Board of directors report

Group activities and location

Grieg Seafood ASA (”the Company”) is the parent Company of the Grieg Seafood Group (”the Group”). The Group’s business activities relate to production and trading in the sustainable farming of salmon, and in naturally related activities.

The Group is one of the world’s largest producers of farmed salmon, delivering an output of nearly 65,000 tons in 2016, in addition to a significant unutilised capacity. The Group has 100 licenses for salmon production and five licenses for smolt production. The Group shall be a leader in the area of aquaculture. The Group’s commercial development builds on profitable growth and the sustainable use of natural resources, as well as being a preferred supplier to selected customers.

The Group has operations in Finnmark and Rogaland in Norway, in British Columbia in Canada (BC), and in Shetland/Scotland (UK). The Group owns 60% of the sales company Ocean Quality AS, which keeps offices in Norway, Canada and Shetland (UK). The head office is located to Bergen, Norway.

Grieg Seafood ASA has been listed on the Oslo Stock Exchange since June 2007.

Main features of 2016

  • 2016 represents the best year in the Group´s history.
  • Historically strong market with good prices.
  • Additional dividend was paid with NOK 1.50 per share.
  • Very good solidity and liquidity by year-end.
  • All fish harvested by the Group in 2016 is Atlantic salmon. Focus on this single product is an intentional strategy.
  • The production in Norway has been strong throughout 2016. In December, an indication of ISA (Infectious Salmon Anaemia) was located in Hammerfest. All fish has been culled in 2017.
  • Good revenues from Shetland in 2016, in spite of high mortality caused by algae, sea lice and gill problems.
  • Production in BC has been good in the last quarter of 2016, although algae posed a challenge in the first half of the year. The smolt production has been satisfactory in 2016.
  • An expansion of the smolt facility in Rogaland was put into action in 2016.

Accounts

The consolidated financial statements are prepared in accordance with International Financial Reporting Standards (IFRS).

Results

The Group had a turnover of MNOK 6,545 in 2016, an increase of 42% compared with the previous year. The total harvest was 64,726 tons glutted weight (65,398 tons in 2015), a decrease of 1%. EBIT before fair value adjustment of biological assets was MNOK 1,168, compared to MNOK 48 in 2015. EBIT per kg before fair value adjustment of biological assets was NOK 18 against NOK 0.7 in 2015. The strong profit is a consequence of high salmon prices and substantially improved production, both in sea and smolt facilities. The market salmon prices have been high throughout 2016, in both Europe and the US. The strong salmon prices must be regarded in context with lack of supply growth. A general increase in biological challenges facing the industry, with sea lice as the biggest problem, has complicated production growth in recent years. Finnmark and Rogaland have recorded good production throughout 2016, while algae and low oxygen levels represent problems in Canada in the first half of the year. This has gradually improved in the second half of 2016. Shetland has experienced weak production with high mortality rates due to lice in the second half of 2016. At the beginning of 2016, the GPB was strong, entailing a weaker market position for UK. This prospect has normalised later in 2016, with a weakened GPB.

Feed prices have continued to increase during 2016, in both Europe and UK, while Canada has experienced a decline in prices. The price increases are attributable to the development in raw material prices and a local currency effect in UK. Increased use of special feed varieties also leads to increased feed costs. Feed prices are sensitive to both marine and vegetable commodity prices, which vary with seasonal harvesting and production conditions.

Treatment costs, not least preventive measures against diseases and lice, have increased every year. Cleansing fish has been deployed in Rogaland, Finnmark and Shetland. Investments have been placed into mechanical treatment to combat lice and limit consequences of AGD (Amoebic Gill Disease), which entails persistently high production costs, both in Norway and UK. The preventive measures have been effective and lice treatment could be reduced in Rogaland last year.

EBIT after fair value adjustment of biological assets was MNOK 1,683 against MNOK 81 in 2015. Net financial expenses showed MNOK 135 against MNOK 93 in 2015. Interest expenses were substantially lower in 2016 compared to 2015, due to strong liquidity, and by year-end 2016 credit facilities are unutilised. Increased finance expense is due to losses on current loans in GBP and CAD. The Group had a negative net unrealised loss in 2016 of MNOK -70, against net unrealised gain in 2015 of MNOK 29.

Tax expense for the year was MNOK 339, against net tax income of MNOK 14 in 2015. The effective tax rate of 21.7% for 2016 is due to change in tax rate in Norway and different tax rates between the countries. Effective tax rate for 2015 was 147%, due to high permanent differences. The Group has entered into tax position and MNOK 172 has been provisioned at year-end 2016 (MNOK 24 for 2015) for tax payable.

The Group´s profit after tax for 2016 was MNOK 1,222 compared with MNOK 4 in 2015.

Segment report

Rogaland

EBIT before fair value adjustment was MNOK 467, corresponding to NOK 25.4/kg. The equivalent in 2015 was MNOK 84 (NOK 5.5/kg). Total harvested volume in 2016 was 18,367 tons, up 21% from 2015. Increased result is caused by higher prices and higher harvesting volume. In the first half of 2016, the production in sea was marked by increasing numbers of lice treatments, which involved missing feeding days in several periods. An underlying increase in treatment and emergency preparation costs to reduce PD (Pancreas disease), AGD and other biological challenges, has contributed to an increased production cost. Rogaland uses wrasse agains sea lice, which has proved effective in 2016, and number of treatments have been very low. There are significant costs incurred, but this has yielded positive results in terms of low sea lice levels in the last half of the year, as well as increased production in sea. Production at the hatchery has been satisfactory in 2016.

Finnmark

EBIT before fair value adjustment was MNOK 447.1, corresponding to NOK 20.2/kg. The equivalent for 2015 was MNOK 124 (NOK 6.4/kg). Total harvested volume in 2016 was 22,104 tons, up 13% from 2015. Finnmark showed a high harvested volume in the last half of the year (63%). Due to lice challenges in the Øksfjorden in 2015, it was decided to fallow the whole area. The fish in Øksfjorden was harvested in Q2 2016, with a low margin due to high treatment costs. The harvesting plant was closed down for the last part of Q2 and first part of Q3, during a period of very high salmon prices. As a consequence, Finnmark achieved lower realised prices in Q2 and Q3 due to harvesting period in relation to price development.

Increasing resistance of lice against medical treatment is a challenge in Finnmark. Hence, the company has secured mechanical treatment capacity, which was implemented from the third quarter. Both treatment costs and the costs of prevention increase and will lead to a higher production cost. In December, ISA was detected at a location in Hammerfest. All fish were down-harvested in the beginning of 2017. A following impairment has been expensed through operation. Production in the sea has otherwise been good throughout the year, if one disregards the ISA and a few localities with IPN (Infectious Pancreatic Necrosis). In 2014, Finnmark was awarded four green licenses, which are in the process of implementation. In this region, an increasing number of smolts is released. Production in the hatchery is good.

BC

EBIT before fair value adjustment of biological assets was MNOK 81, corresponding to NOK 7.5/kg, against MNOK 13 (NOK 0.9/kg) in 2015. The improved positive result is due to higher prices in 2016, and lower costs on harvested fish. The American segment has been weaker than the Norwegian segment, although better than in 2015. Total harvested volume in 2016 was 10,716 tons, against 14,311 tons in 2015, corresponding to a reduction of 25%. BC has experienced challenges by algae in Q2 and Q3, which lead to reduced feeding and growth in these periods. High mortality in Q3 due to algae and low oxygen levels has incurred impairments, which are included in operating costs. Investments are deployed in order to reduce risk of future biological divergences, due to low oxygen levels. The management is not satisfied with the development in BC and continuously evaluates how improvements can be implemented. It is an advantage to keep production in the proximity of the US market. Ring cages are approved at one location in BC, and further endeavors are carried out to attain permission for more localities. Algae has damaged the quality of the fish, thereby reducing realised prices in 2016. 2016 is the first year in BC region exclusively with Atlantic salmon.

The smolt production startet with Furunculosis in Q1. This entailed an impairment, recognised as operating cost. Smolt production since Q1 has been very satisfactory throughout 2016.

In 2014, agreements for external delivery of smolt were put into practice, in order to ensure sufficient backup of smolt to avoid negative production impacts from new incidents of disease at the hatchery in 2015. This generates higher costs than normal related to smolt. As a result of the smolt delivery backup-system, Grieg Seafood has released the projected number of smolts in 2016.

Shetland

In Shetland the EBIT before fair value adjustment was MNOK 176, corresponding to NOK 13/kg. The equivalent for 2015 was MNOK -165 (NOK -10.1/kg). Included in the 2015 result is an impairment of the smokehouse and filleting plant at MNOK 46.

Total harvested volume in 2016 was 13,541 tons, against 16,370 tons in 2015. Reduction of the harvesting volume by 2,829 tons from 2015 is due to high mortality caused by lice and algae. Shetland has experienced challenges by algae, AGD and lice during the year, which has entailed reduced production and a high mortality rate. Impairments have been recognised through operating costs. High output prices on harvested fish have been the most significant factor for weak results.

Shetland has achieved somewhat lower prices due to a strong GBP at the beginning of 2016. This changed along the weakening of the GBP. The main grounds for the improved result in 2016, are good prices.

In 2015, a decision was made to change the production cycle from 24 to 18 months. The purpose is to improve utilisation of the good locations. Implementation is progressing as planned. Efforts are maintained to keep lice at the lowest possible levels, as lice remains to be a challenge. To keep lice at an acceptable level has incurred high treatment costs. Cleansing fish and temperate water (mechanical de-lousing) have been deployed against resistant lice. Measures are underway to reduce the biological risk connected with algae. Observation and analyses of the algae situation is critical in this respect. The hatchery was completed in 2015 and the production of smolt went according to plans throughout 2016.

Sales: Ocean Quality

All fish from each segment is sold by Ocean Quality Group (OQ). All revenue is accounted for at the producers and presented as part of EBIT per segment. OQ handles marketing and sales distribution for Grieg Seafood Group. OQ also handles sales for Bremnes Fryseri AS, including both fresh fish, processed and frozen salmon, except for the brand Salma. OQ is owned by Grieg Seafood ASA (60%) and Bremnes Fryseri AS (40%). The company is established in Shetland, Canada and Norway. The establishing of the company both in UK and Canada has yielded synergies in terms of sale of various origins of salmon in different markets. The salmon market was very strong in 2016. Throughout six years, OQ has established good customer relations, allowing them to exploit the market and return high margins to the producers in 2016. In a high price market, even brands like Skuna Bay, Kvitsøy and Bømlo achieved higher volume and margin compared to previous years. OQ sells to Asia, Europe, US and Canada. The total sales volume in 2016 is  98 323 tons. See Note 6 for further information.

Research and development

Grieg Seafood makes provisions and utilises funds for research and development every year. This relates to various activities ranging from active participation in steering committees in national research projects to local test and trial projects in the regions. The focus of these activities was sharpened through a review of the company´s R&D strategy, carried out June 2016. The focus should be operational and supporting projects in order to detect solutions to biological and technical challenges in short and/or long term, which in turn contributes to streamline daily operations in our farms. Group is working on many different projects, ranging from improving fish health and welfare, efficient operation of large units, feeding control and optimisation of young fish production in large recycling plants. In 2016, the Group initiated its hitherto largest R&D project, by assembling and submitting an application to the government for 10 development licenses, intended to make an operating plan for fish farming in the open sea. The project´s cost estimate is MNOK 270 over 8 years.

Balance Sheet

The Group had total recorded assets of MNOK 6,770 as at 31 December 2016, against MNOK 5,940 at year-end 2015. Of this, goodwill accounted for MNOK 109 and licenses MNOK 1,061. Investments in tangible fixed assets relate mainly to maintenance investments and implementation of green licenses in Finnmark. Fair value adjustment of biological assets was positive due to expected future sales prices that will exceed the accrued production costs.

Group equity at 31 December 2016 stood at MNOK 3,207, against MNOK 2,238 at year-end 2015. The equity ratio at year-end 2016 was 47%, up from 38% in 2015.

Finance and funding

The Group’s net interest-bearing debt including Ocean Quality Group is MNOK 1,400 at year-end 2016.This includes factoring liabilities of MNOK 503. The equivalent for 2015 was MNOK 1,907, of which factoring debt was MNOK 338. This equals a reduction of MNOK 507. Net interest-bearing debt according to loan covenants is MNOK MNOK 906 (MNOK 1,569). The bank syndicate consists of Nordea and DNB. The syndicated loan comprises a total frame of MNOK 1,910. The revolving credit has not been utilised at year-end. The term loan has been repaid with MNOK 90 in 2016. The Group mainly uses finance leasing by investing in new feeding barges and other operational equipment. Through the agreement with the bank syndicate, the Group has a leasing facility of MNOK 350. As at 31 December 2016, the leasing liabilities amount to MNOK 318. According to covenants, equity is calculated exclusive of Ocean Quality. The equity thus stands at 52% (41%). All covenants are met.

Cash flow

The net cash flow from operations was increased with MNOK 583 to MNOK 953 in 2016, up from MNOK 370 in 2015. The increase in working capital is related to improved operations compared with the previous year. Net cash flow from investment activities in 2016 was MNOK -200, against MNOK -317 in 2015. Investment payments related to fixed assets amounted to MNOK 248. The equivalent for 2015 was MNOK 264. Net cash flow from financing was MNOK -645 against MNOK 158 in 2015. There has been a net repayment on credit facilities and term loan as mentioned under financing. This implies a negative cash flow from financing in 2016, compared to 2015. Increased factoring liabilities from 2015 contribute to a small increase in financing. For 2016 there was a net change in cash and cash equivalents of MNOK 109. As at 31 December 2016 the disposable cash balance was MNOK 504.

Grieg Seafood ASA

The parent company’s financial statement is prepared according to Norwegian accounting principles (NGGAP). The parent company recorded an operating income of MNOK -52 (MNOK -19). Weaker operating income is caused by exercise of options in course of 2016 compared to 2015, as well as higher operating expenses. The company gives loans to subsidiaries in foreign currency, which has incurred losses of net MNOK 157 against gains of MNOK 77 in 2015. This is caused by a strengthening of NOK against GBP during 2016. In 2016, contribution from subsidiaries of MNOK 725 (MNOK 39) has been recognised, which contributes to the positive financial result. Interest expenses have been reduced compared to 2015, due to positive liquidity and unutilised credit facility, which implied a low margin. In 2015, the company was granted a waiver of the covenants, and thus increased margin. In 2016, the company has a very good liquidity, and the interest expenses have decreased substantially due to reduced margin.

In 2016, the company has paid dividends totalling MNOK 165, pertaining to the 2015 statement. The equity ratio by year-end is 35%.

The parent company´s net cash flow from operations in 2016 was MNOK -176, against MNOK 105 in 2015. The cash flow from investing activities was MNOK 467 (MNOK 3). Net cash flow from financing activities was MNOK -123 (MNOK 10). In 2016, the term loan and credit facilities debt have been partially repaid. There was a net change in cash and cash equivalents of MNOK 168.

As at 31 December 2016 the disposable cash balance was MNOK 383.

Accounting results and allocations – Grieg Seafood ASA

The aim of the Group is to offer a competitive return on invested capital to the shareholders through distribution of dividend and growth of share price.

The Group´s strategy for dividend is that the annual dividend over several years should correspond to around 25-35% of the Group’s profit after tax and adjusted for accounting effect of biomass adjustments. In 2016, an additional dividend of NOK 1.50 per share was paid, based on the 2015 statement. The Board of directors will recommend the General Meeting to adopt a dividend of NOK 3.- per share.

The parent company, Grieg Seafood ASA, recorded a profit for 2016 of MNOK 388, which the Board proposes to the General Assembly to dispense as follows:

Provision for dividends

MNOK  331

Transfer to retained equity

MNOK    57

Total dispensed

MNOK  388

Going concern assumption

Forecasting is carried out, showing a positive and good cash flow based on conservative salmon price assumptions. The supply growth of salmon is expected to be small in the coming years. Accordingly, a strong market is likely in the nearest future. This is a trend in Europe, Asia and the United States which is expected to contribute to a positive cash flow. It is a target to increase smolt size. This will bring down the future biological risk. During 2017, Shetland will complete the transition from 24 to 18 months production cycle. Efforts are being made in BC to improve monitoring of algae and low oxygen levels, and to deploy actions in a timely manner. In Rogaland, the expansion of the smolt facility will be complete during Q3 2017. This will more than double the production capacity of this plant. A similar expansion of the smolt facility in Finnmark is under planning, which will be completed in 2018.

Strong cash flow in 2016 has provided a good starting point in order to service debt established in accordance with the Group´s financing agreements. At year-end, the Group has sufficient funding to carry out its plans.

It is the view of the Board 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 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 a number of areas, such as biological production, changes in salmon prices, the risk of political trade barriers, as well as financial risks such as changes in interest and exchange rates and liquidity.

The Group’s internal control and risk exposure are subject to continuous observation and improvement, and the task to reduce risk in different areas has a high priority.

The management has set parameters for managing and eliminating most of the risks that could prevent the company from achieving its goals. For further information, we refer to the Principles of corporate governance for Grieg Seafood ASA.

Financial risk

The Group operates within an industry characterised by great volatility which entails greater financial risk. 2016 has provided a good financial market for the aquaculture industry, still with more liquidity available in the market. Requirements towards the borrower are still high, due to stringer requirements on lending practiced by financial institutions. Financial and contractual hedging as is a matter of constant consideration, in combination with operational measures. The management draws up rolling liquidity forecasts extending over five years. These forecasts incorporate conservative assumptions for salmon prices, and this applies as basis for calculating the liquidity need. This forecast forms the basis of the need for financial parameters. With the financing of the Group at year-end, the level of this risk is considered to be very satisfactory. At year-end, the Group had an unutilised credit facility of MNOK 700. The Group´s financial position is very good at year-end 2016.

The long-term financing agreement includes a revolving credit facility totaling MNOK 700. It is flexible, as it can be drawn down within 1 month or a longer period, depending on the Group´s need for liquidity. The following sections provide further information about the individual risk areas.

Currency risk

In converting the operating income and balance of foreign subsidiaries, the Group’s greatest exposure is to CAD and GBP. The main strategy is to reduce the currency risk by funding the business in the local currencies. All long-term loans from the parent company to subsidiaries are in the local currency. Such loans are regarded as a net investment, as the loans are not repayable to the parent company. The subsidiaries will always require long-term funding. The currency effect of the net investment is incorporated in the consolidated statement of comprehensive income (OCI) for the Group.

Income for the Norwegian operation is denominated in NOK, and the translation risk is transferred to the sales company. The case is similar for Shetland and BC. BC sells in CAD to the sales company, which in turn hedges against currency volatility in relation to CAD/USD. The Norwegian sales company likewise hedges against currency volatility in relation to EUR/NOK, USD/NOK and other currency in demand. At year-end, contracts are concluded until Q1 2018. Long-term foreign currency contracts are hedging instruments, where unrealised agio/disagio is recognised through comprehensive income (OCI) in the statement. The currency situation is continuously assessed against the volatility of the currencies. The remaining net exposure is frequently monitored. For further information, refer to Note 3.

Interest rate risk

The Group is exposed to interest rate risk through its loan activities. The Group is exposed to varying interest rate levels in connection with financing of its activities in all regions.

Most of the Group’s existing loans are based on floating rates, but separate fixed rate contracts have been entered into in order to reduce the interest rate risk. It is the Group´s policy to have a certain percentage 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 in relation to 3 months Nibor.

Liquidity risk

The Group´s equity ratio increased from 42% at year-end 2015 to 47% at year-end 2016. Interest-bearing debt has decreased due to strong cash flow throughout 2016, and no drawdown of the credit facility. Ocean Quality has concluded agreements with factoring companies for Norway and UK, implying transfer of credit insured receivables to factoring company. This ensures the companies an early settlement of account receivables. This is a financial arrangement, as the factoring company does not acquire the substantial credit risk. The 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 Board seek to maintain a high equity ratio in order to be well equipped to meet financial and operational challenges. Considering the dynamic nature of the industry, the Group aims to maintain flexibility of funding.

Operating risk

It is critical to manage the operating risk. Book value of live fish in the balance sheet at year-end was MNOK 2,500. Operating risk was adequately managed throughout 2016, but there is still focus on training of staff and on proper internal guidelines to reduce operating risk. There have been challenges by algae in Shetland and BC. Measures are being carried out to improve the biological situation in these two regions. One important issue is observation of algae with regard to timing of feeding as a precondition for algae blooming. In Shetland, the transition to 18 months production cycle is one of the measures taken. In BC, there is also a focus on correct oxygen concentration, and new oxygen equipment is acquired to suit all localities.

There is an ongoing shift from medical to mechanical treatment of lice, because the lice develop resistance. Cleansing fish is another important remedy against lice, which has proven effective in Rogaland. The Group has adopted a policy of zero tolerance for escapes. In 2016, there were three cases of escapes. In 2015 there were no cases. Action is taken to bring this number down to zero. The Group has production of Atlantic salmon as its main product, in order to reduce the risk.

In 2016, new regional directors have been appointed in Shetland and BC. In Shetland, former regional production manager Grant Cumming, has taken over as leader. In BC, former production manager Rocky Boschman has assumed the position of regional director.

For further information about financial risks (currency, interest rate, credit and liquidity), refer to Note 3 to the consolidated financial statements.

Sustainability report

The Group´s main cost drivers, risks and opportunities are increasingly connected with managing our impact on the environment, our personnel and the local communities where we operate. Systematic efforts to secure a balanced sustainability are therefore fundamental in order to facilitate a long-term profitable growth. These efforts are increasingly material for the industry´s viability. The Group has in 2013 conducted an assessment in order to accentuate priority areas for sustainability, an assessment which has been further followed up in 2016. Our priorities will ensure that our efforts respond to our main stakeholders´ expectations of us, as well as being resource efficient in terms of our strategy and long-term value creation. The priorities also take into account our long-term obligations through Global Salmon Initiative (GSI). A comprehensive statement of the Group´s approach, efforts, results and ambitions towards sustainability priorities is available in the Sustainability report. The Group´s sustainability priorities treated in the report are divided into the following main areas; External environment, working environment, and social relations. Within external environment fish health, sea lice, and escape are focus areas. In the domain of the soft factors, HSE and working environment are priorities. Social relations are divided into three main areas: quality and food safety, the ripple effect in communities, and anti-corruption. Starting from 2016, the sustainability report has been revised on basis of the GSI handbook in compliance with the standard ISAE 3000. Further information can be obtained from the report.

Employees

Of the Group´s 664 employees at year-end 2016, 385 work in Norway, 169 in Shetland and 110 in Canada. The Board wishes to thank the employees for good work in the past year.

The Group has a majority of male managers and employees. In total, 533 men and 131 women are hired in the Group. The employee policy is to take the steps necessary to retain and attract qualified personnel of both genders.

Grieg Seafood’s position as an international company is also reflected in the fact that in total, 130 employees work in a country different than their country of origin. The Group accepts no kind of discrimination related to gender, religion, cultural or ethnic background, disability, or in any other way. Our aim is to conduct our activities on the basis of equality and respect. In terms of human rights and equal treatment, we are not exposed to significant risk. A focused effort is made to secure equal treatment and to avoid discrimination.

In 2016, the incidence of short-term sick leave within the Group was 1.96% while the figure for long-term sick leave was 1.70%. For further information, refer to the Sustainability report, in the section about employee health, safety and working environment.

All management of human resources is managed locally according to local rules and instructions, and in accordance with Group guidelines. The working environment in the Group is considered satisfactory, at the same time as we work actively to reduce sick leave and injury. As from May 2016, an HR director has been appointed, with a special responsibility to strengthen global routines and guidelines for HR and HSE in the Group.

Grieg Seafood ASA

At year end the parent company had 21 employees in its main office in Bergen, of which five men and two women in senior positions. Short-term sick leave in the parent company was 0.3%, while long-term sick leave was 0.0%. No injuries/accidents were registered in the Company in 2016. The Company does not pollute the external environment.

Post-balance sheet development

At the beginning of 2017 the prices were somewhat sinking, although from a high level. At the end of Q1 2017, prices have stabilised around NOK 60 for deliveries to Oslo, which is a good level. NOK remains weak. In total, this provides the basis for good earning in the nearest future.

The biological situation has been stable at the start of 2017. ILA was detected at a location in Finnmark in December, and all fish was destroyed in the beginning of 2017 by order of the Norwegian Food Safety Authority. The incident has been relayed to the market. The harvested volume in Q1 2017 will be low. This is to position as much biomass as possible before the important growth season this summer. Low harvest volumes will lead to high costs measured per kg. Because of continued harvesting from weak sites with 24 months production cycle, UK also represents high costs at the beginning of 2017. When harvesting commences in the new 18 months production cycle, expenses will drop. This will be the case as from Q2 2017. BC also has high prices at the start of 2017, as a consequence of fish affected by algae in 2016. A reduction of costs is expected for BC as well, in course of the year.

Outlook

The fish farming industry is very volatile and it will always be considerable uncertainty when projecting for future conditions. There has been, though, a steady increase of demand for salmon during recent years. This is expected to continue in the future. China represents a market demanding more salmon every year. This country has a growing middle class requesting high quality food. Therein resides a great potential for salmon. The Russian market also represents huge opportunities. At present, it is closed, but it would be positive for demand if this market were to open again. Additionally, at the backdrop of low supply growth, the forecast is good prices in the time to come.

Norway has introduced a new system of regulations for future growth, referred to as the «traffic light system». The Norwegian coastal territory has been divided into 13 new production areas. The limit of expansion is 6%, depending on environmental sustainability in the respective area. The impact of sea lice on wild salmon is defined as one of the environmental indicators. Based on the indicators, a production area will be evaluated as acceptable, moderate or unacceptable.

The Group has applied for 10 development licenses in Rogaland, intended for fish farming in the open sea, including plans for technology transfer from the oil industry. The project is a close cooperation between technology suppliers from both the aquaculture and oil industries.

The Group expects a total harvested volume of 70,000 tons in 2017, according to defined production plans. The plans represent a growth of 8% from 2016. The group aims to grow 10% per year in the period 2017-2020. The group has attained new locations, and together with larger smolts, it is foreseeable to utilise better the existing and new licenses. Furthermore, it is a goal to reduce costs to an average industry level, or less.

Statement from the Board of Directors and CEO

We hereby confirm that the financial statements for the period from 1 January to 31 December 2016 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 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.