CERMAQ ANNUAL REPORT 2011

Transcription

1 CERMAQ ANNUAL REPORT 2011

2 CONTENT integrated annual and sustainability report Our company FLAP Cermaq: A global leader Cermaq in brief: Key objectives, core values and map of locations 2 3 Message from the CEO Summary of 2011 and challenges ahead 4 5 Key figures and highlights 2011 Cermaq s financial and sustainability performance 2011 Main events in Strategy and history Cermaq s priorities and objectives for 2012 Company history 9 Management team Photo and presentation Our value chain EWOS Stable market share secures volume growth and profitability Mainstream Producing sustainably and entering new areas Innovation Innovation is our lifeblood Employees Cermaq people: Cermaq s HR policy and key facts Our approach Progress through sustainability reporting Our approach to sustainability 34 Stakeholders engagement Our engagement with stakeholders 35 Compliance Our point of entry Management approach Our approach to the material sustainability aspects 40 Table of indicators Our indicators related to the material aspects 41 Objectives 2012 and results 2011 Our endorsement of global initiatives 42 Endorsing global initiatives Our endorsement of global initiatives 43 Auditor s review Review report from KPMG Our results Board of directors report Cermaq delivers solid results in a very challenging market 55 Board of directors Photo and presentation 56 Corporate governance table Summary of Cermaq s corporate governance Annual accounts 2011 Accounts and notes for Group and Parent Company Senior management s remuneration Principles for the company s senior management policy 108 Responsibility statement Responsibility statement from the Board and CEO Auditor s statement Statement from KPMG Analytical information Background on harvest, supply, price development, and export quantities Shareholder information Cermaq share information 116 Information about Cermaq s digital reporting Guide to the web report This report is tagged according to Global Compact s ten Principles GC PRINCIPLES 1 2: Human rights GC PRINCIPLES 3 6: Labour Standards GC PRINCIPLES 7 9: Environment GC PRINCIPLES 7 9: Environment CG PRINCIPLE 10: Anti-corruption HUMAN RIGHTS Cermaq acknowledges, supports and respects human rights LABOR STANDARDS Cermaq acknowledges, supports and respects labour standards FISH HEALTH Cermaq seeks to maximise fish health through knowledge based, preventive work ENVIRONMENTAL IMPACT ANTI-CORRUPTION Cermaq s operations Cermaq has a zero have, like all aqua and tolerance for corruption agri-industry, an impact on environment. However, Cermaq strives to operate in a sustain able manner COMMUNITY ENGAGEMENT Cermaq seeks to be a reliable partner and a positive contribution to local communities

3 CERMAQ: a global leader Cermaq is an international fish farming and fish feed group with head office in Oslo, Norway. The group has a diversified presence in the major salmon farming regions worldwide. Creating values through sustainable aquaculture is the mission that underlies all of Cermaq s operations. The company is listed on Oslo Stock Exchange. SCOTLAND WESTFIELD (EWOS) Cermaq employs a total of 63 people through its feed operations located in Westfield. The feed production in Scotland mainly supplies fish farmers in Scotland, where the market is the most diverse in speciality feeds. EWOS Scotland also exports feeds to other European countries. CANADA CAMPBELL RIVER (MAINSTREAM) SURREY (EWOS) Cermaq s operations are located in British Columbia. Here, Cermaq employs a total of 328 people in a wide variety of jobs. Mainstream operations are headed out of Campbell River on Vancouver Island. Fish farming is a key employer in the northern part of Vancouver Island, mainly supplying the US west coast market with fresh salmon. The feed factory also supplies enhancement hatcheries for salmon located in Surrey, south of Vancouver, ranging along the entire west coast of the US. 36% of global feed market share EWOS continues to grow in a competitive market, and delivered a record full year in The company delivers through expertise within value added products and focus on supporting customer needs. CHILE PUERTO MONTT (MAINSTREAM) CORONEL (EWOS) COLACO (EWOS INNOVATION) Mainstream s operations are located in region X, XI and XII and lead out of Puerto Montt, the fish farming capital of Chile. Due to higher production of processed products, a large proportion of employees work in processing. Feed production is located in Coronel in Region VIII, where work opportunities are less dependent on fish farming. EWOS Innovation has a research station in Colaco, near Puerto Montt. In Chile, Cermaq employs a total of people. #3 global salmonid farming company Mainstream is one of the global leaders in farming of salmon and trout. Production is spread both geographically and on species, which makes the company well suited to meet market demands. The company delivers good biological results in all regions.

4 p p EWOS A leading international player in the production of feed for the fish farming industry producing primarily feed for salmon and trout. An important contributor to knowledge development through the R&D unit EWOS Innovation. Mainstream One of the largest players in the salmon farming industry. The group produces Atlantic salmon, rainbow trout and coho salmon Our objectives: Cermaq shall be one of the leading global suppliers of feed to salmon and trout, with a complete product range and with operations in all four main salmon producing regions of the world. Cermaq shall be a significant player within farming of salmonid species in the two main farming regions, Norway and Chile. Cermaq shall be among the best players when it comes to research and development on fish feed and salmon farming. NORWAY OSLO (CERMAQ) STEIGEN (MAINSTREAM) BERGEN, FLORØ, BERGNESET, HALSA (EWOS) DIRDAL, LØNNINGDAL (EWOS INNOVATION) Cermaq is located in Oslo, with a lean head office of 47 employees. Mainstream s operations are located in Nordland and in Finnmark, and headquartered from Steigen. EWOS is lead out of Bergen and the three feed plants are located in Florø (Sogn og Fjordane), Halsa (Nordland) and Bergneset (Troms). EWOS Innovation has research facilities in Dirdal (Rogaland) and Lønningdal (Hordaland). Cermaq employs a total of 760 people in Norway. Cermaq shall maintain strong operational focus as a basis for success and future growth. Our core values: Integrity We adhere to a code of ethical values such as fairness, loyalty and respect so that we maintain our pride and earn trust. Prudence We are disciplined and reasoned. We depend on skill and good judgement in use of resources, and we manage risk proactively. Preparedness We anticipate change and capitalize on growth opportunities through hard work and creative thinking. Business mindedness We are always thinking of generating cash and opportunities for profit. All other goals come to naught if we fail. VIETNAM BEN LUC, LONG AN PROVINCE (EWOS) Sharing success and concerns In order to create a positive working environment where success is shared and problems are solved, we encourage networking, personal development, teamwork and open communication. EWOS Vietnam was established in 2011 as a joint venture with local partner Anova. The company produces feed for the pangasius feed market in South East Asia. EWOS Vietnam employs 181 people. nok11.6billion operating revenues Has increased by 6 percent despite volatile salmon prices due to strong feed sector and efficient risk management.

5 Our Company CEO MESSAGE KEY FIGURES HIGHLIGHTS STRATEGY HISTORY MANAGEMENT Creating values Cermaq s vision is to be a global leader in the aquaculture industry. Global leadership requires high standards for sustainable aquaculture. We believe that the key to value creation through sustainable aquaculture is to demonstrate respect for each other, the consumer, and the communities and environment in which we operate.

6 Our Company: CEO message WELL PREPARED FOR THE FUTURE With a total operating profit of NOK million and a return on average capital employed of 22 percent, Cermaq has just experienced one of its best years ever. This is due to well-run operations, successful product launches and good biological performance. The high price of salmon in the first half of the year along with low and extremely volatile prices in the second half of the year had a significant impact on the results. both in Chile and other areas. By continuous improvements, we can ensure optimal cost development and gain the acceptance of the society for continued growth in the salmon farming industry in order to meet the growing consumption of healthy salmon. In December 2011, Jon Hindar was appointed new CEO. He assumed his position in March We will always be prepared to carry out transactions that increase value for our share holders in the long term. Despite good results generated by all of the group s companies, I should particularly like to highlight EWOS, which once again has delivered record profits with strong growth in Chile and rising sales of functional feeds. Mainstream Chile also saw an operating profit of NOK 430 million in 2011, compared with NOK 206 million in The strong financial and biological performance of Mainstream Chile is highly impressive, bearing in mind the challenging rebuilding process that has taken place in Chile in recent years. Change is bases for renewed growth In the second half of 2011, we saw a sharp rise on the supply side in the salmon market. The rebuilding of production capacity in Chile has so far been very successful and has been based on new sustainable operating procedures. We experience that the salmon farming industry and the Chilean authorities have together taken it upon themselves to reduce the risk of an outbreak of disease similar to those happening a few years ago. This is reflected in low mortality rates, the reduced use of antibiotics and the high average yield per smolt. It is important that these efforts continue unabated in the years to come, Despite an increase in demand, the sharp rise in production this year has created a temporary imbalance between supply and demand with occasional but severe price fluctuations during the autumn. At the same time, we are also experiencing significant growth in new markets such as Russia and Brazil as well as good development in more established markets. This trend is expected to be further reinforced in the coming years. New products increase value creation Also in 2011, EWOS launched new products based on research carried out by EWOS Innovation. The products have helped boost performance and improve fish health in the salmon farming industry, and the proportion of functional feeds at EWOS Norway exceeded 50 percent in One of the successes was EWOS Robust, which helps reduce the attachment of salmon lice. This and other EWOS products can reduce mortality, improve growth and thus increase profits for salmon farmers regardless of price performance. We therefore expect to continue to see a large share of these quality products in the times ahead. 2 CERMAQ ANNUAL REPORT 2011

7 always a risk of disease and other biological challenges, our primary task is to create expertise and good procedures for preventive fish health along with processes for reducing the impact of any outbreaks of disease. This was demonstrated in the summer of 2011 in Finnmark, where an ISA outbreak was well managed, both in terms of operations and in relation to the authorities. This limited the damage done to the company and upheld trust in Mainstream as a professional operator in the industry. Profitable growth is decisive If Cermaq is to continue developing its position as a leading aquaculture business, it needs to see sustained, profitable volume growth in both areas of business. With regard to salmon farming, we worked to increase production capacity in 2011 in Region XII, Chile and in Finnmark, Norway. The investment projects will be completed in 2012, and the group s production capacity will subsequently increase by around tonnes in Combined with increased production at existing locations in Chile, we will be operating at almost maximum capacity and see a production output of around tonnes by the end of In order to be able to grow further, we will either need to obtain more concessions or take structural action. We will always be prepared to carry out transactions that increase value for our shareholders in the long term. EWOS has seen strong growth in the last two years, and in 2011 the unit produced more than 1 million tonnes of fish feed for the first time. With a large market share Tore Valderhaug was appointed acting CEO in July 2011 when Geir Isaksen left the company. He was the acting CEO until March and new launches of quality products, this gives it a solid basis for future growth in step with increased salmon production saw the establishment of EWOS Vietnam for the production of feed for Pangasius. This unit will be developed further in We also continue to consider more wide-reaching initiatives in relation to other species. Sustainable aquaculture is a prerequisite Cermaq once again achieved good results on key sustainability indicators in Transparent reporting and endorsement of international initiatives, including Global Compact and the Global Reporting Initiative, are important both internally and externally. However, our results are generated within the individual business units. EWOS has drawn up a new code of conduct for suppliers which demands that they sign up to the ten GC principles. In Chile, new processes and good management have helped generate strong biological performance in relation to mortality, sea lice and the use of antibiotics. As there is Well prepared for the future The strong results generated in the last two years along with the sale of non-strategic assets have helped Cermaq create a good foundation for future growth. We have established a solid financial structure and thus the ability to grow, even in a weak market. We continue to emphasise the importance of maintaining a predictable dividend policy. We operate salmon farming in three regions. In Chile we also produce trout and coho in addition to Atlantic salmon, and these are in high demand in the Asian market. EWOS revenues are stable, which gives us more flexibility to operate optimally, even in times with challenging salmon prices. However, we are conscious of the fact that working in an industry with live animals is challenging, and despite all the measures we have taken and continue to develop, we are not immune to various biological or operational incidents. In that respect it is extremely good to know that we have a solid organisation throughout the group which is well prepared both on a professional and a human level, to handle the challenges that will arise. Some wonderful work has been done throughout the year to deliver a very good result, and I would like to thank our employees for their outstanding efforts in Tore Valderhaug CERMAQ ANNUAL REPORT

8 Our company: Key figures / Highlights Key figures 2011 Income statement Operating revenues EBITDA 1) EBITDA margin 14.5% 17.8% 9.6% 3.8% 13.1% EBIT pre fair value adjustments 2) EBIT margin pre fair value adjustments 11.8% 14.4% 5.8% 0.6% 9.7% EBIT 3) Net result continuing operations (55 080) Net result discontinued operations - - (45 035) (2 938) - Net result (58 017) Financial position Non-current assets Current assets Total assets Equity, excluding non-controlling interests Non-controlling interests Non-current liabilities Current liabilities Total equity and liabilities Capital employed pre fair value adjustments 4) Financing Total equity Equity ratio 5) 59.5% 59.8% 52.7% 42.0% 57.3% Net interest bearing debt 6) Profitability Operating margin 7) 8.7% 19.5% 6.1% 1.6% 6.4% EPS adjusted. basic/diluted continuing operations 8) (1.37) 7.54 Dividend per share (paid and proposed) Return on equity 9) 13.3% 30.0% 7.8% (1.3)% 11.6% Return on capital employed 10) 22.1% 21.7% 8.0% 0.8% 14.2% EBIT pre fair value adjustments/kg fish farming 11) (1.3) 4.2 EBIT pre fair value adjustments/tonne fish feed 12) ) EBITDA: Earnings before interest, taxes, depreciation and amortisation 2) EBIT pre fair value adjustments: Earnings before interest, tax and fair value adjustments 3) EBIT: Earnings before interest and taxes 4) Capital employed: Total equity + net interest bearing debt fair value adjustment on biological assets 5) Equity ratio: Total equity/total assets in percent 6) Net interest bearing debt: Long term and short term interest bearing debt cash balance 7) Operating margin: EBIT/operating revenues in percent 8) EPS: Earnings per share adjusted for unrealised fair value adjustments. Diluted EPS reflects the dilutive potential of share options 9) Return on equity: Net result/average total equity in percent 10) Return on capital employed: (EBIT pre fair value + income from associates)/capital employed in percent For 2011, 2010 and month average is used for capital employed, year end balances for prior years 2010 figure excludes material gains on sale of business/assets 11) EBIT pre fair value per kg, gutted weight equivalent, in NOK 12) EBIT pre fair value per tonne in NOK Sustainability Employees (number) Fatalities (number) * Injury rate (injuries per working hours) Workforce absence rate (percent of total work days) 3.2% 3.1% 3.0% 5.0% Total energy consumption (GJ) Global GHG emissions (Tonnes of CO2e) Non-compliance with environmental regulations Non-compliance with food-safety regulations Non-compliance with other societal regulations Non-compliance with product and service regulations Figures except in total employees are adjusted to exclude Mainstream Scotland * In 2008, 2 contracted divers died while carrying out work for Mainstream Chile 4 CERMAQ ANNUAL REPORT 2011

9 OPERATIONS MS Canada advanced domestic egg production by opening spawning facility in fresh water (May) EWOS Norway launched a series of new functional feeds (May) MS Norway established a new production area in Ofotfjorden (August) MS Norway reopened processing plant in Finnmark with increased capacity (August) MS Canada began the trial of increasing the oxygen in the water (September) EWOS Vietnam operated from first half of the year and was officially registered in November MS Chile started production in Region XII (December) EWOS crossed the 1 million tonnes production limit (December) ORGANISATION & TRANSACTIONS Cermaq sold its shares in the non-core business Hordafôr AS (February) CEO Geir Isaksen left Cermaq after 15 years as CEO (July) Jon Hindar was appointed new CEO (December) CERTIFICATIONS AND MEMBERSHIPS Cermaq joined UN Global Compact (March) Highlights 2011 MS Norway was the first Norwegian aquaculture company certified according to OHSAS standard (April) MS Canada was certified according to the APSA (Aboriginal Principles for Sustainable Aquaculture) (May) Cermaq joined Transparency International Norway (June) MS Canada received a COR (Certificate of Recognition) award from the Food and Manufacturing Industry Occupational Safety Alliance of British Columbia (June) MS Canada site was the first in the world to be certified to the Global Aquaculture Alliance s Best Aquaculture Practices new standard for farmed salmon. (December) AWARDS MS Norway was honored with the Industry Federation prize for its training practices (February) Cermaq won the Farmand price for the best annual report for listed companies in Norway (September) Seafood Intelligence rated Cermaq s sustainability report to be the best (September) MS Chile received a Government award for a community project in Chiloé (November) OTHER Cermaq arranged its first Capital markets day (May) OECD complaint was settled, and a joint statement was issued (August) Cermaq was included in the OBX list of the 25 most traded companies at Oslo Stock Exchange (December) SO FAR 2012 MS Chile received the Pro Pyme Seal, from the Chilean President, recognising the importance for small and medium sized suppliers being paid within 30 days (January) OPERATING REVENUES NOK Million EBIT PRE FAIR VALUE ADJUSTMENT NOK Million EARNINGS PER SHARE, ADJUSTED (BASIC, CONTINUING) NOK CERMAQ ANNUAL REPORT

10 Our Company: Strategy / History / Organisation OUR STRATEGY Cermaq is a global leader within the salmonid aquaculture industry with two business areas that carries different business models where the growth opportunities and corresponding strategy therefore will be different. Both business areas focus on sustainable production of its products and as part of this also invest substantial resources in research and development to secure efficiency and quality within feed and farming. The key strategic rationale for operating a combined feed and farming supplier with in Cermaq is the transfer of knowledge between the business areas that we believe adds additional value to both Mainstream and EWOS. Feed is the key cost component in the fish that the farmers grow and knowledge about feeding and its impact on the growth and health of the fish is a key success factor for both business areas. In addition, operating a feed business with less cyclicality together with a traditional cyclical farming business reduces the financial risk for the group as such. Creating shareholder value Cermaq creates shareholder value by focusing on: Delivering solid operational and financial results Profitable growth within salmon farming and feed operations Sound financing and ability to reap benefits of growth opportunities Committing to significant research and development to promote efficiency and quality within fish feed and farming Acting responsibly in relation to sustainable use of natural resources, environmental and social concerns in the communities in which we operate Taking care of occupational safety and health and working conditions of its employees Growth Cermaq s position as a global leader in aquaculture will be developed through profitable volume growth within both business areas. Organic growth in Mainstream is currently being completed through expansions in Region XII in Chile and in Finnmark in Norway. Within EWOS, Cermaq invests currently in new capacity in Norway to be able to meet the increased demand from customers. In addition to organic growth and profitable mergers & acquisitions within our existing activities, Cermaq is continuously exploring new areas for value creation. In the feed sector EWOS entered during 2011 into the white fish market in Vietnam using the competence from comprehensive research in feed processing and fish nutrition. Further steps to grow feed to other species than salmonids are continuously considered. Within farming, key focus has during 2011 been on organic growth within existing licenses. Unless new licenses are distributed in any of the countries where the company currently operates, further growth initiatives will require mergers & acquisitions. Such activities are supported to the extent long term value to our shareholders is created. Value chain focus Cermaq operates in the feed and farming part of the aquaculture value chain. Value added products are in addition delivered through Mainstream Chile and includes most finished products for the retail and restaurant market. Cermaq may however increase the share of such value added products to the extent additional value creation is supported. EWOS operates mainly as a producer of salmonid feed with high focus on research and development to the benefit of all its customers. Raw materials are sourced from external suppliers and EWOS is currently not investing in other parts of the salmonid value chain. Feed: Growing in the Vietnamese market In 2011, Cermaq entered the Vietnamese feed market for white fish to utilise our broad competence in fish feed. EWOS holds 51 percent of the shares in EWOS Vietnam, a producer of feed to pangasius. The production for 2011 were tonnes, a substantial increase from Even though the current operations are not significant, the strategic importance over time may be high due to Vietnam s position in global aquaculture. Entering this market through a small and carefully selected business has provided Cermaq with several achievements in 2011, including: Implementation of EWOS quality and production standards Introduction of functional feeds Establishment of R&D facilities Improvement of marketing & sales promotion Production improvement to support future capacity increase Implementation of Cermaq s CSR policy with training of employees as well as other corporate governance initiatives Cermaq expects the Vietnamese market to grow rapidly, and has through EWOS Vietnam a good position to take part in this 6 CERMAQ ANNUAL REPORT 2011

11 PELAGIC FISHING FLEET FISH MEAL FISH OIL FACTORIES FEED PRODUCERS SALMON FARMERS HARVESTING PROCESSING TERRESTRIAL FARMING RAW MATERIAL PROCESSING development. Further initiatives both in Vietnam and other white fish areas will be considered to support further growth. Farming: Growing in far north and in far south Mainstream has during 2011 continued making use of the growth potential in our existing licenses and through expanding into new areas. Mainstream has initiated operations in Region XII in Chile, an area which until now has seen little activity due to challenging climate. Mainstream has so far invested in the development of 2 out of 9 licenses and the first smolt was transferred to sea on December 28th Cermaq s ambition is to achieve a harvesting volume of tons Atlantic salmon from Region XII in In Finnmark, we are utilising our potential for organic growth through increasing production within the existing concessions. Cermaq considers the profitability from this kind of growth to be good, and we experience good operational results. The expansion in Finnmark involves investments in sea sites, as well as an expansion of our processing plant in Hammerfest, which has increased its capacity to 150 tonnes per shift. Region XII in Chile and Finnmark in Norway are areas which historically have seen modest activity within fish farming, but which we believe are attractive areas which through a strong operational focus can be cost efficient and sustainable. Increased activity in new areas for fish farming also provides a risk diversifying effect for Mainstream. Objectives and results Objectives 2011 Results 2011 Objectives 2012 Rebuild farming operations in Chile. Expanding into region XII Constructed and started operations of land based fresh water facility for production of juvenile trout Established operations in Region XII through the development and stocking of one site Develop and stock further three sites in Region XII Grow farming volumes in Nordland and Finnmark, Norway Develop and launch new and profitable products through R&D Establish EWOS Vietnam Protect the framework conditions for our operations and demonstrate sustainability performance Developed three sites and expanded primary processing plant Own developed anti-attachment feeds for salmon against sea lice is among several successful product launches in 2011 Platform is established and further growth is planned Sustainability performance was demonstrated in our third party reviewed GRI report which also received external recognition and awards Develop and stock further one site in Finnmark Implement a program to further strengthen Mainstream s focus on cost-efficient production in all regions Leverage our core competencies from the technology, in more species and geographies Implement new supplier control system, with attention on corporate social responsibility in the entire value chain Ensure sufficient capacity expansion to support the planned volume growth, with low CAPEX / tonne new capacity Improve overall OHS performance CERMAQ ANNUAL REPORT

12 Our company: Strategy / History / Organisation Company history The history of Cermaq ASA starts where the Norwegian state monopoly on grain import ended. What started out as an agricultural company with import and domestic operations, took a distinct new direction in 2000 and has developed into a global leader within aquaculture. The historic events that transformed our company are presented on Today our company structure is based on fish feed and fish farming, with some remains from our past within agriculture. CERMAQ ASA FISH FEED AND R&D FISH FARMING NON CORE EWOS AS (NORWAY) MAINSTREAM NORWAY AS NORGRAIN AS 72.5% OWNERSHIP EWOS CANADA LTD EWOS CHILE S.A. EWOS INNOVATION AS MAINSTREAM CANADA A DIVISION OF EWOS CANADA LTD MAINSTREAM CHILE S.A EWOS LTD (SCOTLAND) EWOS VIETNAM JSC 51% OWNERSHIP Minority shareholdings are not included. 8 CERMAQ ANNUAL REPORT 2011

13 Our company: Group of management GROUP OF MANAGEMENT AS OF MARCH : JON HINDAR (1956) Chief Executive Officer as of March 19th 2012 Mr. Hindar took up the position as CEO of Cermaq in March Mr. Hindar holds a Master of Science in Chemical Engineering from the Norwegian University of Science and Technology, and has supplementary management education at IMD from Lausanne, Switzerland. He was previously the CEO of Norsun AS, Senior Vice President of Invitrogen Corp., CEO of Dynal Biotech ASA, and Partner and Managing Director of Fondsfinans ASA. Jon Hindar is on the board of amongst others Photocure ASA and Handicare ASA. 2: KJELL BJORDAL (1953) Chief Operating Officer Feed Mr. Bjordal was appointed Global Director of the EWOS group and COO of Cermaq feed in He was formerly CEO of NorAqua, which he joined in He is a business studies graduate from the Norwegian School of Economics and Business Administration and has also pursued legal studies. In addition he has attended the Advanced Management Programme at Wharton Business School. Mr. Bjordal s previous employment includes President and CEO of the Glamox Group ( ) and Chief Financial Officer of Glamox Group ( ). 3: TORE VALDERHAUG (1960) Chief Financial Officer and Acting CEO until March 19th 2012 Mr. Valderhaug was appointed CFO of Cermaq ASA in November He is a Norwegian State Authorized Public Accountant and has long audit experience inter alia from Arthur Andersen & Co. Mr. Valderhaug has broad experience as CFO in listed companies, including EDB Business Partner ASA, Proxima ASA, and Ocean Rig ASA. Mr. Valderhaug was acting CEO in Cermaq between July 2011 and March : GEIR SJAASTAD (1953) Project Director 5: GEIR MOLVIK (1958) Chief Operating Officer Farming 6: SYNNE HOMBLE (1972) Director Corporate Functions Mr. Sjaastad joined Cermaq ASA (previously Statkorn Holding ASA) in 1996 and was appointed Deputy CEO in From March 2009 he took up the role as Project Director. He is a business studies graduate from the Norwegian School of Economics and Business Administration and has also pursued legal studies. Mr. Sjaastad s previous employment includes periods as manager/partner of Gemini Consulting and IKO Strategi ( ), as well as finance director and company secretary of Bjølsen Valsemølle AS ( ). Mr. Molvik joined the Cermaq group as Managing Director for EWOS Norway in 2006 and was appointed Chief Operating Officer Farming from June He holds a MSc. from the University of Tromsø, Norway, and has broad experience in aquaculture from Hydrotech-gruppen, Hydro Seafood and Noraqua in Norway and from Georgia Sea Farms Ltd. in Canada and Tassal Ltd. in Tasmania, Australia. Mr. Molvik was Senior Vice President in Christiania Bank og Kreditkasse for several years. Synne Homble joined Cermaq ASA as Group Legal Counsel in 2006, and was appointed Chief Legal Counsel and a member of the Management Team in August From March 2009 she took on the role as Director Corporate Functions, with responsibility for legal affairs, communication, corporate responsibility/ sustainability and HR. Mrs. Homble has her law degree from the University of Oslo, with special classes from Hamline School of Law, Minnesota, USA. From 1998 to 2006 she was employed as attorney at law in the Norwegian law firm Wikborg, Rein & Co. CERMAQ ANNUAL REPORT

14 Our value chain EWOS MAINSTREAM INNOVATION R&D EMPLOYEES

15 FEED FARM INNOVATION ADAPTABLE Sharing knowledge, thinking ahead Cermaq has two core business areas EWOS (fish feed production) and Mainstream (fish farming) and our many employees represent the backbone in our value creation. Cermaq invests heavily in research to improve performance and quality throughout the value chain.

16 Our value chain: EWOS STABLE MARKET SHARE SECURES VOLUME GROWTH AND PROFITABILITY EWOS maintained its overall share of 36 percent in the global salmon feed market in The group reaped the benefits of considerable investment in R&D, yielding new functional feeds and increased formulation flexibility. 12 CERMAQ ANNUAL REPORT 2011

17 Cermaq s fish feed operations are organised in the EWOS business division. EWOS is one of three major salmonid fish feed companies globally, with a market share of around 36 percent. Operations EWOS supplies extruded feeds for the full life cycle from hatch to harvest of salmonids and pangasius. Feeds are also supplied for a number of other marine and fresh water species, positioning EWOS to take part in the expected growth within these species. Today EWOS produces feeds for 28 different farmed fish species. EWOS is present in all of the four large salmon-producing countries, with three production facilities in Norway, and one each in Chile, Canada and Scotland, in addition to presence in the pangasius feed market in Vietnam. From these operations, EWOS exports feed to a range of countries in Europe, South America, Asia, and to the US. EWOS reached a significant milestone in 2011, passing a combined production of 1 million tonnes of fish feed. Total sales for the year ended at thousand tonnes of feed and had revenues of NOK million and an EBIT pre fair value of 625 million. EWOS has a total of employees, including EWOS Innovation. Competitive advantages EWOS is recognised in all markets on five important characteristics; performance, fish health and welfare, experience, service, and partnership. Considerable investment in research contributed to a competitive edge especially in speciality and functional feeds. An in depth knowledge of the impact of advanced nutrition on fish health and performance is of fundamental value for customer relations. EWOS also offers an industry leading performance and benchmarking system which is widely used in improvement programmes by EWOS customers. Framework conditions There have been no major regulatory changes directly influencing the fish feed business in However, regulators are refining the system by gradually adjusting requirements regarding controls and monitoring of undesirable substances as well as documentation of practice within the industry. EU s new Common Fisheries Policy (CFP) is being developed and is to be effective 1 January It will focus on better control and management of fisheries and will help improve the sustainability of EU s fisheries. Aquaculture is to be part of CFP. Risk considerations EWOS continuously manages operational risk and uncertainties in order to protect its strong reputation, to ensure continuously supply and to protect our assets. The main factors creating risk exposure to EWOS are: Food safety risks Raw material price volatility risks Raw material availability risks Receivables risks particularly in Chile where there has traditionally been a market practice for granting extended credit terms Business interruption risks EWOS is well prepared to manoeuvre in this challenging business environment and has EWOS is recognised in all markets on five important characteristics; performance, fish health and welfare, experience, service, and partnership. KEY FIGURES EWOS NOK million Operating revenues EBITDA EBITDA margin 8.4% 9.1% 8.2% 4.4% 8.3% EBIT before unrealised fair value adjustments EBIT margin before unrealised fair value adjustments 6.7% 6.9% 6.1% 2.7% 6.4% EBIT (operating profit) Volumes (ktonnes) CERMAQ ANNUAL REPORT

18 Our value chain: EWOS FUNCTIONAL FEEDS Percent of sales volume % 25% 36% 47% SALES VOLUME PER REGION CANADA 7% VIETNAM 3% NORWAY 51% SCOTLAND 8% CHILE 31% implemented EWOS Integrated Management System EIMS which integrates food safety, quality, occupational health and safety and environmental management. Risks related to sourcing of raw materials are managed by a highly competent global purchasing team. Risk related to receivables is managed through credit authorization procedures and close follow up of customers. Sustainability Sustainable sourcing and efficient use of raw materials are key sustainability elements in the feed sector. The global supply of marine ingredients is limited and unstable, and EWOS has through advanced R&D contributed to a significantly more efficient utilisation of those ingredients. Recently a milestone of being a net fish protein and oil producer was achieved by EWOS Norway. The carbon footprint of salmon is in line with that of chicken and significantly lower than pork and beef. Further EWOS promotes better utilisation of marine raw materials e.g. the use of bycatch for feed purposes, and sources marine raw materials from sustainable fisheries. EWOS supports the IFFO Global Standard for Responsible Supply demonstrating responsible fish stock management, food safety and traceability in their factories. In 2011, EWOS was sponsor of the IFFO RS Improvers programme for fishmeal and fish oil factories that initially fall short of the IFFO RS standard. EWOS adopted a new sourcing policy and code of conduct for suppliers in 2011, clearly stating EWOS expectations that suppliers should enact the Global Compact s 10 principles. EWOS continues to use marine raw materials efficiently, which still remain an important feed ingredient. The marine index was 37.5 percent excluding Vietnam, down from 42 percent in Trimmings used as raw materials in EWOS feed constituted 18 percent of the marine ingredients in 2011, a decrease from 21 percent in Market overview Biologically favourable conditions in Norway and the successful comeback of farming operations in Chile led to a higher market growth than expected in EWOS maintained its market share in all markets, gaining volume growth in Norway, Chile and Scotland. SOURCING OF MARINE RAW MATERIALS Forage fish / Origin Tonnes % Anchovy Peru,Chile Capelin Norway, Iceland Sand Eaal Danmark, Norge Sprat Denmark Menhaden USA Misc. Species* Forage fish total Trimmings and byproducts Herring trimmings Misc. Species* Fish trimmings and byproducts total Other marine ingredients Krill and shrimp trimmings Other Marine Ingredients Total Marine ingredients total *Species included are Blue whiting, Jack Mackrell, Hake, Norway Pout, Pilchard, and Sardine. In Norway, the fish feed market grew by 12 percent to tonnes in EWOS ended the year with a relatively stable market share of around 37.5 percent. Total sales volume rose by around tonnes and passed tonnes for EWOS produced more than tonnes of feed in the peak month of August, a new all-time high for the industry. Scotland is part of the UK and Ireland market of tonnes for all species, where Scottish salmon accounted for approximately tonnes, 5 percent higher than EWOS slightly increased its share of this sector to 33 percent. Export sales from EWOS Scotland to the EU and Norway increased by over 30 percent to tonnes. In Canada, there was a small decrease in the total market in 2011 and it is expected that 14 CERMAQ ANNUAL REPORT 2011

19 the market will decrease again in 2012 as a result of planned reductions in the number of smolts being put to sea in 2011/2012. The farming operations are highly consolidated with four companies accounting for more than 90 percent of total production. EWOS Chile experienced growth, strengthened market positioning and increased leadership in 2011, with a growth of 58 percent, compared to 43 percent for the Chilean Feed Industry. EWOS market share was 32 percent with total annual sales at tonnes. Functional feed sales represented more than 40 percent of total sales. The Vietnamese total aquaculture feed market probably exceeds 3.5 million tonnes, of which the local pangasius market alone accounts for close to 2 million tonnes of feed. In 2011, the global economy affected farmers financial situation and feed sales were challenging for all companies. Since its operational takeover in February 2011, EWOS has through considerable efforts built sales to a year-end total of tonnes. Business development Functional feeds strengthened their role as a tool for preventative management of diseases and parasites. During spring 2011 EWOS released new functional feeds containing combinations of immune stimulants and natural, plant-based masking compounds that can confuse sea lice at settlement and reduce the levels of lice that attach to the salmon. This functional feed was very well received amongst EWOS customers, and functional feeds represented 47 percent of EWOS group s total sales in 2011, an increase from 36 percent in In Norway, the capacity expansion at the Florø factory in 2009 was basis for the high volume growth in With the increased output of smolt in 2011 EWOS Norway will again adjust its capacity to be able to meet the expected increased demand for feed in The investment programme in Scotland continues to drive manufacturing efficiency and new warehousing and loading facilities due for completion in 2012 should improve distribution performance. In Canada, EWOS continues its efforts to increase sales to marine fish in Asia and the salmon enhancement operations in the Pacific Northwest and Alaska to utilize available plant capacity. In Chile, the impact of Atlantic Salmon price reduction in the second half of 2011, together with new regulations will be challenging for farmers for at least the next 1.5 years, although very good prices of Coho and Trout in the international markets have helped diversified producers. EWOS Vietnam had provided increased capacity through efforts in repairs and replacement of equipment and site infrastructure, and maintenance. EWOS has established local R&D and sales support, important to build EWOS product portfolio and reputation. Outlook for 2012 The strong demand from 2011 is expected to continue in In Norway, farmers are successfully optimising production within the present regulatory framework. It therefore seems likely that the Norwegian market will have another year of strong volume growth in Canada and Scotland have limited growth potential in Chile has so far demonstrated a successful comeback and will continue to grow at the highest rate of all markets. In Vietnam, EWOS has rented new facilities and will as a result increase its capacity and market share significantly. Functional feed sales are expected to hold in 2012, building on their proven success in trials and in the market. Support from academia and fish health authorities also further strengthens the acceptance of functional feeds as an important tool for preventative health management. The main focus for EWOS in its raw material sourcing is to optimize the supply base as well as to contribute to realizing the EWOS growth strategy through a coordinated global approach to all raw material markets. Competition on access to marine oils, mainly from the omega 3 segment for human consumption, remains moderate. EWOS reached a milestone producing more than 1 million tonnes in one year. CERMAQ ANNUAL REPORT

20 Do Our value chain: EWOS Working for continuous improvement EWOS commitment to continuous improvement according to international standards is called EWOS Integrated Management System (EIMS). It is based on the feed plants independent certification according to international management standards and for quality (ISO9001); food safety (ISO22000); environment (ISO14001); and health & safety (OHSAS18001) management, in addition to accreditation of individual plants in accordance to standards like GlobalGap, to meet local market needs. Mission Vision Values Policies Plan EIMS HACCP ISO FOOD SAFETY GRI UNGC CDP IFFO RS EIMS has become pivotal to the way EWOS does business. It represents a systematic way of managing social and environmental risk in business, working by recognised international standards. EIMS also ensures that the continuous improvement of business is done in a transparent and responsible way. For example, all EWOS operating companies take part in a global program for the monitoring of undesirables in feed. Act ISO ENVIRONMENTAL MANAGEMENT ISO 9001 QUALIY MANAGEMENT ISO OCCUPATIONAL HEALTH &SAFETY Feed and food safety risks are managed systematically also in the supply chain for raw materials. A system for supply chain risk analysis and supplier approval defines the processes and criteria on how raw material suppliers are selected, approved, audited and controlled. Global G.A.P. Check Objectives and results Objectives 2011 Results 2011 Objectives 2012 Refocus our marketing and support organisation to better reflect our high competences and the potential in our strong product range. We aim to be the feed supplier that creates the highest value for our customers We have continued to develop new feed based solutions for the challenges in the fish farming industry. Our success is confirmed by increased sales of value added products, and has inspired the competition to follow. This has professionalised the industry and made it overall more sustainable Defend our market share and high profitability in the salmon market Develop and launch new and profitable products through R&D Utilise the competent purchasing team to outperform competition in a complex raw material market, aiming to create benefits for our customers Own developed anti-attachment feeds for salmon against sea lice is among several successful product launches in 2011 The refreshed global purchasing team has supported the rapid EWOS growth with right volumes and qualities of raw materials to right prices ensuring safe supply of feed to the market Leverage our core competencies from the technology, in more species and geographies Implement new supplier control system with attention to corporate social responsibility in the entire value chain Maintain current market position in all markets and profitability as best in class Establish our future growth platform in Asia, by developing EWOS Vietnam to become one of the 10 largest feed suppliers in the country EWOS has maintained or gained market shares in all markets during 2011 Platform is established and further growth is planned Ensure sufficient capacity expansion to support the planned volume growth with low CAPEX / tonne new capacity 16 CERMAQ ANNUAL REPORT 2011

21 Our value chain: Mainstream PRODUCING SUSTAINABLY AND ENTERING NEW AREAS Mainstream s volumes grew significantly in 2011 driven by strong performance in Chile and organic growth in Norway. Despite price decrease through the year, Mainstream s results were solid due to diversified production and efficient risk management. p CERMAQ ANNUAL REPORT

22 Our value chain: Mainstream Fish farming activities in Cermaq are executed by the Mainstream business division, one of the largest players in the global salmon farming industry. The division has operations in Chile, Canada and Norway, and produces Atlantic salmon, trout and coho salmon. Mainstream employs ca people, and reported operating revenue for 2011 of NOK 3.6 billion. This is an increase of 2.6 percent from 2010 (NOK 3.5 billion). Volume grew by 12 percent, to a total of ktonnes, gutted weight of salmon and trout delivered during the year. EBIT pre fair value was 772 million in 2011, down from NOK 913 million in Operating companies Mainstream Chile produces three species (Atlantic salmon, coho salmon and trout) and covers the value chain from brood fish to value added processing. The company has eight land based freshwater sites and is present in two lakes for smolt production (coho and trout). In 2011, all Atlantic smolt stocked was produced in land based facilities. For on-growing in sea the company has 62 licences and the company has two processing plants. Most of the sea sites for coho and trout are located in the area of Chiloé Island, in region X, while almost half of the Atlantic salmon is produced in region XI and XII. The company is managed from the head office in Puerto Montt in Region X. Mainstream Canada operates both on the west and east coasts of Vancouver Island, British Columbia. The company produces Atlantic salmon and has 27 sea sites and three freshwater sites. Salmon is processed at a company-owned facility in Tofino and under contract at a processing plant near Campbell River. All operations are managed from the head office in Campbell River. Mainstream Norway produces Atlantic salmon with operations in Nordland (17 licences and two processing plants) and in Finnmark (27 licences and one processing plant). The four freshwater sites are all located in Nordland, and the head office is located in Steigen, Nordland. Competitive advantages A strategy of diversified production contributes to reducing the company s fish health and market risks. Balanced production in major salmon producing countries, significant production of coho and trout in addition to Atlantic salmon, high level of aquaculture competence and years of business experience make Mainstream a stable and important supplier to the global market. Framework conditions New regulations implemented in Chile in 2010 have strengthened the authorities power of influence in several fields related to: environment, fish health, biosecurity, and union rights. The new regulations will reduce production volume within each area, and farming will probably expand further south to regions XI and XII. Further licenses are to be assigned in Region XII. In Norway, the Gullestad committee delivered their recommendations for future regulation of the Norwegian salmon farming industry, which will be considered by authorities in In 2011, two new regulations were adopted; maximum number of fish per cage is set at fish, and maximum weight of smolt stocked increased from 250 grams to grams. Both regulations have limited effect on Mainstream s operations. In British Columbia, Canada, the transfer of regulations from the provincial level to the federal level has gone smoothly with minimal interruptions to operations. The Federal Government continues to work on improving the regulations with stakeholder input. Litigation by one group of First Nations in the Broughton Islands against the Province of British Columbia is on-going. Whereas the industry is not a part in the court case the outcome might affect our activity in that region. Risk consideration Biological risk is one of the major challenges in fish farming, and includes environmental conditions (algae, oxygen), infectious and non-infectious diseases as well as marine predators. Mainstream has built up a fish health team with fish health experts working across the operating regions. Key elements in our preventive fish health approach are monitoring of relevant pathogens, vaccination policy, use of functional feeds, stress mapping, policies for antibiotic use and monitoring, improving water quality, and building general knowledge and competence. The team supports and complements skills of the local fish health teams. Mainstream cooperates also with renowned research institutes. Area management is crucial for effective fish health measures, giving the possibility to work preventive and with long-term strategies. In 2011 all sites in Chile and Norway were included in area management agre- KEY FIGURES MAINSTREAM NOK Million Income statement Operating revenues EBITDA EBITDA margin 25.7% 31.0% 11.4% 1.3% 21.5% EBIT before unrealised fair value adjustments (130.8) EBIT margin before unrealised fair value adjustments 21.5% 26.1% 5.3% (5.0%) 15.9% EBIT (operating profit) (27.9) Volumes, GWE (ktonnes) CERMAQ ANNUAL REPORT 2011

23 ements or located in areas fully controlled by Mainstream, whereas this counts for 16 of our 27 Canadian sites. Algae blooms and low oxygen level in the sea naturally occur in British Columbia. This affects production and may cause mortality. Mainstream has developed experience in managing those natural events, and has as a result not experienced significant losses. In 2011, Mainstream Canada invested in a commercial scale trial project to inject on site produced oxygen into the seawater. The effect will be evaluated in In Chile, biological performance has shown a positive development after the ISA crisis. This is due to a combination of improved routines in the companies as well as strickter regulations. With a production cycle of approximately two years, production is not very adaptive to changing prices. Mainstream addresses this risk by producing three species and entering into sales contracts when assumed profitable and/or risk-reducing. Brood fish screening a preventive fish health measure Modern molecular biology enables us to monitor microorganisms (pathogens) which may cause disease in our groups of fish. This enables us to better predict potential outbreaks of disease, implement the correct measures at an early stage and hence reduce the biological risk. Mainstream has developed a surveillance program adapted to the different geographic areas in which we operate, and included in this screening are all the best known and most serious pathogens affecting the fish. The most important phase in the production to conduct such surveillance is on brood fish, since this is the basis for a new generation. Further on is has proven important to release pathogen free smolt into sea water, seeing as it has the best basis for a disease free production in sea. Most current fish pathogens for salmonids has their origin in the fresh water phase. Surveillance in the sea phase is also a part of the program to be aware of pathogens with reservoirs and transmission routes in the sea. The method may also be used to track the origin of the pathogen, hence enabling us to prevent transmission into the fish group. All in all this makes our production more sustainable, both from a biological and economic point of view. Sustainability Sustainable aquaculture is our vision and the basis for Mainstream s operations, where ISO management standards, sustainability indicators, and internal reporting are essential. Mainstream s units work within local environmental rules, ensuring that production does not exceed the sustainable licensed site capacities. Mainstream operates with a zero escapes strategy, and key elements are extensive training procedures, operators awareness, solid equipment and technical maintenance. Mainstream had no escapes in 2010, but in 2011 Mainstream Norway had one incident where two fish escaped. At year end we had more than 44 million fish in the sea. In accordance with local regulations sea lice data are reported regularly. Mainstream experienced overall no significant changes in the sea lice levels. The use of bath treatment increased somewhat and the use of feed treatment decreased compared to All treatments were after protocol and in accordance with local area management. Functional feeds are one of the tools to improve fish health and growth, and reducing lice attachment. Mainstream s average fallowing periods for sea sites spanned from 12 to 17 weeks, and all operations fully respected the regulations. Antibiotics are only used when deemed absolutely necessary by a veterinarian and then only under a prescription. Measured use of antibiotics per tonne produced per year was 8.2 g API/t in 2010 to and 7.4 g API/t in 2011 PRESENT PRODUCTION CAPACITIES PER REGION, 2011 Region Smolt (millions) Current farming capacity (tonnes LWE) Additional farming potential (tonnes LWE) Total theoretical farming capacity (tonnes LWE) Processing (tonnes GWE) Mainstream Chile Mainstream Canada Mainstream Norway EWOS Innovation (Norway) Total CERMAQ ANNUAL REPORT

24 Our value chain: Mainstream OPERATING REVENUES PER REGION SALES PER VOLUME PER REGION MAINSTREAM SALE BY SPECIES 1000 tonnes, gwe CANADA 22% CANADA 20% CHILE 45% NORWAY 33% CHILE 45% NORWAY 35% '04 '05 '06 '07 '08 '09 '10 '11 Atlantic Coho Trout USE OF ANTIBIOTICS g Active Pharmaceutical Ingredient/tonne LWE produced for total production in Mainstream and EWOS Innovation 35 SEALICE TREATMENT g Active Pharmaceutical Ingredient/tonne LWE produced for total production in Mainstream and EWOS Innovation 4.0 FISH ESCAPES Number of fish escaped from our global operations / / / Feed Bath Information for each company can be found in the web report. EBIT BY REGION AND PER KILOGRAM EBIT NOK mill EBIT/kg NOK Region Chile* (172.0) (332.3) (3.5) (7.7) Canada Norway Scotland Total (130.8) (1.3) * EBIT/kg is average for all species 20 CERMAQ ANNUAL REPORT 2011

25 (both live weight) that is 10 percent reduction. The Norwegian operations have not used antibiotics for several years. Market conditions Strong volume growth from key salmon producing regions affected the supply/ demand balance in The year started with high prices, but the market experienced a strong price decrease half way through the year. Mainstream Chile s sales of trout and coho have been increasing in A strong demand for Atlantic salmon in Brazil has made this an important market for Mainstream Chile, together with the US. Mainstream Canada has shown stable production. Most of the fish produced were sold on the US west coast and in Canada Mainstream Norway experienced strong growth in Russia in 2011 and it is now Mainstream Norway s second-most important market after France. Business development 2011 was a positive year for Mainstream, with healthy financial results in all countries. Fish health conditions have further improved. Systems and procedures have been upgraded. The development in Mainstream Chile has been very good, mainly due to growth in volume and relatively high prices. The company has focused on continued re-building of operations in Region X and XI, as well as opening new operations in Region XII. Technical installations in Region XII have been done throughout the year and just before year end the first smolt was transferred to the sea. Growth in Region XII is realized by utilizing existing licenses. Higher logistic cost in Region XII is assumed to be offset by good biological performance and risk diversification. The operations in Mainstream Canada have been stable in Mainstream Canada initiated certification according to the GAA BAP standard for sustainable salmon farming Mainstream Norway s expansion of farming operations in Finnmark has proceeded according to plan. Investments have been made in new sites in order to efficient utilize Mainstream s capacity in Norway s northern-most region. The growth project also includes an expansion of the processing plant in Hammerfest. Outlook 2012 We expect a continued high demand for salmon and positive development in harvested volume in Increased volume may cause prices to remain low. Mainstream is able to expand through organic growth in the year to come, both in Chile (Region XII) and Norway (Finnmark). Investments in 2012 will be linked to expansion of production of Atlantic salmon in these regions. Mainstream Canada is expected to continue at the same level of production. All Mainstream companies are well positioned in the market and expected to perform well under unstable market conditions. Objectives and results Objectives 2011 Results 2011 Objectives 2012 Move production of juvenile trout in Chile to land based freshwater sites Constructed and started operations of land based fresh water facility for production of juvenile trout Seek increased production of Atlantic salmon in Chile through establishment in Region XII Increase production in Finnmark with two new sites utilising unused licenses New smolt production site in Steigen Continue building on progress in 2010 to strengthen relations to First Nations Maintain zero escapes Established operations in Region XII through the development and stocking of one site Developed three sites and expanded primary processing plant Done initial investments and finalized planning, but awaiting final regulatory approval Continued protocol with Ahousaht First Nation, developed verbal agreement to work on creating protocol with We Wi Cum First Nation (Cape Mudge Band) Two salmon escaped in one incident in Mainstream Norway Develop and stock further three sites in Region XII Develop and stock further one site in Finnmark Progress negotiations with Cape Mudge Band and work with Government to create AMA (Area Management Agreements) guidelines in the Broughton operating area Zero escapes Implement a program to further strengthen Mainstream s focus on cost-efficient production in all regions Upgrade screening program for pathogens in Canada CERMAQ ANNUAL REPORT

26 Our value chain: Research and development INNOVATION IS OUR LIFEBLOOD Cermaq invests heavily in research and development. Our resulting knowledge is the basis for value creation through ensuring continued sustainable and profitable operations and securing our position as a key player in the relatively new and fast growing industry of fish farming. 22 CERMAQ ANNUAL REPORT 2011

27 Aquaculture has changed dramatically over the last decades because research and development has delivered improvements in productivity and enabled the industry to meet challenges related to operations, environmental impact, fish health, raw materials and technical equipment. To continue this trend, research and development in Cermaq is focussed on parts of the aquaculture value chain where we have operations, i.e. feed composition and production, and with a special focus on fish health and welfare. Our research enables us to: Reduce operational risks, both for feed production and for fish farming Gain a competitive advantage for EWOS feed division Ensure continuous progress towards our sustainable aquaculture mission Cermaq invests around NOK 100 million in aquaculture research and development every year, corresponding to more than seven percent of EBIT. Our areas for research and development can be broadly described in terms of feed innovation and fish farming innovation. Feed Innovation EWOS Innovation has its headquarters and facilities in Dirdal, Norway. Supporting facilities are also located in Lønningdal (Norway), Colaco (Chile), and recently opened facilities in the Mekong delta (Vietnam). EWOS Innovation has a staff of around 100 employees, of which 27 are researchers in Norway, and five are researchers in Chile. EWOS Innvoation enjoys wide recognition for their highquality research. Recognition is, amongst other factors, measured by success in external funding applications and peer reviewed publications. EWOS Innovation was appointed key partner in a new innovation centre for sea lice research, granted SFI (Centre for Research Based Innovation) status by the Norwegian Research Council. The centre s objective is to find solutions to sea lice related challenges. This is one example of EWOS Innovation s strategy to cooperate with other institutions where our knowledge can connect constructively with research in other areas. Feed as tool for integrated sea lice management Sea lice represent one of the major challenges for salmon farming at present. The economic impact has been estimated at US$ per kg of salmon produced, with total losses of US$ 417 million annually for the industry. Sea lice have advanced host-location and recognition mechanisms to target salmon. After the lice land on a fish they taste to recognise a number of salmon-specific molecules. If these specific molecules are not detected the lice will release and swim away to look for a more suitable host. However if they do detect the host odours they will punch in an attachment and become embedded in the salmon. A number of different management tools like area rotation, rotation of compounds and strategic treatment programmes has improved overall lice control and delayed the development of lice resistance to medicines. Functional feeds represent an important additional tool that can be deployed as part of an integrated pest management strategy for sea lice control. In EWOS, two main areas have been identified for the development of these additional controls: Immune modulation; and Anti-attachment. During spring 2011 EWOS released new functional feed products containing combinations of these two control strategies that can be used tactically during the salmon production cycle. The feed EWOS Robust contains natural, plant-based masking compounds that confuse the lice at settlement and reduce the levels of lice that attach. TRIAL OF ANTI-ATTACHEMENT FEED Six tanks in total with three replicates per group. Average number of lice and standard deviation Control 1.65 Robust CERMAQ ANNUAL REPORT

28 Our value chain: Research and development Microalgae Phaeodactylum trichornutum (here magnified by 1000) gave the best results in fish feed in trials done at SINTEF. Host immunity is a critical component of sea lice infection. Salmon with reduced or compromised immunity have significantly higher sea lice infection than healthy individuals. In contrast, salmon with enhanced immunity show a significant reduction in the levels of sea lice. Reducing reliance on marine raw materials Future growth of the aquaculture industry may well depend upon our ability to make the most efficient use of limited supplies of marine ingredients. However, new research has shown that full cycle production of salmon can be achieved without any fishmeal or fish oil whilst still achieving strong growth and survival as well as full food quality. EWOS Innovation works to reduce reliance on protein from captured, small pelagic fish by finding new concentrates from plant proteins and increasing the use of existing concentrates. Recent progress has enabled salmon producers using EWOS feeds to become net producers of marine protein; that is they produce more marine protein than they use in the feed. For further details see Cermaq sustainability report. The volumes of such novel plant proteins are, however, limited and increasing the supply of such materials is a growing focus of EWOS Innovation s work. Low fishmeal feed documentation. Several large scale trials in the past year have compared the performance of low fishmeal feed and higher fishmeal feed. For example, commercially produced EWOS Opal 110 with standard 15 percent fishmeal was compared to a version with 10 percent fishmeal and invivo results showed no difference between the treatments. Zero marine concept fish feed. In a groundbreaking trial at Dirdal, a control feed with 30 percent fishmeal and around 15 percent fish oil was compared against zero fishmeal and zero fish oil based diets (and in combinations) with both European and South American formulations (the latter including animal byproducts). The weight gain on the two zero marine concept feeds was slightly lower than the control feed. As first trial of the concept the results are encouraging and a good basis for further tests. Even if some of the special raw materials used in the concept feed are high in price and low in volume, what this trial demonstrates is that we already have the knowledge to achieve solid fish performance without any use of fishmeal and fish oil. Before such concept feeds can become commercially viable, however, the task of developing full scale production of special raw materials like micro algae must be solved. 24 CERMAQ ANNUAL REPORT 2011

29 Fish Farming Innovation Mainstream s international Fish Health team is another important contributor to new knowledge in Cermaq and to the industry in general. The team consists of highly competent fish health biologists and veterinarians who base their work on best practice, knowledge transfer and carrying out research projects to solve specific challenges. Three researchers are located with lab facilities at the University of Bergen, Norway. Preventing parvicapsulosis Parvicapsulosis is a disease caused by a parasite affecting the eyesight of the fish and can be both a welfare and mortality problem. In 2009 Mainstream Norway initiated a preventive fish health project to reduce losses due to parvicapsulosis. The main target was to detect the transmission pattern and identify when the fish gets infected. This is crucial knowledge to be able to prevent this disease. As a second part, the project has a goal to genetically identify the parasite with the intention of future vaccine development. The project has grown since 2009, and now includes several research institutions and representatives from the industry. The project has this far resulted in knowledge about the infection dynamic of the parasite. We know more about when the fish gets infected, in what tissues the parasite develops and how long it takes for the parasites to be transferred from fish to surrounding environment. The practical implementation of this knowledge is that we have more facts to make better planning and timing of sea transfer and thereby be able to reduce the risk of infection. We also see infection differences in geography, and therefore the selection of sites is a consideration to make in a preventive strategy. PARVICAPSULOSIS The parasite Parvicapsula pseudobranchicola causes the disease parvicapsulosis on farmed salmon. Parvicapsula belongs to a group multicellular parasitic organisms which are related to cnidarians. They have a polychaet worm (unidentified) as primary host and fish as an inter mediate host. The tools used for identifying the parasite are very sensitive and the parasite can be detected before disease outbreak. This is of high importance so we can be able to foresee outbreaks of disease, and take preventive fish health actions such as stress reducing measures and use of appropriate functional feeds. CERMAQ ANNUAL REPORT

30 Our value chain: Employees EMPLOYEES A common set of values, standards and policies unite our international activities. Our employees represent a diverse group in terms of culture, work, and competences. 26 CERMAQ ANNUAL REPORT 2011

31 Employer of choice Our employees are our most valued assets and represent our most important interaction with society. In the long run it is the employees optimism, proficiency and efforts which determine the success of the company. Cermaq promotes equal work opportunities and just treatment of all its employees. Strict standards for health, safety and environment ensure a high level of safety. Our employees are expected to contribute to a work environment free of discrimination. Actively involved central management Cermaq s Central Management Team visits all Cermaq s operating companies every year. This hands-on involvement is important to acknowledge the effort made by all our employees and is also highly valuable for the management to experience the everyday life of our value chain. The board of directors visits one region each year. In 2011, the board visited EWOS and Mainstream s operations in Canada. Employment At the end of 2011, Cermaq employed people, an increase of 514 people since the end of While employment in the feed business is relatively stable, there are strong seasonal variations in farming, especially related to the harvesting and processing plants. Chile is the largest region in terms of employment. Two-thirds of all Cermaq employees are located in Chile. SHARE OF EMPLOYEES PER REGION EWOS including EWOS Innovation CANADA 7% SCOTLAND 6% VIETNAM 18% Mainstream Canada has a protocol agreement with the Ahousaht First Nation in Clayoquot Sound. The agreement provides Ahousaht people with employment opportunities as well as contract opportunities, training and other financial benefits. Mainstream Canada employs approximately 80 First Nations people, including many from the Ahousaht First Nation. Local recruitment Cermaq strives to recruit locally when looking for qualified management. This is a strategic approach; local employees have the best knowledge of local conditions and culture. In 2011, the proportion of management hired from local communities averaged about 91 percent (93 percent in 2010), ranging from 60 percent to 100 percent. Diversity Cermaq promotes equality in the workplace for all its employees. Still, gender is a challenge we continue to face. The proportion of women in management is low, on average about 15 percent (11 percent in 2010). There is female representation in the management team of seven of nine subsidiaries. Whereas 26 percent of our employees are female, women have a significantly higher representation amongst the seasonal workers in the processing plant. Gender was included in the relevant indicators for sustainability reporting, in line with updates in the GRI-guidelines. SHARE OF EMPLOYEES PER REGION Mainstream CANADA 9% NORWAY 13% Employees are Cermaq s most valued assets. EMPLOYEES IN CERMAQ CHILE 38% NORWAY 31% CHILE 78% CERMAQ ASA MS Scotland MS Canada MS Chile MS Norway '05 '06 '07 '08 '09 '10 '11 EWOS Innovation EWOS Vietnam EWOS Scotland EWOS Canada EWOS Norway EWOS Chile CERMAQ ANNUAL REPORT

32 Our value chain: Employees Union relations Cermaq values good, constructive relations with employees and labour unions in all subsidiaries. Well established local management structures and practices are the basis for these good relations. In 2011, EWOS Vietnam further developed its local practices. All employees are free to join any labour union. The proportion of employees covered by collective bargain agreements was 37 percent in 2011 (2010: 34 percent). The number varies significantly from 0 percent in Mainstream Canada to 100 percent in EWOS Vietnam, excluding management positions. The number of people covered by collective bargaining agreements does not necessarily correspond to the number of participation in labour unions. Compensation Cermaq offers competitive wages. The wage system values skills, competence and seniority. In Chile and Vietnam, where there are minimum wage levels, our operations have a minimum entry wage level well above the legal minimum wage. At year-end 2011, the lowest entry wage in Chile was 32 percent above the legal minimum and in Vietnam the lowest entry wage was 40 percent above the legal minimum. Based on stakeholder concerns we report on wage levels in processing plants in Chile and in the EWOS plant in Vietnam as a part of the GRI reporting. Occupational H&S Employees shall be safe and secure at work. OHS initiatives are integral parts of the group s risk management. Cermaq s objective is that all operating companies will be certified according to OHSAS health and safety management system. At year-end 2011 all companies were certified, except EWOS Vietnam which will need more time to complete all planned certifications. Consistency in OHS (occupational health and safety) reporting was especially reviewed by the auditors of the 2011 report, and the auditors found a robust system for reporting on employees. However, some weaknesses in the reporting of OHS data for contractors were revealed. This will be followed up seeking improved reporting for contractors, and we present only data for our work force in this report. Although the average lost time injuries has been reduced by 10 percent in 2011, the level of injuries is still high in several of the operating companies. In 2011 an OHS project was initiated to benchmark ourselves with relevant peers and identity areas for improvement. The absence rate for employees was 3.2 percent in 2011 (3.1 percent in 2010), varying from 2.1 to 5.4 percent in the operating companies. There are significant structural differences between operating companies. Each operating company identifies their own relevant and suited initiatives to reduce the level of injuries and absence due to illness. There were no fatal accidents amongst employees or amongst contractors supplying services to our operations in Training Systematic training is important for building competence according to both employees and the organisation s needs. In 2011, the average hours of training per employee was 0.7 percent of total working hours. An important training program executed in 2011 was the anti-corruption training undertaken in the new operating company EWOS Vietnam. The anti-corruption training was well received by the management teams taking part in it. Company reputation It is important that our employees are both proud of the job they do, and the company they work for. Consequently, Cermaq makes an effort to secure the reputation of the company, for example by external and internal, proactive and reactive measures. The advertisement campaign Salmon is RATES OF INJURY, OCCUPATIONAL DISEASES, LOST DAYS AND ABSENCE, AND TOTAL NUMBER OF WORK-RELATED FATALITIES BY REGION Division* Units EWOS Group** Mainstream Group Total Cermaq EWOS Group Mainstream Group Total Cermaq EWOS Group Mainstream Group Total Cermaq Fatalities Number Injury rate Injuries per million hours worked Lost-time injury rate Lost-time injuries per million hours worked Absence rate % of total work days 3.9% 3.0% 3.2% 3.1% 3.3% 3.1% 3.7% 2.8% 3.0% Occupational disease cases Number * EWOS group does not include EWOS Innovation ** EWOS Vietnam not included 28 CERMAQ ANNUAL REPORT 2011

33 important was developed and published in Norway from December 2011 until Easter A similar campaign has been successfully launched in BC, Canada, the BC Salmon Facts campaign, and Cermaq believes it is important for our employees as well as their families, friends and neighbours to enhance knowledge on the positive effects fish farming and feed industry have on local and rural development. Contributing to a Chile without poverty In 2011, Mainstream Canada filed a law suit against The Global Alliance Against Industrial Aquaculture for defamatory claims that salmon farming causes cancer, motivated by the need and responsibility to protect and defend our employees as well as the company s reputation. The Supreme Court in BC heard the case and a judgment is expected later this year. Being a responsible employer also means educating the employees about the value chain they are parts of. Cermaq has therefore developed fact sheets on key issues and concerns related to our industry, presenting Cermaq s position and initiatives. These initiatives contribute to our employees proudly standing up for the important job they perform in the food production industry. The Chilean government has given Mainstream Chile an award for the company s efforts to fight poverty in Chile. The award is an acknowledgment of the project Esencias de Calén, a rural entrepreneurship program initiated by Mainstream Chile in April 2011, empowering family members and neighbours of Mainstream Chile s employees to seek new and more prosperous incomes. In total 20 participants received training and certification to start small companies, and Mainstream Chile also provided tools, raw material, machines and other equipment necessary to get a small business up and running. Cermaq seeks to develop a sustainable aquaculture and we are aware that one of the essential elements to achieve this task is accomplished only when the local community values the presence of the company and sees it as a fundamental factor in local development. Objectives and results Objectives 2011 Results 2011 Objectives 2012 All operating companies should be OHSAS certified within 2011 All OpCos except EWOS Vietnam are certified. EWOS Vietnam has made a plan for establishing certification in line with Cermaq's standards Establish and align individual goals of operating companies for; injury rate; lost time injury rate; lost day; and absence Targets are established for each OpCo Review data quality in group OHS reporting Raise awareness on OHS performance. Improve overall OHS performance CERMAQ ANNUAL REPORT

34 Our approach SUSTAINABILITY REPORTING STAKEHOLDERS ENGAGEMENT COMPLIANCE MANAGEMENT APPROACH TABLE OF INDICATORS GLOBAL INITIATIVES AUDITOR S REPORT

35 FEED FARM Shaping sustainability It is Cermaq s vision to be an internationally leading company within aquaculture and we firmly believe only sustainable production can ensure a foundation for long-term production. We communicate transparently and we engage in constructive dialogue with stakeholders to ensure the continuous improvement of our operations.

36 Our approach: Sustainable aquaculture PROGRESS THROUGH SUSTAINABILITY REPORTING Cermaq s vision is to be one of the global leaders in the aquaculture industry. We are committed to creating value for our shareholders through sustainable aquaculture. This implies practices that do not compromise needs and possibilities for future generations. A successful future for our industry is thus dependent on sustainable conduct from all players engaged in the aquaculture industry. LOW Concern to Stakeholders (External) HIGH Market presence / Non-discrimination / Healthy & affordable food / Corruption / Product and service labelling / Animal welfare / Breeding and genetics Security practices / Anti-competitive behaviour Indirect economic impacts / Public policy / Biofuels / Remediation Targets and disclosure Cermaq has defined its social and environmental sustainability principles (available at and has introduced robust systems to manage, improve and report our performance. Careful measurement of our sustainability performance is critical to enable meaningful benchmarking and the setting of appropriate improvement targets within each of our business units. Investment and procurement practices / Abolition of child labour / Prevention of forced and compulsory labour / Community / Minimising toxicity Water / Labour / Management relations / Equal remuneration for women and men / Human rights review and assessment Transport / Customer privacy Economic Performance Biodiversity / Emissions, effluents and waste / Compliance / OHS / Compliance / Customer health & safety / Compliance / Protecting Fair compensation for labour natural resources / GMOs / Animal husbandry / Transportation, handling and slaughter / Fish health / Medicines / Management Systems Traceability Materials / Energy / Products and services / Employment / Nondiscrimination Training & education Diversity and equal opportunity / Freedom of association and collective bargaining / Indigenous rights / Marketing communications / Fair trade / Products and service Responsibility The operational responsibility for ensuring sustainable business practice ultimately lies with the managing director for each of the operations owned by Cermaq. Cermaq s board of directors holds the overall responsibility to ensure that necessary systems and procedures are in place. Cermaq also recognizes the importance of responsible behaviour from each and every employee, encouraging employees to do their best to ensure that we live up to our standards at all times. This is also integrated in our guidelines for ethical and corporate responsibility. Internal Systems Monitoring and follow-up of sustainability performance is approached at both local and corporate levels. At the local level, operating companies use international management standards which ensure that key sustainability impacts are addressed through a system of procedures, audits and continuous improvement. At the corporate level, Cermaq s executive management receive a quarterly sustainability report outlining social and environmental performance for the preceding period and highlighting any emerging issue or concern. This report is also issued to the Board of Directors on a semi-annual basis. LOW Impact on Company (Internal) HIGH A summary of the performance results 32 CERMAQ ANNUAL REPORT 2011

37 are communicated to all employees semiannually. Determining materiality In compiling this report, we cover topics and indicators that reflect the most significant economic, environmental and social impacts from our operations. Cermaq s Sustainability Principles, defined in 2008, clearly sets out our social and environmental ethics for all stakeholders to see. These principles were developed based upon extensive internal dialogue between Cermaq and employees in each of the business areas. Attention was also paid to external sustainability standards. The resulting set of principles provides an important basis for our judgement on the materiality of content included in this report and also to ensure the completeness of our sustainability reporting. The materiality analyses behind this report builds on an analysis carried out by Cermaq during 2011 taking account of known impacts and concerns amongst internal and external stakeholders. Some of the recent external sources which have been relevant for our materiality analyses are; thorough discussion with WWF, the process in the OECD Contact Point, the Cohen Commission debate in BC, Canada, an assessment by Friends of the Earth of Cermaq s previous sustainability report, and the IMR report on risk assessment of environmental impacts of Norwegian aquaculture. Internal changes in the company exampled by EWOS operation in Vietnam has also been taken into account in the materiality analyses. Accordingly, Cermaq reports on a combination of both GRI and customised indicators. The latter have been designed to measure sustainability impacts, such as fish escapes and use of medicines in fish farming, that are specific to our feed and fish farming operations. Report Scope and Boundary of the sustainability report Cermaq sustainability reporting encompasses wholly-owned feed, farming and R&D operations where Cermaq has full financial control and is therefore able to properly manage any significant sustainability impacts. EWOS Vietnam, where EWOS holds 51 percent ownership, is however also included in the report from 2nd half of 2011 as it is part of our core business operations. Inclusion of figures from EWOS Vietnam is commented for each relevant indicator. The focus of our sustainability reporting is on EWOS feed and R&D operations and Mainstream fish farming operations. Cermaq head office is included in reporting on certain sustainability indicators like workforce, energy use and OHS. FISH FEED AND R&D EWOS AS (NORWAY) Cermaq s non-core businesses, such as Norgrain AS and Denofa AS, will be disposed of when the conditions are favourable. Therefore Cermaq does not include its noncore business interests in the sustainability reporting. Some historic data (e.g. absence rate) has change slightly from the last 2010 annual report and is therefore not comparable to previous annual report. This report has been prepared in line with the GRI G3 guidelines. Whilst this report includes a summary of our sustainability performance in 2011, the complete GRI report and performance indicators are presented at All together we believe this is a B+ report, which has been confirmed by KPMG. Cermaq has appointed KPMG to provide a limited assurance of this report, see page 43. Our ambition going forward is to continue the external auditing of our sustainability reporting and to further adapt our reporting on individual indicators to address emerging sustainability concerns. CERMAQ ASA FISH FARMING MAINSTREAM NORWAY AS NON CORE NORGRAIN AS 72.5% OWNERSHIP Our reporting prioritizes the issues of high concern, like compliance, occupational health and safety, biodiversity and energy use. We also include most issues of medium-high concern like labour relations, corruption risk and indigenous rights. Some issues, like water usage and waste management, have not yet been fully addressed at corporate level. Cermaq aims to prepare performance data in a structured and comprehensive way for future reporting of these and other aspects. The aspects included in our reporting also addresses areas outside the GRI defined scope. EWOS CANADA LTD EWOS CHILE S.A. EWOS INNOVATION AS EWOS LTD (SCOTLAND) EWOS VIETNAM JSC 51% OWNERSHIP MAINSTREAM CANADA A DIVISION OF EWOS CANADA LTD MAINSTREAM CHILE S.A The boundary of the sustainability report is marked with a red line. Minority shareholdings are not included. CERMAQ ANNUAL REPORT

38 Our approach: Stakeholders engagement OUR STAKEHOLDER ENGAGEMENT Our stakeholders show strong interest in Cermaq s sustainability performance. We remain open to dialogue with stakeholders who are directly involved with or impacted by our industry or who constructively engage in seeking industry improvements. Stakeholder engagement is carried out both at local and the corporate level and our aim is to engage in constructive dialogue based on respect and transparency. Stakeholder dialogue which takes place in both structured and un-structured ways plays an important role for the materiality of our reporting. Our stakeholders include employees, shareholders, suppliers, customers, indigenous peoples, authorities, local communities, our industry associations, NGOs, and the general public. Dialogue with our employees is continuous, through well-established local management structures and practices. The competence, engagement and efforts of all our employees are crucial to the success of our business. Relations with our employees and unions are described in more detail on pages Shareholders, analysts and providers of capital are key stakeholders, and continuous contact with them is important to ensure accurate assessment of our business. During 2011, Cermaq arranged a Capital Markets Day with comprehensive presentation of key topics. As in 2010, we submitted a report to the Carbon Disclosure Project (CDP), providing information on Cermaq s carbon emissions and our assessment of climate change risks and opportunity. (CDP is an investor initiative which collects and publicizes information on enterprises emissions of greenhouse gases and other climate challenge related information.) Suppliers of feed raw materials are of utmost importance to EWOS. A particular focus has been on suppliers of marine ingredients where quality, safety and nutrition, as well as sustainability aspects, are addressed. In 2011 Cermaq updated its ethical and corporate responsibility guidelines related to supplier requirements and EWOS adopted a new supplier policy and Code of Conduct for its suppliers. The customers of EWOS are local fish farmers, and all EWOS companies prioritise direct relations with and providing advice to their customers. EWOS also arranges local and regional customer conferences. During 2011, in order to further strengthen customer relations, EWOS did a perception analysis with customers in all of its markets, except Norway which was covered the previous year. For our farming operations the key supplier of feed is EWOS. Mainstreams customers include seafood wholesalers, processors and retailers in the main salmon markets. Transparent reporting is a useful instrument in Mainstream customer relations. Mainstream does not market branded products. Authorities and politicians are stakeholders at the local, regional and national levels who define the framework conditions for our industry. We believe transparent dialogue is a prerequisite for arriving at good and balanced decisions. We actively reach out to authorities and are always meeting requests for dialogue or information. We will try to further develop and improve the dialogue with authorities and politicians, describing the performance of and challenges to our industry. Cermaq has continued its dialogue with the NGO community during Examples include the settlement of the OECD complaint leading to a constructive dialogue with ForUM and Friends of the Earth Norway. The organisation Friends of the Earth has evaluated Cermaq s recent sustainability report. Cermaq has been in dialogue with various Norwegian advocates of wild salmon, and continued open dialogue with WWF, Bellona and others. In Chile Mainstream has focused especially on dialogues with NGOs in the Chiloe area where Olach plays an active role. Mainstream has also been engaged in the project Together for a Chile free from poverty supporting micro enterprises in Chiloe. NGOs that constructively seek industry improvements can give valuable input to Cermaq. Cermaq operates in some areas with a population of indigenous people. The First Nations of British Columbia, Canada, have special titles and rights under Canadian laws and legislation. It is important for the group to be aware of potential challenges our operations might represent, and we therefore acknowledge First Nations as important stakeholders. Based on the renewal in 2010 of a protocol agreement with the Ahousaht First Nation, Cermaq has participated in several conferences on First Nation relations and also increased dialogue with other First Nations. Cermaq s ambition is to have mutual advantageous agreements with First Nations in all the territories in which we operate in British Columbia. Cermaq sees industry associations necessary for ensuring the framework conditions 34 CERMAQ ANNUAL REPORT 2011

39 Our approach: Compliance OUR COMPLIANCE PRACTICE Cermaq s point of entry to social and environmental responsibility is to ensure that our operations respect and are compliant with local, national and international laws. for the aquaculture industry. Thus, Cermaq is actively participating in the industry association, normally represented by senior executives in the board of the association. In 2011 we have representation in the board of Salmon Chile, BCSFA (Canada), and CAIA (Canada). We also participate in FHL (Norway), AIC (UK), FEFAC (The European Animal Feed Industry Association), IFSA (International Salmon Farmers Association). Key aquaculture companies in Norway initiated a campaign in 2011 with the objective to build their social license. The campaign uses ads and the media to explain the local value creation and pride in the industry. Cermaq, EWOS and Mainstream participate in this campaign which is funded by the participating companies. Local communities are important to ensure acceptance for our local operations, support for future growth and recruitment of employees. We contribute to local activity and employment and are a reliable partner for the local communities in which we operate. Dialogues with local communities are addressed mainly through the local stakeholder groups described above. The general public is important for defining the framework conditions and support for aquaculture. Dialogue and transparent reporting are key elements for our engagement with the general public. We seek to be proactive in being the source of information about our operations and to correct misinformation. Where breaches do occur, for what ever reason, this is taken seriously and investigated at the appropriate level before measures are taken to mitigate the risk of recurrence. For transparency, Cermaq reports on the following GRI indicators related to compliance; environmental regulations (EN 28), product and service regulations (PR 02 and PR 09) and general societal regulations (SO 08). In 2011 there were four incidents of noncompliance, compared to seven in The four non-compliance incidents cover: MS Chile for not having the authorisation certificate available at the farm and for farm manager not having signed the attendance register at the farm. These two non-compliances resulted in total fines of USD MS Chile for two incidents of not submitting sufficient information about the sea lice (calligus) treatment program as established in the regulation. These noncompliances resulted in total fines of USD. There are additional ten incidents that have been reported in 2011 but have not been concluded or are under appeal. These incidents include: Missing production data for one week and late delivery of statistics Not separate restrooms for men and women at the cages Water usage not in line with official permit Errors in sampling of fish One site lacked permit to deliver fish to one specific plant Working platform not in acceptable condition Lack of cameras or other detection tool to monitor feed going to cages. The conclusion on these incidents will be reported next year. NOK million EN 28 SO 28 PR 28 PR 28 Total Fines (USD) EWOS Chile EWOS Canada EWOS Scotland EWOS Norway EWOS Vietnam EWOS Innovation Mainstream Chile Mainstream Canada Mainstream Norway Total Total CERMAQ ANNUAL REPORT

40 Our approach: Management approach DISCLOSURE OF MANAGEMENT APPROACH In this section, Cermaq presents its approach towards managing environmental, social and economic aspects of our business. Environmental Approach Policy Cermaq s approach to the environment, in which we operate and upon which we depend, is set out in the published set of Cermaq Sustainability Principles. Cermaq s policy is to establish a systematic management of operational risk through management systems which are certified according to ISO standards or equivalent. The individual operating companies are responsible for implementing an Environmental Management System based upon the ISO standard. The updated status with regard to attainment of this is presented on page 50. Aspects We include the following material environmental aspects in our sustainability reporting: Biodiversity; Emissions, Effluents and waste; Materials; Energy; Water. Additional material aspects from the food processing sector supplement are; Protecting natural resources, GMOs, Animal husbandry, Transportation handling and slaughter and in addition; Fish health and Medicines. Biodiversity Cermaq recognizes the potential for fish farming operations to impact biodiversity, either directly or indirectly. However, in 2011, we have not identified any specific significant impacts of our activities or our products on biodiversity in the areas where we are operating. In 2009, Professor James S. Diana (BioScience paper Aquaculture Production and Biodiversity Conservation) examined the status and trends in seafood production and the positive and negative impacts of aquaculture on biodiversity conservation. Diana s ranking of negative aquaculture impacts included the following four areas that we agree to be of high relevance for salmon feed or farming operations: Escapes; Effluents; Resource use; and Diseases or parasites. Cermaq s performance in these areas is presented under the feed and farming sections of this report and in more detail on Cermaq believes that present technology for open net pens allows for sustainable aquaculture, and we aim at demonstrating this in our operations. Closed-containment technology does not currently represent a viable alternative, especially related to energy usage but also escapes remain a risk in closed containment farming. However, managing environmental impact is key for a sustainable future for fish farming and Cermaq will always try to contribute to development of new methods and technology. Therefore, Cermaq through its R&D company, EWOS Innovation, is currently testing closed containment in cooperation with the producer of the equipment. Emissions Cermaq acknowledges the need for reducing global Green House Gas (GHG) emissions and has been measuring ecological footprint (EF) and carbon footprint on EWOS feeds using an EWOS model developed by external experts in the field. The EWOS EF model output shows that the choice of raw materials has a significant impact on the CO2e/tonne feed produced for example, and by comparison the contribution from feed milling is much smaller. Cermaq established GHG emissions reporting in 2009 and submitted a disclosure to the Carbon Disclosure Project in 2010 and This exercise has confirmed that our operations are not carbon intensive compared to other marine and land based food productions. This was also substantiated by a SINTEF report in 2009 and further confirmed by NOFIMA in Cermaq will continue reporting to Carbon Disclosure Project. Effluents and waste All Cermaq operations are expected to comply with local and national environmental regulations related to effluents and waste. Mainstream sets goals for the management and use of medicines, including antibiotics, in each operating region. Energy Goals for the management of energy use per unit of production are set locally by each operating company. All operating companies in the group have material initiatives in place to improve energy usage per unit of production. Materials Cermaq does not have organisation wide environmental goals related to the volume 36 CERMAQ ANNUAL REPORT 2011

41 of materials used. However, feed is by far the most important cost item. Strong focus on feed management and feed conversion are crucial for the profitability of the farming division. Salmon farming is well known as an efficient farming process, with lower feed conversion rates than farmed land animals (FHL, Environment Report p.15-17) and with efficient utilisation of valuable nutrients. EWOS has been addressing the use of packaging material, and reduced the packaging materials e.g. through transition from small bags to big-bags and increased bulk transportation of feed. Water Cermaq does not have organisation-wide environmental goals related to water. Salmon farming relies upon the availability of clean water; but is generally not consuming water. In cases where water is abstracted for farming operations, it is generally discharged back to source within quality parameters agreed with the local authority. Feed production needs l of water for each kg feed produced. Because water use is the most energy intensive part of the production, our research is continuously seeking reduction in water usage. It should be noted that water usage is imperative given current available technology to ensure maximum nutrient utilization and thus minimize discharge to farm recipient. Protecting natural resources Like all industry activities, aquaculture has an ecological footprint. The footprint must remain within limits that are ecologically acceptable. After on-growing sites have completed a cycle, they will undergo a fallowing period in order to ensure that temporary changes are reversed and safeguard the basis for satisfactory fish health. GMO Cermaq is not engaged in GMO-salmon and does currently not see this as a realistic scenario. GMO-ingredients in feed are used in Canada and Chile according to local legislation. In EU/EEA GMO-ingredients are not used in our fish feed in line with customer or consumer preferences. Animal husbandry and fish health Good animal husbandry is basis for our operation. Only through good husbandry practices fish health can be well maintained and thus secure good operational results. Key element in our husbandry practices is preventive fish health work which is based on knowledge, not limited to the fish, but concerning all aspects of the conditions under which the fish is farmed. Transportation, handling and slaughter Transportation can be stressful to the fish, especially the smolt. We therefore seek to ensure careful transportation and handling to avoid increasing the stress level in the fish. Ensuring good fish health through the entire production cycle is the key to reduce the need for handling of the fish. We use humane, quick and efficient methods to make sure that all fish experience as little pain and stress as possible during harvest. Medicines Good animal health with no medicine is the optimal situation. Preventive fish health is our key tool. Antibiotics are used only when strictly needed. When needed, treatment against sea lice is done after protocol and with an evaluation of the efficiency of the treatment. Bath treatments can pose a risk situation and we train on empty pens to ensure that we manage such operations successfully. Additional information Cermaq has been engaged with several stakeholders from central functions as well as from operating companies. Cermaq s engagement incudes NGOs like WWF Norway, WWF Salmon Aquaculture Dialogue (SAD), FoRUM, Friends of the Earth, and Bellona. These engagements have been useful for our focus with regard to our environmental impacts. Social Approach Labour practices and decent work Cermaq is a large employer providing job opportunities often in rural areas. Our focus is to be a responsible employer and contractor of workforce in the regions in which we operate. Cermaq respects the four fundamental principles and associated rights that are considered fundamental to social justice by the International Labour Organisation (ILO) and included in Global Compact. Furthermore Cermaq also adheres to the OECD s Guidelines for Multinational Enterprises. Cermaq joined UN Global Compact in February Policy Cermaq has defined policies and standards that apply for the entire group, including: ethical and corporate responsibility guidelines; whistle blowing guidelines; and sustainability principles directly related to labour practices and decent work. These policies are available for download on Cermaq s policy is to establish a systematic management of operational risk through management systems which are certified according to ISO standards or equivalent, as OHS Management System based upon the OHSAS standard. The updated status with regard to attainment for the operating companies is presented on page 50. Aspects We include the following material aspects in our reporting on labour practices and decent work: Occupational health & safety; Employment; Labour/Management relations; Training and education; and Diversity and equal opportunity. Occupational health & safety Cermaq shall ensure high level of occupational safety for its employees. We aim to have all operating companies certified according to the OHSAS standard for occupational health and safety. Employment, training and education Employees shall receive systematic training. Cermaq shall facilitate personal and professional development of each employee. Labour/management relations Cermaq employees are free to join any trade union. The companies in the group shall facilitate good relations between the management and the employees and unions. CERMAQ ANNUAL REPORT

42 Our approach: Management approach Diversity and equal opp0rtunity We wish to have an inclusive working environment. Discrimination based on ethnic background, nationality, language, gender, sexual orientation or religious belief is not tolerated. The companies in the group shall promote equal opportunities and fair treatment of all employees. Additional information Cermaq expects its suppliers to have responsible standards, and we will work with our suppliers to seek improvements. In 2011, Cermaq updated its ethical and corporate responsibility guidelines, strengthening the requirements to suppliers, and EWOS has developed a supplier policy and code of conduct for its suppliers. Social Approach Society As a large employer and a food and feed producer we impact society in various ways. We contribute to employment, often in rural areas. Our focus is to be a reliable partner in the local communities as well as in the larger society. Policy Cermaq s policies and standards apply for the entire group, including: ethical and corporate responsibility guidelines and sustainability principles directly related to society and local communities stating that; We train key employees to avoid corruption in our business. We take steps to minimise any problems related to discharge from our feed plants, fish farms and processing plants. Mainstream Canada has defined its basis for relations with local First Nations communities which have special titles and rights in the regions in which we operate in British Columbia. Aspects We include the following material social aspects in our reporting: Community and Corruption. Community Cermaq will contribute to local activity and employment and will be a reliable partner for the local communities in which we operate. Corruption Our ethical and social responsibility guidelines prohibit any form of corruption. Awareness training on corruption given to all management teams in 2010 was continued in 2011 and special training was given to our new operation in Vietnam. Our zerotolerance of corruption has been well received, and in Vietnam we have cooperated with NORAD as well as with other companies in addressing this issue. Additional information There are strong and diverse views on salmon farming, and some parts of local communities and some groups in society are advocating against our operations. Cermaq recognizes that we must demonstrate our respect for the communities and the environment in which we operate. Dialogue, transparency and public sustainability reporting are some of our tools to demonstrate the quality of our operations. Mainstream Canada operates within the traditional territories of several First Nations on the British Columbia coast. Our relationship with these communities is important to our vision of sustainable aquaculture and we strive to develop social, economic, and cultural relationships that are mutually beneficial. Cermaq s ambition is to have mutual advantageous agreements with First Nations in all the territories in which we operate in British Columbia. Within the area of scientific knowledge there are strong and diverse views. Cermaq believes that knowledge must be the basis for our decisions and our operations. Cermaq invests in research and development in Mainstream and in our own research company, EWOS Innovation, while also supporting external research. Social Approach Human rights Cermaq is a member of UN Global Compact and of Transparency International Norway. Cermaq respects the four fundamental principles and associated rights that are considered fundamental to social justice by the International Labour Organisation (ILO). Furthermore Cermaq also adheres to the OECD s Guidelines for Multinational Enterprises. Policy Cermaq has defined policies and standards that apply for the entire group, including: ethical and corporate responsibility guidelines, whistle blowing guidelines and sustainability principles directly related to social aspects. Cermaq s ethical and corporate responsibility guidelines state equal work opportunities, just treatment and a working environment free of discrimination. Aspects We include the following material human rights aspects in our reporting: Investment and procurement practices; Abolition of child labour; Prevention of forced and compulsory labour; Non-discrimination; and Indigenous rights. Investment and procurement practices All major acquisitions are subject to due diligence processes, ensuring that investments fulfil our requirements to compliance, ethical standards and other criteria. EWOS has a pre-approval process for suppliers including a self-assessment form addressing the material aspects of human rights. Human right issues are also included in EWOS supplier policy and code of conduct for suppliers. Abolition of child labour We will not accept child labour or young workers exposure to hazardous work in any of the regions in which we operate or in our business partners. In relation to the establishment of new operations in Vietnam, the risk of child labour has been evaluated as part of the risk analysis. Zero-tolerance for child labour has been communicated to suppliers at risk. Prevention of forced and compulsory labour As with child labour, we will not accept forced and compulsory labour in any of our operations or in those of our business partners. Discrimination The company wide objective is clearly stated as no incidents of discrimination related to 38 CERMAQ ANNUAL REPORT 2011

43 race, colour, sex, religion, political opinion, national extraction, or social origin. Cermaq respects and adheres to the freedom of association and collective bargain. Indigenous rights Cermaq has a clear goal of no violation of indigenous rights. We emphasize consultations with First Nations in British Columbia Canada where the rights and titles of First Nations constitute the basis for our operations in the region. Cermaq s ambition is to have mutual advantageous agreements with First Nations in all the territories in which we operate in British Columbia. Mainstream Canada has identified its basis for relations with First Nation communities, see more: com/sustainability/social-sustainability.php Social Approach Product Responsibility Although Cermaq s business areas do not sell products directly to consumers, we are producing farmed salmon for direct human consumption. As a player in the food industry value chain, we are subjected to strict laws and regulations in the countries of operation. Due to the complexities related to product responsibility, a set of management tools have been implemented. Policy We rely on the ISO food safety management standard as a tool to develop methods and procedures in order to achieve the goals we set. All operating companies in the Cermaq group are either certified ISO or working towards certification. The updated status with regard to attainment of this is presented on page 50. The EWOS feed operations also rely upon various industry standards for good practice, such as the Universal Feed Assurance Scheme in UK and the Global GAP Compound Feed Manufacturing (CFM) Standard. Aspects The following material aspects are included in Cermaq s reporting on product responsibility: Customer health and Safety and Product information. Additional material aspects included in the reporting are; minimising toxicity; and traceability. Customers health and safety All operating companies are to be certified according to ISO where hazard analysis and critical control points (HAACP) is an integral part. We aim to comply with food safety regulations and to supply safe, healthy and nutritious feed and food products to consumers. Product information We comply with laws and regulations pertaining to product information and labelling. Toxicity Food and feed safety has the highest priority. Whereas the food authorities are defining regulations to ensure food and feed safety, Cermaq s operating companies have incorporated management systems to ensure that all regulations are adhered to. Traceability Cermaq companies have modern traceability systems in place to cover first tier traceability. For feed raw materials we require our suppliers to have traceability systems in place. Additional information As Cermaq is engaged in food production, we recognise significant risk arising from any potential incidents impacting consumer health and safety. We believe that we have sufficient procedures in place to mitigate this risk, through the policy that we have described above. Economic Approach Cermaq is committed, through its Sustainable Aquaculture mission, to bring sustainable socio-economic benefits to the regions in which we operate. Organization wide goals relating to this include those described in the Board s Report on Corporate Governance: Cermaq s objective is to create value for its owners, employees and society in general through sustainable aquaculture. Long term dividend level should be in the range of percent of the Company s adjusted profit after taxes. Policy Cermaq has set out its strategy for creating value through sustainable aquaculture. Cermaq s Core Values constitute guidelines for desired attitudes as individuals, companies and group, to achieve long term value creation. Our ethical and corporate responsibility guidelines further ensure that any person acting on behalf of Cermaq acts in an ethically sound way. Aspects The following material economic aspect is included in Cermaq s reporting: Economic performance and market presence Socio-economic benefits are most obviously manifested through payments to suppliers, employees, local authorities and payment of dividends to investors. However, Cermaq also supports local communities with both financial and in-kind contributions. Cermaq will offer competitive entry wage levels above minimum wage limits. We value skills, competence and seniority in our wage systems. Mainstream Chile operates in a region and sector where NGOs and other stakeholders have shown specific interest related to conditions for employees in the industry. We would also expect the same concern for Vietnam. To meet this concern we disclose detailed information about the wage conditions in the Chilean and Vietnamese operations. Additional information In terms of risk profile, the fish farming industry is characterized by a high level of risk. Cermaq must be able to sustain considerable cyclical fluctuations in profitability as a result of price volatility as well as lower results due to production related challenges. It is also recognized that the salmon industry is a young industry, still in a strong growth phase, and with significant potential for consolidation. CERMAQ ANNUAL REPORT

44 Our approach: Management approach Overview of indicators applied to report on the aspects presented in the management approach Aspect GRI Indicator Customized indicators Environment Compliance EN 28 CEQ 13 Biodiversity EN 12 CEQ 2, 6, 7, 8 Emission, effluent and waste EN 16, EN 26 CEQ 3 Materials EN 1, EN 26 Energy EN 3, EN 4, EN 5, EN 26 Water Protecting natural resources EN 26 CEQ 3, 6, 7, 8 GMOs CEQ 10 Animal husbandry CEQ 1, 2, 3, 4, 5, 6, 7 Transportation, handling and slaughtering CEQ 1 Fish health CEQ 1, 2,3,4,5,6,7,9 Medicines CEQ 4, 5, 9 Social Labour practice and decent work Compliance SO8 Occupational health and safety LA 7 Employment LA 1 Labour/management relations LA 4 Training and education LA 10 Diversity and equal opportunities Social Society LA1, EC7 Compliance SO 8 Community EN 26 CEQ 11 Corruption SO 3 Social Human rights Investment and procurement practices Abolition of child labour HR 6 Prevention of forced and compulsory labour Non-discrimination EC7 Indigenous rights HR 9 Social Product responsibility Compliance PR 2, PR 9 CEQ 13 Customer health and safety PR 2, FP 5 Product information Minimising toxicity CEQ 10 Traceability CEQ 10 Economy Economic performance EC 1, EC3, EC4 Market presence EC5, EC 7 40 CERMAQ ANNUAL REPORT 2011

45 Objectives and results Objectives 2011 Results 2011 Objectives 2012 Ensure compliance with law and regulations There were four incidents of non- compliance in Mainstream Chile in 2011 Zero escapes of fish Two fish escaped in one incident Zero escapes of fish Zero incidents of non-compliance with law and regulations Control lice within local action levels (regulations or codes of practice) for each operating region Complete all of planned supplier audits in the feed division Manage energy consumption per kg feed and per kg fish produced Manage the number of substantiated neighbourhood complaints Manage the use of packaging and total reclaim of used packaging materials Sea lice were controlled within local action levels, and with limited use of treatment. 72 percent of planned supplier audits were completed. Energy consumption per tonne of fish decreased in 2011.Energy per tonne of feed produced has increased, due to reduction of marine ingredients in the feed. Production of feed from a higher proportion of agricultural raw materials consumes more energy. There were four complaints from neighbours, all related to feed operations in Florø, and have been managed. Improvement of internal reporting has strengthened the basis for management of packaging materials. Control sea lice within local action levels Implementation of the new policy for EWOS' suppliers. 100 percent completion of planned audits For feed production the 2012 target is 0.98 GJ/ tonne. Submit energy and GHG emissions data to CDP CERMAQ ANNUAL REPORT

46 Our approach: Global initiatives ENDORSING GLOBAL INITIATIVES Cermaq is committed to support global initiatives aiming at improving environmental, social and economic conditions worldwide. We believe our continued business success depends on our ability to continue to integrate sustainable solutions into the way we do business. Global initiatives contribute to creating a sustainable global environment on which we are dependent. Global initiatives that Cermaq endorses are: United Nations Global Compact (UN GC) In 2011, Cermaq became a member of UN GC. Later in 2011, we also decided to join the Nordic UN GC network. Through the membership in UN GC, Cermaq is committed to aligning our operations and strategies with ten universally accepted principles in the areas of human rights, labour, environment and anti-corruption. The ten principles: 1. Businesses should support and respect the protection of internationally proclaimed human rights; and 2. make sure that they are not complicit in human rights abuses. 3. Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining; 4. the elimination of all forms of forced and compulsory labour; 5. the effective abolition of child labour; and 6. the elimination of discrimination in respect of employment and occupation. 7. Businesses should support a precautionary approach to environmental challenges; 8. undertake initiatives to promote greater environmental responsibility; and 9. encourage the development and diffusion of environmentally friendly technologies. 10. Businesses should work against corruption in all its forms, including extortion and bribery Transparency International (TI) Corruption undermines democracy and the rule of law. It also distorts national and international trade. In May 2011, Cermaq ASA became a member of TI Norway. Through the membership we support TI s anti-corruption work. In addition TI is a channel to share our experience with other businesses and draw on other companies experience in the regions where we are present. Cermaq has implemented a zero-tolerance policy towards corruption within all our operations and we perform regular training of management and other employees in vulnerable positions. In 2011 we selected a supplier of an e-learning anti-corruption tool which will be rolled out in all our operations in Carbon Disclosure Project (CDP) Cermaq acknowledges the need for reducing carbon emissions in order to combat climate change. In support of this, we submitted our carbon emissions to the CDP in 2010 and The CDP disclosure process has increased the awareness of our emissions throughout our operations and it has enabled us to better define activities and set targets. Cermaq obtained a CDP score of 75 C in 2011 (based on 2010 emission figures). (CDP s rating is from 0 100, and A E) Global Reporting Initiative (GRI) GRI s Sustainability Reporting Framework enables all companies and organizations to measure and report their sustainability performance. By reporting transparently and with accountability, organisations can increase the trust that stakeholders have in them, and in the global economy. It also makes it possible to compare individual companies performance. Cermaq started to report according to the GRI standard in 2009 and the 2011 report is our third report. The 2011 report meets the requirements of a B+ report. Aquaculture related initiatives Cermaq is engaged in several industry related international initiatives. The Salmon Aquaculture Dialogue (SAD) aims at defining a standard for responsible salmon farming that will gradually transform the industry, and Cermaq participated with our knowledge and experience focusing on the standard to be an efficient and practical tool. A parallel process has been the Global Aquaculture Alliance (GAA) also aiming at defining a global standard for sustainable salmon farming. Cermaq has participated actively in this process. In 2011, one of our farming sites in Canada was the first site in the world to be certified according to this GAA standard. EWOS has been an active supporter of the International Fish meal and Fish oil Organisation s standard for responsible sourcing (IFFO R/S) and in 2011 EWOS supported a special program to assist companies qualifying for certification, and thus increasing the total volumes of certified fish meal and fish oil. 42 CERMAQ ANNUAL REPORT 2011

47 Our approach: Sustainability report KPMG AS Telephone P.O. Box 7000 Majorstuen Fax Sørkedalsveien 6 Internet N-0306 Oslo Enterprise MVA Auditor s Review Report on Cermaq Sustainability Report 2011 To the readers of Cermaq Sustainability Report 2011: Introduction We have been engaged by Cermaq s Central Management team to review the Sustainability Report The Sustainability Report includes in particular sustainability information on page 12-21, 26-29, and in Cermaqs s Annual Report 2011 and on Cermaq s website under the headings Our approach and GRI Navigator. The Board of Directors and Central Management team are responsible for ongoing activities related to sustainable aquaculture, and for the preparation and presentation of the Sustainability Report in accordance with the applicable criteria. Our responsibility is to express a conclusion on the Sustainability Report based on our review. Scope of review We have performed our review in accordance with ISAE 3000 Assurance Engagements other than Audits or Reviews of Historical Financial Information issued by the International Auditing and Assurance Standards Board. A review consists of making inquiries, primarily of persons responsible for different sustainability matters and for preparing the Sustainability Report, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing and generally accepted auditing standards in Norway. The procedures performed consequently do not enable us to obtain an assurance that would make us aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Our assurance does not comprise the assumptions used by Cermaq or whether or not it is possible for Cermaq to reach certain future targets described in the report (e.g. goals, expectations and ambitions). The criteria on which our review is based are the sections of the Sustainability Reporting Guidelines, G3 published by the Global Reporting Initiative (GRI), which are applicable to the Sustainability Report, as well as the CEQ indicators that Cermaq has developed and disclosed. These criteria are presented on Cermaq s website under the headings Our approach and GRI Navigator. We consider these criteria suitable for the preparation of the Sustainability Report. Our review has, based on an assessment of materiality and risk, among other things included the following procedures: An update of our knowledge and understanding of Cermaq s organization and activities. An assessment of the suitability and application of certain criteria in respect to the information provided to stakeholders. Interviews with responsible management, at different levels within the Group, with the aim of assessing whether the qualitative and quantitative information stated in the Sustainability Report is complete, correct and sufficient. Reading of internal documents to assess whether the information stated in the Sustainability Report is complete, correct and sufficient. An evaluation of routines implemented for the collection and reporting of information and data. An evaluation of the model used to calculate CO 2 - emission. An analytical review of reported information. A review of underlying documentation, on a test basis, to assess whether the information and data in the Sustainability Report is accurate. A review of OHS data at all operating companies. Pre-announced visit to Mainstream Canada. A review of qualitative information and statements in the Sustainability Report. An assessment of Cermaq s self-declared application level according to GRI s guidelines. We have gained an overall impression of the Sustainability Report, and its format, considering the information s mutual conformity with the applicable criteria. Reconciliation of the reviewed information with the sustainability information in the Cermaq Annual Report Conclusion Based on our review procedures, nothing has come to our attention that causes us to believe that Cermaq s Sustainability Report 2011 has not, in all material respects, been prepared in accordance with the above stated criteria. Oslo, 5 April 2012 KPMG AS Vegard Tangerud State Authorised Public Accountant Åse Bäckström Head of Climate Change & Sustainability CERMAQ ANNUAL REPORT

48 Our results BOARDS OF DIRECTORS REPORT CORPORATE GOVERNANCE TABLE ANNUAL ACCOUNTS ANALYTIC INFORMATION SHAREHOLDERS INFORMATION GRI NAVIGATOR FARM INNOVATION FINANCIALLY SUSTAINABLE Return on investments We believe that value creation can be measured in more than one way. Our goal is to create value for owners, employees, and society. The long term focus of economic sustainability constitutes a premise. Without economic sustainability we will not be able to achieve our other goals. In 2011, Cermaq again delivered solid results in a very challenging market.

49

50 Our results: Board of directors report DIRECTORS REPORT 2011 Cermaq saw its highest ever operating profit in 2011 at NOK million before fair value adjustment of biomass, adjusted for sales gains. The feed business EWOS increased production volumes and improved its operating profit. The price of salmon fell sharply in the second half of 2011, but the fish farming business Mainstream still managed to generate a solid profit for the year, based on high salmon prices in the first six months, good biological results in all regions, and a very good performance by Mainstream Chile. The board proposes to pay a dividend of NOK 4.63 per share. The group s operations and locations Cermaq s area of business is sustainable farming of salmon and trout and sustainable feed production for these species. The company shall play an active role in research and development within the aquaculture industry. The feed production business is operated by EWOS, which has a global market share of 36 percent. EWOS operates in Chile, Canada, Scotland and Norway, and in 2011 it also became the majority owner of a Vietnamese company that produces feed for the pangasius species. The fish farming business is run by the business area Mainstream, which has operations in Chile, Canada and Norway and is one of the largest operators in the field of salmon and trout farming. Mainstream has a global market share of around 6 percent. Research and Development (R&D) is a key factor for value creation. The R&D operation is primarily run by the company EWOS Innovation AS. EWOS Innovation has research units in Dirdal (Rogaland, Norway), Lønningdal (Hordaland, Norway) and Colaco (Region X in Chile) as well as a small research facility in the Mekong Delta in Vietnam. The company is one of the world s leading private R&D companies in the field of fish feed and farming. Cermaq s research is also carried out through Mainstream s international fish health team in brief The board can look back at a good 12-month period, but it was also a challenging year with a sharp drop in salmon prices in second half of the year. The fall in salmon prices occurred sooner than the market had expected and was steeper than initially thought. When Cermaq is still able to present very good results for the year, it is thanks to the company s strategy with a presence in both the feed and fish farming segments, the diversification of risk through presence in multiple regions, and healthy operations. EWOS has made a very good contribution with relatively stable margins and good revenues overall. Mainstream has seen good biological results in all regions, with Mainstream Chile generating particularly positive results. Transactions and events In February 2011, Cermaq sold its shares in Hordafôr AS. Cermaq s 35.2 percent stake was sold to the company s majority owner for NOK 66 million. The sale generated a profit of NOK 16 million. In April 2011, Cermaq acquired 51 percent of the shares in the fish feed company Anova Fish Feed in Vietnam. Through this acquisition Cermaq s feed division has been established in a new region and entered the production of feed for the species pangasius. The business in Vietnam is limited and represents a careful start as basis for assessment of a further strategy. Anova Fish Feed changed its name to EWOS Vietnam in November In May 2011, Cermaq decided to make dividend payments of NOK 500 million. This is the highest dividend ever to be paid by the company, and constitutes NOK 5.40 per share. CEO Geir Isaksen left the company, and CFO Tore Valderhaug was named acting CEO of Cermaq with effect from July The board appointed a recruitment committee to appoint Mr Isaksen s successor, and on 23 December 2011 the board announced that Jon Hindar had been appointed as CEO. Mr Hindar will take up his position on 19 March In the fourth quarter of 2011 feed production at EWOS exceeded 1 million tonnes in a 12-month period. In 2011, Mainstream made investments in increased farming capacity in Finnmark, Norway and in Region XII, Chile. 46 CERMAQ ANNUAL REPORT 2011

51 Cermaq was listed in the OBX index at the Oslo stock exchange in December Mainstream Chile began production in region XII and released smolt in December Cermaq joined the UN s Global Compact and Transparency International. Explanation of the accounts Profit and loss statement The group s profit after tax for 2011 was NOK million (2010: NOK million). The group s operating revenues were NOK million in This is an increase of NOK million from the previous year. The increase in operating revenues was primarily due to higher operating revenues from the feed business EWOS of NOK million, while operating revenues from the fish farming business Mainstream rose by NOK 91.7 million. Despite an increase in production volumes of 12.3 percent, Mainstream s operating revenues rose by only 2.6 percent compared with This is due to significantly lower market prices in the second half of EWOS production volumes rose by 23.0 percent and operating revenues by 26.7 percent. Operating revenues and production volumes grew in all regions where EWOS operates except Canada and was mostly caused by higher production volumes at EWOS Chile as a result of the rebuilding process following the earlier fish health crisis. The group s operating profit before fair value adjustment of biomass was NOK million (2010: NOK million), which is a slight decrease compared with the previous year. Adjusted for last year s gain from the sale of Mainstream Scotland and a property sale in Norway totalling NOK 96.9 million, there is a slight underlying increase in the operating profit. Mainstream s operating profit fell by NOK million, despite the contribution of NOK million from the rebuilding of Mainstream Chile. Mainstream Norway s operating profit fell by NOK million due to the sharp drop in achieved market prices during the second half of the year. EWOS improved its operating profit by NOK million. The result from the change in the fair value adjustment of biomass was a cost of NOK million (2010: income of NOK million) as a result of changes in salmon prices and the altered composition of biological assets. The group s operating profit totalled NOK million (2010: NOK million). Income from associated companies totalled NOK 36.9 million, compared with NOK 31.6 million in The 2011 figure includes gain from the sale of Hordafôr of NOK 16.0 million. Net financial expenses were NOK 38.8 million (2010: NOK 39.5 million). Interest expenses fell slightly in the period as a result of lower average interest on net interest-bearing debts during the year. In 2011, NOK 12.8 million relating to an interest rate swap was recognised as income. The interest swap was realised in A change in the value of financial contracts at the Fish Pool market place resulted in NOK 17.2 million being recognised as income up until June Cermaq then achieved effective hedge accounting following extensive testing and realised contracts are classified as part of the operating revenues. In 2010 the group recognised a NOK 61.6 million gain on the sale of its shares in Marine Farms ASA, and NOK 20.8 million relating to an interest rate swap was recognised as income. Net finance costs in 2010 also included a loss of NOK 18.2 million as the result of a termination agreement with Cultivos Marinos Chiloé Ltda. and a recognised loss on financial contracts traded on the Fish Pool exchange of NOK 26.7 million. Net tax expense for the year was NOK million (2010: NOK million). The effective tax rate was 21.1 percent CERMAQ ANNUAL REPORT

52 Our Results: Board of Directors Report (2010: 22.1 percent). The reduction in the effective rate of tax was primarily due to the profits from Chile being taxed at a lower nominal tax rate than in other regions. The parent company s profit in 2011 was NOK 45.2 million (2010: a loss of NOK 27.6 million). The positive result in 2011 was mainly due to the gain on a realised interest rate swap of NOK 33.5 million, group contributions, and net interest income from loans to subsidiaries. The negative result in 2010 was largely due to normal operating costs. Business segments EWOS The group s feed business generated operating revenues of NOK million in 2011 (2010: NOK million). This is an increase of NOK million, or 26.7 percent, on Sales volumes increased from to tonnes an increase of 23.0 percent. The main cause of the growth was the increase in production volumes in EWOS Chile. Raw material costs are the most important factors in EWOS total production costs, and these were significantly higher in 2011 than in 2010 as a result of the increase in volumes. EWOS operating profit for the year was NOK million (2010: NOK million). This is an increase of 22.7 percent from 2010 and reflects increased volumes and a favourable product mix. EWOS share of the salmon feed market is estimated at around 36 percent at the end of Mainstream The group s fish farming business generated operating revenues of NOK million in 2011 (2010: NOK million). This is an increase of NOK 91.7 million, or 2.6 percent. Mainstream s production volumes increased by tonnes to tonnes of gutted fish compared with the previous year. This is an increase of 12.3 percent. The increase in production volumes predominantly relates to Mainstream Chile and reflects the recovery of the Chilean aquaculture industry following the earlier fish health crisis. The salmon prices were higher in the first six months of 2011 than in the same period 2010, whilst there was a significant reduction in the salmon prices in the second half of 2011, partly due to increased volumes from Chile. The operating profit before fair value adjustment of biomass was NOK million (2010: NOK million). This represents a reduction of NOK million from A large part of the decrease in operating profit is due to the drop in Atlantic salmon prices during last six months of However, the reduction in operating profit was partly offset by changes in Chilean salmon farming industry, which has seen obvious improvements both in terms of regulation and the quality of the biomass. Mainstream Chile achieved an operating profit of NOK million in 2011, an increase of NOK million. Both Mainstream Norway and Mainstream Canada reported a reduction in operating profits from 2010 because of the fall in prices in the second half of the year. The operating profit after fair value adjustment of biomass was NOK million in 2011 (2010: NOK million). Other activities The group s non-core business primarily consists of the subsidiary Norgrain AS and other associated companies. Norgrain reported an operating profit of NOK 9.2 million in 2011 (2010: NOK -0.1 million). The increase was partly due to the provision for restructuring in connection with discontinuation of the company s trading activities in Oslo in The group s companies within the agricultural sector are not defined as core business and will be sold when the circumstances are favourable. Financial position The book value of the group s assets was NOK million as at 31 December 2011, compared with NOK million at the end of The increase of the group s assets is largely due to an increase in inventories and receivables in EWOS. Mainstream experienced a decrease in the fair value of biomass as a result of the sharp drop in salmon prices. The increase in non-current assets is mainly related to investments made in expanding capacity in Finnmark by Mainstream Norway and in Region XII by Mainstream Chile. Booked equity as at the end of 2011 was NOK million (2010: NOK million). The substantial increase in equity is largely due to the strong total comprehensive income of NOK million, partly offset by dividend payment of NOK million. The equity ratio as at the end of 2011 was 59.5 percent stable with the 59.8 percent ratio at the end of The book value of the parent company s assets was NOK million at yearend, stable with the NOK million book value in The equity ratio for the parent company was 41.3 percent at 31 December 2011 (2010: 56.2 percent). The decrease was due to dividend payment. Financing The group s net interest-bearing debt decreased from NOK million as at 31 December 2010 to NOK million as at 31 December The reduction of NOK million reflects solid cash flows from operations as well as net cash effects from the sale of shares in Hordafôr and the realised gain from the termination of the interest rate swap, offset by dividend payments to shareholders. The strengthening of the US dollar in 2011 increased the NOK value of interestbearing debts denominated in USD by NOK 15 million. A bilateral credit facility of NOK million was established in 2011 along with a cash pool agreement for the Chilean companies with a credit limit of USD 50 million. Mainstream Chile s export credit facility of USD 50 million was refinanced in As a result of these financing activities, the group secured a diversified maturity profile over the period 2013 to At the end of 2011 the group s key sources of funding comprise five committed credit facilities with a credit limit equivalent to NOK million. The equivalent of NOK 48 CERMAQ ANNUAL REPORT 2011

53 1 347 million had been drawn on these facilities as at 31 December Cash flows Net cash flows from operational activities increased by NOK million from NOK million in 2010 to NOK million in This was primarily due to a smaller increase in working capital compared with the previous year, as the operating profit before depreciations and amortisations (EBITDA) adjusted for sales gains remained at almost the same level in both years. Taxes paid totalled NOK million in 2011, an increase of NOK 36.1 million on Net cash flow from investment activities was an outflow of NOK million (2010: inflow of NOK million). Investment payments relating to fixed assets amounted to NOK million. The payment in 2010 was NOK million. Net proceed from purchases and sale of operations and the sale of fixed assets was NOK 55.7 million and relates primarily to the sale of shares in Hordafôr and the investment in EWOS Vietnam. Net cash flow from financing activities was an outflow of NOK million (2010: NOK outflow of million). Down payments on the group s credit totalled NOK million and dividend pay-outs NOK million to the shareholders in Cermaq ASA. Net interest payments and other financial items stood at NOK 8.2 million. The change in cash and cash equivalents for the period was an outflow of NOK 19.4 million (2010: inflow of NOK 58.3 million). The parent company reported a net cash outflow of NOK 2.1 million in 2011 (2010: NOK outflow of 60.9 million). Dividend payment was offset by the repayment of loans by subsidiaries to Cermaq ASA. Going concern Based on the above report of the group`s profit and loss account, the board confirms that the annual financial statements have been prepared under the assumptions that the company is a going concern and that this prerequisite has been met. Allocation of the profits for the year at Cermaq ASA The Cermaq board of directors decided in December 2010 that the annual dividend, over time, should be in the region of percent of the group s adjusted profit after tax. Dividend proposals are reviewed every year in relation to earnings, cash flows, the financial position, market condition and strategy. In some years dividends may therefore deviate from the long-term target. The board proposes to pay a dividend of NOK 4.63 per share for the fiscal year This implies a dividend level of 40 percent of the group s adjusted profit after tax. For this purpose the group s profit is adjusted for the fair value of biomass and certain other special items, and amounts to NOK Profit for the year for the parent company Cermaq ASA totalled NOK The board proposes to the general meeting that the profit be allocated as follows: Profit Allocated to dividends Transferred from other equity The company s distributable equity at yearend after funds for dividends for 2011 have been allocated was NOK Risk and risk management Risk management The group is exposed to various risks of a financial and operational nature. The board of directors has established a framework for risk management (see figure) to ensure that the group has good internal controls and appropriate systems for risk management adapted to the nature of and the risks related to its operations was a good year for the aquaculture industry. However, the increased supply of salmon from Chile and Norway lead to a temporary fall in salmon prices through 2011, and prices may remain low throughout It is important that the group has the financial strength to carry significant fluctuations in profits as a result of price volatility or substantial production challenges such as major outbreaks of disease. The company is engaged in both feed production and farming, which diversifies the risk. The positive effect of this strategy is most visible in periods of low salmon prices or significant production challenges, when the more stable profits and cash flows of the feed business will make up a substantial part of the overall profit for the group (see figure). To reduce the impact of price volatility, the group has more actively pursued hedging of salmon prices through financial contracts. Such contracts have however had limited impact on the results for The board considers the high equity ratio and diversification of risk as outlined, to be the primary foundations of the group s financial risk management. The board has decided that the group s equity ratio should normally be at least 45 percent. At LOW COST PRODUCER EXPOSURE TO A PORTFOLIO OF SALMON PRICES STRONG BALANCE SHEET RISK MANAGEMENT AND VALUE CREATION GEOGRAPHIC DIVERSIFICATION DIVERSION IN THE VALUE CHAIN (FEED/FARMING) R&D AND PRODUCT DEVELOPMENT CERMAQ ANNUAL REPORT

54 Our results: Board of directors report EBIT PER BUSINESS SEGMENT NOK million / / / / / / / / '03 '04 '05 '06 '07 '08 '09 '10 '11 EBIT Mainstream EBIT EWOS ISO-CERTIFICATION PER COMPANY per 31 December 2011 Operating company ISO 9001 ISO ISO ISO MS Norway Yes No No Yes MS Chile Yes Yes Yes Yes MS Canada Yes Yes Yes Yes EW Norway Yes Yes Yes Yes EW Chile Yes Yes Yes Yes EW Canada Yes Yes Yes Yes EW Scotland Yes Yes Yes Yes EW Vietnam No No No No EWOS Innovation No Yes No Yes Yes EWOS Innovation Ch Yes No Yes Yes the end of 2011 the equity ratio was just above 59 percent. The group has decided that operational risks should be governed and controlled by way of management systems certified according to ISO standards or equivalent standards. The group has defined key areas to be quality (ISO 9001), environment (ISO 14001,) food safety (ISO 22000) and health, environment and safety (HES) (OHSAS 18001). With the exception of EWOS Vietnam, which was aquired in April last year and is currently preparing a progress schedule, all companies aim to be certified under the remaining standards during Every quarter the board reviews a report on development in the risk factors assumed to have the greatest financial impact should they occur and on key measures that have been implemented in order to reduce these risks. The effect on reputation is also reviewed for operational risks relating to the environment and corporate responsibility issues. The board undertakes a biannual review of the company s internal reporting on sustainability indicators. The reporting provides information to help identify development trends and address matters that increase operational risk. Financial risk 2011 was characterised by unstable financial markets and increased volatility leading to increased financial risk. The board and management believe that the best way to meet macroeconomic challenges is to sustain a solid balance sheet and to ensure that a good financing structure with diversified maturity. Risk management activities focus on regular assessments of exposure and, to the extent possible, on mitigating risks by means of natural and operational hedges. This approach is in line with the group s financial policy. A more detailed description of each risk category follows below. For further information about financial risks (currency, interest rate, credit and liquidity), please refer to note 24 in the annual accounts. Currency risk Upon translating foreign subsidiaries income statements and statements of financial position, the group s largest exposure is to the US dollar, and assets and revenues recognised in US dollar are predominantly hedged by loans in the same currency. At the end of 2011, 59 percent (2010: 76 percent) of the group s interest-bearing debt was in US dollar. This provided a natural hedge for investments in Chile. 41 percent (2010: 24 percent) of the group s interestbearing debt was in Norwegian krone. Currency exposure in relation to future operational cash flows is primarily linked to the US dollar and the euro against the Norwegian krone, and the US dollar against the Canadian dollar. Currency exposure is significantly reduced by diversification, as companies within the group have individual exposures that offset each other for the group as a whole. Currency exposure is further reduced by introducing cost price adjustment clauses in contracts with feed customers. Remaining net exposure is monitored regularly and is currently considered to be low. For this reason, hedging through financial contracts is utilised only to a limited extent. Interest rate risk The group is mostly exposed to interest rate risk through its funding activities and only to a limited extent through liquidity management, as cash is either reinvested in operations or used to pay down existing debt. The group generally accepts exposure to floating interest rate on its financial liabilities and will not normally use financial instruments to secure fixed rate terms, unless there is deemed to be a significant risk of a breach of the group s loan covenants. At the end of 2011 the totality of the group s interest bearing debt was subject to floating interest rates. 50 CERMAQ ANNUAL REPORT 2011

55 Credit risk The board believes that the credit risk has been diversified since the group s customers represent a range of industries and are located in different geographical regions. The counterparty risk in relation to financial institutions is also deemed to be limited. The group limits its volume of liquid assets at all times, rarely trades in derivatives and predominantly uses a small number of solid banks for financing. Low salmon prices in the second half of 2011 led to an increase in the credit risk faced by the feed business as a consequence of the more challenging situation for the fish farming industry. In order to manage the increased risk to the group, the management has further improved its proactive strategy to mitigate risk, focusing on careful customer selection and adopting a tighter credit regime. The group has also been seeking to establish additional security by obtaining pledge on biomass and parent company guarantees and by purchasing insurance coverage when appropriate. The group is not significantly exposed to any single customer or contractual party as at 31 December Liquidity risk Following successful refinancing in 2010 and 2011, the group has achieved a diversified maturity profile for the period Solid cash flows generated in the last two years have resulted in a significant reduction in the group s net interest-bearing debt and in substantial available financial headroom (approx. NOK 4 billion in cash and unused credit limits as at 31 December 2011). The board and management have elected to retain a high equity ratio to be well positioned for financial and operational challenges. Operational risk Fish health at Cermaq s fish farming business has remained good throughout Emphasis on sustainable production and preventive measures has reduced the operational risk and generated good biological results in all regions, particularly in Chile. The board is being kept up-to-date with the fish health situation for the group and for Chile in particular, and the risk is continually assessed in connection with decisions to release more salmon into marine farms and with future investments. Corporate responsibility The board bases its governance on the fact that Cermaq has a responsibility for the people, communities and environment affected by its business. Through sustainable aquaculture, Cermaq makes a contribution to the effective production of healthy food, employment and economic activity in many rural areas. Social responsibility is an integrated part of Cermaq s business operations. Cermaq has established a set of sustainability principles that apply to all companies within the group. Cermaq s sustainability principles cover the following areas: Healthy fish in healthy farming Sustainable fish feed and sustainable sourcing of fish feed ingredients Management of the environmental impacts of our operations Good labour practice and decent work Local community acceptance Product responsibility Cermaq measures compliance with its sustainability principles and the improvements it achieves using a set of sustainability indicators. Transparency and documented results form an important part of its social responsibility, and in 2012 Cermaq will present its third sustainability report using the Global Reporting Initiative (GRI) standard. The 2009 report was at C level and 2010 report was at B+ level. The report for 2010 was verified externally by the company s auditor, KPMG. Detailed information about the sustainability indicators results can be found on the company s website, The website also contains an index through which all information covered by the GRI reports can be retrieved. Cermaq s stakeholders are concerned with key environmental issues such as escapes, disease and lice, effluents from farms and marine ingredients in feed. All of these topics are thoroughly covered in the company s sustainability report. Cermaq also undertakes other external reporting and is a member of various organisations. In 2011 the company reported to the Carbon Disclosure Project and joined the UN s Global Compact and Transparency International. The UN s Global Compact principles have been adopted as part of Cermaq s ethical and corporate responsibility guidelines. The guidelines state that Cermaq also expects its suppliers to adhere to the principles. Cermaq takes a zero tolerance approach to corruption, and through its membership in Transparency International it supports the organisation s international anti-corruption work. The concept of social responsibility is embedded in the board of directors and is described in the company s ethical and corporate responsibility guidelines. Adherence to the ethical and corporate responsibility guidelines shall be secured by integration in our management systems, by providing internal information and training and by monitoring the company s results using non-financial indicators. There is contact and dialogue between stakeholders and both the parent company Cermaq and the operational units. Contact with the local community is essential to Cermaq. The company has also been actively involved in the WWF s Salmon Aquaculture Dialogue, the Global Aquaculture Alliance s BAP standard and the International Fishmeal and Fish Oil Organisation s (IFFO) certification programme for responsible sourcing (IFFO RS). EWOS has supported a programme to assist companies in meeting the criteria for the standard, thus increasing the volume of certified fishmeal and fish oil. The board of directors views the research activities of the company as an important foundation for accommodating continued sustainable development of the aquaculture industry. Important areas of commitment for Cermaq s research activities are reduced dependency of marine ingredients in feed and development of functional feeds that CERMAQ ANNUAL REPORT

56 Our results: Board of directors report improve fish health. The research contributes to advanced understanding of fish health, disease prevention and substitution of raw materials to be used in fish feed saw the conclusion of a case in which Cermaq was reported by the Friends of the Earth, Norway and the Forum for Environment and Development (FoRUM) to the National Contact Point for OECD s Guidelines for Multinational Enterprises. The parties reached an agreement on a joint statement. The joint statement emphasises the importance of the sustainable use of natural resources, of the company s social responsibilities in the times ahead, and of a platform for further contact between the organisations and the company. In the statement Cermaq accepts the criticism of the lack of sustainability of its fish farming business in Chile before the fish health crisis in 2007 and The board is very pleased that the case was concluded with an agreement and that the parties thus achieved a constructive and forward-looking solution. As the first company in Canada, Mainstream Canada was in 2011 certified under APSA (Aboriginal Principles for Sustainable Aquaculture), a standard that upholds the rights and values of indigenous peoples. In order to obtain certification, the company s operations must be sustainable and conducted in a manner that maintains the culture, values, interests and fisheries of indigenous peoples. As the first fish farm in the world, Mainstream Canada s site Brent Island was certified according to the Global Aquaculture Alliance s Best Aquaculture Practices new standard for salmon farming. During 2011 the board has been concerned with the social responsibility that comes with going into business in Vietnam, with responsibilities for employees and the environment and a zero tolerance approach to corruption. Impact on the external environment Cermaq is presenting a sustainability report in line with the Global Reporting Initiative (GRI) framework with a B+ level. An index with links to information about each indicator can be found at cermaq.com. Like all other economic activity, aquaculture leaves an ecological footprint, which must remain within the limits that society has deemed to be acceptable. After the end of each cycle, on-growing farms will be fallowed for a while to ensure that temporary environmental changes are reversed, thus providing good conditions for good fish health and biological diversity. Complaints about our businesses from neighbours do occur and are reported to Cermaq. All complaints are addressed by the individual companies. In 2011 EWOS Norway was the only company to receive a complaint from neighbours (four complaints about dust in connection with the unloading of raw materials). By reporting to the Carbon Disclosure Project, the company publishes detailed information about the group s energy consumption. See detailed information in the sustainability report: EWOS is of the opinion that the fish stocks used as ingredients in fishmeal and fish oil purchased by EWOS are sustainably farmed and are within the statutory quotas. In 2011 EWOS developed up new guidelines and criteria for suppliers in order to spell out the company s requirements for suppliers in relation to social responsibilities. The board believes that the group s farming and feed businesses pollute the external environment only to a limited extent. Emissions to air and water are within the limits established by the authorities. Fish health and the effects on wild salmon Fish health at Cermaq s fish farming business has remained good with good biological performance for all the companies. Disease has been at a minimum and there has been little need for treatment with antibiotics. The need for antibiotics remains low across the group and was further reduced in 2011, both in Chile and in Canada. Norway and Canada are both seeing an extensive debate about how the fish farming industry affects wild salmon. The focus of attention is primarily on the potential spread of salmon lice and disease and in Norway on how escaped salmon affects wild salmon genetically. The industry has a stated goal of no escapes, and in 2011 Cermaq only experienced one single event during which two fish escaped. The goal of zero escapes was reached in In 2009 the total number of escaped fish was lower than The company will continue its initiatives to prevent escapes. Salmon lice can have a negative effect on migrating smolt, and extensive salmon lice infestations can affect Norwegian sea trout in the areas surrounding the fish farms during the summer. Lice counts at Mainstream s sites in Norway have shown a low level of infestation below the limit at which action needs to be taken, and few treatments were administered in Lice levels at Mainstreams sites in Canada and Chile have also been low. Some of EWOS Norway s trial facilities are located in areas with a higher prevalence of lice, however. All of Cermaq s sites have complied with regulations on salmon lice. On that basis, the board believes that the impact on wild salmon by the company s farming operations was limited in Cermaq monitors the development of available technology that can help minimise the negative environmental impact of fish farming, and the company also relies on the R&D company EWOS Innovation in this process. EWOS Innovation is taking part in the testing of an available model for farming in closed containment, and conclusions can only begin to be drawn when the trial has been completed. Cermaq s initial assessment is that there are still significant challenges that need to be solved before closed containments can become a sustainable solution. Personell As at 31 December 2011 the group employed people (2010: 3 533). Of the group s employees, 760 were employed in Norway and outside Norway. Cermaq ASA employed 47 staff. Six employees were employed in non-core businesses. 52 CERMAQ ANNUAL REPORT 2011

57 All Cermaq employees should enjoy a high level of safety in the workplace. All operative companies must be certified according to the International HES standard OHSAS (see certification status on page 50.) Average absence rate at the group was 3.2 percent (2010: 3.1 percent). The absence rate at Cermaq ASA was 4.2 percent, compared to 0.4 percent in Across the group, a total of 242 work-related injuries were recorded. In 2010 there were 189 injuries. Injuries leading to absence from work totalled 21.6 injuries per 1 million working hours. This was a fall from 24.1 in The board continues to view this result as not satisfactory and efforts for improvement will be intensified. In 2011 training activities accounted for an average 0.7 percent of the working hours of all employees. The figure ranged from 0.5 percent at Mainstream to 3.0 percent at Cermaq ASA. The board has adopted a set of principles stating that companies in the group shall ensure good co-operation with employees and unions, and employees are free to join any union that they may wish. In 2011 around 37 percent of employees in the Cermaq group had collective wage agreements (2010: 34 percent). The proportion of employees with collective wage agreements in Chile was 34 percent (2010: 25 percent). Diversity Cermaq shall have an inclusive working environment as stated in the principles adopted by the board of directors. Discrimination on the basis of ethnic background, nationality, language, gender, sexual identity or religious faith shall not occur. Companies in the group shall promote equal opportunities and fair treatment of all employees. The proportion of female employees in the Cermaq group was 26 percent as at 31 December The proportion of female employees at Cermaq ASA was 30 percent. At the end of 2011 the group management consisted of five persons, of whom four were male and one female. All members of the group management were Norwegians. There are no women amongst the general managers in the group. The management teams across the group counted a total of 15 percent female members (2010: 11 percent). As at the end of 2011 the Cermaq board of directors comprises eight members, of whom five are male and three female. All board members are Norwegians. Of the five board members elected by shareholders, three are men and two are women. Of the board members elected by the employees, two were male and one female at the end of No specific measures were taken to promote anti-discrimination, accessibility or equality in Generally speaking, the board wishes to increase the proportion of female managers by developing in-house talent. Mainstream Canada has entered into an agreement with Ahousaht First Nation about the terms of the company s farming operations in Ahousaht territory. The agreement also covers employment of members of the Ahousaht First Nation. Mainstream Canada currently employs around 80 members of First Nations, many of them from Ahousaht. Shareholder matters As at 31 December 2011 Cermaq ASA had shareholders (2 724 at the end of 2010). The Norwegian government, represented by the Ministry of Trade and Industry, is the largest shareholder with a 43.5 percent stake percent of the shares are held by foreign investors. As at 31 December 2011, Cermaq ASA held treasury shares treasury shares were sold to employees in 2011 under the annual share programme. A total of treasury shares were acquired in Corporate governance The board aims to govern the group s operations in a way that generates value for shareholders while also protecting the environment and our surroundings. The group s principles for corporate governance correspond to the Norwegian Code of Practice for Corporate Governance with only very small number of deviations. The deviations are clearly stated in the board s statement of corporate governance. The statement is available at com, and an account of compliance and non-compliance can be found on page 56 in the annual report. With reference to the Accounting Act 3-3a, paragraph fourteen, cf. the Securities Trading Act 5-8a, the following is stated: According to the company s articles of association the board shall withhold its consent for any acquisition that would result in the holding of the Norwegian State falling below 34 percent. Otherwise, the company s shares are subject to free trade. The rights to shares in the company s employee share scheme are exercised by the employees covered by the scheme. The company is not aware of any agreements between shareholders that restrict the ability to transfer or exercise voting rights for shares. It is not proposed any takeover bid involving the company, and thus none of the company s contracts are affected by any such offer. Future prospects Mainstream Mainstream is expecting to harvest tonnes of salmon in 2012, compared with tonnes in This is an increase of 12.6 percent. Increased production at existing plants in Region XI in Chile and harvesting at new plants in Finnmark, Norway are the main reasons for the volume growth. Mainstream Norway has sold tonnes for 2012 through Fish Pool at an average price of NOK 27 per kg, delivery Oslo. Mainstream Chile has fixed price contracts for 30 percent of the harvest of Coho salmon in the first quarter of Prices are somewhat lower than those achieved in the fourth quarter of Apart from these contracts, Mainstream has no significant fixed price contracts for Mainstream Chile is expecting to release around 10 million Atlantic salmon smolt in 2012, compared with 9 million in The company now has marine farms in regions CERMAQ ANNUAL REPORT

58 Our results: Board of directors report X, XI and XII. Recent analyses from the Norwegian analysis company Kontali indicate a global increase in the harvest of Atlantic salmon of 14 percent ( tonnes in total) in 2012, predominantly through increased slaughter in Norway and Chile. EWOS The increase in production volumes at EWOS in 2012 relates to the continued growth of the Chilean fish farming industry. Growth of between 10 and 15 percent is expected in the Chilean market in The Norwegian market is expected to see growth of between 4 and 6 percent. Other markets are expected to remain relatively stable. With regard to ingredients, good fisheries in recent months have reduced the price of fishmeal, and no significant increase is expected in the first quarter of The price of fish oil is more volatile and also depends on changes in the price of mineral oils. Due to larger quotas and corresponding good fisheries in Peru, the stability of fish oil prices from the last quarter of 2011 is expected to continue throughout the first quarter of In order to meet market demand in 2012, EWOS Norway will be increasing capacity by around tonnes by upgrading all its factories in Norway. The upgrade will be completed before the high season in EWOS functional feeds are still in demand amongst its customers, and despite an expected slight fall in the proportion of functional feeds during the winter season, particularly in Norway, EWOS expects to continue to see good sales of these products in The first quarter and most of the second quarter constitute the low season for EWOS because of low water temperatures in the northern hemisphere. Based on a high proportion of functional feeds combined with an increase in volume in line with market growth, EWOS believes that an annual operating margin of 5 7 percent is within reach. Cermaq Cermaq is well prepared for the future. All of the group s businesses are performing well, and the company has a solid financial structure, which means that the company can grow even in a weak market. The board of directors continues to assess relevant strategic initiatives and will be open to carrying out transactions that create value for shareholders in the long term. The board should like to thank all employees in the Cermaq group for their good work and solid effort in 2011 which lead to a very good result. It is now up to our valued staff to continue to realise opportunities and generate results in the year to come. Oslo, 15. March 2012 Bård Mikkelsen Rebekka Glasser Herlofsen Åse Aulie Michelet Chairman Deputy Chairman Director Helge Midttun Jan Erik Korssjøen Reidun Karlsen Director Director Director (employee elected) Ted Andreas Mollan Jan Helge Førde Tore Valderhaug Director (employee elected) Director (employee elected) Acting Chief Executive Officer 54 CERMAQ ANNUAL REPORT 2011

59 Our results: Board of directors BOARD OF DIRECTORS 1: HELGE MIDTTUN (1955) Director 2: JAN HELGE FØRDE (1967) Employee elected Director 3: REBEKKA GLASSER HERLOFSEN (1970) Deputy chair of the board 4: ÅSE AULIE MICHELET (1952) Director Midttun holds a Master of Science in Economics and Business Administration from Norwegian School of Economics and Business Administration. He was President and CEO of Aker BioMarine ASA and before that President and CEO of Fjord Seafood ASA and President and CEO of Det Norske Veritas AS. Midttun is engaged in various board activities and he is chairman of the board of Rieber & Søn ASA. Midttun has been a board member of Cermaq ASA since May Førde is trained an industry mechanic and project manager. He is head of maintenance at EWOS Florø, and has been employed in EWOS since Førde is leader for EWOS employees organised in the union Leaders, and has been a representative for the EWOS emploees in the EWOS AS board for four years. He was a member of the Cermaq ASA board between 2003 and 2009, and re-entered in May Herlofsen holds a Master of Science in Economics and Business Administration from Norwegian School of Economics and Business Administration. She is CFO in Torvald Klaveness. Herlofsen has been CFO of Noreco ASA and Director Business Development Division in BW Gas ASA. She also has experience from various positions in Enskilda Securities in Norway and London. Herlofsen is also on the board of Handelsbanken Norge. Herlofsen has been a board member of Cermaq ASA since May Michelet holds a cand.pharm degree from Oslo and Zürich. Michelet is CEO of Teres Medical Group. She was CEO of Marine Harvest ASA from 2008 to Michelet has also held international leading positions in GE Healthcare, and was Managing Director of the company from 2004 to In addition she has held leading positions in Amersham and Nycomed. She is chair of board of Photocure ASA and director on the boards of Orkla ASA and Norske Skog ASA. Michelet has been a board member of Cermaq ASA since May : BÅRD MIKKELSEN (1948) Chair of the board 6: JAN ERIK KORSSJØEN (1948) Director 7: REIDUN KARLSEN (1952) Employee elected Director 8: TED ANDREAS MOLLAN (1977) Employee elected Director Mikkelsen graduated from the Military Academy in 1972, the Norwegian School of Management in 1981 and the INSEAD Executive Programme in He has been CEO of Statkraft AS ( ) and Oslo Energi Gruppen, the Ulstein Group, and Widerøe. Mikkelsen is chairman of the Board of Store Norske Spitsbergen Kulkompani AS, Powel AS, Bore Tech AB and Clean Energy Invest AS, and is also a board member of EON AG and Saferoad AS. Mikkelsen has been a board member of Cermaq ASA since May Korssjøen holds a Master degree in Mechanical Engineering from the Norwegian University of Science and Technology. He was CEO of Kongsberg Gruppen from Korssjøen has broad experience from boards both in Norway and internationally. Korssjøen is the chairman of the corporate assembly of Telenor and also chairs Telenor s nomination committee. Korssjøen has been a board member of Cermaq ASA since May Karlsen works in Mainstream Norway with payroll and administration. She joined Mainstream (previously Hammerfest Lakseslakteri) in Former employment was with Finnmark Fylkesrederi and Ruteselskap and with Knudsen Agency (shipping agent) doing accounting, payroll, HR and administration. Karlsen was elected as a deputy board member to the Cermaq ASA board in 2007 and as board member in March Mollan holds a master in fish nutrition from National Institute of Nutrition and Seafood Research (NIFES). He is Chief Nutritionist, responsible for nutrition, raw material documentation and research updating at the head office of EWOS Norway in Bergen. He joined EWOS in Mollan has previously worked as researcher at NIFES. Mollan has been a board member of Cermaq ASA since May CERMAQ ANNUAL REPORT

60 Our results: Corporate Governance table BASIS FOR LONG TERM VALUE CREATION Cermaq s goal is to create value for its owners and the community by operating sustainably in the aquaculture and fish feed production sectors. The business is based on long-term industrial development, in which concern for the natural environment, the community, consumers and employees occupies a central role. The Board of Directors of Cermaq has prepared its corporate governance statement for 2011 in accordance with the Norwegian Code of Practice for Corporate Governance, which was issued on 21 October The structure adheres to the code of practice, using the same section headings and numbering, and the statement covers every point in the code. Deviations from the code are clearly indicated. The company s articles of association, guidelines and routines referred to in this statement can be found on the company s web-site The complete statement from the Board of Directors can be found at cermaq.com Review of how Cermaq satisfies the Norwegian Corporate Governance Board requirements Main points in the Norwegian Code of Practice for Corporate Governance 1. Implementation of the code of practice Yes 2. Business Yes 3. Equity and dividends Yes 4. Equal treatment of shareholders and transactions with close associates Yes Cermaq follows the code: 5. Freely negotiable shares Yes, with deviation regarding the ownership share of the Norwegian government 6. General meeting Yes 7. Nomination commitee Yes 8. Corporate assembly and board of directors: composition and independence Yes, with one minor deviation regarding no formal request to own shares in the company 9. The work of the board of directors Yes 10. Risk management and internal control Yes 11. Remuneration of the board of directors Yes 12. Remuneration of the executive management Yes 13. Information and communication Yes 14. Take-overs Yes 15. Auditor Yes See also: 56 CERMAQ ANNUAL REPORT 2011

61 Our results: Annual report 2011 " CERMAQ GROUP CONSOLIDATED INCOME STATEMENT Notes Operating revenues Cost of materials 18 ( ) ( ) Personnel expenses 7, 8 ( ) ( ) Depreciation 13, 14 ( ) ( ) Other operating expenses 9 ( ) ( ) Gain/(loss) from sale of operations and fixed assets 5, Operating result before unrealised fair value adjustments Unrealised fair value adjustments 19 ( ) Operating result Income from associates Interest income Other financial income Fair value adjustment (5 883) Interest expenses 10 (48 989) (55 794) Net gains/(losses) on financial assets and liabilities Other financial expenses 10 (19 468) (25 260) Net foreign exchange gains/(losses) 10 (14 362) (3 626) Financial items, net 10 (38 791) (39 521) Result before tax Income tax expense 11 ( ) ( ) Result for the year Attributable to: Owners of the parent Non-controlling interests Earnings per share Basic and diluted EPS CERMAQ ANNUAL REPORT

62 Our results: Annual report 2011 " CERMAQ GROUP STATEMENT OF COMPREHENSIVE INCOME Net result total operations Exchange differences on translation of foreign operations Cash Flow hedges - effective part, net of tax Available-for-sale investments - change in fair value (1 008) (49 567) Total other comprehensive income Total comprehensive income Attributable to: Owners of the parent Non-controlling interests CERMAQ ANNUAL REPORT 2011

63 " CERMAQ GROUP CONSOLIDATED FINANCIAL POSITION AS OF 31 DECEMBER Notes ASSETS Licences Goodwill Deferred tax asset Other Intangible assets Total intangible assets Property, plant and equipment Investments in associates Investments in shares Other non-current receivables Total financial fixed assets Total non-current assets Inventory Biological inventory Accounts receivable from customers Other current receivables Bank deposits, cash in hand, etc Total current assets TOTAL ASSETS EQUITY AND LIABILITIES Share capital Treasury shares 22 (37) (46) Result for the year Total equity attributable to owners of the parent Non-controlling interests Total equity Pension liabilities Deferred tax Total provisions Non-current interest bearing debt Other non-current liabilities Total non-current liabilities Current interest bearing debt Accounts payable Other current liabilities Total current liabilities TOTAL EQUITY AND LIABILITIES Oslo, 15. March 2012 Bård Mikkelsen Rebekka Glasser Herlofsen Åse Aulie Michelet Chairman Deputy Chairman Director Helge Midttun Jan Erik Korssjøen Reidun Karlsen Director Director Director (employee elected) Ted Andreas Mollan Jan Helge Førde Tore Valderhaug Director (employee elected) Director (employee elected) Acting Chief Executive Officer CERMAQ ANNUAL REPORT

64 Our results: Annual report 2011 " CERMAQ GROUP CASH FLOW STATEMENT Notes Ordinary result before tax (Gain)/loss on shares, tangible and intangible assets (923) (97 013) Depreciation and impairment 13, Impairment and other fair value adjustments 10 (30 103) (64 529) Change in fair value of biological assets ( ) Taxes paid ( ) ( ) Income from associates 15 (36 917) (31 634) Dividends received from associates Change in stock, accounts receivable and accounts payable ( ) ( ) Change in other short-term operating assets and liabilities Net cash flow from operating activities Proceeds from sale of property, plant, equipment (PPE) and intangible assets 13, Purchases of PPE and intangible assets 13, 14 ( ) ( ) Proceeds from sale of operations, net of cash disposed 5, Purchases of operations, net of cash acquired 5, 15 (11 801) (22 154) Proceeds from sale of shares and other investments Purchases of shares and other investments 16 (678) ( ) Net cash flow from investing activities ( ) Change interest bearing debt 23 ( ) ( ) Interest received Interest paid 23 (46 264) (54 263) Paid other financial items (19 867) Paid dividends (incl. payments to non-controlling interests) ( ) ( ) Change in treasury shares (54) Net cash flow from financing activities ( ) ( ) Foreign exchange effect Net change in cash and cash equivalents for the year (19 412) Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year CERMAQ ANNUAL REPORT 2011

65 " CERMAQ GROUP STATEMENT OF CHANGES IN EQUITY Share capital Treasury shares Other reserves Conversion differences Total equity attributable to owners of the parent Noncontrolling interest Total equity Equity 1 January (32) ( ) Total comprehensive income Change in treasury shares - (14) (40) - (54) - (54) Dividend paid - - ( ) - ( ) (1 101) ( ) Equity 31 December (46) (80 004) Equity 1 January (46) (80 004) Total comprehensive income Change in treasury shares Dividend paid - - ( ) - ( ) (11 086) ( ) Transactions with non-controlling interests Equity 31 December (37) (3 283) CERMAQ ANNUAL REPORT

66 Our results: Annual report 2011 " CERMAQ GROUP NOTES TO THE CONSOLIDATED FINANCIAL ACCOUNTS NOTE 0 " Content Note Name Page 01 Corporate information Accounting principles Significant accounting judgments and estimates Company structure Business combinations and significant company transactions Information on segments and geographic distribution Wages and personnel expenses Pension expenses and pension obligations Other operating expenses Financial income/expenses Taxes Non-controlling interests Intangible assets Property, plant and equipment Investments in associated companies Investments in other companies Other receivables Inventory Biological assets Accounts receivable from customers Liquid assets Share information Interest bearing debt Financial risk management Other non-interest bearing current liabilities Commitments Mortgages and guarantees Transactions with related parties Subsequent events CERMAQ ANNUAL REPORT 2011

67 NOTE 1 " Corporate information Cermaq ASA is a company incorporated and domiciled in Norway whose shares are publicly traded on the Oslo Stock Exchange (OSE). The address of its registered office and the Group s principal places of business are disclosed at the end of the annual report. The principal activities of the company and its subsidiaries are described in note 6. The consolidated financial statements of Cermaq ASA for the year ended 31 December 2011 were authorised for issue in accordance with a resolution of the Board of Directors on 15 March NOTE 2 " Accounting principles 2.1 BASIS OF PREPARATION Statement of compliance The consolidated financial statements of Cermaq ASA and its subsidiaries have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union, relevant interpretations and the additional Norwegian disclosure requirements following the Norwegian Accounting Act applicable as at 31 December Basis of measurement The consolidated financial statements are prepared under the historical cost convention except for the following: derivative financial instruments are measured at fair value available-for-sale financial assets are measured at fair value less costs to sell biological assets are measured at fair value less costs to sell The methods used to calculate fair values are discussed in the principles below and in the relevant note. The accounting principles are applied consistently for all years presented. Presentation currency Figures are presented in Norwegian kroner and all values are rounded to the nearest thousand, except where otherwise indicated. 2.2 ADOPTION OF NEW AND REVISED STANDARDS AND INTERPRETATIONS The accounting policies adopted are consistent with those of the previous financial year. In addition, the Group has adopted the following new and amended Standards and interpretations issued by the IASB and approved by the EU that are relevant to its operations and effective for annual reporting periods beginning on 1 January 2011: Amended IAS 24 Related Party Disclosures Improvements to IFRSs issued May 2010 The amended IAS 24 clarifies the concept of related parties with the impact of who are related and gives a simplification of the requirements for related party through state ownership. The adoption of the standards and interpretations described above has had an immaterial impact on the Group s consolidated financial statements for Please refer to the end of the principles section for approved IFRSs and IFRICs with a future effective date. 2.3 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation principles The consolidated accounts include the parent company Cermaq ASA and companies where Cermaq ASA has a direct or indirect ownership of more than 50 percent of the voting capital and/or a controlling influence. Companies where Cermaq ASA has a significant influence (normally defined as ownership interest between 20 and 50 percent of the voting capital) over operations and financial decisions have been incorporated into the Group accounts by means of the equity method. In accordance with this principle, the share of the profit or loss from these companies for periods where significant influence is effective is included as income from associates. Investments are recognised at cost and include goodwill identified on acquisition, net of any accumulated impairment losses. The purchase method is applied when accounting for business combinations. Companies that have been acquired during the year have been consolidated from date of acquisition. Companies that have been sold during the year have been consolidated up until the date of transfer. Consolidated accounts have been prepared on the basis of uniform principles, and the accounting principles of subsidiaries and associates are consistent with the policies adopted by the Group. The accounting principles have been consistently applied to all the years presented. All significant transactions and balances between Group companies have been eliminated. Classification principles Liquid assets are defined as cash and bank deposits. The Group s cash pool systems are netted, with cash and overdrafts within the same cash pool system presented net. Other assets which are expected to be realised within the entity s normal operating cycle or within 12 months from the balance sheet date, are classified as current assets. Other assets expected to be realised over a longer period are classified as non-current assets. Liabilities that are expected to be settled in the entity s normal operating cycle or are due to be settled within 12 months after the balance sheet date, are classified as current liabilities. Other liabilities expected to be settled over a longer period are classified as non-current liabilities. Proposed dividend is not recognised as liability until the Group has an irrevocable obligation to pay the dividend, which is normally after approval at the annual general assembly. Cermaq s key measurement is EBIT pre fair value adjustments on live biomass. Fair value changes on biological assets are presented on a separate line within the income statement. This presentation CERMAQ ANNUAL REPORT

68 Our results: Annual report 2011 has been chosen to clearly identify earnings on sales during the period. Foreign operations and foreign currency translation The functional currency of the subsidiary companies is the local currency in the country in which they are based, except for the subsidiaries in Chile which use the US dollar (USD) as their functional currency. On consolidation, the financial statements of foreign operations, including any excess values, are translated into Norwegian kroner using exchange rates at the year end for the financial position and average monthly exchange rates over the year for the income statement. Foreign currency differences are recognised in other comprehensive income. Foreign currency transactions All foreign currency transactions are converted to the respective functional currencies at exchange rates at the dates of the transactions. All monetary items denominated in foreign currency are translated to the functional currency at the exchange rate at the balance sheet date. Realised and unrealised currency gains and losses are recognised as financial items in the income statement. Revenue recognition Sale of goods The sale of all goods is recorded as operating revenue at the time of delivery which is the point at which risk passes to the customer. Revenue is measured at the fair value of the consideration received or receivable. Discounts, other price reductions, taxes etc., are deducted from operating revenues. Transfers of risks and rewards vary depending on the individual terms of the contract of sale or terms with the specific customer. Feed companies Risk is transferred to the customer at delivery which could be either at factory gate if the customer collects the goods or at the customer s premises, depending on the terms of the sales agreement. Farm companies The point when risk passes to the customer depends on the delivery terms specified in the sales agreement. Delivery terms vary between countries and between customers. Normally where delivery is made by vehicle owned or hired by the farm companies, delivery is complete and risk passes once delivery has been made to the buyers specified address. Where delivery is made by other means, risk normally passes when the goods are handed over to the relevant carrier. Interest income Interest income is recognised as incurred, using the effective interest method. Dividend Dividend income is recognised in profit and loss on the date that the Group s right to receive payment is established. Fair value on biomass Live fish is measured at fair value. For fish where little biological transformation has taken place since initial cost was incurred or the transformation is not expected to impact the price materially, cost is used as an approximation for fair value. This approximation is used up to 1 kilo of live weight. Mature fish is measured using the most relevant selling price available at the reporting date for harvested fish less cost to sell. Mature fish is defined as 4 kilo and higher live weight. Atlantics in in the interval from 1 to 4 kilo live weight is defined as immature fish. The corresponding sizes for Coho and trout are from 1 to 2.5 kilo live weight. No efficient market exists for immature fish. Measurement for fair value is performed using a fair value model. The model uses the most relevant forward prices at the balance sheet date, preferably quoted forward prices where those are available and/or the most relevant prices at the expected time of harvest. Estimated actual cost per site at completion is used to measure the expected margin at the time the fish is defined as mature. The expected margin is recognised gradually based on weight sizes with the starting point being from 1 kilo live weight, where biological transformation is taking place. As an example, a fish of 2 kilo live weight will include one third of the expected margin. If the expected margin at the point of harvest is a loss, the full amount will be included as a negative fair value adjustment and being an indicator for a potential write-down of the historical cost. In note 19 the biological assets are specified showing both the incurred cost and the fair value adjustment. Changes in estimated fair value on biomass are recognised in the income statement. The fair value adjustment is reported on a separate line; Unrealised fair value adjustments. Fixed price contracts The Group enters into long-term sale contracts for delivery of salmon products. The contracts are signed based on the assumption that delivery of salmon products will take place. These contracts are not tradable. Provisions are made for onerous fixed price contracts to the extent where the Group is obliged to sell salmon products at a lower price than the market price used for the fair value adjustments of biomass. Derivative financial instruments The Group holds some financial derivative instruments. Derivatives are initially recognised at fair value. Changes in fair value of derivatives are recognised through profit and loss, unless they qualify for hedge accounting. The Group s criteria for classifying a derivative as a hedging instrument for accounting purposes follows specific guidance in IAS39 and is as follows: (1) there is adequate documentation when the hedge is entered into that the hedge is effective, (2) the hedge is expected to be highly effective in that it counteracts changes in the fair value or cash flows from an identified asset or liability, (3) for cash flow hedges, the forthcoming transaction must be highly probable, (4) the effectiveness of the hedge can be reliably measured, and (5) the hedge is evaluated regularly and has proven to be effective. For the purpose of hedge accounting, hedges are classified as cash flow hedges where they hedge exposure to variability in cash flows that is attributable to a particular risk associated with a forecast transaction. For cash flow hedges which meet the conditions for hedge accounting, any gain or loss on the contract 64 CERMAQ ANNUAL REPORT 2011

69 that is determined to be an effective hedge is recognised in other comprehensive income and the ineffective portion is recognised in the income statement. All financial instruments are recognised in the balance sheet at fair value when the entity becomes a party to the contractual provisions of the instrument. The instrument is derecognised when the contractual rights expires or contractual rights and obligations are transferred. Derivative financial instruments are classified as current assets or liabilities in the financial position. Non-derivative financial instruments Other financial assets of the Group are classified into the following categories: at fair value through profit and loss, held-tomaturity investments, loans and receivables and available-for-sale financial assets. Management determines the classification of its financial assets at initial recognition. Other financial assets are initially recognised at fair value, with subsequent measurement as described below (only listed those relevant to the Group): Loans and receivables are measured at amortised cost using the effective interest method, less any impairment. Available-for-sale financial assets are measured at fair value with fair value changes except impairment, recognised in other comprehensive income. Borrowing cost Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset are capitalised as part of the cost of that asset. Other borrowing costs are recognised as an expense when incurred. Interest bearing loans are measured at amortised cost using the effective interest method. Inventories Raw materials and purchased commodities are valued at the lower of historical cost and net realisable value in accordance with the FIFO principle. Finished goods in feed companies are feed ready for deliverance to customer, valued at the lower of cost and net realisable value. The cost of finished goods includes any processing costs that have incurred. Processing costs consist of logistics, handling and storage costs. Cermaq values all live biomass (fish) inventory at fair value less costs to sell. Finished goods/frozen inventory within the farming division is recognised at the lower of cost (fair value at the point of harvest) and net realisable value. Tangible fixed assets and depreciation Tangible fixed assets are carried at cost less accumulated depreciation and accumulated impairment losses. Allowances are made for depreciation from the point in time when an asset is placed in operation, and depreciation is calculated based on useful life of the asset considering estimated residual value, normally in accordance with the following guidelines: Asset group Depreciation rate Furniture and fixtures 20 33% Computer equipment 20 33% Vehicles 15 20% Machinery and production equipment 10 20% Plant 3 5% Office buildings and dwellings 2 5% Different depreciation rates are applied to an asset where components of the asset are characterised by having different useful economic lives. Land and plant under construction are not depreciated. For asset under construction, depreciation is charged once the asset is ready for its intended use. Gains or losses from sale of tangible assets are calculated as the difference between sales price and carrying value at date of sale. Gains and losses from sale of tangible fixed assets are recorded as operating revenues or losses. Carrying values of plant and equipment are reviewed for impairment when events or changes in circumstances indicate that carrying amount may not be recoverable. If any such indication exists and where the carrying value exceeds the estimated recoverable amount, the assets or cash generating units are written down to their recoverable amount. Depreciation methods, residual values and estimated useful life are reviewed annually. Intangible assets Expenditure on research activities are expensed as incurred. Development costs are only capitalised if specific criteria are met. In 2011, all development costs have been expensed. Payments for licences, rights and other intangible assets are depreciated in accordance with the useful life of such licences or rights. The substance of fish farming licences in the Group s major markets is that they have an indefinite life. The uncertainty related to renewal of existing licences by the authorities in each region is not considered to alter the indefinite useful life of these assets and therefore licences are not amortised. Licences, which are obtained as part of an acquisition, are valued using values established by similar transactions in similar locations. Where a business is acquired and the consideration for the business exceeds the net fair values of the identifiable assets, liabilities and contingent liabilities, the difference, provided it represents a commercial value, is identified as goodwill on the balance sheet. Goodwill is carried at cost less accumulated impairment write downs. Goodwill is not amortised. At acquisition date goodwill is allocated to each of the cash generating units expected to benefit from the combination s synergies. Impairment is determined by assessing the recoverable amounts of the cash generating unit to which the goodwill relates. In order to determine the Group s cash generating units, assets are grouped together at the lowest levels for which there are separately identifiable, mainly independent, cash flows. Recoverable amounts are calculated using a value in use approach, rather than fair value less costs to sell. Carrying value of goodwill and licenses with an indefinite life is CERMAQ ANNUAL REPORT

70 Our results: Annual report 2011 reviewed for impairment annually or more frequently, if there are indicators of a fall in value below carrying amount. Pension costs and obligations Group companies operate various pension schemes and these include both defined benefit schemes and defined contribution schemes. In 2006, the parent company and all 100 percent owned Norwegian companies in the Group transferred to defined contribution plans for kollektiv tjenestepensjon. In 2007, the same Norwegian companies in the Group transferred from funded to unfunded defined benefit plans for Top Hat-schemes (salary above 12 G) for employees in the scheme at 31 December New employees/ employees with a salary above 12 G after 1 January 2007 have a defined Top Hat-contribution scheme. In 2007, a UK subsidiary transferred from defined benefit plans to defined contribution schemes. The defined benefit scheme is closed for future accrual but established under a trust, which means that its assets are held separately from the company s, although any funding shortfall must be financed by the company. The companies payments to defined contribution schemes are recognised in the income statement the year the contribution applies, with no further liability for the Group. In defined benefit plans, the pension commitments and pension costs are determined using a linear accrual formula. A linear accrual formula distributes pension obligations in a straight line over the accrual period. The employees accrued pension rights during a period are defined as the pension costs for the year. All pension costs are recognised in the income statement as personnel expenses. Pension obligations are calculated on the basis of long-term discount rates and long-term expected yield, wage increases, price inflation and pension adjustment. Pension funds are recognised net of their fair value and the pension obligations to which they relate. A surplus is recognised to the extent that it can reasonably be utilised. Changes in calculated pension obligations due to changes in pension plans are accrued over the remaining contribution vesting period. Changes in the underlying obligations and assets of pension funds as a result of changes in estimates are accrued over the average remaining useful working life of employees for the portion of the deviations that exceed 10 percent of gross pension obligations or pension assets. The discount rate used in calculations is determined based on the 10 year government bond rate in each country where the Group has pension obligations. Share-based remuneration The Group has share-based payments to key personnel. The fair value of share options is calculated at grant date. The valuation is based on well known valuation models accommodating the characteristics of the options in question. The fair value calculated at grant date is charged against profit and loss over the vesting period of the options, with a corresponding increase in equity. The amount recognised as an expense is adjusted to reflect the actual number of share options that vest. The vesting period is the period from granting the options until the options are fully vested. Taxation Income tax expense consists of tax payable and changes in deferred tax. Tax payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the income statement following items of income and expense which are not taxable/deductible in the year or taxable/deductible in future years. Tax payable is calculated using tax rates using approved taxrates or substantively inacted at the reporting date. Deferred tax is recognised in respect of all temporary differences and accumulated tax losses carried forward at the balance sheet date which implies increased or decreased tax payable when these differences reverse in future periods. Temporary differences are differences between taxable profits and results that occur in one period and reverse in a later period. Deferred tax is calculated applying the nominal tax rates (at the balance sheet date for each relevant tax jurisdiction) to temporary differences and accumulated tax losses carried forward. A net deferred tax asset is only recognised when, on the basis of all available evidence, it is more likely than not that there will be taxable profits from which the future reversal of the underlying timing differences can be deducted. Government grants Government grants are not recognised until there is reasonable assurance that the Group will comply with the conditions attaching the grants and that the grants will be received. The grants are recognised in the income statement in accordance with the progress in the projects to which they are related. Discontinued operations A discontinued operation is a component of the Group s business that represents a separate major line of business or geographical area of operations that has been disposed of or is held for sale. Classification as a discontinued operation occurs upon disposal or when the operation meets the criteria to be classified as held for sale, if earlier. When an operation is classified as discontinued operation, the comparative statement of income, comprehensive income and cash flow is re-presented as if the operation had been discontinued from the start of the comparative period. Share capital Ordinary shares Ordinary shares are classified as equity. Costs directly attributable to the issue of ordinary shares and share options are recognised as a deduction from equity, net of any tax effects. Repurchase of share capital (treasury shares) When share capital recognised as equity is repurchased, the amount of the consideration paid, which includes directly attributable costs, is recognised as a deduction from equity net of tax effects. Repurchased shares are classified as treasury shares and are presented as a deduction from total equity. When treasury shares are sold or reissued, the amount received is recognised as an increase in equity, and the resulting surplus or deficit of the transaction is transferred to/from retained earnings. 66 CERMAQ ANNUAL REPORT 2011

71 Non-controlling interests The share of the profit or loss after tax attributable to noncontrolling interests is presented on a separate line after the Group s profit for the year. The share of the equity attributable to non-controlling interests is presented on a separate line within Group equity. Cash flow statement The Group s cash flow statement analyses the Group s overall cash flow by operating, investment and financing activities. The acquisition of subsidiaries is shown as an investment activity for the Group and is presented separately with deductions for any cash reserves in the acquired company. The statement shows the effect of operations on the Group s liquid asset balances. Statement of changes in equity The statement of changes in equity only includes transactions with the owners and is presented after the statement of financial position. IFRSs and IFRIC interpretations not yet effective At the date of authorisation of financial statements, the following standards and interpretations were issued, but not yet effective. These pronouncements have not been applied in preparing these financial statements: Amendment to IFRS 7 Financial Instruments. The amendments to IFRS 7 imply additional disclosures to enhance the transparency of disclosure requirements for the transfer of financial assets. The amendments will assist users to understand the implications of transfers of financial assets and the potential risks that may remain with the transferor. IFRS 7 is effective from 1 July 2011, but the standard is not yet approved by the EU. The Group expects to apply IFRS 7 as of 1 July The potential impact of the standard on the Group s accounts has not been concluded. IFRS 9 Financial Instruments. IFRS 9 replaces the classification and measurement rules in IAS 39 Financial Instruments Recognition and measurement for financial instruments. According to IFRS 9 financial assets with basic loan features shall be measured at amortised cost, unless one opts to measure these assets at fair value. All other financial assets shall be measured at fair value. IFRS 9 is effective from 1 January 2015, but the standard is not yet approved by the EU. The Group expects to apply IFRS 9 as of 1 January The potential impact of the standard on the Group s accounts has not been concluded. IFRS 10 Consolidated Financial Statements. IFRS 10 replaces the parts of IAS 27 that contain consolidated financial statements and is based on one single control model to be applied on all investments. IFRS 10 is effective from 1 January 2013, but the standard is not yet approved by the EU. The Group expects to apply IFRS 10 as of 1 January The impact of the standard on the Group s accounts is expected to be minimal or none. IFRS 12 Disclosure of Interests in Other Entities. IFRS 12 combines all relevant disclosure requirements from IAS 27, IAS 28 and IAS 31. Additionally, further information is required as disclosures. IFRS 12 is effective from 1 January 2013, but the standard is not yet approved by the EU. The Group expects to apply IFRS 12 as of 1 January The potential impact of the standard on the Group s accounts has not been concluded. IFRS 13 Fair Value Measurement. IFRS 13 provides guidance on how to measure fair value where its use is already required or permitted by other standards within IFRSs. IFRS 13 is effective from 1 January 2013, but the standard is not yet approved by the EU. The Group expects to apply IFRS 13 as of 1 January The implementation of IFRS 13 will be relevant for the items fair value of biomass and hedge accounting of salmon derivatives. The potential impact of the standard on the Group s accounts has not been concluded. Amendment to IAS 1 Presentation of Financial Statements. The amended IAS 1 require companies to group together items within other comprehensive income (OCI) that may be reclassified to the Income Statement in future periods. IAS 1 is effective from 1 July 2012, but the standard is not yet approved by the EU. The Group expects to apply IAS 1 as of 1 July Amendment to IAS 19 Employee Benefits. The amended IAS 12 implies the corridor method is no longer permitted and a limitation of the changes in the net assets (liabilities) in the Income Statement to net interest income (expense) and the service cost. Expected return on plan assets will be based on the rate used to discount the defined benefit obligation. The revised IAS 19 is effective from 1 January 2013, but is not yet approved by the EU. The Group expects to apply IAS 12 from 1 January The change is expected to have an insignificant impact on the Group accounts. Amendment to IAS 32 Financial Instruments. The amended IAS 32 clarifies the definition of the meaning of currently has a legally enforceable right of set-off and furthermore that some gross settlement systems may be considered equivalent to net settlement. The amended IAS 32 is effective from 1 January 2014, with retrospective application, but is not yet approved by the EU. The Group expects to implement the amended standard from 1 January The potential impact of the standard on the Group s accounts has not been concluded. IASB s annual improvement project was published in June 2011 as exposure drafts and implies expected changes in 5 standards. The improvements are expected to be effective for annual periods beginning on or after 1 January 2013, but are not yet final. There are separate transition provisions for each standard. The Group expects to implement the changes from 1 January These changes are expected to have an insignificant impact on the Group accounts. IFRS 11 Joint Arrangements. IFRS 11 replaces IAS 31 and removes the option to account joint operations based on the proportionate consolidation method. IFRS 11 is effective from 1 January 2013, but the standard is not yet approved by the EU. The Group expects to apply IFRS 11 as of 1 January The impact of the standard on the Group s accounts is expected to be none. CERMAQ ANNUAL REPORT

72 Our results: Annual report 2011 NOTE 3 " Significant accounting judgements and estimates Preparation of the accounts requires that management make judgements, estimates and assumptions that affect the application of accounting policies and reported amounts of assets, liabilities, income and expenses. The final values realised may deviate from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised. The judgements and estimates which are considered to be most significant for the Group are set out below: Goodwill and intangible assets Carrying value of goodwill and intangible assets with indefinite lives is reviewed for impairment annually or more frequently if there are indicators of a fall in value below carrying amount. This requires an estimation of value in use of the cash generating units to which the goodwill and intangible assets are allocated. Identifying the value in use requires the Group to make an estimate of the expected future cash flows from the cash generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows. Expectations about future cash flows will vary between periods. Changes in market conditions and expected cash flows may cause impairments in the future. The major assumptions which have an impact on present value of projected cash flows, are the discount rate, the estimated price of salmon in each of the Group s markets, cost of production for each product, salmon production volumes and that there will continue to be a market for salmon produced in the geographical areas where the assets are located. More details are given in note 13, Intangible assets. Deferred tax Deferred tax assets related to tax losses carried forward are recognised to the extent that expected future income for the respective company will be sufficient over the medium term to utilise those tax losses. This requires an estimate to be made of the expected future income of the company concerned. Estimates of future income may change over time and this could result in changes to the carrying value of deferred tax assets. Details of unrecognised deferred tax assets are given in note 11. Fair values on acquisitions The cost price for acquired shares is allocated to identifiable assets and liabilities at their estimated fair values at the time of acquisition. Any excess value beyond that allocated to assets and liabilities is recognised in the financial position as goodwill. To determine fair values on acquisition, estimates must be made. Commonly, an active market does not exist for assets and liabilities obtained through acquisitions and therefore alternative methods must be used to determine fair values. If fair value of assets acquired exceeds the consideration paid, the difference is recognised in the income statement. The allocation of the consideration to identifiable assets and liabilities is made on a provisional basis. The values allocated are reviewed based on improved knowledge of operations in subsequent periods, but no later than 12 months after the acquisition. Fair value of biological assets In accordance with IAS 41, the Group records inventories of live fish at fair value less costs to sell. Difference between fair value of live inventory at the beginning and the end of the period is recognised as a net positive or negative fair value adjustment in the income statement. The estimate of fair value is based on the most relevant forward prices for salmon at the balance sheet date in the respective markets in which the Group operates. The fair value calculation includes estimates of volumes, quality, mortality and normal cost of harvest and sale. The income or loss which will be recognised on sale may differ materially from that implied by the fair value adjustment at the end of a period. The fair value adjustment on inventories has no cash impact and does not affect the result of operations before unrealised fair value adjustments.. 68 CERMAQ ANNUAL REPORT 2011

73 NOTE 4 " Companies in the Group The consolidated accounts for 2011 include the following subsidiaries and associates of significant size: (local currency) Registered Currency Nominal share capital Company name Parent company Cermaq ASA Norway NOK The Group s ownership interest and voting share Subsidiaries Statkorn Aqua AS Norway NOK % EWOS AS Norway NOK % EWOS Innovation AS Norway NOK % Mainstream Norway AS Norway NOK % EWOS Ltd. Scotland GBP % EWOS Canada Ltd. - Group 1) Canada CAD % EWOS Chile Alimentos Ltda. Chile USD % Mainstream Chile S.A Chile USD % EWOS Vietnam JSC Vietnam VND % Norgrain AS Norway NOK % Associated companies Denofa AS 2) Norway NOK % 1) Activities in Canada are organised in one legal entitiy, which includes Mainstream Canada. 2) Ownership through Norgrain AS. NOTE 5 " Business combinations and significant company transactions YEAR 2011 The following significant acquisitions and sales of companies took place during the year: Date of asquisition / sale Transaction cost / (proceeds) Company name Hordafôr AS (66 000) EWOS Vietnam JSC EWOS Vietnam On 17 December 2010, Cermaq entered into an agreement with Anova Corporation Group (Anova) to acquire 51 percent of the shares in the company Advance Nova Aquafeed in Vietnam, a feed producer for farmed white fish species like pangasius and tilapia. The transaction was completed on 1 April 2011 by a total consideration of NOK 29.5 million via a combination of share acquisition from Anova and capital contribution in the acquired company. Cermaq gained control through the shareholder agreement. The value was set based on fair value after negotiations between the parties. The company has been renamed to EWOS Vietnam JSC. Obtaining control of EWOS Vietnam enables Cermaq to enter into the non-salmonids feed production, in particular the important pangasius farming market. Through EWOS vast competence and experience related to food safety and sustainability in salmonid feed production, EWOS Vietnam should be well positioned to contribute significantly to the expected future growth in the Vietnamese pangasius farming industry. The purchase price allocation is deemed as final. The carrying values at the date of acquisition are reported in accordance with IFRS. The net assets acquired in the transaction, and the goodwill arising, are as follows: CERMAQ ANNUAL REPORT

74 Our results: Annual report 2011 EWOS Vietnam carrying amount at transaction date Fair value adjustments Total fair values at transaction date ASSETS Property, plant and equipment Financial fixed assets Total non-current assets Inventory Accounts receivable Other current receivables Cash and cash equivalents Total current assets Total assets LIABILITIES Deferred tax Non-current interest bearing liabilities Total non-current liabilities Current interest bearing liabilities Accounts payable Other current liabilities Total current liabilities Total liabilities Net assets Net assets acquired Goodwill Total consideration The excess value allocated to Property, plant and equipment is related to a leasehold land and is determined based on an external valuation report. The land has a remaining term of 47 years and is depreciated. The goodwill arising on the acquisition of EWOS Vietnam is mainly attributable to deferred tax liabilities related to excess values. Expenses related to the transaction have been expensed as incurred. EWOS Vietnam has been consolidated in Cermaq Group accounts from 1 April From the time of consolidation until 31 December 2011, EWOS Vietnam contributed with revenues of NOK 85.5 million and a loss after taxes of NOK 4.8 million. This does not include Cermaq s interest expenses related to financing the acquisition. YEAR 2010 The following significant acquisitions and sales and of companies took place during the year: Date of asquisition / sale Transaction cost / (proceeds) Company name Ranfjord Fiskeprodukter AS Mainstream Scotland Ltd ( ) Marine Farms ASA ( ) The subsidiary Mainstream Norway AS acquired percent of the shares in Ranfjord Fiskeprodukter AS in August Please refer to note 15 for the Group s share of the 2010 net profit and other financial information for the company. 70 CERMAQ ANNUAL REPORT 2011

75 Cermaq ASA entered into an agreement to sell its farming and processing operations in Scotland, Mainstream Scotland Ltd., to Morpol ASA in August 2010 for a enterprise value of NOK 350 million. The sale resulted in an accounting gain of NOK 69.8 million. On 14 September 2010, Cermaq ASA achieved through several transactions an ownership of 43 percent in Marine Farms ASA and announced its intent to issue a mandatory offer for the remaining shares in the company. On 17 September 2010, the Group announced that Cermaq ASA had entered into an agreement to sell all its shares in Marine Farms ASA to Morpol ASA for a total consideration of NOK 292 million or NOK per share. The sale resulted in an accounting gain of NOK 61.6 million. NOTE 6 " Information on segments and geographic distribution The Group has two reportable segments in accordance IFRS 8 Operating segments. The Group s main strategic business area is; Aquaculture, which consists of two segments; fish feed production and fish farming. The segment information is reported in accordance with the reporting to Cermaq Central Management Team, which is defined as the chief operating decision-makers. Fish feed and Fish farming are managed separately as each segment is considered to be a strategic business unit. Separate reports are prepared for the operating segments, and corporate management evaluates the results, cashflow and resource allocation continuously. Segmental information is presented in these accounts. Cermaq s other activities consist of operations carried out through parent company Cermaq ASA, the Agri subsidiary Norgrain AS and associated companies. The Group evaluates operations based on the operating profit or loss and cash flows of the strategic business units. Intercompany sales and transfers between operations take place at market prices. Fish feed Fish farming Other activities External sales Internal sales Operating revenues Depreciation ( ) ( ) ( ) ( ) (3 279) (4 870) EBIT pre fair value (49 913) Fair value adjustments (17 552) ( ) Operating result (49 913) Income from associates Tax on ordinary result ( ) ( ) (98 876) ( ) Net income/(loss) Total Assets Intangible assets Total Liabilities Capital expenditure Investments in businesses CERMAQ ANNUAL REPORT

76 Our results: Annual report 2011 Eliminations Consolidated External sales (1 242) (253) Internal sales ( ) ( ) - - Operating revenues ( ) ( ) Depreciation - - ( ) ( ) EBIT pre fair value (20 016) Fair value adjustments ( ) Operating result (5 794) Income from associates Tax on ordinary result (52) ( ) ( ) Net income/(loss) Total Assets ( ) ( ) Intangible assets - (27 771) Total Liabilities ( ) ( ) Capital expenditure Investments in businesses Group operating revenues by the location of the individual customers Country Norway Chile USA Japan United Kingdom Canada Rest of Europe Other countries Total Total assets per country Country Norway Chile United Kingdom Canada Vietnam Total Total capital expenditure per country Country Norway Chile United Kingdom Canada Vietnam Total capital expenditure CERMAQ ANNUAL REPORT 2011

77 NOTE 7 " Wages and other personnel expenses Wages and salaries including holiday pay National insurance contributions Pension costs Other staff expenses Total wages and other personnel expenses The number of employees in the Cermaq Group at 31 December 2011 was persons (2010: persons). The number of manyears during the year in the Group was (2010: man-years). Remuneration key management personnel The Cermaq Central Management Team (CCMT) and the Cermaq Board of Directors were entitled to the following remuneration: 2011 Salary Bonus Other remuneration Total paid remuneration Pension cost 5) Geir Isaksen 1) Geir Sjaastad Tore Valderhaug 2) Kjell Bjordal Synne Homble Geir Molvik 4) Total Salary Bonus Other remuneration Total paid remuneration Pension cost 5) Geir Isaksen 1) Geir Sjaastad Tore Valderhaug 2) Steven Rafferty 3) Kjell Bjordal Synne Homble Geir Molvik 4) Total ) Geir Isaksen resigned from his position as Chief Executive Officer (CEO) 31 August In addition to paid salary in 2011, it was paid out a previously expensed Top-hat pension of NOK 2,7 million. 2) Tore Valderhaug assumed his position as Chief Financial Officer (CFO) 1 November Mr. Valderhaug was appointed acting CEO from 25 July 2011 and combined it with his CFO position until 19 March ) Steven Rafferty resigned from his position as Chief Operating Officer (COO) Farming 31 March ) Geir Molvik assumed his position as COO Farming 1 June Mr. Molvik was previously Managing Director of EWOS AS. 5) Pension cost is this year s service cost and payments to defined contribution schemes. The Board of Directors Board fee 2011 Board fee 2010 Bård Mikkelsen Chairman of the Board 1) Rebekka Glasser Herlofsen Deputy Chairman 2) 3) 4) Astrid Sørgaard 3) 5) Helge Midttun 3) 4) Jan Erik Korssjøen 4) Åse Aulie Michelet 3) 6) Reidun Karlsen employee elected 4) Terje Rekdal employee elected 5) Ted Andreas Mollan employee elected 4) Jan Helge Førde employee elected 6) 94 - Total ) Chairman of the Board from Annual General Meeting in May ) Deputy Chairman from Annual General Meeting in May ) Included in the total Board fee for 2011 is compensation related to Audit Committee meetings. Annual Audit Committee fee is NOK ) Board member from Annual General Meeting in May ) Resigned from the Board in May CERMAQ ANNUAL REPORT

78 Our results: Annual report 2011 Employee elected directors have in addition received ordinary salaries from the companies where they are employed. Deputies in the Board and members of the Nomination Committee receive NOK for each meeting they attend. None of the directors have any share-based remuneration. An overview of CCMT and Board members share holdings in the company are shown in note 22. For 2011, the Board determined a bonus scheme for CCMT based on Return on capital employed (ROCE) between 7 and 13 percent and individual criteria. Each element counts for half of the maximum bonus and is independent of each other. The total bonus is limited to 30 percent of the fixed salary. There will be bonus payments in 2012 for the financial year The bonus has been provided for in the 2011 accounts. Bonus paid in 2011 was related to the financial year For 2010, the Board determined a bonus scheme for CCMT based on ROCE between 7 and 13 percent, and individual criteria. Each element counted for half of the maximum bonus and was independent of each other. The total bonus was limited to 30 percent of the fixed salary. CCMT members are members of the Group s pension schemes described in note 8. In addition, Kjell Bjordal has a pension scheme which entitles him to retire at the age of 60 years. His early retirement scheme provides pension payment up to a maximum of 66 percent of salary from retirement dependent upon number of years of pensionable service. Kjell Bjordal and Geir Sjaastad are entitled to one year s and nine months salary compensation, respectively, if the company terminates the employment. Sjaastad s compensation for loss of employment is reduced if income from other sources than board fees and capital income exceeds NOK The Chairman of the Board and other members of the Board as well as other CCMT members have no such rights. Geir Molvik and Synne Homble have loans of NOK each at year-end 2011 related to the general share programme for all employees in the Group. Bjordal has a loan from EWOS AS of NOK There has been no remuneration paid during the year beyond what is considered normal for management. Option scheme In 2006, an option scheme was established. Fair value per option and established cost in the financial statements is calculated using Monte Carlo simulation. At year end, 39 individuals (2010: 42 individuals) are included in the scheme. The options vested in three tranches, with one third at 26 October 2006, one third at 1 June 2007 and one third at 1 June Options vested at 26 October 2006 can be exercised in the period 1 June June Options vested at 1 June 2007 can be exercised in the period 1 June June Options vested at 1 June 2008 can be exercised in the period 1 June June Cermaq has limited the potential gain of the options vested to NOK 50 per option. The gain is calculated as the difference between strike price and average share price at Oslo Stock Exchange the day the trading is notified, and the following day. If the maximum gain is achieved, the number of options that can be exercised will be reduced. The options are associated with employment and employees leaving the company must exercise any options that are vested within three months. Employees whose employment has been terminated as a result of misconduct do not have any right to exercise options. At the end of 2011, options are vested and outstanding (2010: options). Strike price for options vested on 1 June 2008 is NOK per option, based on the average share price from the days 30 May, 2 June and 3 June 2008 plus a premium of 10 percent. The strike price for options vested on 1 June 2007 is based on the average share price from the days 31 May, 1 June and 4 June 2007 plus a premium of 10 percent The strike price for options vested on 26 October 2006 is NOK per option, based on a three day average share price from the days 31 May, 1 June and 2 June 2006 (as 1 June 2006 was the exercise date of the previous option program) plus a premium of 10 percent. Share price on grant date 2006 was NOK Other assumptions considered in the model is falling volatility during the exercise period from percent, 4.1 risk free interest rate and 2.25 percent in expected dividend. The share price of Cermaq at year end 2010 was NOK The accumulated option cost of the program is NOK 12.7 million. The vesting period ended in June 2008 and there will be no further cost related to the program. 74 CERMAQ ANNUAL REPORT 2011

79 Overview of Cermaq Central Management Team members options: Cermaq Central Management Team members Ingoing balance Options vested in 2011 Outgoing balance Geir Sjaastad Kjell Bjordal Geir Molvik Report to shareholders on directors remuneration The main principles for the Group s wage policies for key management personnel are: management wages should be competitive, motivating, understandable, acceptable and flexible. In addition to fixed salary, bonus, pensions and other fringe benefits which are common for similar positions, are considered. The terms of the CEO are set by the Board. General programs for variable pay to CCMT are also set by the Board. With respect to remuneration linked to shares or share price development, guidelines are approved by the general assembly. The report to shareholders on directors remuneration is approved by the Board and is available on the Group s website www. cermaq.com, and can also be found on page 106 in the Annual Report. NOTE 8 " Pension costs and obligations Of the employees at 31 December 2011, are members of pension schemes within the Group. 63 of these are located in Scotland, 328 in Canada and the remaining 759 in Norwegian companies. In Norway, the Group is required by law (Act relating to mandatory service pensions) to have a service pension plan. The schemes in Norwegian companies meet the requirements of the law. All Norwegian fully owned subsidiaries have defined contribution schemes for active members. Contributions are given in steps of 0, 3 and 6 percent of salary for salaries below 12G (which is equivalent to annual salary of around NOK ). Furthermore, some of the Group s foreign subsidiaries have contribution schemes. Contributions are made at various rates of salary depending on the age and position of the employee. Contributions to these schemes in 2012 are expected to be at approximately the same level as in 2011 given the scheme structures as at year-end A UK subsidiary has a defined benefit pension scheme which was closed to future accrual in 2007 following transfer to defined contribution scheme. The scheme is established under a trust, which means that its assets are held separately from the company s assets, but any funding shortfall must be financed by the company. At year end 2011, the scheme deficit was GBP 1.5 million. All scheme assets are held by EWOS Ltd. pension scheme trustees and are mainly invested in an investment fund. Assumptions used in the UK actuary calculation as at 31 December 2011 are a discount rate of 4.8 percent, actual return of 6.1 percent and inflation/pension adjustment of 2.3 percent. Top Hat-schemes in Norwegian companies (benefits for salary above 12G), are non-funded defined benefit schemes for employees within the scheme at 31 December Persons entering the Top Hat-scheme after this date have a defined contribution scheme. Annual contribution is 15 percent of salary above 12G. Early retirement schemes and schemes for pensioners are defined benefit schemes. Under defined benefit schemes, the Group is responsible for providing pensions to employees who are members of the schemes. These responsibilities are funded by making contributions to insurance schemes. There is no guarantee that the amounts funded will be sufficient to meet the Group s pension liabilities. As at 31 December 2011, there was a deficit of NOK 45.9 million in pension scheme funding, which will be made up by increased ongoing contributions. The new Norwegian pension legislation related to general early retirement schemes ( AFP-tilskottsloven ) was approved 19 February 2010 with effect from 1 January Persons borned after 31 December 1948 will get early retirement in accordance with the new scheme. Persons borned between 1944 and 1948 could choose whether to be a part of the old or new scheme. The old scheme was closed for further accruals at the end of 2010 and will be settled in January The new early retirement legislation resulted in an income of NOK 7.1 million in 2010 for the Group. CERMAQ ANNUAL REPORT

80 Our results: Annual report 2011 Assumptions (Norwegian defined benefit schemes) Financials Discount rate 3.3% 3.2% Expected return on pension funds 4.5% 4.5% Wage adjustment 3.8% 3.8% Basic amount adjust/inflation 3.8% 3.8% Pension adjustment 1.5% 1.5% Demographic Mortality K-2005 K-2005 Early retirement 50% at age 62 50% at age 62 Pension cost Net present value of current year's pension benefit earned Interest cost of pension liability Expected return on pension funds (5 347) (5 604) Actuarial gains and losses Effect of closing of pension scheme (7 187) (7 098) Administrative expenses Accrued National Insurance contributions Net accrued pension cost defined benefit schemes (1 110) Cost defined contribution scheme and other pension costs Total pension cost Pension liability, including historical information Funded 2011 Non-funded 1) 2011 Total 2011 Total 2010 Projected benefit liabilities (-) ( ) (13 821) ( ) ( ) Estimated pension funds (+) Estimated net pension funds(+)/liabilities(-) 898 (40 820) (39 923) (59 782) Unrecorded gain/(-) loss (1 590) (632) (2 222) Net pension funds(+)/liabilities(-) (692) (41 452) (42 145) (54 423) Accrued National Insurance contributions (2 710) (1 117) (3 827) (3 953) Pension funds(+)/obligations(-) (3 402) (42 569) (45 971) (58 376) Pension liability, including historical information Total 2009 Total 2008 Projected benefit liabilities (-) ( ) ( ) Estimated pension funds (+) Estimated net pension funds(+)/liabilities(-) (59 569) (35 150) Unrecorded gain/(-) loss Net pension funds(+)/liabilities(-) (57 000) (25 102) Accrued National Insurance contributions (3 403) (3 344) Pension funds(+)/obligations(-) (60 401) (28 446) 1) Non-funded schemes relate to AFP, Top-hat and early retirement schemes. Changes in the present value of the defined benefit liability Opening defined benefit liabilites at Interest cost Current service cost Benefits paid (7 561) (7 226) (7 804) (3 689) Effect of closing of pension scheme (7 187) Effect of acquisitions/sale of companies 21 - (2 050) Actuarial (gains)/losses on liabilities (2 378) Currency effect (3 822) (4 891) (9 102) Projected benefit liabilites at CERMAQ ANNUAL REPORT 2011

81 Changes in estimated pension funds Estimated pension funds at 1 January Expected return Contributions paid Benefits paid (4 057) (6 444) (6 858) (2 618) Actuarial (gains)/losses on liabilities Currency effect (1 445) (4 891) (9 102) Estimated pension funds at 31 December The Group s Norwegian pension funds are invested as follows Current bonds 15.2% 16.6% Long-term bonds 35.0% 32.5% Moneymarket funds 22.3% 13.2% Stocks 9.2% 15.6% Real estate 17.8% 16.1% Various 0.4% 6.0% Total 100.0% 100.0% Actual return on pension funds 3.2% 6.0% Sensitivities The above pension cost and pension liabilities related to defined benefit schemes, are based on the assumptions outlined above. The actuarial calculations are sensitive to any changes in these assumptions. Normally, a 1 percent change in discount rate would imply a 20 percent change in the pension liability and pension cost (defined benefit schemes) and a 1 percent change in wage adjustment would imply a 10 percent change in the pension liability and pension cost (defined benefit schemes). NOTE 9 " Other operating expenses Production cost 1) Logistic cost 2) Sales and administration expenses Other operating expenses Total other operating expenses ) Production costs include all costs associated with production of goods and other maintenance costs. 2) Logistics costs include all costs associated with transporting goods from production site to the customer. Research and development costs Research and development costs are expenditure on research projects related to aquaculture and include costs of employing scientists and administrators, costs of technical equipment, premises costs and costs of contractors. IAS 38 sets detailed conditions governing the circumstances under which R&D expenditure can be capitalised. These include the requirements that expenditure will generate probable future economic benefits and that costs can be specifically attributed to an intangible asset. The detailed conditions set out in IAS 38 with respect to capitalisation of R&D have not been met in 2011, and R&D costs have been expensed as incurred. R&D costs were NOK 87.1 million in 2011 (2010: NOK 77.5 million). CERMAQ ANNUAL REPORT

82 Our results: Annual report 2011 Auditor Expensed fees from the Group s auditor, KPMG, have been as follow (excluding VAT): Audit fees Other audit related services Total audit fees to KPMG Tax services Other services Total fees Audit fees to other auditors 1) ) Includes audit fees to Auditing and Consulting Co., Ltd. (A&C) in EWOS Vietnam in 2011 and Ernst & Young in Norgrain in NOTE 10 " Financial income/expenses Recognised in profit and loss Interest income on cash and cash equivalents Dividend income on available-for-sale financial assets Other financial income Total financial income Interest expense on financial liabilities measured at amortised cost (48 989) (55 794) Impairment loss on available-for-sale financial assets (19 468) (25 260) Total financial expense (68 458) (81 054) Net foreign exchange gains and losses (14 362) (3 626) Net change in fair value of financial instruments at fair value through profit and loss (5 883) Net gains (losses and impairment) on financial assets and liabilities Net financial items (38 791) (39 521) Total financial income in 2011 is higher than in 2010, mainly related to received dividend from Financial assets available-for-sale. Total financial expense is lower in 2011 than in 2010, mainly related to lower interest bearing debt during the year, but also because in 2010 NOK 12 million of upfront fees were expensed when the Group s main loan facilities were refinanced. The change in fair value of financial instruments is related to an interest rate swap entered into in 2010 and realised in 2011 with a total gain of NOK 33.5 million (of which 20.8 million is taken into account in 2010) and to salmon forward contracts with a gain of NOK 17.2 million (2010: loss of 26.7 million). For more information on these financial instruments and their accounting treatment please refer to note 2, 3 and 24. The net gain of NOK 43.4 million in 2010 is mainly related to the impairment of NOK 18.2 million from a terminationagreement entered into by EWOS Chile with Cultivos Marinos Chiloè Ltda and a gain of NOK 61.6 million on the sale of shares held in Marine Farms ASA. 78 CERMAQ ANNUAL REPORT 2011

83 NOTE 11 " Taxes Income tax expense Tax payable ( ) ( ) Change in deferred tax ( ) Tax on ordinary result ( ) ( ) Distribution of income tax expense Norway (62 823) ( ) Abroad ( ) ( ) Tax on ordinary result ( ) ( ) Tax payable in the consolidated balance sheet amounts to NOK million, mainly related to payable taxes in EWOS Norway and Mainstream Chile. The tax on the Group s profit before tax differs from the theoretical amount that would arise using the weighted average tax rate applicable to profit of the consolidated companies as follows: Reconciliation of the tax for the year % tax on profit before tax for the year ( ) ( ) 28% tax effect on permanent differences Differences in nominal tax rate for foreign companies Change in tax from previous years (4 504) Other differences (10 911) Tax on ordinary result ( ) ( ) The weighted average applicable tax rate for continuing operations was 21.1 percent for the year ending 31 December 2011 (2010: 22.1 percent). The 2011 tax rate reflects that a bigger part of the Group s taxable profits was generated from Chile, which has a lower nominal tax rate compared to the other countries where the Group has operations in. Deferred income tax Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes relate to the same fiscal authority. The table below outlines the Group s net deferred tax liability: Tax effect of temporary differences Intangible assets Tangible assets Inventories Accounts receivables Provision (12 451) (16 079) Other (23 628) Deferred tax losses (8 205) (18 701) Not recognised deferred tax asset Net deferred tax/(deferred tax assets) The Group has net deferred tax liabilities at a total of NOK million. Deferred income tax assets are recognised for tax losses carried forward and other net deductible temporary differences to the extent that the realisation of the related tax benefit through the future taxable profits is probable. Tax effect of tax losses carried forward Norway Abroad Total The tax losses specified above are without expiration. CERMAQ ANNUAL REPORT

84 Our results: Annual report 2011 NOTE 12 " Non-controlling interests Development of non-controlling interests Non-controlling interests Result for the year attributed to non-controlling interests Increase/(decrease) related to acquisitions/(disposals) Dividend paid/capital distributed to non-controlling interests (11 086) (1 101) Foreign currency effect Non-controlling interests Specification of non-controlling interests EWOS Vietnam JSC Norgrain AS Non-controlling interests NOTE 13 " Intangible assets Goodwill Licences Cost Acquisitions Disposals - (32 791) Transfers Foreign currency effect Cost Accumulated amortisation and impairment (19 331) Impairment 1) - (9 045) Foreign currency effect - (1 205) Accumulated amortisation and impairment (29 581) Carrying value Carrying value ) Impairment of non-renewed license in Mainstream Canada. Goodwill Licences Other intangible assets Cost Additions, new companies Additions, cost price Transfers 1) - (21 655) Foreign currency effect Cost Accumulated amortisation and impairment (29 581) - Additions, new companies - - (11) Ordinary depreciation for the year - - (1 417) Transfers 1) - - (18 547) Foreign currency effect - (1 102) (1 218) Accumulated amortisation and impairment (30 683) (21 193) Carrying value Carrying value ) Transfers are between intangible assets and fixed assets. 80 CERMAQ ANNUAL REPORT 2011

85 Specification of goodwill Company/group Acquisition year Carrying value EWOS Norge AS EWOS Chile Ltda EWOS Canada Ltd.-gruppen EWOS Ltd Mainstream Chile S.A-gruppen 2000/ Mainstream Norway AS 2005/2006/ Total Specification of goodwill Company/group Acquisition year Carrying value EWOS Norge AS EWOS Chile Ltda EWOS Canada Ltd.-gruppen EWOS Ltd EWOS Vietnam Mainstream Chile S.A-gruppen 2000/ Mainstream Norway AS 2005/2006/ Total Specification of fish farming licenses Land Ongrowing licences Acquisition year Carrying value Chile /2004/2007/2008/2009/ Canada / Norge /2005/2006/ Total Mainstream Chile acquired two new licenses in Specification of fish farming licenses Land Ongrowing licences Acquisition year Carrying value Chile /2004/2007/2008/2009/2010/ Canada / Norge /2005/2006/ Total Mainstream Chile acquired two new licenses in Impairment At acquisition, goodwill and intangible assets are allocated to the cash generating units to which they relate (operating companies). Group management review carrying value of cash generating units annually or more frequently when there is an indication that an asset may be impaired. A value in use approach is used to determine recoverable amount. Reviews are based on comparing the net present value (NPV) of projected future cash flows with the carrying value of assets taking into account all circumstances which could affect asset value. NPV is calculated by discounting management s best estimates of cash flows for the next 5 years, plus a terminal value. The terminal value is calculated as the net present value of the expected net cash flow in year five over the remaining useful life of the assets. Different NPV scenarios have been developed, using varying salmon prices, production costs and discount rates, to test the sensitivity of the NPV calculation to these variables with reference to existing management plans plus forecasts and current market conditions. The most important assumptions used in the impairment calculations are based on long-term expectations about the industry and the cash generating units, and these do not change frequently in practice. Base case margin assumptions are developed using the Group s long-term expectations for the industry which may vary significantly from the short-term margins achieved mainly due to variations in price. Volume assumptions are based on existing licence capacities and planned production. The Group has an ongoing review process, which includes sensitivity analysis and analysis of actual results achieved compared to long-term assumptions, to assess whether the long-term base case assumptions continue to correctly reflect expectations. CERMAQ ANNUAL REPORT

86 Our results: Annual report 2011 As with any estimate the cash flow projections are sensitive to changes in underlying assumptions; it is possible that the long-term assumptions used in future impairment calculations may differ from those applied in The pre tax discount rate used is 10 years government bond rate for each currency in which Group assets are denominated (NOK 2.59 percent, USD 2.05 percent, CAD 2.20 percent, GBP 2.36 percent, VND percent), plus a risk premium of 6 percent. The terminal growth factor used in the discounted cash flow calculations is 2 percent for all companies, except for Vietnam where 10 percent is used as the long-term inflation rate. On the basis of this analysis, management believes that there is no need for impairment of the carrying value of goodwill and fish farming licenses at 31 December Sensitivities In connection with the impairment testing of goodwill, sensitivity analyses have been carried out. The value in use is determined based on future strategy plans considering the expected development of the company. Sensitivity analyses have been performed for each defined cash generating units and indicates that with a two percentage point increase in the risk premium used (increasing the discount rate), a NOK 1 per kilogram reduction in the long-term average margin assumed in the farming businesses and a significant decrease in volumes in the feed would not result in impairment losses per 31 December 2011, except for EWOS Vietnam where the NPV is slightly above the carrying value. The management will monitor the performance of EWOS Vietnam for potential impairment indicators going forward. Any potential impairment charges will have an insignificant impact in the Group accounts. NOTE 14 " Property, plant and equipement Machinery, fixtures, vehicles, etc. Buildings Land Plant under construction Total Historical cost Additions, cost price 1) Disposals, cost price 3) ( ) (30 332) (383) - ( ) Writeoff (1 295) (1 295) Transfers 2) (8 988) ( ) (1 858) Foreign currency effect (2 753) Historical cost Historical cost Additions, new companies Additions, cost price Disposals, cost price ( ) (4 483) (46) - ( ) Transfers 2) ( ) Foreign currency effect Historical cost Accumulated depreciation ( ) ( ) - (1 342) ( ) Ordinary depreciation for the year for continuing operations ( ) (48 095) - - ( ) Ordinary depreciation for the year for discontinued operations Accumulated depreciation on disposals in the year (15 688) Writeoff Transfers 2) Foreign currency effect (26 958) (2 226) - 8 (29 176) Accumulated depreciation ( ) ( ) - (1 334) ( ) Accumulated depreciation ( ) ( ) - (1 334) ( ) Additions, new companies (4 418) (1 008) (95) - (5 521) Ordinary depreciation for the year for continuing operations ( ) (51 929) (333) (1 173) ( ) 82 CERMAQ ANNUAL REPORT 2011

87 Accumulated depreciation on disposals in the year Transfers 2) (11 195) (231) (12 918) Foreign currency effect (17 072) (3 404) (14) (401) (20 891) Accumulated depreciation ( ) ( ) (669) (13 634) ( ) Carrying value Carrying value Carrying value Carrying value ) Includes additions from discontinued operations, Mainstream Scotland Ltd. 2) Transfers to/from intangible assets. 3) Includes disposal from deconsolidation of Mainstream Scotland Ltd. Financial lease There are no significant restrictions on titles, pledges or other contractual commitments related to tangible fixed assets. Note 23 shows details of financial leases related to fixed assets. NOTE 15 " Investments in associated companies Carrying value Share of result for the year 1) Additions or deductions Carrying value Equity interest Dividend Fish farming Ballangen Sjøfarm AS 30.00% (1 800) Silver Seed AS 50.00% (4 147) Helnessund Bøteri AS 33.00% Øksnes Thermo AS 24.40% Ranfjord Fiskeprodukter 37.35% (290) Nordnorsk Stamfisk AS 25.00% Other 40 (40) Total fish farming (1 800) (290) Other activities Denofa AS 49.00% (4 116) Artic Fjell AS 40.00% Feed Tromsø AS 40.00% Hordafôr AS 35.15% (66 000) - Other Total other activities (4 116) (66 000) Total investment in associates (5 916) (66 290) ) Share of net profit are based on preliminary reporting from associated companies. None of the associate companies have published share price quotations. The Group s share of income from associates is recognised in the profit and loss statement net of tax as Income from associates. Please refer to note 28 for transactions with related parties. CERMAQ ANNUAL REPORT

88 Our results: Annual report 2011 Carrying value Share of result for the year 1) Additions or deductions Carrying value Equity interest Dividend Fish farming Ballangen Sjøfarm AS 30.00% (450) Silver Seed AS 50.00% Helnessund Bøteri AS 33.00% (10) (43) Øksnes Thermo AS 24.40% (1 006) (2 991) - Ranfjord Fiskeprodukter 37.35% - (1 106) Nordnorsk Stamfisk AS 25.00% - (16) Other Total fish farming (1 455) Other activities Denofa AS 1) 49.00% (704) (2 895) Artic Fjell AS 40.00% Feed Tromsø AS 40.00% Hordafôr AS 35.15% (6 855) Other Total other activities (9 750) Total investment in associates (11 205) ) Share of net profit was based on preliminary reporting from associated companies. Summary of preliminary financial information for associated companies, not adjusted for the percentage equity interest held by the Group: Total assets Total liabilities Total equity Operating revenues Result for the year Ballangen Sjøfarm AS Silver Seed AS (8 305) Helnessund Bøteri AS Ranfjord Fiskeprodukter Denofa AS konsern Artic Fjell As Feed Tromsø AS Total assets Total liabilities Total equity Operating revenues Result for the year Ballangen Sjøfarm AS Silver Seed AS Helnessund Bøteri AS Ranfjord Fiskeprodukter Nordnorsk Stamfisk AS (41) Denofa AS konsern (1 437) Hordafôr AS Uniol AS (36 275) NOTE 16 " Investments in other companies AquaGen AS (12.35%) Other Total investments in other companies Investments in other companies are classified as available-for-sale and are measured at fair value. Fair value of Other investments have been estimated using other methods of estimation, ie. valuation techniques using significant unoberservable inputs. The shares in Aqua- Gen AS are carried at fair value in the financial position, with NOK 57.9 million recognised in OCI. 84 CERMAQ ANNUAL REPORT 2011

89 NOTE 17 " Other receivables Other long-term receivables Prepaid Expenses Other short-term receivables Total short-term receivables Total other receivables Other receivables are measured at amortised cost using the effective interest method, less any impairment. Other short-term receivables are mainly prepayments and receivables on VAT and taxes. Long-term receivables mainly relates to amortised upfront fees. The Group s exposure to credit risks related to other receivables is disclosed in note 24. NOTE 18 " Inventory Raw materials Work in progress Finished goods Inventory provisions (7 820) (8 600) Total inventory Finished goods include feed within the feed division valued at cost and within farming; processed fish and frozen inventory recorded at fair value at point of harvest. NOTE 19 " Biological assets Biological assets are inventories of live fish held in tanks, cages and pens at locations in Norway, Chile and Canada. The table below shows the biological assets (biomass) held at the end of the period split between mature, or harvestable, and immature fish. Tonnes Immature fish Mature fish Total In practice, the average weight sizes at harvest vary from site to site and period to period. The designations shown in the table above represent typical minimum harvest weights defined as > 4.0 kilo for Atlantics and > 2.5 kilo for Coho and trout. Fish below these weights are defined as immature or non harvestable. Immature fish also comprise brood stock, smolts and fry. There is more uncertainty related to the valuation of small fish than harvestable fish, due to time to harvest Cost of biological assets Fair value adjustment Total biological assets The decrease in fair value adjustments of biological assets is due to decreased prices and changes in the composition of live inventory. CERMAQ ANNUAL REPORT

90 Our results: Annual report 2011 Movements in carrying value: Biological assets Divestments - ( ) Fair value adjustments ( ) Foreign currency effect Net harvesting/growth Biological assets Tonnes Biological assets Divestments - (5 175) Harvested ( ) ( ) Biological transformation and growth Biological assets Valuation The valuation of biomass is carried out for each operating region. During the second half of 2011, the largest salmon farming companies in Norway, with support from audit firms, formed an industry working group where the objective was to reach a converged and improved common approach for estimating the fair value of the biomass in accordance with IAS 41. Following the working group s conclusions, Cermaq has with effect from fourth quarter 2011 refined its calculation model for estimating the fair value of biomass. The model enhancements have been made to improve capture of the fair value development of the biological inventory during the lifetime of the fish. Previously, the point of intersection was when fair value was equal to or higher than historical cost. The refined model incorporates the proportionate expected net profit at harvest during the interval starting from 1 kilo ending at 4 kilo. The best fair value estimate on fish below 1 kilo is considered to be accumulated cost, while fish above 4 kg (mature fish) are valued to full expected net value. Consequently, there might be a negative fair value adjustment on the biological inventory. The effect in 2011 from the enhanced fair value estimate on biomass amounted to an income before taxes of NOK 96 million. In 2011 the aggregate gain or loss arising on initial recognition of biological assets and from changes in the fair value less costs to sell of biological assets was negative NOK million (2010: positive NOK million). Sensitivities The estimate of unrealized fair value adjustment is based on assumptions. Changes in these assumptions will impact the fair value calculation. In practice, the realized profit which is achieved on the sale of inventory will differ from the calculations of fair value because of changes in the final market destinations of sold fish, changes in price levels, changes in cost levels, differences in quality etc. A 10 percent increase in sales prices would increase fair value of biomass by NOK million. NOTE 20 " Accounts receivable from customers Receivables from customers Provisions for doubtful receivables (15 119) (69 128) Total accounts receivable The Group s exposure to credit risks related to accounts receivable is disclosed in note 24. NOTE 21 " Liquid assets Bank and cash in hand 1) Total bank deposit and cash in hand ) As at 31 December 2011, NOK 0.15 million is restricted cash related to Fish Pool contracts. In 2010 restricted cash was NOK 9 million. The Group has issued bank guarantees for other requirements to restricted bank accounts like for employees payroll taxes.. The Group s exposure to foreign exchange and interest rate risk is disclosed in note CERMAQ ANNUAL REPORT 2011

91 NOTE 22 " Share information 20 largest shareholders 31. desember 2011 Nationality Number of shares held Ownership NÆRINGS- OG HANDELSDEPARTEMENTET NOR % HSBC BANK GBR % FOLKETRYGDFONDET NOR % JPMORGAN CHASE BANK GBR % SVENSKA HANDELSBANKEN LUX % BANK OF NEW YORK USA % SKAGEN VEKST NOR % STATE STREET BANK USA % PARETO NOR % MONTAGUE PLACE CUSTODY GBR % STATE STREET BANK USA % STATE STREET BANK USA % PARETO NOR % VERDIPAPIRFONDET DNB NOR % CLEARSTREAM BANKING LUX % STATOIL PENSJON NOR % NORDEA BANK NOR % STATE STREET BANK USA % JPMORGAN CHASE BANK USA % THE NORTHERN TRUST GBR % Total 20 largest shareholders % Total other shareholders % Total number of shares % The names duplicated in the list of shareholders above may represent different investors. The shares have a face value of NOK 10. All shares in the company have equal status. Shares owned by the company may be used in connection with share sales to employees and for partial payment of share option agreements with key management personnel. Reconciliation of outstanding shares Outstanding shares at 1 January Purchase of own shares to cover the employee share program (29 000) (35 000) Sale of own shares to cover the employee share program Outstanding shares at 31 Desember Own shares at 31 December In 2011, treasury shares were sold to employees in connection with the employee share program. The share program allows the employees to purchase up to 200 Cermaq shares at a 20 percent discount, calculated based on the average closing price on the stock exchange the three last days of the offer period. Share price on the date of sale was NOK The share price including 20 percent discount was NOK share. The employee discount of NOK has been recognized as other personnel expenses. Dividend The Board has proposed a dividend per share of NOK 4.63 for Dividend paid for 2010 was NOK 5.40 per share. The dividend proposed is to be approved at the Annual General Meeting and if approved, the total dividend payment will amount to NOK 428 million. The dividend is not accounted for as a liability at 31 December CERMAQ ANNUAL REPORT

92 Our results: Annual report 2011 The following Board members and key management personnel have shares in the company 31 December: Position Bård Mikkelsen Chairman Rebekka Glasser Herlofsen Deputy Chairman from Astrid Sørgaard 1) Deputy Chairman until Åse Aulie Michelet Director Helge Midttun Director - - Jan Erik Korssjøen Director - - Reidun Karlsen Director employee elected - - Ted Andreas Mollan Director employee elected - - Jan Helge Førde Director employee elected Terje Rekdal Director employee elected Tore Valderhaug 1) Acting CEO and CFO Geir Isaksen CEO until Geir Sjaastad 1) Project Director Geir Molvik COO Farming Kjell Bjordal 1) COO Feed Synne Homble 1) Director Corperate Functions ) Number of shares held includes shares held by companies or other related parties with whom the persons can be identified with according to the law. Earnings per share (EPS) Basic earnings per share Basic EPS is calculated by dividing the profit attributable to equity holders of the company by the weighted average number of ordinary shares in issue during the year, excluding ordinary shares purchased by the company and held as treasury shares. Diluted earnings per share Diluted EPS is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. The dilutive potential is share options. The Group s share-based compensation scheme has a dilutive effect for the full year. Adjusted earnings per share Adjusted EPS is based on the reversal of certain fair value adjustments, and is shown as it is Cermaq s view that this figure provides a more reliable measure of performance Net income/(loss) after tax and non-controlling interests Biological assets fair value adjustments ( ) Financial instruments fair value adjustments (12 854) (20 848) Impairment of financial assets Gain on sale of shares and operations (15 982) ( ) Tax impact of fair value adjustments (90 560) Adjusted net income/(loss) Shares issued 1 January Effect of treasury shares (4 072) (3 866) Number of shares Adjusted for share options Diluted number of shares Earnings per share Basic and diluted EPS Adjusted basic and diluted EPS CERMAQ ANNUAL REPORT 2011

93 NOTE 23 " Interest bearing debt This note provides information about the contractual terms of the Group s interest bearing loans and borrowings. For an analysis of the Group s exposure to interest rates, foreign currency and liquidity risk, see note 24. For information about secured debt and carrying value of pledged assets, see note 27. The Group s interest bearing debt is classified as financial liabilities measured at amortised cost Credit facilities Long-term financial leasing Total interest bearing long-term liabilities Short-term financial leases Short-term liabilities Total interest bearing liabilities In June 2011 a new bilateral credit facility of NOK million was signed. The main source of debt financing for the Cermaq Group are five committed revolving credit facilities, with a total credit limit equivalent of NOK million, of which NOK million is due in August 2013, NOK million is due in June 2014, USD 50 million is due in November 2014 and USD 200 million is due in August As of 31 December 2011 USD 141 million (equal to NOK 845 million) and NOK 500 million of these facilities were utilised. The interest rates on these facilities are variable and linked to the relevant LIBOR rate plus a margin depending on the level of the Group s consolidated interest cover ratio. The Group s credit facilities are subject to the same financial covenants: a) The Group s equity ratio shall not be lower than 40 percent (including goodwill). b) The ratio of the Group s adjusted EBITDA to Interest payable shall not be less than 4:1. If the Group s equity ratio exceeds 45 percent this covenant does not apply. Cermaq s calculations show that the Group is in compliance with the financial covenants at year end. Long-term financial leases are related to machinery and equipment, land and water and buildings and constructions. Short-term debt is related to net overdraft in the Group s cash pool. Maturity Etter 2016 Credit facilities Long-term financial leasing Short-term liabilities Gross interest bearing debt Available credit lines of the credit facilities Other available credit lines Total available credit lines NOTE 24 " Financial risk management Overview The Group has exposure to the following risks from its use of financial instruments; market risk, liquidity risk and credit risk. This note presents information about the Group s exposure to each of these risks, the Group s objectives, policies and procedures for measuring and managing risk, and the Group s management of capital. Further quantitative disclosures are included throughout these consolidated financial statements. CERMAQ ANNUAL REPORT

94 Our results: Annual report 2011 The main objective of Cermaq s financial risk management policies is to ensure the ongoing liquidity of the Group, defined as being at all times in a position to meet the liabilities of the Group as they fall due. This also includes being able to meet financial covenants on Group debt under normal circumstances. Financial risk management is carried out by Group treasury under financial risk management policies approved by the Board of Directors. These policies cover areas such as funding, foreign exchange risk, interest rate risk, credit risk, insurance coverage, use of derivative and non-derivative financial instruments and the investment of excess liquidity. With regards to insurance coverage, the Group insures globally against material risk where the insurance is economically available. The balance between the amount covered and what is left to own risk varies, depending on the nature of the risk, the value of the assets and prospective liabilities and the cost and the availability of insurance. The Board of Directors believes that the most important measure against any risk the Group is exposed to would be to have a strong financial position. The Board aims at maintaining a minimum equity ratio of 45 percent to ensure the Group s solidity and operational flexibility. At 31 December 2011 the Group s equity ratio was 59.5 percent. Risk management policies and procedures are reviewed regularly to reflect changes in market conditions and the Group s activities. There were no material changes to these policies and procedures during the year. Market risk Market risk can be defined as the risk that the Group s income and expenses, future cash flows or fair value of financial instruments will fluctuate because of changes in market prices. Market risk comprises three types of risk: currency risk, interest rates risk and other price risk (such as commodity prices and salmon spot prices). Market risk are monitored and actively managed by the Group. Exposure to these risks is reduced by diversification, suitable controls and business tactics. In some cases market risks are transferred to third parties via contractual price adjustment clauses, but rarely by means of financial derivatives. As hedging activities normally result in lower average expected return, the Group only uses external hedging where there is a significant risk of breach of financial covenants. Currency risk Because of the international nature of its operations, the Group is exposed to fluctuations of foreign currency rates. For risk management purposes, three type of currency exposure have been identified: Translational exposure Being a multinational Group, Cermaq faces currency risk arising from the translation into the reporting currency of the financial statements of subsidiaries whose functional currency differs from the parent. Translational exposure does not give rise to an immediate cash effect, however as it may impact the Group s financial covenants, it is closely monitored. The Group seeks to mitigate balance sheet exposure by funding assets with borrowing denominated in the same currency. The exposure related to equity of foreign subsidiaries is generally not hedged. Transactional exposure Most of the operating companies in the Group are exposed to changes in the domestic value received or paid under foreign currency denominated committed transactions. For the farming business exposure arises mainly from export sales, while for the feed companies exposure results from the sourcing of raw materials in the international commodity markets. Transactional exposure for the Group is mitigated by diversification benefits and price adjustment clauses in feed supply contracts. Where opposite exposure from different subsidiaries are not perfectly offset, the residual effect of adverse movements in foreign currency rates on transaction streams could negatively impact the results and financial position of the Group, thus affecting covenants based on accounting measures. The table below summarises the foreign currency exposure on the net monetary position of all Group entities against their functional currency. The exposure on translating the financial statements of subsidiaries into the presentation currency is not included in the analysis. Exposure to currency risk Currency 2011 NOK/USD NOK/EUR GBP/USD USD/CLP CAD/USD JPY/USD GBP/EUR Cash and cash equivalents Accounts Receivable Trade payable (66 166) ( ) - ( ) (33 991) - (5 722) Borrowing (interest bearing debt) 1) ( ) (18 333) Forward Contracts Net Exposure ( ) ( ) (84 275) CERMAQ ANNUAL REPORT 2011

95 2010 NOK/USD NOK/EUR GBP/USD USD/CLP CAD/USD JPY/USD GBP/EUR Cash and cash equivalents Accounts Receivable Trade payable (66 611) (59 750) - (86 564) (15 120) - (2 656) Borrowing (interest bearing debt) 1) Forward Contracts Net Exposure (16 413) (61 579) (1 406) 1) The loan portfolio by currency is specified below; under interest rate risk. Sensitivity analysis Currency 2011 NOK/USD NOK/EUR GBP/USD USD/CLP CAD/USD JPY/USD GBP/EUR Profit & Loss Net exposure ( ) ( ) (84 275) Historical volatility 3% 1% 2% 4% 3% 3% 3% Total effect on Profit of + movements (5 247) (977) 339 (3 484) (8 412) Total effect on Profit of - movements (339) (334) (269) (354) NOK/USD NOK/EUR GBP/USD USD/CLP CAD/USD JPY/USD GBP/EUR Profit & Loss Net exposure (16 413) (61 579) (1 406) Historical volatility 4% 1% 3% 4% 2% 5% 5% Total effect on Profit of + movements (622) (2 742) (66) Total effect on Profit of - movements 622 (100) (556) (1 946) (2 494) 66 (1 665) The analysis is based on the currencies the Group is most exposed to at the end of The reasonable shifts in exchange rates in the table above are based on 5 years historical volatility. If the relevant cross foreign exchange rates moved by the amounts showed in the table above, the effect on the Group s net income would be NOK 8 million (2010: NOK 2 million). As a general rule the Group does not hedge transaction exposure in the financial markets. Currency protection measures may be allowed in those cases where there is a significant risk of breach in the financial covenants, and the exposure can not be effectively reduced by use of operational hedges. Amounts in of local currency Currency forward contracts as at Cermaq Group buys Cermaq Group sells USD GBP EUR 700 USD CLP The fair value of currency hedging derivatives as at 31 December 2011 was positive and valued at NOK (2010: NOK positive). These financial instruments have not been accounted for using hedge accounting. Economic currency exposure The Group is exposed to the risk that medium/long-term trend shifts in exchange rates might affect its competitive position. This strategic currency exposure is regularly monitored, but as the exposure is currently considered limited, it is not actively hedged. The following significant exchange rates applied during the year Average Rate Reporting Rate mid-spot rate USD GBP EUR CAD CLP JPY CERMAQ ANNUAL REPORT

96 Our results: Annual report 2011 Interest rate risk The Group is exposed to increase in interest rates as a result of having debt with floating interest rate terms. An increased cost of borrowing might adversely affect the Group s profitability and interest cover ratio, which is one of the debt covenants. At the outset, the Group wishes to be exposed to floating rate conditions on its loans, and will normally not utilize financial derivates to obtain fixed rate terms, unless it is considered to be a significant risk for breach in debt covenants. The Board of Cermaq has however granted the administration the authority to enter into interest swap agreements on its long-term borrowing, should this for various reasons be considered suitable, provided that the agreements do not lead to a significantly increased exposure for the Group. In 2010 the Group entered a 5 year interest rate swap agreement that was terminated in 2011 generating a total realised gain of NOK 33.5 million (of which NOK 20.8 million charged to the income statement in 2010). The Group has no fixed rate liabilities and is therefore not exposed to the risk that changes in interest rates might drive changes in market value of its outstanding debt. The table below shows the Group s interest bearing debt split by currency, as well as average interest rates and the average time until the next interest rate adjustments. Loan portfolio by currency Average fixing of interest rates Average interest rates USD month 1.83% NOK month 3.74% Other Interest bearing debt month 2.61% Cash and bank Net interest bearing debt Income statement Other comprehensive income Cash flow sensitivity analysis for variable rate instruments 100 BPS increase 100 BPS decrease 100 BPS increase 100 BPS decrease 2011 Variable rate instruments (15 103) Interest rate swap Cash flow sensitivity (net) (15 103) Variable rate instruments (16 579) Interest rate swap (4 386) - - Cash flow sensitivity (net) (12 193) A change of 100 basis points in interest rate at the reporting date would have increased (decreased) profit and loss by NOK 15 million (2010: NOK 12 million). This analysis assumes that all other variables remain constant. Other price risk The Group s feed business is active on the international commodity markets. A large portion of raw materials needed in production is contracted in advance of periodic sale price regulations, this way the risk associated with increases in commodity prices is effectively transferred to feed customers. Constraints in the availability of certain raw materials, might result in increased sourcing cost in those cases where an unexpected surge in sales volume make it necessary to purchase raw material outside of previously negotiated purchase agreements. Under these circumstances it might not be possible to charge the customers with the increased cost, and profitability would thus suffer. The farming business is sensitive to fluctuations in the spot prices of salmon, which is determined by global supply and demand. The impact of changes in salmon prices is primarily mitigated by geographical diversification, specie mix, long-term contracts and financial contracts, however due to long production cycles; it is difficult to respond quickly to global trends in market prices. Salmon is to a large extent traded based on spot price, although this would vary with different markets and with the market position of the company. In order to partially mitigate the price risk arising from spot sales of Atlantic salmon, Mainstream Norway entered into financial salmon contracts at the Fish Pool marketplace. During 2011, contracts for a total of tonnes were settled by Mainstream Norway with a net 92 CERMAQ ANNUAL REPORT 2011

97 realised gain of NOK 3.8 million. Contracts to be settled during 2012 had a fair value of NOK 47 million at year end 2011, and amounted to a volume of tonnes, evenly spread throughout the year. For more information about these financial instruments please refer to note 2, 3 and 10. LIQUIDITY RISK Liquidity risk arises from the Group s potential inability to meet its financial obligations towards suppliers and debt capital providers. The Group s liquidity situation is closely monitored, and rolling forecasts of cash flows and cash holdings are prepared regularly. Liquidity risk is managed through maintaining flexibility in funding by securing available committed credit lines provided by Nordic banks with good credit rating, and through maintaining sufficient liquid assets with the same relationship banks. During 2011 the Group successfully renegotiated and extended some of its committed credit lines obtaining a diversified maturity profile over the period The refinancing has provided the Group with significant financial flexibility to grow, both organically and through acquisitions, and to pay out dividend. The Group seeks to maintain medium term committed facilities to cover forecasted borrowings the next 12 months, plus financial headroom to cover medium sized acquisitions, and unforeseen movements in cash requirements. The committed credit facilities are supplemented by short-term overdrafts and borrowing lines in the local companies. These credit lines are generally callable on demand, so while they are useful for flexibility, they cannot be relied upon in times of financial difficulties. Please also refer to note 23 for information on committed credit facilities, available credit lines and maturity of interest bearing debt. Other short-term debt is specified in note 25. In addition to the above described sources of liquidity, Cermaq monitors funding options available in the capital markets, as well as trends in the availability and cost of such funding, with a view to maintain financial flexibility and limiting refinancing risk. Cermaq s overall liquidity as of 31 December 2011 and 2010 (see note 21) included NOK million and NOK million, respectively, in cash and cash equivalents held in various currencies. CREDIT RISK Credit risk represents the accounting loss that would have to be recognised if other parties failed to perform as contracted and is related to financial instruments such as cash and cash equivalents, receivables and derivative financial instruments. Cermaq has implemented a Group-wide cash management policy with the overall objective of minimising cash holdings while ensuring sufficient liquidity to meet business needs, avoid shortage of cash and limit the need for borrowing. The policy allows cash management investments in securities having a credit rating equal to or better than A+/A1 or equivalent, with a limit to how much can be invested in each security. The Board has approved a Group-wide credit management policy governed by Cermaq credit committee. The committee is responsible for granting credits to international customers, defined as customers domiciled in more than one country. Cermaq credit committee is also responsible for approving credit limits to other large customers with credit limits above certain defined limits. Lower credit limits are established for credits with credit terms exceeding 90 days. Below the authorization level of Cermaq credit committee, Chief Operating Officers of each division are responsible for granting credit limits to the individual operating units. Loans or guarantees to customers can only be granted by Cermaq credit comittee. To mitigate credit risk, a policy has been implemented under which operating units may sell part of their receivables on a non-recourse basis. Some of the feed and farming companies have credit insurance, other guarantees or other securities such as pledges reducing the actual risk on outstanding receivables significantly. Recoverable VAT included in the balance also reduces the risk. Concentration of credit risk is at the outset not considered significant since the Group s customers represent various industries and geographic areas. Counterparty risk against financial institutions is not considered significant due to limited liquid assets and low traded volume in derivatives. For these transactions, the Group relies mostly upon Nordic relationship banks, other relationship banks or widely recognized commodity exchanges. The Group was not significantly exposed to any single customer or other counterparty as at 31 December The management has further improved its proactive strategy to mitigate credit risk in Chile, focusing on careful selection of customers and strict management of credit days but also seeking additional security by obtaining pledge on biomass and parent company guarantee and by purchasing insurance coverage where this is considered necessary. The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was: CERMAQ ANNUAL REPORT

98 Our results: Annual report 2011 Exposure to Credit Risk Notes Accounts receivable Other receivables Cash and cash equivalents Total The ageing of accounts receivables at year end was: Current Overdue months more than 3 months more than 1 year Total accounts receivable Movement in allowance for impaiment losses Balance at 1 January 2011 (69 128) (74 883) Change in bed debt provision Balance at 31 December 2011 (15 119) (69 128) CAPITAL MANAGEMENT The Group s objective when managing capital is to maintain a capital structure able to support the operations and to maximise shareholder value. The farming business is characterized by price volatility and challenging production dynamics. The Group must be financially solid in order to be able to cope with fluctuations in profits and financial position and for this reason the Board of Directors has established as policy that the consolidated equity ratio shall at no time be lower than 45 percent. At 31 December 2011, the Group s equity ratio was 59.5 percent. According to the Group s dividend policy, under normal circumstances, average dividend over several years should be percent of the adjusted net profit. The Board has proposed a dividend of NOK 4.63 per share for the financial year 2011, corresponding to a distribution to shareholders of NOK 428 million. At 31 December 2011, net interest bearing debt amounted to NOK 1.1 billion. Note 23 provide an overview of the debt s maturity profile and information on the debt s financial covenants. The Group is currently mainly financed by bank loans, and developments in the availability of bank finance and alternative funding sources are evaluated in dialogue with the Group s leading banks. There were no changes in the Group s approach to capital management during the year. Neither the company nor any of its subsidiaries are subject to externally imposed capital requirements. NOTE 25 " Other non-interest bearing short-term liabilities Other non-interest bearing short-term liabilities are classified as financial liabilities measured at amortised cost Social security taxes and VAT Taxes payable Accrued expenses Other short-term liabilities Total other short-term liabilities The Group s exposure to currency and liquidity risk related to trade and other payables is disclosed in note 24. NOTE 26 " Commitments The Group has entered into agreements with fixed payments in respect of the following as of 31 December 2011: 94 CERMAQ ANNUAL REPORT 2011

99 After 2016 Minimum lease payments operating leases ( ) (52 967) (31 748) (26 051) (24 155) (11 104) (9 933) Contractual purchases - (66 496) (16 125) (16 125) Contractual investments - (21 617) (57 300) (34 600) (35 100) (35 600) ( ) Total ( ) ( ) ( ) (76 776) (59 255) (46 704) ( ) The table does not include agreements with no committed minimum purchase obligations. Contractual purchases are related to smolt deliveries and Contractual investments are mainly related to a future financial lease of a well boat. NOTE 27 " Mortgages and guarantees The Group s credit facilities, see note 23, are based on a negative pledge, which allows only limited potential to mortgage assets as security for other loans. The parent company guarantees include guarantees for the debt of other Group companies. Guarantee liabilities Guarantees Total gurantee liabilities Secured debt Secured debt secured in the following assets, book value: Inventories/Accounts Receivable Fixed assets Total book value of secured assets NOTE 28 " Transactions with related parties The table below provides details of transactions with related parties: Related party Transaction Sales to Purchases from Sales to Purchases from Øksnes Thermo AS 1) Packing material (7 541) Helnessund Bøteri AS Nets and services - (16 584) 12 (10 410) Silver Seed AS Smolt (7 048) (13 319) Ballangen Sjøfarm AS Processing services (7 208) (406) Denofa AS Raw materials and services 116 (14 948) 884 ( ) Hordafôr AS 2) Services (331) Ranfjord Fiskeprodukter AS Smolt - (4 864) - - Artic Fjell AS Services - (10 139) - - 1) Transactions with Øksnes Thermo AS in the period as associated company until 15 September ) Transactions with Hordafor AS in the period as associated company until 24 february The Group had no significant liabilities to associated companies as of 31 December 2011 and All transactions with related parties are priced on an arm s length basis. Transactions with subsidiaries have been eliminated in the Group accounts and do not represent related party transactions. NOTE 29 " Subsequent events No significant events have occurred subsequent to the balance sheet date. CERMAQ ANNUAL REPORT

100 Our results: Annual report 2011 " CERMAQ ASA INCOME STATEMENT Notes Operating revenues Payroll expense 2, 3 (80 493) (60 765) Depreciation 7 (3 087) (3 718) Other operating expenses 4 (45 550) (44 823) Result of operations (58 468) (37 240) Interest income Other financial income Financing fair value impacts Interest expenses 5 (26 957) (31 285) Write down of financial assets 5 - (59 990) Other financial expenses 5 (14 156) (23 115) Net foreign exchange gains/(losses) Financial items, net Result before tax (19 620) Tax (8 015) Result for the year (27 636) Proposed dividend Allocated to/ from (-) other equity ( ) ( ) Total allocation of result for the year (27 636) Received Group contribution after tax CERMAQ ANNUAL REPORT 2011

101 FINANCIAL POSITION PER 31. DESEMBER Notes ASSETS Tangible fixed assets Investments in subsidiaries Loans to group companies Investments in shares Other financial assets Total financial fixed assets Total non-current assets Accounts receivable from customers Other short-term receivables Short-term intercompany receivables Bank deposits, cash in hand, etc Total current assets TOTAL ASSETS EQUITY AND LIABILITIES Share capital Company's own shares 14 (37) (46) Other paid-in capital Total paid-in capital Other equity Total equity Pension liabilities Deferred tax Total provisions Interest bearing long-term debt 15, Long-term intercompany liabilities Total non-current liabilities Other short-term liabilities Interest bearing short-term debt Short-term intercompany liabilities Total current liabilities TOTAL EQUITY AND LIABILITIES Oslo, 15. March 2012 Bård Mikkelsen Rebekka Glasser Herlofsen Åse Aulie Michelet Chairman Deputy Chairman Director Helge Midttun Jan Erik Korssjøen Reidun Karlsen Director Director Director (employee elected) Ted Andreas Mollan Jan Helge Førde Tore Valderhaug Director (employee elected) Director (employee elected) Acting Chief Executive Officer CERMAQ ANNUAL REPORT

102 Our results: Annual report 2011 " CERMAQ ASA CASH FLOW STATEMENT Notes Ordinary result before tax (19 620) (Gains)/Losses on tangible and intangible assets - (32 455) Depreciation Change in fair value of financial assets 5 (33 500) - Taxes (paid)/refunded Change in stock, accounts receivable and accounts payable (3 606) Change in other short-term operating assets and liabilities (54 171) 949 Net cash flows from operating activities (40 228) (48 817) Proceeds from sale of property, plant, equipment (PPE) and intangible assets Purchases of (PPE) and intangible assets 7 (6 863) (1 246) Purchase of share and companies, net of purchased cash and cash equivalents (28 799) - Distribution of share capital from subsidiaries Proceeds from sale of shares and other investments Purchases of shares and other investments (202) ( ) Change in loans to Group companies Net cash flows from investing activities Net change in interest bearing debt ( ) Change in loans to group companies Interest received Interest paid (16 746) (31 981) Paid in other financial items Paid other financial items - (19 867) Received group contribution Dividends paid ( ) ( ) Change in treasury shares 112 (54) Net cash flows from financing activities (12 120) ( ) Net change in cash and cash equivalents for the year (2 107) (60 913) Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year CERMAQ ANNUAL REPORT 2011

103 " CERMAQ ASA NOTE 1 " Accounting principles Annual accounts for Cermaq ASA have been prepared in accordance with the Norwegian Accounting Act and Norwegian generally accepted accounting principles. The accounting principles described in this section are as applied to Cermaq ASA company only and do not describe the principles applied to the Cermaq group accounts. The notes for the Cermaq group are presented with the consolidated accounts for the group. Investments in subsidiaries, and associated companies In Cermaq ASA, investments in subsidiaries and associated companies are recorded in accordance with the cost method. Recognition of income The sale of all goods is taken to income at the time of delivery. Services are taken to income at time of delivery. Classification principles Liquid assets are defined as cash and bank deposits. Other assets intended for permanent ownership or use and receivables that mature more than one year after the end of the accounting year are identified as non-current assets. Other assets are classified as current assets. Liabilities that fall due later than one year after the end of the accounting year are classified as non-current liabilities. Other liabilities are classified as current liabilities. Foreign currency transactions All foreign currency transactions are converted to NOK at the date of the transaction. All monetary items denominated in foreign currency are translated at the exchange rate at the balance sheet date. Derivatives designated as hedging instruments in fair value hedges are measured at fair value and changes in fair value are recognised in the income statement. Accounts receivables from customers Receivables from customers are recorded at their nominal value less deductions for any expected losses. Tangible fixed assets and depreciation Tangible fixed assets are carried at cost less accumulated depreciation and impairment write downs. Ordinary depreciation commences from the point in time when an asset is ready for its intended use, and depreciation is calculated based on the economic/technical life of the asset in accordance with the following guidelines: Asset group Depreciation rate Furniture and fixtures 20 33% Computer equipment 20 33% Vehicles 15 20% Machinery and production equipment 10 20% Plant 3 5% Office buildings and dwellings 2 5% Fixed assets are written down if the net present value (NPV) of the anticipated future cash flows related to the asset can be demonstrated to be lower than the carrying value of the asset. Gains or losses from the sale of tangible assets are calculated as the difference between sales price and carrying value at the date of sale. Gains and losses from sale of tangible fixed assets are recognised as operating revenues or losses. Pension costs and obligations Norwegian companies are required by law to have a service pension plan according to the mandatory occupational pensions act. Cermaq ASA s pension schemes are in compliance with the law. In 2006, the company transferred to defined contribution plans for kollektiv tjenestepensjon. The company s premiums to the defined contribution scheme are recognised in the income statement for the year to which the contribution applies, with no further liability for the company. In 2007, the company transferred from funded to unfunded defined benefit plans for Top-hat schemes (salary above 12 G) for employees in the scheme at 31 December New employees/ employees with salaries over 12 G after 1 January 2007 have a defined Top Hat-contribution scheme. Pension obligations financed by operations is calculated and recognised in the pension liabilities in the balance sheet. In defined benefit plans, pension commitments and pension costs are determined using a linear accrual formula. A linear accrual formula distributes future pension benefits in a straight line over the accrual period. The employees accrued pension rights during a period are defined as the pension costs for the year. Pension obligations are calculated on the basis of long-term discount rate and long-term expected yield, wage increases, price inflation and pension adjustment. Pension funds are valued net of their fair value and the pension obligations to which they relate. A surplus is recognised to the extent that it can reasonably be utilised. Changes in calculated pension obligations due to changes in pension plans are accrued over the remaining contribution period or expected lifetime. Changes in the underlying obligations and assets of pension funds as a result of changes in estimates are accrued over the remaining contribution period for the portion of the deviations that exceed 10 percent of gross pension obligations. The discount rate used in calculations is based on 10 year government bond rate. Share based remuneration Fair value of share options is calculated at grant date. Valuation is based on well known valuation models accommodating the characteristics of the options in question. The fair value calculated at grant date is charged against profit and loss over the vesting period of the options, with a corresponding increase in other paid equity. The vesting period is the period from granting the options and to the options are fully vested. Financial assets and liabilities Cermaq ASA implemented in 2009 the preliminary standard on Financial assets and liabilities. The standard is effective as from 1 January 2010 but earlier application is permitted. According to CERMAQ ANNUAL REPORT

104 Our results: Annual report 2011 the standard, companies can choose between recognising financial instruments at fair value or off balance sheet-accounting. Cermaq ASA recognises fair value of financial instruments in the balance sheet. Taxation Tax accounted for considers both tax payable for the period and the movement in deferred tax. Deferred tax is recognised in respect of all temporary differences and accumulated tax losses carried forward at the balance sheet date which implies increased or decreased tax payable when these differences reverse in future periods. Temporary differences are differences between taxable profits and results that occur in one period and reverse in a later period. Deferred tax is calculated applying the nominal tax rate to temporary differences and accumulated tax losses carried forward. Cash flow statement The cash flow statement analyses the company s overall cash flow by operating, investment and financing activities. The statement shows the effect of operations on liquid asset balances. Use of estimates Preparation of the accounts in accordance with generally accepted accounting principles requires that management make estimates and assumptions which have an effect on the value of assets and liabilities on the balance sheet and reported revenues and expenses for the accounting year. The ultimate values realised may deviate from these estimates. NOTE 2 " Wages and other personnel expenses Wages and salaries including holiday pay National insurance contributions Pension costs Other staff expenses Total wages and other personnel expenses The number of employees at year end is 47 persons (2010: 46 persons). Number of man-years during the year was 45 (2010: 43). For details regarding salary for key management, please refer to note 7 in the group accounts. NOTE 3 " Pension costs and obligations 1 January 2007 have a defined Top Hat-contribution scheme with annual contribution of 15 percent of salary above 12G. Top-hat schemes for employees in the scheme at 31 December 2006, early retirement schemes and schemes for pensioners are defined benefit schemes. Under a defined benefit scheme, the company is responsible for providing pensions to employees who are members of the schemes. These responsibilities are funded by making contributions to insurance schemes. As at 31 December 2011, there was a deficit of NOK 16.7 million related to the funding of the pension obligations. In addition Cermaq ASA has responsibility for 30 pensioners. These were transferred to Cermaq ASA as an element in the final clarification of the sale of Stormøllen to Felleskjøpet in Assumptions Discount rate 3.3% 3.2% Expected return on pension funds 4.5% 4.5% Wage adjustment 3.8% 3.8% Basic amount adjust/inflation 3.8% 3.8% Pension adjustment 1.5% 1.5% Pension costs Net present value of current year's pension benefit earned Interest cost of pension liability Expected return on pension funds (517) (684) Amortisation of discrepancies Amortization of past service cost (7 187) (141) Administrative expenses Accrued National Insurance contributions Internal transaction 1) Net accrued pension costs Pension expense for the defined contribution plan Other pension cost Total pension cost ) Konsernintern overføring av pensjonsforpliktelse fra datterselskap til Cermaq ASA i 2011, som følge av overføring av ansatte til morselskapet. Pension liabilities Projected benefit liabilities (27 054) (21 359) Estimated pension funds Estimated net pension funds/(liabilities) (13 275) (8 760) Unrecorded gain/(loss) on pension funds (514) Accrued National Insurance contributions (2 859) (1 054) Pension funds/(liabilities) (16 650) (5 252) In November 2006, the company transferred from a defined benefit plan to a defined contribution plan for active members. The pension premiums are expensed when paid, and there is no additional obligation for the company beyond the annual premium. Contributions are given in steps of 0, 3 and 6 percent of salary. New employees/employees with salaries above 12G after 100 CERMAQ ANNUAL REPORT 2011

105 NOTE 4 " Other operating expenses Auditor Cost regarding the company s auditor, KPMG.have been for Cermaq ASA as follow (amounts exclusive of VAT): Audit fees Assurance services Other services Total fees Fee for other services are mainly related implementation of hedge accounting. NOTE 5 " Financial income/expenses Interest income Gain on sale of financial contracts 1) Other financial income Total financial income Of which are related to group items Interest expenses (26 957) (31 285) Fair value adjustments of financial assets 2) - (59 990) Other financial expenses 3) (14 156) (23 115) Total financial expenses (41 113) ( ) Of which are related to group items (10 209) (33) Net foreign exchange gains/losses, external (4 786) Net foreign exchange gains/losses, group Net financial items ) Realised gain on termination of interest rate swap agreement. 2) In 2010 Fair value adjustments relates to write down of loan to Mainstream Scotland Ltd. 3) Upfront fees on the Group s committed facilities were previously classified as interest expense and are now reported as Other Financial Expenses. NOTE 6 " Taxation Income tax expense Tax payable Changes in deferred tax (11 918) Total income tax expense (8 015) Tax base calculation Profit before income tax (19 620) Permanent differences 1) (2 303) Temporary differences (15 180) Change in tax losses carried forward and other tax credits (27 383) Corrections earlier years 2) (55 591) Tax base Temporary differences: Non current assets - - Financial instruments Pensions (28 985) (36 231) Gains and losses (10 509) (28 325) Net temporary differences Tax losses carried forward and other tax credits Total (10 392) (28 325) Deferred tax (liability) asset (2 910) (7 931) Reconciliation of the tax of the year % tax on profit before tax for the year (11 222) % tax effect on permanent differences 1) 645 (12 470) Change in tax from previous years Other differences 2) (2 803) Tax on ordinary result (8 015) 1) Tax impact of permanent differences in 2010 related to write down of loan to subsidiary and gain from sale of shares in Marine Farms ASA. 2) Other differences are related to tax correction of Tax return 2010 and CERMAQ ANNUAL REPORT

106 Our results: Annual report 2011 NOTE 7 " Tangible fixed assets Machinery, fixtures, vehicles, etc. Buildings Land Work in progress Total Historical cost as at Additions, cost price Disposals, cost price (1 453) (86) - - (1 539) Historical cost as at Accumulated depreciation as at (20 858) (10 407) - - (31 265) Ordinary depreciation for the year (2 459) (628) - - (3 087) Accumulated depreciation on disposals in the year Accumulated depreciation as at (21 864) (10 949) - - (32 813) Carrying value as at Carrying value as at NOTE 8 " Investments in subsidiaries Ownership interest Cermaq ASA Equity Profit/(loss) for 2011 Carrying value Office location Statkorn Aqua AS 100.0% Oslo EWOS AS 1) 62.0% Bergen EWOS Ltd % Westfield, Scotland NorAqua AS 100.0% 144 (8) Bergen EWOS Chile Ltda. 1) 1.0% Coronel, Chile Mainstream Norway AS 100.0% Steigen EWOS Vietnam 51.0% (2 400) Vietnam Share based remuneration 2) Total investment in subsidiaries ) The Cermaq group has 100 percent ownership of the companies. Statkorn Aqua AS has the remaining owner share. 2) The amount refers to shares in subsidiaries following share based remuneration in the parent company for work performed in subsidiaries. NOTE 9 " IInvestments in other companies Ownership interest Number of shares owned Total par value Share capital Carrying value AquaGen AS 12.3% Røding AS 12.6% Umlax AB 0.7% Other companies 10 Total investments in shares CERMAQ ANNUAL REPORT 2011

107 NOTE 10 " Other financial assets and liabilities Financial assets Financial liabilities - (921) Other financial assets/(liabilities) The financial assets and liabilities above are related to internal hedges with the subsidiaries EWOS AS and Mainstream Norway AS to reduce foreign currency exposure in these companies. The net exposure in Cermaq ASA is not hedged externally. NOTE 11 " Long-term inter-company loans Loans to group companies Currency Currency amount EWOS Vietnam USD Loan to norwegian companies NOK Total loans to group companies All intercompany items in foreign currency are translated at the exchange rate at the balance sheet date. NOTE 12 " Accounts receivable from customers Receivables from customers Total accounts receivable NOTE 13 " Liquid assets Bank and cash in hand Total bank deposits and cash in hand As of 31 December 2011 there were no restricted deposits included within liquid assets. The Group has established a cash pool system with Fokus Bank. Cermaq ASA is in accordance with the agreements the Group account holder and other group companies are subaccount holders or participants. The bank can offset overdrafts against deposits, so that the net position represents the net balance between the bank and the Group account holder. CERMAQ ANNUAL REPORT

108 Our results: Annual report 2011 NOTE 14 " Equity Selskapskapital Egne aksjer Annen innskutt egenkapital Annen egenkapital Sum egenkapital Equity per (46) Change in own shares/redemption Share based payment - - (5 251) Result for the year Dividend ( ) ( ) Difference between proposed and paid dividend Equity per (37) Number of shares in the company is The shares have a face value of NOK 10. All the shares in the company have equal status. For details regarding largest shareholders and shareholdings of key management personnel, please refer to note 22 in the group accounts. NOTE 15 " Interest bearing debt Cermaq ASA has a NOK 83.2 million short-term interest bearing debt as at 31 December 2011 related to the net overdraft in the Groups cash pool system (2010: NOK 0). Cermaq ASA has drawn NOK 500 million on the group s long- term loan facility (2010: NOK 350 million). NOTE 16 " Financial risk management Please refer to note 24 in the group accounts for further details related to financial risk management in the company and within the group. NOTE 17 " Non-interest bearing short-term liabilities Social security taxes and VAT Accounts payable Taxes payable - 58 Dividend Other short-term liabilities Total other short-term liabilities NOTE 18 " Off-balance sheet leases Rent Annual rent Duration of agreement Cermaq ASA Rent Cermaq ASA has rental agreement for head-office that runs from to Yearly rent is NOK 2.9 million. 104 CERMAQ ANNUAL REPORT 2011

109 NOTE 19 " Mortgages and guarantees Guarantees Total guarantee liabilities The group s syndicated loan is based on a negative pledge, which allows only limited potential to mortgage assets as security on other loans. The parent company s guarantee liabilities also include guarantees for the debt of other group companies. NOTE 20 " Transactions with related parties See note 8 Investments in subsidiaries for identification of subsidiaries and primary relationships with those parties. Cermaq ASA operates the cash pooling arrangements in the Group. Further, Cermaq ASA extends loans to subsidiaries, associates at terms and conditions reflecting prevailing markets conditions for corresponding cervices, allowing for a margin to cover administration and risk. See note 5 Financial income and expense for information on interest paid and recieved from group companies. Cermaq ASA allocates cost for corporate staff services and shared services to subsidiaries. The total amount allocated in 2011 was NOK 78 million. Principal of arm length are used in all transactions with subsidiaries. CERMAQ ANNUAL REPORT

110 Our results: Annual report 2011 REPORT TO SHAREHOLDERS ON SENIOR MANAGEMENT S REMUNERATION 1. MAIN PRINCIPLES FOR REMUNERA- TION TO SENIOR MANAGEMENT Remuneration to senior management is determined based on the following main principles: Senior management remuneration should be competitive, enabling Cermaq to attract and keep good managers. The remuneration should normally be at a level corresponding to remuneration received for similar positions in comparable enterprises in the country where the manager is acting. Senior management remuneration should be motivating. The remuneration should be structured to give incentives for continuous improvement of the company s operations and performance. The principal element of the remuneration is the basic salary, but additional variable elements of remuneration should be provided to motivate the managers performance. The variable elements of remuneration should appear reasonable with respect to the company s results. The remuneration system should be flexible. It should be modified when necessary. To be able to offer competitive salaries, Cermaq should have a flexible remuneration system with room for special adaptations. The hire of managers located outside Norway raises particular issues related to remuneration. Cermaq should have a remuneration system that is competitive and enables the Group to attract and retain non-norwegian managers. Further, the remuneration system must be flexible and accommodate particular needs of individual managers. 2. REMUNERATION THAT MAY BE OFFE- RED IN ADDITION TO BASIC SALARY 2.1 The basic salary The basic salary is the main element of the managers remuneration packages. There are no determined limits on the size of the basic salary, but the basic salary should reflect market conditions. Cermaq annually obtains external annual surveys on remuneration of similar positions, exercised by external consultants. In addition to the basic salary the managers may receive other remuneration elements. The individual elements of remuneration are commented on in detail below. Unless mentioned, no special conditions or limits apply to use of the remuneration elements listed. 2.2 Additional remuneration elements Bonus scheme Cermaq Group has a bonus scheme that applies to the senior management teams of Cermaq and the operating companies. The board conducts a yearly assessment of bonus criteria suitable for the relevant year. In the current bonus scheme, the variable supplementary payment can be a maximum of 30 per cent of fixed salary. For 2012, the board has divided the bonus criteria in two. One half of the bonus is related to return on employed capital (ROCE) of the Group. The bonus calculation for senior management team of Cermaq starts when ROCE for the Group reaches 7 per cent, with maximum bonus when ROCE reaches 13 per cent. The other half of the bonus is based on individual criteria for each individual member of the management team. Options The annual general meeting of Cermaq ASA adopted the following resolution on 3 May 2006: An option scheme for the senior management in the Cermaq Group is to be established. This plan may include up to 65 individuals in managerial positions or key personnel in the company. The maximum number of options in the programme may not exceed The upper limit of the maximum profit that may be obtained for the individual participant in this programme is NOK 50 per awarded option. The total accounting cost of the programme is calculated to be maximum NOK 15 million. The Board is granted authority to prepare guidelines for the schemes within the frames that have been provided. Option agreements that have been entered into will be fulfilled, but no new option agreements have been signed, nor has any new options been awarded under the adopted option programme. A total of options have been granted, which give the right to subscribe to a total of shares in Cermaq ASA. The options are distributed on 39 individual persons in the Cermaq Group. In accordance with the signed option agreements, the options were transferred in three equal instalments with one third on 26 October 2006, 1 June 2007 and 1 June 2008 respectively. The exercise price for the options that were transferred in 2006 is NOK 92.93, the exercise price for the options transferred in June 2007 is NOK , and the exercise price for the options transferred in 2008 is NOK The awarded options may be exercised between 36 and 72 months after vesting. On exercise of the options, the board may choose whether the option is to be redeemed in giving the option holder shares, or by paying the option holder the value of the option (the profit) in cash. The maximum profit is limited in accordance with the decision of the general meeting on 3 May Other allocation of shares, subscription rights or other forms of remuneration that are related to shares or the development of the share price The annual general meeting in 2006 adopted a share purchase programme for all employees in the Cermaq Group, including the management. The scheme entails that all employees each year receives an offer to buy 200 shares with a discount of 20 per cent. The company also offers financing assistance in connection with the purchase of shares. No other remuneration related to shares or share prices is granted. Pension schemes Agreements relating to early retirement have been signed historically. However, the company wants to limit the use of such agreements. Senior management should in general have pension schemes that secure a reasonable pension payment taking into account the level of the salaries prior to retirement. The company s pension 106 CERMAQ ANNUAL REPORT 2011

111 scheme that is applied for new recruitments is based on the assumption that the retirement age in the company is 67 years and that the accumulated rate of total compensation is not to exceed 66 per cent of the salary. Senior management participate in a pension scheme for salary above 12G (G= Basis Amount as defined by Norwegian National Insurance). With effect from 1 September 2011 the Board of Directors resolved a new scheme for salary above 12G. Payments will be made to a separate legal entity and contribution will be calculated based on 20 percent of the salary. New CEO will be part of the new scheme, while agreements with existing management will be continued. The historical agreement does not provide for contributions to a separate legal entity. Remuneration after termination of employment Cermaq s Chief Executive Officer (CEO) that will take up the position in 2012 has an agreement relating to pay after termination of employment, which provides payment for 12 months included salary and remuneration in the notice period, if he is dismissed by the company. The compensation is reduced if the CEO receives income from other sources in the period. The CEO should normally have a contract that considers the potential need for termination of employment if this is considered to be in the company s best interest. The remuneration after termination of employment must therefore be sufficiently favourable to secure the CEO acceptance of an agreement with limited dismissal protection. Agreements related to remuneration after termination of employment have been signed and may be entered into also for other senior group management. This is in order to secure the company s ability to maintain the necessary mix of management personnel following the company s requirements. Such agreements will, in accordance with the Employment Protection Act, not be binding for other managers than the CEO. Schemes relating to remuneration after termination of employment should be prepared so they are conceived as acceptable internally and externally. When entering into new employment contracts with members of the senior management team, clauses on pre-agreed termination payment will be limited to 12 months salary compensation included salary and remuneration in the notice period. Payment in kind Senior management will receive payment in kind considered normal for comparable positions. This includes telephone, home computer, broadband connection, participation in the company s insurance schemes, newspapers, car arrangement and parking. There are no particular limitations on type of payment in kind which may be agreed. Other supplementary payment Other variable elements of remuneration may be used or other special supplementary payment may be awarded than those mentioned above if this is considered appropriate in order to attract and/or retain a manager. 3. STATEMENT REGARDING SENIOR MANAGEMENT REMUNERATION POLICY IN Senior management remuneration policy in 2011 The senior management remuneration policy for 2011 was implemented in accordance with the board s executive statement for 2011 that was included in the annual report for The board has not made any decisions that have deviated from the senior management remuneration statement. The bonus scheme for the Group s senior management team followed the criteria described in the board s statement relating to executive remuneration for Effect of agreements or modifications in 2011 Mr. Geir Isaksen resigned as CEO in 2011 and left the company 30 August The CFO was appointed acting CEO with effect from 22 July 2011 and until the new CEO takes up the position. It was agreed that the acting CEO should receive the same remuneration as the former CEO in the period when he was the acting CEO. In December 2011 a new CEO was appointed. He will take up his position in the first half year of The contract of employment with the new CEO has been set up in accordance with the principles in the senior management salary agreement for The CEO will participate in the company s senior management bonus scheme. He participates in a pension scheme for all employees in Norway for salary up to 12G (Basic Amount), and in the company s new pension scheme for salary above 12G as described above. All payment in kind is within what is considered normal in the company, see presentation of payment in kind under item 2.2. The CEO has not been awarded options as a consequence of the appointment, as the option programme, as stated in item 2, has been closed for allocation of new options. Moreover, adjustments of the basic salary for the other members of the senior management of Cermaq have been made. The effect for the company and the shareholders with respect to the senior management agreements or any modifications of such in 2011 is limited. Oslo, 15 March 2012 The Board of Directors of Cermaq ASA CERMAQ ANNUAL REPORT

112 Our results: Annual report 2011 STATEMENT FROM THE BOARD OF DIRECTORS AND THE CEO We confirm that, to the best of our knowledge, the financial statements for the period for 2011 for the group and the parent company have been prepared in accordance with applicable accounting standards, and that the accounts give a true and fair view of the group and the company s consolidated assets, liabilities, financial position and results of the operations per 31 December We also confirm, to the best of our knowledge, that the Director s report provides a true and fair view of the development and performance of the business and the position of the group and the company including description of key risks and uncertainty factors pertaining to the group going forward. Oslo, 15. March 2012 Bård Mikkelsen Rebekka Glasser Herlofsen Åse Aulie Michelet Chairman Deputy Chairman Director Helge Midttun Jan Erik Korssjøen Reidun Karlsen Director Director Director (employee elected) Ted Andreas Mollan Jan Helge Førde Tore Valderhaug Director (employee elected) Director (employee elected) Acting Chief Executive Officer 108 CERMAQ ANNUAL REPORT 2011

113 KPMG AS Telephone P.O. Box 7000 Majorstuen Fax Sørkedalsveien 6 Internet N-0306 Oslo Enterprise MVA To the Annual Shareholders Meeting of Cermaq ASA INDEPENDENT AUDITOR S REPORT Report on the Financial Statements We have audited the accompanying financial statements of Cermaq ASA, which comprise the financial statements of the parent company Cermaq ASA and the consolidated financial statements of Cermaq ASA and its subsidiaries. The parent company s financial statements comprise the balance sheet as at 31 December 2011, the income statement and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory information. The consolidated financial statements comprise the statement of financial position as at 31 December 2011, and the income statement and the statement of other comprehensive income, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory information. The Board of Directors and the Managing Director s Responsibility for the Financial Statements The Board of Directors and the Managing Director are responsible for the preparation and fair presentation of the parent company financial statements in accordance with the Norwegian Accounting Act and generally accepted accounting standards and practices in Norway and for the consolidated financial statements in accordance with International Financial Reporting Standards as adopted by the EU, and for such internal control as the Board of Directors and the Managing Director determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with laws, regulations, and auditing standards and practices generally accepted in Norway, including International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Offices in: KPMG AS, a Norwegian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. Statsautoriserte revisorer - medlemmer av Den norske Revisorforening Oslo Alta Arendal Bergen Bodø Elverum Finnsnes Grimstad Hamar Haugesund Kristiansand Larvik Mo i Rana Molde Narvik Røros Sandefjord Sandnessjøen Stavanger Stord Tromsø Trondheim Tønsberg Ålesund

114 Independent auditor's report Cermaq ASA Opinion on the separate financial statements In our opinion, the parent company s financial statements are prepared in accordance with the law and regulations and give a true and fair view of the financial position of Cermaq ASA as at 31 December 2011, and of its financial performance and its cash flows for the year then ended in accordance with the Norwegian Accounting Act and accounting standards and practices generally accepted in Norway. Opinion on the consolidated financial statements In our opinion, the consolidated financial statements are prepared in accordance with the law and regulations and give a true and fair view of the financial position of Cermaq ASA and its subsidiaries as at 31 December 2011, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the EU. Report on Other Legal and Regulatory Requirements Opinion on the Board of Directors report and Report on corporate governance 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 Report on corporate governance concerning the financial statements, the going concern assumption, and the proposal for the allocation of the profit is consistent with the financial statements and complies with the law and regulations. Opinion on Accounting Registration and Documentation 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 (ISAE) 3000, «Assurance Engagements Other than Audits or Reviews of Historical Financial Information», it is our opinion that the 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. Oslo, 15 March 2012 KPMG AS Vegard Tangerud State Authorised Public Accountant [Translation has been made for information purposes only] p. 2/2

115 Our results: Analytic information GLOBAL HARVEST OF FARMED SALMON / LARGE TROUT AND CATCH OF WILD SALMON (Thousand tonnes wfe) Farmed salmon/trout E Norway Chile Canada UK Others Total farmed Wild caught salmon E USA Canada Japan Russia Others Total wild caught Total salmon and trout Source: Kontali Analyse HARVEST OF FARMED SALMON AND LARGE TROUT BY SPECIES (Thousand tonnes wfe) Farmed salmon/trout E Atlantic salmon Large trout Coho Chinook Total farmed Source: Kontali Analyse SUPPLY DEVELOPMENT SPLIT BY MAIN MARKET ATLANTIC SALMON (ADJUSTED FOR CHANGES IN FROZEN INVENTORY) (Thousand tonnes wfe) Market E EU USA Japan Russia Other markets Total Source: Kontali Analyse GLOBAL FEED CONSUMPTION ATLANTIC SALMON, LARGE TROUT & COHO/CHINOOK Per selected countries Regions 2006 % change 2007 % change 2008 % change 2009 % change 2010 % change 2011E % change Norway % % % % % % Chile % % % % % % UK % % % % % % North America % % % % % % Faroe Island % % % % % % Total % % % % % % Source: Kontali Analyse CERMAQ ANNUAL REPORT

116 Our results: Analytic information Price development by species and markets ATLANTIC SALMON, FILLET, 3 4 LBS CHILE FOB Miami, USD/lb Jan Jan Jan Jan Jan Jan Jan Source: UrnerBarry Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 ATLANTIC SALMON, WHOLE FISH, 8 10 LBS CANADA FOB Seattle, USD/Lb Jan 01 Jan 02 Source: UrnerBarry Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 COHO, FROZEN, 4 6 LBS CHILE (Wholesale price Tsukiji market) (jpy/kg) Jan Jan Jan Jan Jan Jan Source: Nmfs Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 TROUT, FROZEN, 4 6 LBS CHILE (Wholesale price Tsukiji market) (jpy/kg) Jan Jan Jan Jan Jan Jan Source: Nmfs Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 ATLANTIC SALMON, WHOLE FISH NORWAY (FCA Oslo, NOS spot price) NOK/kg Jan Jan Jan Jan Jan Jan Jan Source: FHL Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Export quantities NORWAY ATLANTIC SALMON Thousand tonnes wfe / / / / / / / / / / 112 CHILE ATLANTIC SALMON Thousand tonnes wfe / 62 / / 102 / / 136 / / 130 / / 97 / / 130 / / 121 / / 38 / / 64 / 30 Frozen Fresh Other value added Frozen Fresh Source: Kontali Analyse Source: Kontali Analyse 112 CERMAQ ANNUAL REPORT 2011

117 Our results: Shareholder information SHAREHOLDER INFORMATION Cermaq focus on maintaining a good dialogue with its shareholders and the financial markets in general. One goal is that the share price reflects the underlying asset value of the group by providing all price-relevant information to the market. Cermaq ASA had shareholders at 31 December 2011 (2724) percent of the shares were held outside Norway (30.2 percent). The 20 largest shareholders owned percent of the shares at 31 December (70.92 percent), with non-norwegian shareholders accounting for 25.7 percent (20.8 percent). Share capital Cermaq ASA had ordinary shares with a nominal value of NOK 10 per share at 31 December The company has only one share class, and each share has one vote. The company s articles of association specify that the board may not approve any transfer of shares, which would reduce the Norwegian government s shareholding below 34 percent. The company s shares are otherwise freely transferable. Prevailing board authorities At the company s ordinary general meeting 11 May 2011, the board was authorised to purchase treasury shares up to a total nominal value of NOK The company can not acquire more than five percent of its outstanding shares at any given time. The lowest and highest price that can be paid for the shares is NOK 10 and NOK 300 respectively. When purchasing shares, the board must ensure that general principles for the equal treatment of shareholders are observed. The authority remains valid until 30 June Option schemes An option scheme for the senior management in the Cermaq Group was established in 2006 and currently 39 employees are included in the programme (detailed information is provided in note 7 to the group s annual accounts). No new option agreements have been signed, nor has any new options been awarded under the adopted option programme following the initial awards in Listing Cermaq secured a listing on 24 October 2005 on Oslo Stock Exchange. The shares are included in the Oslo Stock Exchange s Benchmark Index (OBX) under the ticker code CEQ. They are registered in the Norwegian Central Security Depository, and DnB NOR is registrar and issuer. The shares carry the securities number ISIN NO Share price development and liquidity The share had a closing price at 31 December 2011 of NOK per share. A total of shares ( ) were traded during the year. This corresponded to 66.3 percent (59.8 percent) of the company s total outstanding shares. Shares traded in 2011 represent percent of outstanding shares net of the Ministry of Trade and Industry s holding. In 2010 this figure was percent. The Cermaq share price dropped 22 percent during The main index at the Oslo Stock Exchange dropped percent in the same period. The Cermaq share is along with the other listed aquaculture companies included in industry index OSE30 Consumer staples. This industry index dropped 46 percent in SHARE PRICE DEVELOPMENT (PERCENT) CEO OSE 30 OSEBX Oct/05 Dec/05 Feb/06 Apr/06 Jun/06 Aug/06 Oct/06 Dec/06 Feb/07 Apr/07 Jun/07 Aug/07 Oct/07 Dec/07 Feb/08 Apr/08 Jun/08 Aug/08 Oct/08 Dec/08 Feb/09 Apr/09 Jun/09 Aug/09 Oct/09 Dec/09 Feb/10 Apr/10 Jun/10 Aug/10 Oct/10 Dec/10 Feb/11 Apr/11 Jun/11 Aug/11 Oct/11 Dec/11 Feb/12 Apr/12 CERMAQ ANNUAL REPORT

118 Our results: Shareholder information SHAREHOLDER BY NATIONALITY at 15. march 2012 Nationality Holding Percent NORWAY UNITED KINGDOM U.S.A LUXEMBOURG GERMANY SWITZERLAND BELGIUM SWEDEN FINLAND UNITED ARAB EMIRATES AUSTRALIA JAPAN IRELAND DENMARK CHILE FRANCE AUSTRIA HONG KONG GUERNSEY NETHERLANDS JERSEY CANADA OTHER LARGEST SHAREHOLDERS at 15. march 2012 Name Holding Percent NORWEGIAN MINISTRY OF TRADE AND INDUSTRY % HSBC BANK % FOLKETRYGDFONDET % JPMORGAN CHASE BANK % SVENSKA HANDELSBANKEN % STATE STREET BANK % BANK OF NEW YORK % SKAGEN VEKST % PARETO AKSJE NORGE % MONTAGUE PLACE CUSTODY % STATE STREET BANK % STATE STREET BANK % PARETO AKTIV % VERDIPAPIRFONDET DNB % JPMORGAN CHASE BANK % BANK OF NEW YORK % CLEARSTREAM BANKING % BANK OF NEW YORK % VITAL FORSIKRING ASA % STATE STREET BANK % SHAREHOLDER BY NATIONALITY at 15. march 2012 USA 10% OTHER 12% UNITED KINGDOM 13% THE SHARE IN 2011 Highest traded price NOK Lowest traded price NOK 58.5 Share price at 31 December NOK 70.2 Number of shares issues at 31 December Number Treasury shares (own shares) held at 31 December Number Outstanding shares at 31 December Number Market value at 31 December NOK million Turnover rate Percent 66% Proposed dividend per share NOK/share 4.63 NORWAY 65% SHAREHOLDER DISTRIBUTION at 15. March 2012 No. of shares No. of owners Percent over Total ANALYST COVERAGE Stockbroker Phone ABG Sundal Collier Arctic Securities SpareBank 1 Markets Carnegie DNB Markets First Securities Fondsfinans Handelsbanken Capital Markets Investment Bank with UBS Nordea Markets Norne Securities Pareto Securities RS Platou Markets SEB Enskilda Terra Markets CERMAQ ANNUAL REPORT 2011

119 The company s total market value at 31 December 2011 was NOK 6.49 billion. The share was traded 253 days of 253 possible trading days, compared to 252 days of 252 trading days in The average number of shares traded per trading day in 2011 were shares, compared to shares per trading day in Dividend policy The company has an overall objective to reflect a long term return on the shareholders investments in the form of dividend and higher share price, which is at least on a par with other companies offering a comparable level of risk. Over time, the increase in value is to a larger extent expected to occur through a rising share price rather than dividend payments. Future dividend will depend on Cermaq s earnings, financial position, and cash flow as well as market outlook, expected investment level and strategic opportunities. The board takes the view that the dividend paid should show a steady development in line with the growth in Cermaq s results. In 2010, the board decided to revise the dividend policy such that in the long term dividend should be in the range of 30 50% percent of the company s adjusted net profit after tax. YEAR DIVIDEND PER SHARE (NOK) Year Dividend per share (NOK) (proposed) Information policy Cermaq aims to provide the market with accurate, consistent and relevant information about the company on a timely basis. It is an objective to treat all investors and other market players equally. Relevant and accurate information should be made available as quickly as possible in order to ensure that the market can assess the company s value on the best possible basis. The company s financial results are published on a quarterly basis, followed by a presentation, which is open to all interested parties. The presentations are also published directly via a webcast. All relevant information about Cermaq is published on the company s web site Nomination committee The company s nomination committee consists of the following members: Gunnar Bjørkavåg, Chair, NHST Media Group Mette I. Wikborg, The Norwegian Ministry of Trade and Industry Kari Olrud Moen, DNB ASA Ottar Haugerud, Orkla ASA Shareholders can contact the nomination committee via the following address: [email protected]. General meeting The annual general meeting will take place at on 9th of May 2012 at Grev Wedels plass 5 Oslo. Possible changes will be announced on Cermaq s web sites. Written notice is sent to all the shareholders individually or to their custodian bank at the latest 21 days before the annual general meeting. The notice will also be made available at the company s website three weeks before the meeting. In order to vote at the general meeting shareholders must be physically present, either in person or by authorised representative. TRADED SHARES Jan/11 Feb/11 Mar/11 Apr/11 May/11 Jun/11 Jul/11 Aug/11 Sep/11 Oct/11 Nov/11 Dec/11 Jan/12 Feb/12 Mar/12 CERMAQ ANNUAL REPORT

120 cermaq.com: online report Our integrated annual and sustainability report 2011 online Visit our online report for the complete sustainability results and GRI-report report2011.cermaq.com ANNUAL ACCOUNTS OUR VALUE CHAIN UN GLOBAL COMPACT SUSTAINABILITY NAVIGATOR For a full PDF download of our 2011 accounts, go to short cut on the opening page. Presentation of Cermaq s two core business areas EWOS (fish feed production) and Mainstream (fish farming). The content in our report is tagged according to the UN Global Compact ten principles. The report on our website offers an easily accessible sustainability navigator, allowing users quick access to relevant content with regard to our GRI results, Cermaq s own indicators and our reporting on other global initiatives. 116 CERMAQ ANNUAL REPORT 2011

121 CONTACT POINT FOR THIS REPORT Contact person for this report is Lise Bergan, Director Corporate Affairs, Design, counselling and production: Itera Gazette as Photos: All photos by Cermaq except Yvonne Holth (pages 2 3, 8 9 and 44 45), Johanne Arff / SINTEF (page 24) and Gettyimages (cover and page 10 11, and 42 43). Print: GRØSET NORDIC ECOLABEL PRINTED MATTER CARBON NEUTRAL PRINTED MATTER

122 EWOS AS Tollbodallmenningen 1B P.O. Box 4 Sentrum NO-5803 Bergen Norway Phone: Fax: [email protected] EWOS Innovation AS NO-4335 Dirdal Norway Phone: Fax: [email protected] EWOS Limited Westfield, Bathgate West Lothian EH48 3BP Scotland Phone: Fax: EWOS Canada Limited nd Street Surrey BC Canada V3W 4M8 Phone: Fax: Mainstream Norway AS NO-8286 Nordfold Norway Phone: Fax: [email protected] Mainstream Canada # Island Highway Campbell River British Columbia Canada V9W 2C2 Phone: Fax: Mainstream Chile S.A. Auda. Diego Portales th Floor Puerto Montt Chile Phone: Fax: EWOS Vietnam JSC 11th Floor AGREX Building 58 Vo Van Tan, District 1 Ho Chi Mihn City S. R. Vietnam Phone/Fax: EWOS Chile Alimentos Ltda. Parque Industrial Escuadron Coronel Km 20 Camino Coronel Chile Phone: Fax: Cermaq ASA Grev Wedels plass 5 P.O. Box 144 Sentrum NO-0102 Oslo Norway Phone: Fax: [email protected]