interests, based on settlement of trade payables with shorter-than-normal credit terms. ** Interest expenses on bank borrowings and leases includes recognized gains/losses from realized interest rate swaps. *** Interest expenses relating to the factoring agreement at Ocean Quality are included in other interest expenses. NOTE 24 Other operating expenses AMOUNTS IN NOK 1 000 OTHER OPERATING EXPENSES (NOK 1 000) Transportation costs Maintenance costs Electricity and fuel Lease expenses Outsourced services * Insurance IT expenses Marketing costs Other operating expenses ** Other production-related costs *** Total other operating expenses 2018 521 659 265 461 101 499 97 764 51 774 54 092 37 124 8 996 104 735 578 520 1 821 623 2017 497 734 232 597 71 369 108 303 51 857 41 119 20 408 8 613 127 070 565 535 1 724 604 * Outsourced services include auditor´s fees. See more detailed information below. ** Includes equipment, telephony/postage, office supplies, fees, travel costs etc. *** Production-related costs comprise harvesting costs including expenses for well-boat services, packaging material, diving services, vaccination, de-lousing, oxygen, and analyses etc. 261 Part 03 Operational resultsGrieg Seafood Group AccountsNOTE 24 CONT. AMOUNTS IN NOK 1 000 BREAKDOWN OF AUDITOR'S FEES AUDITOR'S FEES Group auditor Other auditors OTHER CERTIFICATION SERVICES Group auditor Other auditors TAX ADVICE Group auditor Other auditors OTHER SERVICES Group auditor Other auditors Total Group auditor Total other auditors Total auditor's fees NOTE 25 Other current liabilities AMOUNTS IN NOK 1 000 OTHER CURRENT LIABILITIES Accrued expenses * Other current liabilities ** Other current liabilities 2018 2 504 542 323 - 350 195 121 119 3 298 857 4 154 2017 2 785 469 85 290 523 117 362 - 3 754 877 4 631 2018 139 803 8 861 148 663 2017 201 788 10 929 212 717 * Accrued expenses relate to other operating expenses, including accrued purchases, transportation costs, bonuses/discounts for buyers, accrued salaries, and insurance. ** At year-end 2018, the Group had physical delivery contracts recognized as liability, totalling NOK 0.5 million. 262 Grieg SeafoodAnnual report 2018NOTE 26 New accounting policies CHANGES IN ACCOUNTING POLICIES AND DISCLOSURE OF NEW STANDARDS A) NEW AND AMENDED STANDARDS - ADOPTED IN 2018 IFRS 9 FINANCIAL INSTRUMENTS INCLUDING RELATED AMENDMENTS TO VARIOUS OTHER STANDARDS IFRS 9 replaces the classification and measurement models of IAS 39 with a single model, with essentially only two categories: amortized cost and fair value. The classification of lending depends on the entity’s business model for managing its financial instruments and the characteristics of the cash flows of each instrument. A debt instrument is measured at amortized cost if; a) the business model is to hold the financial asset in order to receive the contractual cash flows, and b) the contractual cash flows solely represent payments of principal and interest. All other debt and equity instruments, including investments in complex instruments, should be measured at fair value through profit/ loss. There is an exception made for equity instruments not held for sale. Value changes in such positions should be recognized in comprehensive income, without subsequent reclassification to profit/loss. For financial liabilities that the entity has chosen to measure at fair value, the proportion of the change in value attributable to changes in inherent credit risk is recognized through other comprehensive income and not through profit/loss. The new rules for hedge accounting imply that hedge accounting better reflects normal practice for the risk management of enterprises. As a general rule, it will be easier to apply hedge accounting to come. The new standard also introduces expanded disclosure requirements and changes in the rules for the presentation of hedge accounting. The standard is subject to mandatory application as from the fiscal year 2018. As a consequence of implementing the new standard, the Group has changed the model for calculating loss allowance on trade receivables. The change did not have a significant monetary effect for the Group. For more information, refer to note 20. IFRS 15 REVENUE FROM CONTRACTS WITH CUSTOMERS IASB has issued a new standard for revenue recognition, which replaces IAS 18 Revenue and IAS 11 Construction Contracts. The new standard is based on the principle that revenue is recognized when control over a good or service is transferred to a customer, so that the principle of control substitutes the existing principle of transfer of risk and returns. Identify the contract(s) with a customer Identify all separate performance obligations in the contract A new five-step model framework must be applied before revenue can be recognized: 1. 2. 3. Determine the transaction price of the contract 4. Allocate the transaction price to the separate performance obligations in the contract, and 5. Recognize revenue when each performance obligation is satisfied. Major changes from current practices include: • Goods and/or services that are sold together, but which can be sold separately, must be recognized separately. Any discounts should normally be allocated to each individual element. Revenues can be recognized earlier than permitted under current standards if the compensation varies (i.e. due to incentives, rebates, performance fees, royalties, the success of an outcome, etc.). The minimum amount should be recognized unless there is a significant risk of cancellation of the agreement. The point of revenue recognition may shift: Some revenues that currently are recognized retrospectively, may need to be recognized over the contract term, and vice versa. There are new specific rules on licenses, warranties, nonrefundable advance payments, and commission sales, to mention a few. As with any new standard, it implies increased disclosure requirements. • • • • These changes in accounting policies may affect the Group´s business practices regarding systems, processes and controls, compensation and bonus schemes, contracts, tax planning and communication with the investors. The Group will be able to choose between full retrospective application, or prospective application with additionaldisclosures.The standard is effective as from the annual reporting period beginning in 2018, but early adoption is permitted. 263 Part 03 Operational resultsGrieg Seafood Group AccountsNOTE 26 CONT. The Group has carried out an evaluation of the new standard, based on current revenue flows, and concluded that it will have no material impact on the financial statement. In the following, a brief summaryof the Group's review of the five-step model, as discussed above, is disclosed: Step 1: The Group is covered by the standard, as the main sale each week is settled with the customer. Fixed delivery contracts are entered into with customers, specifying per-week volume. The cash flow is the sale of gutted salmon packed in boxes and dispatched to customers. The major part is fresh fish, while a proportion is filleted or frozen. The Group also sells roe, smolt and ensilage, together making up about 1 % of the total sales. The Group furthermore offers harvesting services for other aquaculture companies in the case of surplus capacity. This is recognized as other operating income, similar to insurance settlement related to biomass. All categories of the Group´s revenue streams are recognized at the time of delivery. That also applies to the fulfillment of physical delivery contracts. Step 2: Furthermore, the standard requires identification of all separate performance obligations. The Group assesses that the contracts entered into with customers, do not contain separate performance obligations, as they are related to the delivery of fish, ref. Step 1, hence only one performance obligation. However, it may be agreed to deliver volumes at different points of time, but this has already been accounted for through the Group's accounting policies. Step 3: Transaction prices are spot prices based on the Nasdaq prices including transport and margin. The price is per kilogram. The price varies according to the quality of the fish and size. The fish is mainly sold Delivered Duty Paid (DDP) to customer. Step 4: This step does not apply, as the Group has concluded that separate performance obligations as mentioned in Step 2, essentially do not exist. Step 5: This step does not imply any substantial amendments to the current accounting treatment of revenue recognition, ref. Step 1. The Group has utilized a modified retrospective application upon transition to IFRS 15 from 1 January 2018. Please refer to Note 2 about revenue principles and Note 6 for disaggregation of revenues. B) NEW STANDARDS AND INTERPRETATIONS - NOT YET ADOPTED A number of new standards, amendments of standards and interpretations of existing standards are mandatory for future financial statements. Additionally, the application of some amendments is permitted prior to mandatory application. Among those amendments the Group has decided to implement in the future, and which are not mandatory for 2018, the essential are disclosed below. IFRS 16 LEASES IFRS 16 was issued January 2016 and specifies accounting principles for leases. This will replace IAS 17 Leases, incl. related interpretations. IAS 17 has essentially designated two models for the recognition of leasing agreements – one for operating leases and one for finance leases. The lessee has only been required to recognize leased assets classified as finance lease in the balance sheet. IFRS 16 no longer specifies this as a main rule. There is primarily one model for recognition, which implies that the lessee shall recognize most leased assets, with certain exceptions. The new standard will have a material impact on the Group’s financial statement, which at 31 December 2018 has several operating lease contracts. The Group has been preparing for the implementation of the new standard during the year. This includes obtaining and systematizing all lease agreements in the Group, as well as evaluating them in accordance with the new recognition rules and calculating the effects. At year-end, the Group has non-cancellable operating lease commitments of NOK 449 million, please refer to Note 11 for further details. The Group expects to recognize right-of-use assets and corresponding lease liabilities of at least NOK 300 – 400 million at 1 January 2019. The Group expects that net profit before tax will decrease by approximately NOK 4 million for 2019 and EBITDA before fair value adjustment of biological assets will increase by approximately NOK 88 million. Operating cash flow will increase, and financing cash flow will decrease by approximately NOK 5 million as the period installments will be classified as financing activities. The figures are subject to change due to consideration of renewal options, discount rates, currency effects, new agreements and other factors. The standard will apply for accounting periods starting 1 January 2019 or later, but early adoption is permitted upon application of IFRS 15. The Group will carry out a modified retrospective application upon the implementation of IFRS 16 for the fiscal year 2019. OTHER STANDARDS There are no other standards or interpretations that still have not taken effect that are expected to materially impact the consolidated financial statements. 264 Grieg SeafoodAnnual report 2018NOTE 27 Post-balance sheet events GRIEG SEAFOOD SHETLAND LTD - OCEAN QUALITY UK LTD – INSPECTION BY THE EUROPEAN COMMISSION DG COMPETITION 19 February 2019, The European Commission DG (Director General) Competition performed an inspection at Grieg Seafood Shetland to explore potential anti-competitive behavior in the salmon industry. Grieg Seafood aims to be open, transparent and forthcoming and will provide all necessary information requested by the European Commission DG Competition in its investigation. Currently, there is no new information. There has been no other significant events after the reporting period. 265 Part 03 Operational resultsGrieg Seafood Group AccountsGrieg Seafood Annual report 2018 ANNUAL ACCOUNTS Grieg Seafood ASA Accounts 266 266 Grieg SeafoodAnnual report 2018Income statement AMOUNTS IN NOK 1 000 GRIEG SEAFOOD ASA Other operating income Total operating income Salaries and personnel expenses Depreciation and amortization Other operating expenses Total operating expenses Operating loss Financial income Financial expenses Net financial items Profit before tax Income tax expense Net profit/loss for the year APPROPRIATION OF PROFIT FOR THE YEAR Proposed dividend Transferred to other equity Total appropriations NOTE 2/17 3/4 12/13 6/17 5/17 5/17 15 2018 72 136 72 136 -56 652 -5 528 -71 661 -133 841 -61 704 673 851 -78 431 595 420 2017 62 756 62 756 -49 799 -5 162 -52 564 -107 524 -44 768 635 125 -42 608 592 517 533 716 547 749 -118 343 415 373 -126 460 421 289 220 867 194 506 415 373 220 824 200 465 421 289 267 Part 03 Operational resultsGrieg Seafood ASA Accounts Statement of financial position AMOUNTS IN NOK 1 000 GRIEG SEAFOOD ASA ASSETS Software Property, plant and equipment Investments in subsidiaries Loan to Group companies Other non-current receivables Investment in shares Total non-current assets Trade receivables Trade receivables from Group companies Other receivables from Group companies Other current receivables Bank deposits Total current assets NOTE 12 13/18 10/18 17/18 11 6/17 17 17/18 7/18 8 31.12.2018 31.12.2017 18 739 4 488 1 385 840 619 171 167 676 18 196 5 478 1 226 980 623 365 167 666 2 029 082 1 874 851 - 466 1 112 619 34 840 5 790 1 153 715 156 41 450 1 151 052 19 655 157 460 1 369 773 Total assets 3 182 797 3 244 624 268 Grieg SeafoodAnnual report 2018 AMOUNTS IN NOK 1 000 GRIEG SEAFOOD ASA EQUITY AND LIABILITIES Share capital Treasury shares Other reserves Other retained earnings Total equity Deferred tax Cash-settled share options Total provisions Non-current loan Total non-current liabilities Current portion of non-current loan Overdraft facility Cash-settled share options Proposed dividend Trade payables Trade payables to Group companies Current liabilities to Group companies Tax payable Public tax payable Other current liabilities Total current liabilities Total liabilities NOTE 31.12.2018 31.12.2017 14 14 15 4 18 18 18 4 17 17 15 7/9 446 648 -4 914 13 877 856 775 1 312 386 18 147 8 493 26 641 446 648 -5 000 13 652 880 823 1 336 123 16 632 8 848 25 480 1 298 713 1 298 713 1 191 688 1 191 688 98 212 46 597 9 010 220 867 5 715 16 068 11 476 115 816 2 568 18 728 545 057 90 000 - 6 746 220 824 6 986 35 881 178 801 122 802 2 246 27 047 691 333 1 870 411 1 908 501 Total equity and liabilities 3 182 797 3 244 624 BERGEN, 11 APRIL 2019 GRIEG SEAFOOD ASA ASBJØRN REINKIND Vice Chair PER GRIEG JR. Chair WENCHE KJØLÅS Board Member KARIN BING ORGLAND Board Member SOLVEIG NYGAARD Board Member TORE HOLAND Board Member ANDREAS KVAME CEO 269 Part 03 Operational resultsGrieg Seafood ASA Accounts Statement of changes in equity AMOUNTS IN NOK 1 000 Equity at 01.01.2017 PROFIT FOR THE YEAR 2017 Other gains and losses recognized in equity Proposed dividend, to be paid in 2018 Paid additional dividend in 2017 Equity at 31.12.2017 PROFIT FOR THE YEAR 2018 Other gains and losses recognized in equity Sale of treasury shares to employees Dividend paid-out 2018, not accrued 2017 Proposed dividend, to be paid in 2019 SHARE CAPITAL OTHER PAID-IN EQUITY OTHER EQUITY TOTAL EQUITY 441 648 13 652 - - - - - - 441 648 13 652 - 86 - - - 225 - - 790 759 421 289 10 -220 824 -110 412 880 823 415 373 10 2 304 -220 867 -220 867 856 775 1 246 059 421 289 10 -220 824 -110 412 1 336 123 415 373 10 2 615 -220 867 -220 867 1 312 386 Equity at 31.12.2018 441 734 13 877 270 Grieg SeafoodAnnual report 2018Cash flow statement AMOUNTS IN NOK 1 000 GRIEG SEAFOOD ASA Profit before tax Taxes paid Depreciation and amortization Interest paid Change in trade and other receivables Change in trade payables Change in other accruals Sale of treasury shares Recognized, not paid Group contributions Dividend income Net cash flow from operating activities Dividend income Purchase of property, plant and equipment Purchase of intangible assets Payments/proceeds, loans to/from Group companies Payment of shares in Group companies Payments, loans to associates Net cash flow from investing activities Change in overdraft facility Change in non-current interest-bearing liabilities Change in loans to/from Group companies Change in non-current debt Interest paid Dividends paid Net cash flow from financing activities Net change in cash and cash equivalents Cash and cash equivalents at 01.01. Cash and cash equivalents at 31.12. NOTE 15 12/13 5 13 12 18 2018 533 716 -122 802 5 528 30 780 156 -1 271 7 885 2 615 -610 981 -20 189 -174 563 20 189 -576 -4 505 653 608 -158 860 -9 000 500 855 46 597 -40 000 -167 324 155 237 -30 780 -441 691 -477 962 -151 670 157 460 5 790 2017 547 749 -146 025 5 162 29 038 -137 319 3 507 - -534 523 -25 376 -120 285 25 376 -2 074 -4 144 603 867 - -13 100 609 925 - 300 000 -454 775 -90 000 -29 038 -441 648 -715 461 -225 822 383 281 157 460 271 Part 03 Operational resultsGrieg Seafood ASA Accounts Notes NOTE 1 NOTE 2 NOTE 3 NOTE 4 NOTE 5 NOTE 6 NOTE 7 NOTE 8 NOTE 9 Accounting policies Operating income Salaries and personnel expenses Cash-based remuneration Financial income and expenses Trade receivables Other current receivables/ other liabilities Bank deposits Financial instruments at fair value NOTE 10 Investments in subsidiaries NOTE 11 NOTE 12 Investments in shares Intangible assets NOTE 13 Property, plant and equipment NOTE 14 Share capital and shareholder information NOTE 15 Taxes NOTE 16 Guarantees NOTE 17 Related parties NOTE 18 Net interest-bearing liabilities and pledges NOTE 19 Post-balance sheet events page 273 page 275 page 275 page 277 page 279 page 280 page 280 page 281 page 281 page 281 page 282 page 282 page 283 page 284 page 286 page 287 page 287 page 288 page 289 272 Grieg SeafoodAnnual report 2018NOTE 1 Accounting policies The annual financial statements have been prepared in accordance with the Norwegian Accounting Act and generally accepted accounting principles in Norway. All amounts are stated in NOK thousand, unless otherwise indicated. REVENUE RECOGNITION Revenue from the sale of goods is recognized at the time of delivery. Revenue from the sale of services is recognized when the services are delivered. The share of sales revenue associated with future service is recognized in the balance sheet as accrued sales revenues and is transferred to income at the time of execution. CLASSIFICATION AND VALUATION OF BALANCE SHEET ITEMS Assets intended for long-term ownership or use are classified as non-current assets. Assets related to the normal operating cycle are classified as current assets. Receivables are classified as current assets if they are expected to be repaid within 12 months of the transaction date. Similar criteria are applied to liabilities. Current assets are valued at the lower of cost and fair value. Current liabilities are recognized in the balance sheet at nominal value. Non-current assets are valued at historical cost. Property, plant and equipment whose value will deteriorate is depreciated on a straight-line basis over the asset’s estimated useful life. Non-current assets are written down to fair value where this is required by accounting rules. Nominal amounts are discounted if the interest rate element is material. INTANGIBLE ASSETS Expenditure on intangible assets is recognized in the balance sheet to the extent that a future economic benefit can be identified as deriving from the development of an identifiable intangible asset and costs can be measured reliably. Otherwise, the costs are expensed as they arise. Capitalized development costs are amortized over their useful life. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is recognized in the balance sheet and depreciated on a straight-line basis over its estimated useful life, providing the asset has an expected useful life of more than 3 years and a cost price of more than NOK 15 thousand. Maintenance costs are recognized in income as operating expenses as they arise, while improvements and additions are added to the acquisition cost of the asset and depreciated at the same rate as the asset. The distinction between maintenance and improvements is made based on the asset’s relative condition at the original purchase date. SUBSIDIARIES Subsidiaries are valued at cost in the single-entity financial statements. Investments are recognized as the cost of the shares adjusted for any minor impairments where necessary. Group contributions paid to subsidiaries, net of tax, are recognized as an increase in the cost of the shares. Dividends and Group contributions are recognized in the same year as they are proposed in the subsidiary’s financial statements. If dividends/ Group contributions materially exceed retained earnings after acquisition, the excess amount is regarded as a reimbursement of invested capital and is deducted from the recorded cost in the balance sheet. Group contributions received are recognized as other financial income. IMPAIRMENT OF NON-CURRENT ASSETS Impairment tests are performed upon indication that the carrying amount of a non-current asset exceeds its estimated fair value. The test is performed at the lowest level of non-current assets at which independent cash flows can be identified. If the carrying amount is higher than both the fair value less costs to sell and the recoverable amount (net present value of future use/ownership), the asset is written down to the higher of fair value less costs to sell and the recoverable amount. Previous impairment charges are reversed in a later period if the prerequisites for impairment are no longer present (except for impairment of goodwill). TRADE AND OTHER RECEIVABLES Trade and other receivables are recognized in the balance sheet at nominal value after a provision for bad debts. The provision for bad debts is estimated based on an individual assessment of each material receivable. An additional general provision is recognized for minor receivables based on estimated expected losses. investments (shares and CURRENT INVESTMENTS investments which are Current considered current assets) are carried at the lower of average purchase cost and net realizable value at the balance sheet date. Dividends and other distributions received are recognized as other financial income. PENSIONS The company’s pension schemes meet the requirements of the Mandatory Occupational Pensions Act. The company operates a defined contribution pensions scheme for its employees. The premium is paid through operations and is expensed on an ongoing basis. Social security costs are charged based on the pension premium paid. GROUP ACCOUNT SCHEME – DEPOSITS AND LOANS Grieg Seafood ASA operates as an internal bank for its subsidiaries. Grieg Seafood ASA borrows funds under the agreement from financial institutions and then lends these funds to its subsidiaries. The company has set up a group account scheme (multi-account scheme) in which Grieg Seafood ASA is the legal account holder. Deposits and loans are recognized as intercompany transactions. All subsidiaries are jointly and severally liable to the financial institutions for the entire amount of the commitment under the scheme. 273 Part 03 Operational resultsGrieg Seafood ASA AccountsNOTE 1 CONT. FOREIGN CURRENCY The company’s functional and presentational currency is NOK. All foreign currency transactions are translated into NOK at the transaction date. Exchange rate and translation differences are recognized under other financial income or expenses. All monetary items denominated in foreign currency are translated using the balance sheet rate. Derivatives are recognized at fair value with changes in value recognized in the income statement. CASH-BASED REMUNERATION The company operates a share-based remuneration scheme with settlement in cash, where each employee is obliged to purchase shares relative to their annual salary. The company’s estimated liability is recognized under current or non-current liabilities based on the estimated settlement date. The cost for the year is recognized in the income statement. DERIVATIVES FORWARD CURRENCY CONTRACTS Realized gains are recognized in the income statement as financial income. The fair value of the contracts is measured based on the exchange rate at the balance sheet date for 2018. INTEREST RATE SWAPS Interest rate swap contracts are stated at the lowest value principle. TAXES The tax expense in the income statement consists of both taxes payable for the accounting period and changes in deferred tax. Deferred tax is calculated at the relevant rate on temporary differences between the value of assets and liabilities for tax purposes and any allowable loss to be carried forward at the year-end in the financial statements. Temporary differences, both positive and negative, are offset within the same period. Deferred tax assets are recognized in the balance sheet when it is likely on the balance of probabilities that the tax assets will be utilized. Deferred tax assets and deferred tax liabilities are presented net in the balance sheet. Tax on paid Group contributions recognized as an increase in the purchase price of shares in other companies, and tax on received Group contribution recognized directly in equity, are recognized directly against tax items in the balance sheet (offset against tax payable if the Group contribution affects tax payable and offset against deferred taxes if the Group contribution affects deferred taxes). CASH FLOW STATEMENT The cash flow statement has been prepared according to the indirect method. Cash and cash equivalents include cash, bank deposits and other short-term highly liquid investments which entail no appreciable exchange rate risk, and which mature within three months of the purchase date. 274 Grieg SeafoodAnnual report 2018NOTE 2 Operating income AMOUNTS IN NOK 1 000 OPERATING INCOME Administrative services – Group companies (Note 17) Other operating income Total operating income NOTE 3 Salaries and personnel expenses AMOUNTS IN NOK 1 000 SALARIES AND PERSONNEL EXPENSES Wages and salaries Social security costs Share options for directors and key personnel (See Note 4) Pension costs – defined contribution scheme Other personnel costs Total 2018 71 516 620 72 136 2017 62 756 - 62 756 2018 29 020 5 667 15 173 1 282 5 510 56 652 2017 23 436 5 047 13 247 1 304 6 765 49 799 Average number of employees 24 21 The Company has a pension scheme covering all employees at 31 December 2018. The pension scheme is funded and managed through an insurance company. The board's guidelines and principles for the determination of salaries and other remuneration paid to the management group are disclosed in the consolidated financial statements note 14. AMOUNTS IN NOK 1 000 REMUNERATION PAID TO SENIOR OFFICERS IN 2018 Andreas Kvame (CEO) Atle Harald Sandtorv (CFO) Knut Utheim (COO) Kathleen O. Mathisen (CHRO) Total remuneration incl. social security costs SALARY BONUS EARNED, NOT YET PAID OPTIONS EXERCISED DURING THE YEAR OTHER BENEFITS 2 685 1 748 1 748 1 466 7 647 630 335 195 347 1 507 389 207 149 314 1 058 2 522 1 607 1 607 1 448 7 184 90 97 97 92 376 Recognized expenses arising from synthetic options not declared throughout the year are not included in the above statement. TOTAL 6 316 3 994 3 796 3 667 17 772 275 Part 03 Operational resultsGrieg Seafood ASA AccountsNOTE 3 CONT. AMOUNTS IN NOK 1 000 REMUNERATION PAID TO BOARD MEMBERS IN 2018 Per Grieg jr. 1) Wenche Kjølås 2) Karin Bing Orgland 2) Asbjørn Reinkind 1) Ola Braanaas (until 12.06.2018 ) 3) Solveig M.R. Nygaard (from 12.06.2018) Tore Holand (from 12.06.2018) Total remuneration including social security costs 1) Payment for work performed on the Remuneration Committee of NOK 17 115 is included in the remuneration paid to Per Grieg jr. and Asbjørn Reinkind. 2) Payment for work performed on the Audit Committee of NOK 51 345 is included in the remuneration paid to Wenche Kjølås and Karin Bing Orgland. 3) Payment for work performed on the Remuneration Committee of NOK 8 558 is included in the remuneration paid to Ola Braanaas. The amounts include social security costs. AMOUNTS IN NOK 1 000 REMUNERATION PAID TO SENIOR OFFICERS IN 2017 Andreas Kvame (CEO) Atle Harald Sandtorv (CFO) Knut Utheim (COO) Kathleen O. Mathisen (CHRO) Total remuneration incl. social security costs SALARY BONUS RETAINED, NOT YET PAID 2 498 1 596 1 596 1 272 6 962 1 133 505 276 281 2 195 630 335 195 347 1 508 OPTIONS EXERCISED DURING THE YEAR OTHER REMUNERATION 2 475 1 578 1 578 0 5 630 137 132 133 125 527 Recognized expenses arising from synthetic options not declared throughout the year are not included in the above statement. AMOUNTS IN NOK 1 000 REMUNERATION PAID TO BOARD MEMBERS IN 2017 Per Grieg jr. 1) Wenche Kjølås 2) Karin Bing Orgland 2) Asbjørn Reinkind 1) Ola Braanaas 1) Total remuneration incl. social security costs 1) Payment for work performed on the Remuneration Committee of NOK 17 115 is included in the remuneration paid to Per Grieg jr., Asbjørn Reinkind, and Ola Braanaas. 2) Payment for work performed on the Audit Committee of NOK 51 345 is included in the remuneration paid to Wenche Kjølås and Karin Bing Orgland. The amounts include social security costs. AMOUNTS IN NOK 1 000 BREAKDOWN OF AUDITOR'S FEES Statutory audit Other certification services Tax advisory fee Other services Total 276 2018 808 291 144 56 1 299 TOTAL 434 280 280 302 123 114 114 1 646 TOTAL 6 873 4 145 3 778 2 025 16 821 TOTAL 434 280 280 302 245 1 540 2017 1 119 0 95 79 1 293 Grieg SeafoodAnnual report 2018 NOTE 4 Cash-based remuneration (options) The Company has issued options to the management group and regional directors. The options’ strike price is the stock market price on the date of issue, rising by 0.5% per month until the exercise date. As at 31 December 2018, no equity options were available for vestment. Since 2009, an option scheme with settlement in cash has been established for the management and regional directors. The most recent allocation was in 2017, totalling 1 800 000 options. The final exercise date is 31 May 2021. The options have a term of two years, where 50% is vested each year. Employees taken on after the initial allocation of options are allocated options on taking up employment. The Black & Scholes option pricing model is used to calculate the market value. A brokerage firm is used to perform the calculations. The table below shows the movement in outstanding options during 2017 and 2018. OVERVIEW 2018 (TOTAL OPTIONS) Andreas Kvame (CEO) Atle Harald Sandtorv (CFO) Knut Utheim (COO) Kathleen O. Mathisen (CHRO) Others Total OPTION CATEGORY OUTSTANDING OPTIONS AT 31.12.2017 GRANTED OPTIONS EXERCISED OPTIONS EXPIRED OPTIONS OUTSTANDING OPTIONS AT 31.12.2018 OF WHICH CASH- SETTLED Cash settlement Cash settlement Cash settlement Cash settlement Cash settlement 658 272 311 274 352 366 300 000 1 329 634 2 951 547 - - - - - - 55 275 35 230 35 230 100 000 262 677 488 412 2 997 - 17 136 - 66 958 87 091 600 000 276 044 300 000 200 000 999 999 600 000 276 044 300 000 200 000 999 999 2 376 044 2 376 044 OPTION CATEGORY OUTSTANDING OPTIONS AT 31.12.2016 GRANTED OPTIONS EXERCISED OPTIONS EXPIRED OPTIONS OUTSTANDING OPTIONS AT 31.12.2017 OF WHICH CASH- SETTLED OVERVIEW 2017 (TOTAL OPTIONS) Andreas Kvame (CEO) Atle Harald Sandtorv (CFO) Knut Utheim (COO) Kathleen O. Mathisen (CHRO) Others Total Cash settlement Cash settlement Cash settlement Cash settlement Cash settlement 314 009 146 801 187 893 100 000 592 379 400 000 200 000 200 000 200 000 800 000 55 737 35 527 35 527 - 62 745 1 341 082 1 800 000 189 536 - - - - - - ALLOCATION: YEAR - MONTH EXPIRY DATE: YEAR - MONTH STRIKE PRICE NOK PER SHARE AT 31.12.2018 STRIKE PRICE NOK PER SHARE AT 31.12.2017 2015–06 2015–06 2016–12 2017–11 2017–11 Total 2018–06 2019–06 2019–06 2020–05 2021–05 - 31.60 - 88.78 88.78 29.76 29.76 84.12 83.62 83.62 Cash-based options available for settlement Weighted average exercise price on outstanding options (NOK per option) 658 272 311 274 352 366 300 000 1 329 634 2 951 547 OPTIONS 2018 - 576 044 - 900 000 900 000 658 272 311 274 352 366 300 000 1 329 634 2 951 547 2017 251 547 600 000 300 000 900 000 900 000 2 376 044 2 951 547 2018 2017 1 476 044 66.49 1 151 547 43.94 277 Part 03 Operational resultsGrieg Seafood ASA Accounts NOTE 4 CONT. 2018 Former employees with expired options Andreas Kvame (CEO) Atle Harald Sandtorv (CFO) Knut Utheim (COO) Kathleen O. Mathisen (CHRO) Andreas Kvame (CEO) Atle Harald Sandtorv (CFO) Knut Utheim (COO) Kathleen O. Mathisen (CHRO) Other options allocated in 2015 Other options allocated in 2016 Other options allocated in 2017 Total NOK/OPTION AMOUNTS IN NOK 1 000 OPTION CATEGORY LISTED PRICE ON ALLOCATION CALCULATED VALUE PER OPTION ON ALLOCATION CALCULATED TOTAL VALUE ON ALLOCATION * TOTAL VALUE OF ALL OPTIONS AT 01.01.2018 CHANGE IN PROVISION CB-OB * EXERCISED OPTION 2018 ACC. COST RECOGNIZED IN EQUITY AT 31.12.2018 RECOGNIZED LIABILITY CASH SETTLEMENT AT 31.12.2018 Equity option Cash Cash Cash Cash Cash Cash Cash Cash Cash Cash Cash 25.50 25.50 25.50 79.00 83.00 83.00 83.00 83.00 25.50 79.00 83.00 3.36 3.97 3.97 3.63 2.26 2.79 2.79 2.38 3.60 3.34 2.35 1 342 4 255 -1 679 2 522 793 793 363 906 557 557 475 1 857 2 868 -223 -1 095 1 607 1 607 237 -237 1 448 147 1 563 90 90 77 967 1 040 821 - - - - 2 876 5 227 -2 200 2 859 669 441 -441 2 896 1 880 11 212 305 15 594 3 394 1 909 - 12 939 6 887 *) Amounts exclude social security costs NOK/OPTION AMOUNTS IN NOK 1 000 OPTION CATEGORY LISTED PRICE ON ALLOCATION CALCULATED VALUE PER OPTION ON ALLOCATION CALCULATED TOTAL VALUE ON ALLOCATION * TOTAL VALUE OF ALL OPTIONS AT 01.01.2017 CHANGE IN PROVISION CB-OB * EXERCISED OPTION 2017 ACC. COST RECOGNIZED IN EQUITY AT 31.12.2017 RECOGNIZED LIABILITY CASH SETTLEMENT AT 31.12.2017 2017 Former employees with expired options Equity option Andreas Kvame (CEO) Atle Harald Sandtorv (CFO) Knut Utheim (COO) Kathleen O. Mathisen (CHRO) Andreas Kvame (CEO) Atle Harald Sandtorv (CFO) Knut Utheim (COO) Kathleen O. Mathisen (CHRO) Other options allocated in 2015 Other options allocated in 2016 Other options allocated in 2017 Total Cash Cash Cash Cash Cash Cash Cash Cash Cash Cash Cash 25.50 25.50 25.50 79.00 83.00 83.00 83.00 83.00 25.50 79.00 83.00 3.36 3.97 3.97 3.63 2.26 2.79 2.79 2.38 3.60 3.34 2.35 *) Amounts exclude social security costs 278 1 342 2 935 1 320 2 475 793 793 363 906 557 557 475 1 699 2 298 41 - - - - 157 570 197 147 90 90 77 1 578 1 578 - - - - - 2 876 4 312 916 2 786 669 1 880 11 212 75 - 11 360 366 305 4 234 - - 8 416 6 887 6 887 - - - - - - - - - - - 6 887 - - - - - - - - - - - 2 575 1 634 1 773 - 1 709 1 057 1 130 898 3 027 - 3 699 17 503 4 255 1 857 2 868 237 147 90 90 77 5 227 441 305 15 594 Grieg SeafoodAnnual report 2018AMOUNTS IN NOK 1 000 ACCRUED COSTS RELATED TO CASH OPTIONS Change in provisions Exercised options during the year Total costs excl. social security costs Social security costs Total costs incl. social security costs 2018 1 909 12 939 14 848 325 15 173 2017 CLASSIFICATION IN FINANCIAL STATEMENTS 4 234 Other provisions for liabilities 8 416 Salaries and personnel expense / cash 12 650 597 Public taxes payable 13 247 Salaries and personnel expense Costs relating to cash-based remuneration in 2018 totalled NOK 15 173 thousand. This is recognized in the income statement as a personnel cost. Social security contributions are provided for on an ongoing basis based on the fair value of the options. As at 31 December 2018 outstanding options with the right to cash settlement were stated at NOK 17 503 thousand, of which NOK 8 493 thousand were classified as non-current liabilities. Issued options are cancelled on termination of employment. ESTIMATES USED TO CALCULATE ALLOCATION OF OPTIONS Anticipated volatility (%) Risk-free rate of interest (%) Estimated qualification period (years) The estimated qualification period for the options is based on historical data, and does not necessarily represent future developments. In order to estimate volatility, management has applied historical volatility for comparable listed companies. 41.49% 1.07% 1.56 NOTE 5 Financial income and financial expenses AMOUNTS IN NOK 1 000 FINANCIAL ITEMS FINANCIAL INCOME Interest income from Group companies Other interest income Group contributions from subsidiaries Dividend Unrealized value changes, derivatives, see Note 9 Unrealized currency change, non-current loans from Group companies Net realized currency gains Net unrealized currency gains Total FINANCIAL EXPENSE Loan interest expenses Other interest expenses Realized value changes, derivatives, see Note 9 Unrealized currency change, non-current loans from Group companies Unrealized currency change, non-current EUR term loan Other financial expenses Net realized currency losses Net unrealized currency losses Total 2018 2017 31 640 840 610 982 20 189 9 723 - 478 - 673 851 34 808 3 322 4 944 4 193 16 054 1 334 - 13 776 78 431 26 699 344 534 522 25 384 1 197 22 333 - 24 646 635 125 30 478 10 757 - - - 1 216 157 - 42 608 Net financial items 595 420 592 517 279 Part 03 Operational resultsGrieg Seafood ASA Accounts NOTE 6 Trade receivables AMOUNTS IN NOK 1 000 TRADE RECEIVABLES Trade receivables Provision for bad debts Book value of trade receivables at 31.12 Change in bad debt provision Amounts received for previously written-off bad debts Total recognized loss on trade receivables 2018 - - - - - - NOTE 7 Other current receivables/other current liabilities AMOUNTS IN NOK 1 000 OTHER CURRENT RECEIVABLES Prepaid expenses VAT Loan to Nordnorsk Smolt AS * Unrealized gain on interest rate swap contracts, see Note 9 Other current receivables ** Other current receivables at 31.12 2018 8 028 2 492 22 940 858 523 34 840 2017 156 - 156 - - - 2017 1 143 835 13 100 - 4 578 19 655 * GSF has entered into a partnership with Norway Royal Salmon in order to secure additional smolt capacity in Finnmark. NRS and GSF each own 50% of Nordnorsk Smolt AS. As part of the agreement, GSF has extended loans to Nordnorsk Smolt AS to cover operations, investments and accumulation of working capital in connection with development of the facility. ** GSF ASA entered into an FX-forward agreement in DKK on behalf of the subsidiary GSF Finnmark, in respect of GSF Finnmark´s agreement with a Danish contractor to develop the smolt facility in Adamselv. The purpose of the contract was to hedge payments in DKK. GSF ASA and GSF Finnmark entered into a back-to-back agreement on the contract. The contract expired during 2018. AMOUNTS IN NOK 1 000 OTHER CURRENT LIABILITIES Accrued interest Other accrued expenses Unrealized loss on interest rate swap contracts, see Note 9 Unrealized loss on foreign currency contracts Other current liabilities Other current liabilities at 31.12 280 2018 2 584 13 552 - 85 2 507 18 728 2017 1 212 14 658 4 071 4 880 2 227 27 047 Grieg SeafoodAnnual report 2018NOTE 8 Bank deposits AMOUNTS IN NOK 1 000 BANK DEPOSITS Restricted deposits relating to employees' tax deductions Other bank deposits Total 2018 1 495 4 295 5 790 2017 3 938 153 522 157 460 The company has renegotiated the syndicate bank loan in February 2018. The new agreement consists of, among other things, an overdraft facility of NOK 100 million. Available credit on the overdraft facility was NOK 53 million at year-end 2018. Please refer to note 18 for more information about the new loan agreement. NOTE 9 Financial instruments at fair value AMOUNTS IN NOK 1 000 2018 2017 FINANCIAL INSTRUMENTS Interest rate swap contracts (two contracts for NOK 400 million and NOK 260 million maturing in 2019 and 2021, respectively *) Foreign currency contract EUR/NOK (One contract comprising 52 transactions maturing December 2018) Total financial instruments at fair value * Amounts exclude accrued interest totalling NOK -392.2 thousand (2017: NOK -247.4 thousand) ASSETS CURRENT LIABILITIES ASSETS CURRENT LIABILITIES 858 - 858 - -85 -85 - - - CHANGES IN FAIR VALUE RECOGNIZED AS FINANCIAL ITEMS Unrealized gain/loss on interest rate swaps Unrealized gain/loss on foreign currency contracts Net unrealized gain/(loss) on financial instruments 2018 4 929 4 795 9 723 -4 071 -4 880 -8 951 2017 1 197 -4 880 -3 683 NOTE 10 Investments in subsidiaries SUBSIDIARY Grieg Seafood Rogaland AS Grieg Seafood Canada AS Grieg Seafood Finnmark AS Grieg Seafood Shetland Ltd Ocean Quality AS Total REGISTERED OFFICE COUNTRY REGISTERED OFFICE LOCATION OWNERSHIP/ VOTING SHARE Norway Norway Norway UK Norway Bergen Bergen Bergen Shetland Bergen 100 % 100 % 100 % 100 % 60 % EQUITY AT 31.12.2018 (NOK 1 000) 682 475 227 353 852 024 160 060 54 367 1 976 278 PROFIT/LOSS 2018 (NOK 1 000) BOOK VALUE (NOK 1 000) 163 516 -49 445 423 15 507 40 688 665 086 223 497 297 112 400 481 458 750 6 000 1 385 840 Equity and profit/loss taken from provisional financial statements, which have been prepared in accordance with local accounting standards. 281 Part 03 Operational resultsGrieg Seafood ASA AccountsNOTE 11 Investments in shares INVESTMENTS IN SHARES REGISTERED OFFICE COUNTRY REGISTERED OFFICE LOCATION OWNERSHIP/ VOTING SHARE NUMBER OF SHARES ACQUISITION COST (NOK 1 000) BOOK VALUE (NOK 1 000) Finnøy Næringspark AS DNB Global Allokering CO2 AS Norsk Villaksforvaltning Fiskeriforum Vest Book value of shares at 31.12 Norway Norway Norway Norway Norway Finnøy Oslo Lindås Førde Bergen 7.14% 0.00% 10.00% 15.15% 20.00% 100 3 038 2 5 20 103 630 20 50 16 103 487 20 50 16 676 NOTE 12 Intangible assets AMOUNTS IN NOK 1 000 2018 Book value at 01.01 Intangible assets acquired Amortization Book value at 31.12 ACCUMULATED VALUES Acquisition cost Accumulated amortization Book value at 31.12 Economic life/amortization schedule 2017 Book value at 01.01 Intangible assets acquired Amortization Book value at 31.12 ACCUMULATED VALUES Acquisition cost Accumulated amortization Book value at 31.12 Economic life/amortization schedule 282 SOFTWARE 18 196 4 505 -3 962 18 739 45 797 -27 058 18 739 3–10 years SOFTWARE 17 419 4 144 -3 367 18 196 41 292 -23 096 18 196 3–10 years Grieg SeafoodAnnual report 2018NOTE 13 Property, plant and equipment AMOUNTS IN NOK 1 000 2018 Book value at 01.01 Additions Depreciation charge Book value at 31.12 ACCUMULATED VALUES Acquisition cost Accumulated depreciation Book value at 31.12 Economic life/depreciation schedule 2017 Book value at 01.01 Additions Disposals Depreciation charge Depreciation on disposals (book value) Book value at 31.12 ACCUMULATED VALUES Acquisition cost Accumulated depreciation Book value at 31.12 Economic life/depreciation schedule PLANT, EQUIPMENT AND OTHER FIXTURES ETC. 5 478 576 -1 566 4 488 17 131 -12 643 4 488 3–5 years PLANT, EQUIPMENT AND OTHER FIXTURES ETC. 5 972 2 074 -1 495 -1 794 721 5 478 16 555 -11 077 5 478 3–5 years 283 Part 03 Operational resultsGrieg Seafood ASA AccountsNOTE 14 Share capital and shareholder information As at 31 December 2018, the company had 111 662 000 shares with a nominal value of NOK 4 per share. All shares issued by the company are fully paid-up. There is one class of shares and all shares confer the same rights. In June 2011, the company purchased 1 250 000 treasury shares at NOK 14.40 per share. 21 November 2018, the company sold 21 576 shares to employees for use in the share savings program. The sales price was NOK 121.56 per share, which provided a gain of NOK 107.16 per share. After the transaction the company have 1 228 424 treasury shares. SHARE CAPITAL AND NUMBER OF SHARES NOMINAL VALUE (NOK) TOTAL SHARE CAPITAL (NOK 1 000) NO. OF ORDINARY SHARES Holdings of treasury shares Sale of treasury shares to employees Total at 31.12.2018 4.00 4.00 4.00 446 648 -5 000 86 441 734 111 662 000 -1 250 000 21 576 110 433 576 THE 20 LARGEST SHAREHOLDERS IN GRIEG SEAFOOD ASA 31.12.2018 31.12.2018 31.12.2017 31.12.2017 NO. OF SHARES SHAREHOLDING NO. OF SHARES SHAREHOLDING 56 018 799 50.17 % - - 6 039 379 3 760 350 2 928 197 2 055 051 1 926 457 1 700 796 1 228 424 1 057 190 965 253 891 700 866 255 828 120 766 040 685 964 603 115 602 577 574 943 566 035 552 773 - 55 801 409 5.41 % 3.37 % 2.62 % 1.84 % 1.73 % 1.52 % 1.10 % 0.95 % 0.86 % 0.80 % 0.78 % 0.74 % 0.69 % 0.61 % 0.54 % 0.54 % 0.51 % 0.51 % 0.50 % 5 164 379 2 949 137 2 928 197 2 602 761 1 915 000 1 700 796 1 250 000 - 1 038 097 2 602 761 1 286 414 1 477 767 518 635 559 802 92 506 648 523 674 006 587 369 745 897 84 617 418 27 044 582 111 662 000 75.78 % 24.22 % 100.00 % 84 543 456 27 118 544 111 662 000 - 49.97 % 4.63 % 2.64 % 2.62 % 2.33 % 1.71 % 1.52 % 1.12 % - 0.93 % 2.33 % 1.15 % 1.32 % 0.46 % 0.50 % 0.08 % 0.58 % 0.60 % 0.53 % 0.67 % 75.71 % 24.29 % 100.00 % Grieg Aqua AS Grieg Holdings AS ** OM Holding AS Folketrygdfondet Ystholmen Felles AS (2017: Nye Ystholmen AS) State Street Bank and Trust Comp Verdipapirfondet Pareto Investment Verdipapirfondet Alfred Berg Gamba Grieg Seafood ASA Handelsbank Nordiska Sambolagsfond Euroclear Bank S.A./N.V. State Street Bank and Trust Comp Clearstream Banking S.A. JPMorgan Chase Bank, N.A., London The Bank of New York Mellon SA/NV The Northern Trust Comp, London Br Pictet & Cie (Europe) S.A. VPF Nordea Avkastning VPF Nordea Kapital UBS Switzerland AG JPMorgan Chase Bank, N.A., London Total –20 largest shareholders Other shareholders Total shares 284 Grieg SeafoodAnnual report 2018SHARES CONTROLLED BY BOARD MEMBERS AND GROUP MANAGEMENT 31.12.2018 31.12.2018 31.12.2017 31.12.2017 NO. OF SHARES SHAREHOLDING NO. OF SHARES SHAREHOLDING BOARD OF DIRECTORS Per Grieg jr. * Asbjørn Reinkind (Reinkind AS) Wenche Kjølås (Jawendel AS) Karin Bing Orgland Solveig Nygaard Tore Holand GROUP MANAGEMENT Andreas Kvame (CEO) Atle Harald Sandtorv (CFO) Knut Utheim (COO) Kathleen O. Mathisen (CHRO) 58 961 996 120 000 7 000 - - - 39 165 24 208 23 507 3 456 52.80 % 0.11 % 0.01 % - - - 0.04 % 0.02 % 0.02 % 0.00 % * THE SHARES OWNED BY THE FOLLOWING COMPANIES ARE CONTROLLED BY PER GRIEG JR. AND FAMILY Grieg Aqua AS Grieg Holdings AS ** Nye Ystholmen AS Grieg Ltd AS ** Per Grieg jr. privately Total shares 56 018 799 - 2 928 197 - 15 000 58 961 996 50.17 % - 2.62 % - 0.01 % 52.80 % 58 961 996 120 000 7 000 - - - 35 000 21 793 18 200 - - 55 801 409 2 928 197 217 390 15 000 58 961 996 52.80 % 0.11 % 0.01 % - - - 0.03 % 0.02 % 0.02 % - - 49.97 % 2.62 % 0.19 % 0.01 % 52.80 % ** Grieg Holdings AS decided to transfer all Grieg Seafood ASA shares to Grieg Aqua AS through a demerger. Grieg Aqua AS was established when the demerger was completed. The process was formalized 3 December 2018. In addition, all Grieg Seafood ASA shares owned by Grieg Ltd AS was transferred to Grieg Aqua AS. Grieg Maturitas II AS, the parent company of Grieg Holdings AS and Grieg Ltd AS, is the sole shareholder of Grieg Aqua AS. Please refer to notification at www.oslobors.no for more information. 285 Part 03 Operational resultsGrieg Seafood ASA AccountsNOTE 15 Taxes AMOUNTS IN NOK 1 000 BASIS FOR TAX PAYABLE Profit before tax Dividends recognized in income 3% dividend tax Net other permanent differences Change in financial derivatives Change in temporary differences Group contribution received/provided Taxable loss Group contribution received Basis for tax expense for the year 23% (24%) tax payable AMOUNTS IN NOK 1 000 2018 533 716 -20 189 606 -410 -9 723 -451 -610 982 -107 432 610 982 503 550 115 816 2017 547 749 -25 384 762 1 693 3 683 -16 827 -534 522 -22 846 534 522 511 676 122 802 BREAKDOWN OF DEFERRED TAX BASIS CHANGE 2018 2017 TEMPORARY DIFFERENCES Non-current assets Profit and loss account Cash-based options Non-current debt/amortized cost Revaluation account non-current liabilities Net temporary differences Financial instruments Basis for deferred tax in balance sheet 23% (24%) deferred tax Change in deferred tax assets due to change in tax rate 22% (23%) Deferred tax assets/deferred tax liabilities in balance sheet BREAKDOWN OF TAX CHARGE Tax payable Change in deferred tax, previous rate 23% (24%) Change in deferred tax due to change of rate Tax effect of foreign tax not credited Norwegian tax Tax expense in income statement RECONCILIATION OF TAX EXPENSE Profit before tax Estimated tax 23% (24%) Tax expense in income statement Difference THE DIFFERENCE CONSISTS OF THE FOLLOWING: 23% (24%) of permanent differences Tax effect of foreign tax not credited Norwegian tax Change in tax/deferred tax due to change of rate Total reconciled difference 286 280 -248 -2 178 6 790 -4 193 451 9 723 10 174 23 % 5 561 993 -19 971 10 102 85 030 81 715 773 82 488 18 972 -825 18 147 115 816 2 340 -825 1 012 118 343 533 716 -122 755 118 343 -4 411 -4 598 1 012 -825 -4 411 5 280 1 241 -17 793 3 312 89 224 81 264 -8 951 72 314 17 355 -723 16 632 122 802 3 155 -723 1 226 126 460 547 749 -131 460 126 460 -5 000 -5 503 1 226 -723 -5 000 Grieg SeafoodAnnual report 2018NOTE 16 Guarantees Grieg Seafood ASA acted as a guarantor for Ocean Quality UK Limited and Ocean Quality North America Inc in connection with sales contracts with customers. The total guaranteed amounts are EUR 250 000 and USD 3 000 000. NOTE 17 Related parties AMOUNTS IN NOK 1 000 2018 Total related parties – Group companies Total related parties – Shareholders Total AMOUNTS IN NOK 1 000 2017 Total related parties – Group companies Total related parties – Shareholders Total OPERATING INCOME OPERATING EXPENSES FINANCIAL INCOME FINANCIAL EXPENSES NON- CURRENT RECEIVABLES TRADE RECEIVABLES CURRENT RECEIVABLES TRADE PAYABLES OTHER CURRENT LIABILITIES 71 516 -14 510 31 645 126 71 643 -8 792 -23 301 - 31 645 -6 - -6 619 171 466 1 112 619 -16 068 -11 476 - 619 171 - 466 - - - 1 112 619 -16 068 -11 476 OPERATING INCOME OPERATING EXPENSES FINANCIAL INCOME FINANCIAL EXPENSES NON- CURRENT RECEIVABLES TRADE RECEIVABLES CURRENT RECEIVABLES TRADE PAYABLES OTHER CURRENT LIABILITIES 62 756 - 28 440 -1 741 623 365 41 450 1 151 052 -35 881 -178 801 - 62 756 7 698 7 698 - - - - - -518 - 28 440 -1 741 623 365 41 450 1 151 052 -36 399 -178 801 The company carries out transactions with companies controlled by Grieg Seafood ASA's largest shareholder, Grieg Holdings AS. The services provided include: • ICT-related and other services such as catering, reception etc. are delivered by Grieg Group Resources AS. The services are provided on an arm's length basis. Grieg Seafood ASA rents its offices from Grieg Garden AS on an arm’s length basis. • The parent company provides a range of services to the subsidiaries. The services include administrative services and services relating to the provision of parent company non-current loans and current credit facilities to the subsidiaries. Interest is charged on an arm's length basis. Ocean Quality AS has been classified as a subsidiary of Grieg Seafood ASA since 2015. Grieg Seafood ASA enters into hedging contracts on behalf of Grieg Seafood Rogaland AS and Grieg Seafood Finnmark AS. The arrangement is intended to reduce these companies´ exposure to salmon prices. The agreements with the subsidiaries are priced on the basis of a “back-to-back” arrangement. The contract ended in 2018. 287 Part 03 Operational resultsGrieg Seafood ASA AccountsNOTE 18 Net interest-bearing liabilities and pledges The company has a syndicated loan provided 50/50 by DNB and Nordea. To cater for major investment needs relating to the company's growth strategy in the period leading up to 2020, the company has renegotiated its syndicated bank loan before its original maturity in 2019. The company has set growth targets, including increased smolt capacity and new locations, which will entail an increased need for working capital. The new agreement includes (among other things) two term loans of NOK 600 million and EUR 60 million, a revolving credit facility of NOK 1 000 million, alongside overdraft facilities of NOK 100 million. Repayments of NOK 50 million and EUR 5 million will be made for term loans of respectively NOK 600 million and EUR 60 million, split into half-yearly instalments. The drawdown rate of the EUR loan is 9.6691. The agreement has a term of five years and matures on 28 February 2023. The agreement includes covenants, stipulating consolidated equity of 35% (in the Group, excluding Ocean Quality), a revolving NIBD/ EBITDA ratio of 5.0 if the book equity ratio is higher than 40% and 4.5 if the book equity ratio is between 35% and 40%. As at 31 December 2018, the NIBD/EBITDA for the Group excluding Ocean Quality was 1.3 and the equity ratio was 53%. Consequently, the Group fully complied with all covenants at the year-end. AMOUNTS IN NOK 1 000 NON-CURRENT LIABILITIES (INTEREST-BEARING) Non-current syndicated loan Non-current revolver credit facility * Amortized cost Total AMOUNTS IN NOK 1 000 CURRENT LIABILITIES (INTEREST-BEARING) Current overdraft facility * Current portion of non-current borrowing Total AMOUNTS IN NOK 1 000 NET INTEREST-BEARING LIABILITIES Gross interest-bearing liabilities Bank deposits Loans to subsidiaries Loans to other companies Net interest-bearing liabilities 2018 1 048 816 260 000 -10 102 1 298 713 2018 46 597 98 212 144 808 2018 1 443 522 5 790 1 108 432 22 100 307 200 2017 895 000 300 000 -3 312 1 191 688 2017 - 90 000 90 000 2017 1 281 688 157 460 1 063 519 13 100 47 609 * At the end of 2018, the Company had a total revolver credit facility and overdraft facility of NOK 1 100 million, of which NOK 793 million was available for utilization at the reporting date. MATURITY PROFILE - NON-CURRENT LIABILITIES 2019 2020 2021 2022 2023 LATER TOTAL Non-current loan Non-current credit facility Total 98 212 98 212 98 212 98 212 - - - - 754 181 260 000 98 212 98 212 98 212 98 212 1 014 181 - - - 1 147 027 260 000 1 407 027 288 Grieg SeafoodAnnual report 2018LIABILITIES SECURED BY MORTGAGE Liabilities to credit institutions Total liabilities BOOK VALUE OF ASSETS PLEDGED AS SECURITY Shares in subsidiaries Property, plant and equipment Trade receivables Loans to subsidiaries Total assets pledged as security 2018 1 443 522 1 443 522 2017 1 281 688 1 281 688 1 385 840 1 226 980 4 488 - 1 108 432 2 498 760 5 478 156 1 063 519 2 296 133 AMOUNTS IN NOK 1 000 2018 2017 TYPE OF LIABILITY CURRENCY Syndicated non-current loan Syndicated non-current loan Syndicated loan revolving credit Overdraft facility Total NOK EUR NOK Multiple INTEREST RATE Floating Floating Floating Floating MATURITY CURRENT PART NON-CURRENT PART CURRENT PART NON-CURRENT PART 02/2023 02/2023 02/2023 50 000 48 212 - 46 597 144 808 514 898 523 816 260 000 - 90 000 891 688 - - - - 300 000 - 1 298 713 90 000 1 191 688 CURRENCY EXPOSURE ON LOANS TO CREDIT INSTITUTIONS 31.12.2018 NOK GBP EUR USD OTHER Syndicated non-current loan (NOK) Syndicated non-current loan (EUR) Syndicated loan revolving credit (non-current) Overdraft facility * Total * Other currency effects mainly relate to CAD and DKK Average interest rate (NOK) Average interest rate (EUR) 564 898 572 027 260 000 46 597 564 898 - 260 000 407 609 - - - -415 913 1 443 522 1 232 506 -415 913 - 572 027 - 21 318 593 346 - - - - - - 47 413 47 413 -13 830 -13 830 2018 2.20% 1.21% 2017 2.21% N/A NOTE 19 Post-balance sheet events There has been no signifcant events after the reporting date that will materially affect the financial statement. 289 Part 03 Operational resultsGrieg Seafood ASA AccountsGrieg Seafood Annual report 2018 Auditor's report 290 290 Grieg SeafoodAnnual report 2018Part 03 Operational results Aduitor's report 291291 Part 03 Operational resultsGrieg Seafood ASA AccountsGrieg Seafood Annual report 2018 292 292 Grieg SeafoodAnnual report 2018Part 03 Operational results Aduitor's report 293293 Part 03 Operational resultsGrieg Seafood ASA AccountsGrieg Seafood Annual report 2018 294 294 Grieg SeafoodAnnual report 2018Part 03 Operational results Aduitor's report pwc Report on Other Legal and Regulatory Requirements Opinion on the Board of Directors' report Independent Auditor's Report - Grieg Seafood ASA Opinion on Registration and Documentation (ISAE) 3000, Assurance Engagements Other than Audits or Reviews of Historical Financial Information, We communicate with the Board of Directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the Board of Directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the Board of Directors, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Based on our audit of the financial statements as described above, it is our opinion that the information presented in the Board of Directors' report and in the statements on Corporate Governance and Corporate Social Responsibility concerning the financial statements, the going concern assumption and the proposed allocation of the result is consistent with the financial statements and complies with the law and regulations. (5) Based on our audit of the financial statements as described above, and control procedures we have considered necessary in accordance with the International Standard on Assurance Engagements it is our opinion that management has fulfilled its duty to produce a proper and clearly set out registration and documentation of the Company's accounting information in accordance with the law and bookkeeping standards and practices generally accepted in Norway. 295295 Jon Haugervag Part 03 Operational resultsGrieg Seafood ASA AccountsGrieg Seafood Annual report 2018 Auditor's sustainability statement 296 296 Grieg SeafoodAnnual report 2018Part 03 Operational results Auditor's sustainability statement 297297 Part 03 Operational resultsGrieg Seafood ASA AccountsGrieg Seafood Annual report 2018 298 298 Grieg SeafoodAnnual report 2018Part 03 Operational results Part 03 Operational results 299 299 PRODUCTION DESIGN Mission PRINT Runestein PAPER Scandia 2000 GRIEG SEAFOOD VISITING Grieg Gaarden C. Sundts gate 17/19 N-5004 Bergen Norway POST Postbox 234 Sentrum 5804 Bergen CONTACT Tlf: +47 55 57 66 00 Fax: +47 55 57 69 70 info@griegseafood.com www.griegseafood.com 

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