20-F 1 a14-11076_120f.htm 20-F

Table of Contents

 

As filed with the Securities and Exchange Commission on April 30, 2014.

 

Commission File No.      

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

Form 20-F

 


 

o

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

Or

 

 

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2013

 

 

Or

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

Or

 

 

o

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

MARINE HARVEST ASA

(Exact name of Registrant as specified in its charter)

 


 

Norway
(State or other jurisdiction of incorporation or
organization)

 

2092/4
(Primary Standard Industrial Classification
Code Number)

 

Not Applicable
(I.R.S. Employer Identification No.)

 

P.O. Box 4102 Sandviken
5835 Bergen, Norway
Telephone: + 47 21 56 23 00

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 


 

Copies to:

 

James A. McDonald
Skadden, Arps, Slate, Meagher and Flom (UK) LLP
40 Bank Street
London E14 5DS
Telephone: +44 20 7519 7000
Facsimile: +44 20 7519 7070

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

American Depositary Shares, each representing 1 ordinary share, having a nominal value NOK 7.5 per share

Ordinary shares, having a nominal value of NOK 7.5 per share

 

New York Stock Exchange
New York Stock Exchange (for listing purposes only)*

 


 

Not for trading, but only in connection with the registration of the American Depositary Shares.

 



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Securities registered or to be registered pursuant to Section 12(g) of the Act: None

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o  No x

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

o Yes   x No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such a shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yes   o No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

o Yes   o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer o

 

Non-accelerated filer x

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP o

 

International Financial Reporting Standards as issued by the International
Accounting Standards Board
x

 

Other o

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the Registrant has elected to follow:

o Item 17   o Item 18

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes   x No

 

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

 

o Yes   o No

 



Table of Contents

 

TABLE OF CONTENTS

 

PART I

 

 

ITEM 1.    Identity of Directors, Senior Management and Advisers

4

A. Directors and Senior Management

4

B. Advisers

4

C. Auditors

4

ITEM 2.    Offer Statistics and Expected Timetable

4

ITEM 3.    Key Information

4

A. Selected Financial Data

4

B. Capitalization and Indebtedness

13

C. Reasons for the Offer and Use of Proceeds

13

D. Risk Factors

13

ITEM 4.    Information on the Company

33

A. History and Development of the Company

33

B. Business Overview

34

C. Organizational Structure

66

D. Property, Plants and Equipment

66

ITEM 4A.    Unresolved Staff Comments

66

ITEM 5.    Operating and Financial Review and Prospects

66

ITEM 6.    Directors, Senior Management and Employees

109

A. Directors and Senior Management

109

B. Compensation

112

C. Board Practices

114

D. Employees

115

E. Share Ownership

115

ITEM 7.    Major Shareholders and Related Party Transactions

115

A. Major Shareholders

116

B. Related Party Transactions

117

C. Interests of Experts and Counsel

117

ITEM 8.    Financial Information

117

A. Consolidated Financial Statements and Other Financial Information

117

B. Significant Changes

117

ITEM 9.    The Offer and Listing

117

A. Offer and Listing Details

117

B. Plan of Distribution

118

C. Markets

118

D. Selling Shareholders

118

E. Dilution

118

F. Expenses of the Issue

118

ITEM 10.    Additional Information

118

A. Share Capital

118

B. Memorandum and Articles of Association

118

C. Material Contracts

118

D. Exchange Controls

118

E. Taxation

119

F. Dividends and Paying Agents

124

G. Statements by Experts

124

H. Documents on Display

124

I. Subsidiary Information

124

ITEM 11.    Quantitative and Qualitative Disclosures About Market Risk

124

ITEM 12.    Description of Securities Other Than Equity Securities

128

A. Debt Securities

128

B. Warrants and Rights

128

C. Other Securities

128

 

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D. American Depositary Shares

128

 

 

PART II

 

 

 

ITEM 13.    Defaults, Dividend Arrearages and Delinquencies

129

ITEM 14.    Material Modifications to the Rights of Security Holders and Use of Proceeds

129

ITEM 15.    Controls and Procedures

130

ITEM 16.    [RESERVED]

130

ITEM 16A.    Audit Committee Financial Expert

130

ITEM 16B.    Code of Ethics

130

ITEM 16C.    Principal Accountant Fees and Services

130

ITEM 16D.    Exemptions from the Listing Standards for Audit Committees

131

ITEM 16E.    Purchases of Equity Securities by the Issuer and Affiliated Purchasers

132

ITEM 16F.    Change in Registrant’s Certifying Accountant

132

ITEM 16G.    Corporate Governance

133

ITEM 16H.    Mine Safety Disclosure

133

 

 

PART III

 

 

 

ITEM 17.    Financial Statements

134

ITEM 18.    Financial Statements

134

ITEM 19.    Exhibits

135

 

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EXPLANATORY NOTE

 

In this annual report, the “company,” the “Group,” “we,” “us” and “our” refer to Marine Harvest ASA or Marine Harvest ASA and its consolidated subsidiaries, as the context may require.  We received regulatory approval for our acquisition of Morpol ASA, or Morpol, a leading seafood producer, on September 30, 2013.  As of November 12, 2013 we acquired 100% of Morpol. Information set forth in this annual report includes Morpol’s results starting from September 30, 2013, unless noted otherwise.

 

We prepare our financial statements included in this annual report in accordance with the International Financial Reporting Standards, or IFRS, issued by the International Accounting Standards Board, or IASB.

 

We present our consolidated financial statements in Norwegian krone. All references in this annual report to “krones” or “NOK” are to Norwegian krone, the legal currency of Norway, unless otherwise noted.  All references in this annual report to (i) “USD” or “U.S. dollar” are to the legal currency of the United States; (ii) “EUR” or “Euro” are to the legal currency of participating member states for the purposes of the European Monetary Union; (iii) “GBP” or “pound sterling” are to the legal currency of England and Wales; (iv) “CAD” or “Canadian dollar” are to the legal currency of Canada; (v) “JPY” or “Japanese yen” are to the legal currency of Japan; (vi) “DKK” or “Danish krone” are to the legal currency of Denmark and (vii) “CLP” or “Chilean peso” are to the legal currency of Chile.

 

Unless otherwise indicated, all sources for industry data and statistics are estimates or forecasts contained in or derived from internal or industry sources we believe to be reliable. Market data used throughout this annual report were obtained from independent industry publications and other publicly available information. Such data, as well as internal surveys, industry forecasts and market research, while believed to be reliable, have not been independently verified. In addition, in certain cases we have made statements in this annual report regarding our industry and our position in the industry based on our experience and our own investigation of market conditions.

 

Market data and statistics are inherently predictive and speculative and are not necessarily reflective of actual market conditions. Such statistics are based on market research, which itself is based on sampling and subjective judgments by both the researchers and the respondents, including judgments about what types of products and transactions should be included in the relevant market. In addition, the value of comparisons of statistics for different markets is limited by many factors, including that (i) the markets are defined differently, (ii) the underlying information was gathered by different methods and (iii) different assumptions were applied in compiling the data. Accordingly, the market statistics included in this annual report should be viewed with caution and no representation or warranty is given by any person as to their accuracy.

 

As a result of rounding adjustments, the figures or percentages in a column may not add up to the total for that column.

 



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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This annual report on Form 20-F contains forward-looking statements that reflect our current expectations and views of future events. The forward-looking statements are contained principally in the sections titled “Item 3. Key Information,” “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects.” Some of these forward-looking statements can be identified by terms and phrases such as “anticipate,” “should,” “likely,” “foresee,” “believe,” “estimate,” “expect,” “intend,” “continue,” “could,” “may,” “plan,” “project,” “predict,” “will” and similar expressions. These forward-looking statements include statements relating to:

 

·                  our goals and strategies;

 

·                  our ability to increase or otherwise vary our harvest volume in the short or long term and our expected investments in working capital;

 

·                  the expected trends in global demand for seafood;

 

·                  capacity to expand salmon production in Norway;

 

·                  our ability to complete the construction (timely or at all) and the expected performance of the fish feed plant which we are constructing;

 

·                  the expected benefits from our acquisition and integration of Morpol ASA and divestiture of some of Morpol ASA’s Scottish operations;

 

·                  the expected trends in the seafood industry, globally and regionally;

 

·                  the expected trends in human population growth;

 

·                  our ability to control or mitigate biological risks, including fish diseases and sea lice, through the use of vaccines, treatment or otherwise;

 

·                  expected developments in the cost and availability of fish feed raw materials;

 

·                  our ability to implement (successfully or at all) our restructuring initiatives;

 

·                  climate change;

 

·                  our expected capital expenditures and commitments;

 

·                  our ability to maintain access to quality fish feed;

 

·                  future movements in the price of salmon and other seafood;

 

·                  our ability to continue to develop new and attractive products;

 

·                  our future business development, results of operations and financial condition;

 

·                  competition in our industry;

 

·                  the prospects of the Chilean salmon industry;

 

·                  our VAP restructuring plans, including closure of production facilities;

 

·                  our plans with respect to construction and opening of new production facilities;

 

·                  our ability meet our research and development plans and expectations; and

 

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·                  developments in, or changes to, the laws, regulation and governmental policies governing our business and industry.

 

The preceding list is not intended to be an exhaustive list of all of our forward-looking statements. The forward-looking statements are based on our beliefs, assumptions and expectations of future performance, taking into account the information currently available to us. These statements are only predictions based upon our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements. In particular, such factors are described in “Item 3. Key Information—D. Risk Factors” in this annual report.

 

These forward-looking statements speak only as of the date of this annual report. Except as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The factors set forth in “Item 3. Key Information—D. Risk Factors” that could cause our actual results to differ materially from those contemplated in any forward-looking statement included in this annual report should not be construed as exhaustive. You should read this annual report and the documents filed as exhibits to it completely and with the understanding that our actual future results may be materially different from our expectations.

 

3


 


Table of Contents

 

PART I

 

ITEM 1.    Identity of Directors, Senior Management and Advisers.

 

A. Directors and Senior Management.

 

Not applicable.

 

B. Advisers.

 

Not applicable.

 

C. Auditors.

 

Not applicable.

 

ITEM 2.    Offer Statistics and Expected Timetable.

 

Not applicable.

 

ITEM 3.    Key Information.

 

A. Selected Financial Data.

 

The following tables set forth our selected consolidated financial and other data. You should read the following selected consolidated financial and other data together with the information in “Item 5. Operating and Financial Review and Prospects” and “Item 3. Key Information—D. Risk Factors,” and our consolidated financial statements and the related notes included elsewhere in this annual report. Historical results are not indicative of the results to be expected in the future. Our financial statements have been prepared in accordance with IFRS as published by the IASB.

 

The selected consolidated financial data as of and for the years ended December 31, 2013, 2012 and 2011 have been derived from our audited consolidated financial statements for those periods, which are included elsewhere in this annual report. The selected consolidated financial data as of and for the year ended December 31, 2010 have been derived from our audited consolidated financial statements for that period, which are not included in this annual report. The selected consolidated financial data as of and for the year ended December 31, 2009 have been derived from our unaudited consolidated financial statements for that period.

 

The financial information below includes certain non-IFRS measures used to evaluate our economic and financial performance. These measures are not identified as accounting measures under IFRS and therefore should not be considered as an alternative measure to evaluate our performance.

 

Gutted weight equivalent, or GWE, statistic measures the weight of the fish with head on, gutted.

 

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Year Ended December 31,

 

 

 

2013

 

2012

 

2011

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

(unaudited)

 

 

 

(in NOK million, except for per share and number of shares
data)

 

Consolidated Income Statement Data:

 

 

 

 

 

 

 

 

 

 

 

Revenue and other income

 

19,199.4

 

15,463.5

 

16,132.8

 

15,281.2

 

14,619.5

 

Cost of materials

 

-9,998.5

 

-9,666.5

 

-8,398.6

 

-7,732.0

 

-8,796.6

 

Fair value uplift on harvested fish

 

-4,323.7

 

-1,597.5

 

-3,260.1

 

-4,370.3

 

-3,023.0

 

Fair value adjustment on biological assets

 

6,118.3

 

1,993.5

 

949.3

 

5,882.8

 

3,415.7

 

Salary and personnel expenses

 

-2,674.3

 

-2,418.7

 

-2,177.8

 

-2,202.5

 

-2,167.4

 

Other operating expenses

 

-2,581.9

 

-2,163.5

 

-2,063.2

 

-1,502.5

 

-1,448.2

 

Depreciation and amortization

 

-762.5

 

-677.2

 

-666.7

 

-653.0

 

-687.7

 

Provision for onerous contracts

 

-124.7

 

-6.1

 

-5.8

 

-14.3

 

 

Restructuring costs

 

-272.8

 

-0.8

 

-21.8

 

-4.4

 

-169.5

 

Other non-operational items

 

-74.4

 

 

 

 

 

Income/loss from associated companies

 

221.8

 

83.6

 

-15.0

 

194.9

 

83.9

 

Impairment losses

 

-65.0

 

-0.5

 

-67.0

 

-5.0

 

-373.1

 

Earnings before interest and taxes (EBIT)

 

4,661.8

 

1,009.8

 

406.0

 

4,874.9

 

1,453.5

 

Interest expenses

 

-640.2

 

-382.8

 

-405.8

 

-380.3

 

-404.3

 

Net currency effects

 

-311.7

 

523.3

 

236.4

 

366.7

 

682.0

 

Other financial items

 

-252.4

 

-320.0

 

342.9

 

-195.3

 

35.1

 

Earnings before taxes (EBT)

 

3,457.4

 

830.3

 

579.5

 

4,666.0

 

1,766.3

 

Taxes

 

-1,026.8

 

-389.0

 

-46.7

 

-1,254.3

 

-381.7

 

Profit or loss from continuing operations

 

2,430.6

 

441.3

 

532.8

 

3,411.7

 

1,84.6

 

Profit after tax from discontinued operations

 

91.9

 

 

 

 

 

Profit or loss for the period

 

2,522.5

 

441.3

 

532.8

 

3,411.7

 

1,384.6

 

Profit or loss for the period attributable to:

 

 

 

 

 

 

 

 

 

 

 

Non-controlling interests

 

7.4

 

4.0

 

5.5

 

30.5

 

5.9

 

Owners of Marine Harvest ASA

 

2,515.1

 

437.3

 

527.3

 

3,381.2

 

1,378.7

 

Weighted average number of shares, basic and diluted (in millions of shares)

 

3,775.2

 

3,586.4

 

3,579.3

 

3,574.9

 

3,536.0

 

Earnings per share—basic and diluted (in NOK/share)

 

0.67

 

0.12

 

0.15

 

0.95

 

0.39

 

Earnings per share — basic and diluted (in NOK per share) from continued operations

 

0.65

 

0.12

 

0,15

 

0,95

 

0,39

 

Dividends per share (in NOK)

 

0.225

 

 

0.80

 

0.60

 

 

Dividends per share (in USD)(1)

 

0.04

 

 

0.14

 

0.09

 

 

 


(1)         The conversions are provided solely for convenience of the reader and were calculated using the NOK to USD closing rate on the date of the dividend payment, using the official exchange rate quoted by the Noon Buying Rate certified by the Federal Reserve Bank of New York for customs purposes.

 

 

 

As of December 31,

 

 

 

2013

 

2012

 

2011

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

(unaudited)

 

 

 

(in NOK million)

 

Consolidated Statement of Financial Position:

 

 

 

 

 

 

 

 

 

 

 

Inventory

 

1,751.1

 

819.7

 

783.0

 

775.8

 

742.7

 

Biological assets

 

9,536.6

 

6,207.9

 

6,239.3

 

8,034.0

 

5,688.9

 

Trade receivables

 

3,191.4

 

1,782.0

 

1,914.9

 

1,844.9

 

1,672.1

 

Other receivables

 

1,086.5

 

592.7

 

609.8

 

814.7

 

551.6

 

Cash

 

606.2

 

335.3

 

279.1

 

318.9

 

172.2

 

Total current assets

 

16,171.8

 

9,737.6

 

9,826.1

 

11,788.3

 

8,827.5

 

Assets held for sale

 

1,059.1

 

 

 

 

 

Total assets

 

33,727.7

 

23,317.4

 

22,747.3

 

24,295.9

 

20,745.4

 

Total equity

 

16,346.3

 

11,688.6

 

10,813.4

 

13,134.1

 

11,722.6

 

Total non-current liabilities

 

12,051.3

 

8,296.9

 

9,028.2

 

8,120.1

 

6,453.3

 

Total current liabilities

 

5,139.6

 

3,331.9

 

2,905.7

 

3,041.8

 

2,569.5

 

Liabilities held for sale

 

190.5

 

 

 

 

 

Total equity and liabilities

 

33,727.7

 

23,317.4

 

22,747.3

 

24,295.9

 

20,745.4

 

 

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Year ended December 31,

 

 

 

2013

 

2012

 

2011

 

 

 

(unaudited)

 

(unaudited)

 

(unaudited)

 

Other Financial and Operating Data:

 

 

 

 

 

 

 

Harvest Volume (in tons GWE)

 

 

 

 

 

 

 

Salmon of Norwegian origin

 

222,494

 

255,306

 

217,510

 

Salmon of Scottish origin

 

48,389

 

40,261

 

50,174

 

Salmon of Canadian origin

 

33,059

 

40,217

 

33,917

 

Salmon of Chilean origin

 

28,281

 

40,222

 

25,960

 

Salmon of Irish origin

 

5,883

 

9,407

 

9,332

 

Salmon of Faroese origin

 

5,665

 

6,893

 

5,927

 

Total harvest volume

 

343,772

 

392,306

 

342,820

 

Average price achievement(1)

 

95

%

105

%

110

%

Contract coverage(2)

 

37

%

33

%

43

%

Quality—superior share(3)

 

89

%

91

%

92

%

 

 

 

 

 

 

(in NOK million, except for per share and
number of shares data)

 

Segment Operational EBIT—Farming

 

3,001.1

 

415.1

 

2,489.6

 

Segment Operational EBIT—Markets

 

346.3

 

344.2

 

228.3

 

Segment Operational EBIT—VAP Europe

 

-57.7

 

5.8

 

107.9

 

Segment Operational EBIT—Morpol Processing

 

62.6

 

 

 

Segment Operational EBIT—Other

 

-139.9

 

-121.7

 

-108.4

 

Group Operational EBIT(4)

 

3,212.4

 

643.4

 

2,717.3

 

ROCE(5)

 

18.5

%

3.9

%

16.8

%

NIBD/equity(6)

 

47.7

%

46.0

%

59.8

%

 


(1)         Our average price achievement ranks the prices that we are able to achieve on our products against a salmon price index. The achievement is measured against NOS/Fish Pool for salmon of Norwegian and Faroese origin, a derived NOS/Fish Pool (NOS/Fish Pool plus a margin) for salmon of Scottish origin and Urner Barry for salmon of Canadian and Chilean origin. NOS/Fish Pool is an index of prices for Norwegian salmon provided by NOS Clearing ASA, a subsidiary of NASDAQ OMX Group Inc. Urner Barry provides reference prices for Chilean salmon in Miami and North American salmon in Seattle. The reference prices are spot prices for superior quality salmon, while our achieved price is a blend of spot and contract price for all qualities. The average price achievement demonstrates our ability to sell our products at above market rates and is thus important for understanding our performance. In situations where contract prices deviate from spot prices or the quality of our sold fish is low, our achieved price will deviate from the reference price.

(2)         The contract coverage represents the percentage of our products that was sold pursuant to contracts. For this purpose, a contract is defined as a commitment to sell our salmon at a fixed price for a period of three months or longer.

(3)         Superior share of salmon is the percentage of salmon harvested that is classified as superior grade salmon divided by the total volume of harvested salmon. If salmon for some reason, e.g., pale color or scale loss, cannot be classified as a superior product, it is downgraded and sold as a production or ordinary grade product at a lower price.

(4)         Operational EBIT.    Operational EBIT at Group level is a non-IFRS financial measure. Refer to the section below for how we define Operational EBIT and reconcile it to earnings before interest and taxes, or EBIT.

(5)         ROCE.    Return on Capital Employed, or ROCE, is a non-IFRS financial measure. Refer to the section below for how we define and calculate ROCE.

(6)         NIBD/equity.    NIBD/equity is a non-IFRS financial measure. Refer to the section below for how we define and calculate NIBD/equity.

 

Non-IFRS Financial Measures

 

Operational EBIT.    Operational EBIT at Group level and by country of origin is a non-IFRS financial measure, calculated by excluding each of the following items from EBIT as set forth in our consolidated statement of income prepared in accordance with IFRS: change in unrealized salmon derivatives (at Group level only), fair value uplift on harvested fish, fair value adjustment on biological assets, provision for onerous contracts, restructuring costs, income/loss from associated companies, impairment losses and other non-operational items (accrual for contingent liabilities and provisions). We exclude these items from our EBIT as we believe they affect the comparability of our operational performance from period to period, given their non-operational or non-recurring nature. Operational EBIT is used by management, analysts, rating agencies and investors in assessing our performance. Accordingly, we believe that the presentation of Operational EBIT provides useful information to investors. Our use of Operational EBIT should not be viewed as an alternative to EBIT or to profit or loss for the year, which are measures calculated in accordance with IFRS. Operational EBIT has limitations as an analytical tool in comparison to EBIT or other profit and loss measures prepared in accordance with IFRS. Some of these limitations are: (i) it does not reflect the impact of earnings or charges that we consider not to be indicative of our on-going operations, (ii) it does not reflect interest and income tax expense; and (iii) other companies, including other companies in our industry, may calculate Operational EBIT differently than we do, limiting its usefulness as a comparative measure. Our Operational EBIT is reconciled to EBIT below.

 

ROCE.    ROCE is a non-IFRS financial measure, calculated by dividing Adjusted EBIT by average capital employed. Adjusted EBIT is calculated as EBIT, as set forth in our consolidated statement of income prepared in accordance with IFRS, adjusted for fair value uplift on harvested fish, fair value adjustment on biological assets, provision for onerous contracts and other non-operational items (accrual for contingent liabilities and provisions). Average capital employed is calculated as average of the beginning of the period and end of the period capital employed except when there are material transactions during the year. Capital employed is the sum of net interest

 

6



Table of Contents

 

bearing debt, or NIBD, as of the end of the period plus equity as of the end of the period adjusted for fair value adjustment on biological assets, provision for onerous contracts and, for the period from January 1, 2013 until September 30, 2013, our investment in Morpol. The investment in Morpol was excluded from the calculation of capital employed as until the acquisition of Morpol was cleared by the relevant competition authorities, we were unable to consolidate Morpol’s financial results into our financial statements. Our NIBD as of the end of a period (for purposes of calculating average NIBD) is equal to our total non-current interest-bearing debt minus our total cash and plus our current interest-bearing debt. We use ROCE to measure the return on capital employed, regardless of whether the financing is through equity or debt. In our view, this measure provides useful information for both management and our investors about our performance during periods under evaluation. We believe that the presentation of ROCE provides useful information to investors because ROCE can be used to determine whether capital invested in us yields competitive returns. In addition, achievement of predetermined targets relating to ROCE is one of the factors we take into account in determining the amount of performance-based compensation paid to our management. Our use of ROCE should not be viewed as an alternative to EBIT or to profit or loss for the year, which are measures calculated in accordance with IFRS or ratios based on these figures. The usefulness of ROCE is also inherently limited by the fact that it is a ratio and thus does not provide information as to the absolute amount of our income, debt or equity. It also excludes certain items from the calculation and other companies may use a similar measure but calculate it differently. A table setting forth our calculation of ROCE is set forth below.

 

NIBD/equity.    NIBD/equity is a non-IFRS financial measure. Management employs NIBD divided by total equity, as set forth in our consolidated financial statements, to assess our liquidity and financial position. Our NIBD as of the end of a period is equal to our total interest-bearing debt minus our total cash and plus our current interest-bearing debt, in each case as set forth in our consolidated statement of financial position. Management, analysts, rating agencies and investors use our NIBD/equity ratio to assess our liquidity and measure our cash flow. The usefulness of NIBD/equity is inherently limited by the fact that it is a ratio and thus does not provide information as to the absolute amounts of our debt or equity. A table setting forth our calculation of NIBD/equity is set forth below.

 

The following table reconciles our Group Operational EBIT to EBIT in NOK million for the years ended December 31, 2013, 2012 and 2011:

 

 

 

Year ended December 31,

 

 

 

2013

 

2012

 

2011

 

 

 

(in NOK million)

 

Group Operational EBIT

 

3,212.4

 

643.4

 

2,717.3

 

Change in unrealized salmon derivatives

 

-30.2

 

-105.8

 

-109.3

 

Fair value uplift on harvested fish

 

-4,323.7

 

-1,597.5

 

-3,260.1

 

Fair value adjustment on biological assets

 

6,118.3

 

1,993.5

 

949.2

 

Provision for onerous contracts

 

-124.7

 

-6.1

 

-5.8

 

Restructuring costs

 

-272.8

 

-0.8

 

-21.8

 

Income/loss from associated companies

 

221.8

 

83.6

 

-15.0

 

Impairment losses

 

-65.0

 

-0.5

 

-67.0

 

Other non-operational items

 

-74.4

 

 

 

Group earnings before interest and taxes (EBIT)

 

4,661.8

 

1,009.8

 

406.0

 

 

The following table reconciles Group level Operational EBIT to EBIT in NOK per kilogram for the years ended December 31, 2013, 2012 and 2011:

               

 

 

Year ended December 31,

 

 

 

2013

 

2012

 

2011

 

 

 

(NOK per kg)

 

Group Operational EBIT

 

9.34

 

1.64

 

7.93

 

Change in unrealized salmon derivatives

 

-0.09

 

-0.27

 

0.32

 

Fair value uplift on harvested fish

 

-12.58

 

-4.07

 

-9.51

 

Fair value adjustment on biological assets

 

17.80

 

5.08

 

2.77

 

Provision for onerous contracts

 

-0.36

 

-0.02

 

-0.02

 

Restructuring costs

 

-0.79

 

 

-0.06

 

Income/loss from associated companies

 

0.65

 

0.21

 

-0.04

 

Impairment losses

 

-0.19

 

 

-0.20

 

Other non-operational items

 

-0.22

 

 

 

Group EBIT

 

13.56

 

2.57

 

1.18

 

 

7



Table of Contents

 

The following table reconciles Operational EBIT to EBIT for salmon of Norwegian origin in NOK million for the years ended December 31, 2013, 2012 and 2011:

 

 

 

Year ended December 31,

 

 

 

2013

 

2012

 

2011

 

 

 

 

 

 

 

 

 

Operational EBIT—Salmon of Norwegian Origin

 

2,410.2

 

823.5

 

1,990.6

 

Fair value uplift on harvested fish

 

-2,898.1

 

-1,238.5

 

-1,961.1

 

Fair value adjustment on biological assets

 

4,012.1

 

1,767.3

 

223.4

 

Provision for onerous contracts

 

-99,0

 

-12.5

 

7.9

 

Restructuring costs

 

 

 

 

Income/loss from associated companies

 

221.8

 

82.7

 

-15.0

 

Impairment losses

 

-5.9

 

-1.4

 

-5.1

 

Other non-operational items

 

 

 

 

EBIT—Salmon of Norwegian Origin

 

3,641.1

 

1,421.1

 

240.5

 

 

The following table reconciles Operational EBIT to EBIT for salmon of Norwegian origin in NOK per kilogram for the years ended December 31, 2013, 2012 and 2011:

 

 

 

Year ended December 31,

 

 

 

2013

 

2012

 

2011

 

 

 

(in NOK per kg)

 

Operational EBIT—Salmon of Norwegian Origin

 

10.83

 

3.23

 

9.15

 

Fair value uplift on harvested fish

 

-13.03

 

-4.85

 

-9.02

 

Fair value adjustment on biological assets

 

18.03

 

6.92

 

1.03

 

Provision for onerous contracts

 

-0.44

 

-0.05

 

0.04

 

Restructuring costs

 

 

 

 

Income/loss from associated companies

 

1.00

 

0.32

 

-0.07

 

Impairment losses

 

-0.03

 

-0.01

 

-0.02

 

Other non-operational items

 

 

 

 

EBIT—Salmon of Norwegian Origin

 

16.36

 

5.57

 

1.11

 

 

The following table reconciles Operational EBIT to EBIT for salmon of Scottish origin in NOK million for the years ended December 31, 2013, 2012 and 2011:

               

 

 

Year ended December 31,

 

 

 

2013

 

2012

 

2011

 

 

 

(in NOK million)

 

Operational EBIT—Salmon of Scottish Origin

 

602.7

 

153.0

 

519.3

 

Fair value uplift on harvested fish

 

-822.3

 

-276.3

 

-693.1

 

Fair value adjustment on biological assets

 

1,003.1

 

268.1

 

488.1

 

Provision for onerous contracts

 

-25.7

 

6.4

 

-13.2

 

Restructuring costs

 

 

 

 

Income/loss from associated companies

 

 

0.2

 

 

Impairment losses

 

 

0.3

 

-0.6

 

Other non-operational items

 

 

 

 

EBIT—Salmon of Scottish Origin

 

757.8

 

151.8

 

300.5

 

 

8



Table of Contents

 

The following table reconciles Operational EBIT to EBIT for salmon of Scottish origin in NOK per kilogram for the years ended December 31, 2013, 2012 and 2011:

 

 

 

Year ended December 31,

 

 

 

2013

 

2012

 

2011

 

 

 

(in NOK per kg)

 

Operational EBIT—Salmon of Scottish Origin

 

12.45

 

3.80

 

10.35

 

Fair value uplift on harvested fish

 

-16.99

 

-6.86

 

-13.81

 

Fair value adjustment on biological assets

 

20.73

 

6.66

 

9.73

 

Provision for onerous contracts

 

-0.53

 

0.16

 

-0.26

 

Restructuring costs

 

 

 

 

Income/loss from associated companies

 

 

0.01

 

 

Impairment losses

 

 

0.01

 

-0.01

 

Other non-operational items

 

 

 

 

EBIT—Salmon of Scottish Origin

 

15.66

 

3.77

 

5.99

 

 

The following table reconciles Operational EBIT to EBIT for salmon of Canadian origin in NOK million for the years ended December 31, 2013, 2012 and 2011:

 

 

 

Year ended December 31,

 

 

 

2013

 

2012

 

2011

 

 

 

(in NOK million)

 

Operational EBIT—Salmon of Canadian Origin

 

336.8

 

-140.1

 

39.6

 

Fair value uplift on harvested fish

 

-360.3

 

-9.9

 

-198.7

 

Fair value adjustment on biological assets

 

598.9

 

-6.7

 

-38.3

 

Provision for onerous contracts

 

 

 

 

Restructuring costs

 

-4.3

 

-0.8

 

-23.4

 

Income/loss from associated companies

 

 

 

 

Impairment losses

 

-2.1

 

-2.2

 

-54.5

 

Other non-operational items

 

 

 

 

EBIT—Salmon of Canadian Origin

 

569.0

 

-159.6

 

-275.2

 

 

The following table reconciles Operational EBIT to EBIT for salmon of Canadian origin in NOK per kilogram for the years ended December 31, 2013, 2012 and 2011:

 

 

 

Year ended December 31,

 

 

 

2013

 

2012

 

2011

 

 

 

(in NOK per kilogram)

 

Operational EBIT—Salmon of Canadian Origin

 

10.19

 

-3.48

 

1.17

 

Fair value uplift on harvested fish

 

-10.90

 

-0.25

 

-5.86

 

Fair value adjustment on biological assets

 

18.12

 

-0.17

 

-1.13

 

Provision for onerous contracts

 

 

 

 

Restructuring costs

 

-0.13

 

-0.02

 

-0.69

 

Income/loss from associated companies

 

 

 

 

Impairment losses

 

-0.06

 

-0.05

 

-1.61

 

Other non-operational items

 

 

 

 

EBIT—Salmon of Canadian Origin

 

17.21

 

-3.97

 

-8.11

 

 

9


 


Table of Contents

 

The following table reconciles Operational EBIT to EBIT for salmon of Chilean origin in NOK million for the years ended December 31, 2013, 2012 and 2011:

 

 

 

Year ended December 31,

 

 

 

2013

 

2012

 

2011

 

 

 

(in NOK million)

 

Operational EBIT—Salmon of Chilean Origin

 

-65.7

 

-90.9

 

110.6

 

Fair value uplift on harvested fish

 

-123.9

 

27.1

 

-211.0

 

Fair value adjustment on biological assets

 

284.2

 

-97.6

 

143.2

 

Provision for onerous contracts

 

 

 

 

Restructuring costs

 

 

 

 

Income/loss from associated companies

 

 

 

 

Impairment losses

 

1.3

 

3.0

 

-5.5

 

Other non-operational items

 

-74.4

 

 

 

EBIT—Salmon of Chilean Origin

 

21.5

 

-158.4

 

37.2

 

 

The following table reconciles Operational EBIT to EBIT for salmon of Chilean origin in NOK per kilogram for the years ended December 31, 2013, 2012 and 2011:

 

 

 

Year ended December 31,

 

 

 

2013

 

2012

 

2011

 

 

 

(in NOK per kg)

 

Operational EBIT—Salmon of Chilean Origin

 

-2.32

 

-2.26

 

4.26

 

Fair value uplift on harvested fish

 

-4.38

 

0.67

 

-8.13

 

Fair value adjustment on biological assets

 

10.05

 

-2.43

 

5.52

 

Provision for onerous contracts

 

 

 

 

Restructuring costs

 

 

 

 

Income/loss from associated companies

 

 

 

 

Impairment losses

 

0.05

 

0.07

 

-0.21

 

Other non-operational items

 

-2.63

 

 

 

EBIT—Salmon of Chilean Origin

 

0.76

 

-3.94

 

1.43

 

 

The following table reconciles Operational EBIT to EBIT for salmon of Irish origin in NOK million for the years ended December 31, 2013, 2012 and 2011:

 

 

 

Year ended December 31,

 

 

 

2013

 

2012

 

2011

 

 

 

(in NOK million)

 

Operational EBIT—Salmon of Irish Origin

 

-29.6

 

13.6

 

74.4

 

Fair value uplift on harvested fish

 

-41.4

 

-82.3

 

-114.7

 

Fair value adjustment on biological assets

 

44.0

 

46.9

 

102.5

 

Provision for onerous contracts

 

 

 

 

Restructuring costs

 

 

 

 

Income/loss from associated companies

 

 

0.1

 

 

Impairment losses

 

 

-0.1

 

-0.1

 

Other non-operational items

 

 

 

 

EBIT—Salmon of Irish Origin

 

-26.9

 

-21.8

 

62.1

 

 

10



Table of Contents

 

The following table reconciles Operational EBIT to EBIT for salmon of Irish origin in NOK per kilogram for the years ended December 31, 2013, 2012 and 2011:

 

 

 

Year ended December 31,

 

 

 

2013

 

2012

 

2011

 

 

 

(NOK per kg)

 

Operational EBIT—Salmon of Irish Origin

 

-5.02

 

1.45

 

7.97

 

Fair value uplift on harvested fish

 

-7.03

 

-8.75

 

-12.29

 

Fair value adjusted on biological assets

 

7.48

 

4.98

 

10.98

 

Provision for onerous contracts

 

 

 

 

Restructuring costs

 

 

 

 

Income/loss from associated companies

 

 

0.01

 

 

Impairment losses

 

 

-0.01

 

-0.01

 

Other non-operational items

 

 

 

 

EBIT—Salmon of Irish Origin

 

-4.58

 

-2.31

 

6.66

 

 

The following table reconciles Operational EBIT to EBIT for salmon of Faroese origin in NOK million for the years ended December 31, 2013, 2012 and 2011:

 

 

 

Year ended December 31,

 

 

 

2013

 

2012

 

2011

 

 

 

(in NOK million)

 

Operational EBIT—Salmon of Faroese Origin

 

84.2

 

12.1

 

60.9

 

Fair value uplift on harvested fish

 

-77.7

 

-17.7

 

-81.0

 

Fair value adjustment on biological assets

 

168.7

 

24.3

 

28.2

 

Provision for onerous contracts

 

 

 

 

Restructuring costs

 

 

 

 

Income/loss from associated companies

 

 

 

 

Impairment losses

 

 

 

 

Other non-operational items

 

 

 

 

EBIT—Salmon of Faroese Origin

 

175.2

 

18.7

 

8.0

 

 

The following table reconciles Operational EBIT to EBIT for salmon of Faroese origin in NOK per kilogram for the years ended December 31, 2013, 2012 and 2011:

 

 

 

Year ended December 31,

 

 

 

2013

 

2012

 

2011

 

 

 

(NOK per kg)

 

Operational EBIT—Salmon of Faroese Origin

 

14.86

 

1.76

 

10.27

 

Fair value uplift on harvested fish

 

-13.72

 

-2.57

 

-13.67

 

Fair value adjustment on biological assets

 

29.78

 

3.53

 

4.75

 

Provision for onerous contracts

 

 

 

 

Restructuring costs

 

 

 

 

Income/loss from associated companies

 

 

 

 

Impairment losses

 

 

 

 

Other non-operational items

 

 

 

 

EBIT—Salmon of Faroese Origin

 

30.93

 

2.72

 

1.36

 

 

11



Table of Contents

 

The following tables set forth our calculation of ROCE, requiring reconciliation of Adjusted EBIT to EBIT and NIBD to Non-current interest-bearing debt, for the years ended December 31, 2013, 2012 and 2011:

 

 

 

As of and for the
year ended December 31,

 

 

 

2013

 

2012

 

2011

 

 

 

(in NOK million, except ROCE)

 

Adjusted EBIT

 

3,066.2

 

619.9

 

2,722.7

 

Fair value uplift on harvested fish

 

-4,323.7

 

-1,597.5

 

-3,260.1

 

Fair value adjustment on biological assets

 

6,118.3

 

1,993.5

 

949.2

 

Provision for onerous contracts

 

-124.7

 

-6.1

 

-5.8

 

Other non-operational items

 

-74.4

 

 

 

EBIT

 

4,661.8

 

1,009.8

 

406.0

 

Net interest-bearing debt (NIBD)

 

7,790.7

 

5,381.0

 

6,467.3

 

Cash

 

606.2

 

335.3

 

279.1

 

Current interest-bearing debt

 

-686.7

 

-377.8

 

-157.0

 

Non-current interest-bearing debt

 

7,710.2

 

5,338.5

 

6,589.4

 

NIBD

 

7,790.7

 

5,381.0

 

6,467.3

 

Investment in Morpol

 

-868.6

 

-937.6

 

 

Total equity

 

16,346.3

 

11,688.6

 

10,813.4

 

Fair value adjustment on biological assets

 

-2,742.9

 

-835.7

 

-445.9

 

Provision for onerous contracts

 

153.5

 

25.1

 

19.4

 

Capital employed as of the end of the period

 

20,679.0

 

15,321.4

 

16,854.2

 

Average capital employed(1)

 

16,603.7

 

16,087.8

 

16,227.3

 

Adjusted EBIT

 

3,066.2

 

619.9

 

2,722.7

 

ROCE

 

18.5

%

3.9

%

16.8

%

 


(1)         Calculated as the average capital employed as of the beginning and the end of the period, except when there are material transactions during the year. Morpol is included from September 30, 2013.

 

The following table sets forth our calculation of NIBD/equity for the years ended December 31, 2013, 2012 and 2011:

 

 

 

As of December 31,

 

 

 

2013

 

2012

 

2011

 

 

 

(in NOK million)

 

NIBD

 

7,790.7

 

5,381.0

 

6,467.3

 

Cash

 

606.2

 

335.3

 

279.1

 

Current interest-bearing debt

 

-686.7

 

-377.8

 

-157.0

 

Non-current interest-bearing debt

 

7,710.2

 

5,338.5

 

6,589.4

 

NIBD

 

7,790.7

 

5,381.0

 

6,467.3

 

Total equity

 

16,346.3

 

11,688.6

 

10,813.4

 

NIBD/equity

 

47.7

%

46.0

%

59.8

%

 

Exchange Rates

 

The following are the Noon Buying Rates certified by the Federal Reserve Bank of New York for customs purposes, or the Noon Buying Rate, expressed in NOK per USD for the periods stated.

 

Period

 

High

 

Low

 

Period End

 

Period average(1)

 

Year ended December 31, 2009

 

7.278

 

5.537

 

5.790

 

6.258

 

Year ended December 31, 2010

 

6.670

 

5.616

 

5.890

 

6.064

 

Year ended December 31, 2011

 

6.027

 

5.225

 

5.968

 

5.561

 

Year ended December 31, 2012

 

6.130

 

5.560

 

5.562

 

5.785

 

Year ended December 31, 2013

 

6.263

 

5.431

 

6.066

 

5.877

 

October 2013

 

6.035

 

5.877

 

 

 

November 2013

 

6.199

 

5.948

 

 

 

December 2013

 

6.199

 

6.066

 

 

 

January 2014

 

6.277

 

6.084

 

 

 

February 2014

 

6.292

 

5.993

 

 

 

March 2014

 

6.060

 

5.931

 

 

 

April 2014 (through April 18)

 

6.012

 

5.912

 

 

 

 

12



Table of Contents

 


(1)         The period average in respect of a year is calculated as the average of the exchange rates on the last business day of each month for the relevant period.

 

These rates may differ from the actual rates used in the preparation of our consolidated financial statements and other financial information appearing in this annual report. We make no representation that USD or NOK amounts referred to in this annual report have been, could have been or could, in the future, be converted into NOK or USD, as the case may be, at any particular rate, if at all. On April 18, 2014, the Noon Buying Rate was set at NOK 5.985 per U.S.$1.00.

 

B. Capitalization and Indebtedness.

 

Not applicable.

 

C. Reasons for the Offer and Use of Proceeds.

 

Not applicable.

 

D. Risk Factors

 

You should carefully consider the risks described below with all of the other information included in this annual report. If any of the following risks actually occurs, it may materially harm our business, results of operations or financial condition. This annual report also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks faced by us described below and elsewhere in this annual report.

 

We have divided our risks into the following categories:

 

·                  Risks Related to the Sale of Our Products;

 

·                  Risks Related to Government Regulation;

 

·                  Risks Related to Our Fish Farming Operations;

 

·                  Risks Related to Our Industry;

 

·                  Risks Related to Our Business;

 

·                  Risks Related to Acquisitions and Expansions;

 

·                  Risks Related to Our Financing Arrangements;

 

·                  Risks Related to Climate Change;

 

·                  Risks Related to Our ADSs; and

 

·                  Risks Related to Tax Matters.

 

Risks Related to the Sale of Our Products

 

Our results are substantially dependent on salmon prices, and salmon prices are subject to large short- and long-term fluctuations due to variations in supply and demand caused by factors such as smolt release, biological factors, quality, shifts in consumption and license changes.

 

A substantial portion of our products sold are salmon products (representing approximately 91.0% of sales in 2013). Accordingly, our results of operation are substantially dependent on salmon prices. Global and regional prices of salmon are subject to significant fluctuation.

 

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Historically, prices have been driven primarily by the global and regional supply and demand for salmon. The demand for farmed salmon is affected by a number of different factors, such as changes in customer preferences, changes in public attitude towards farmed salmon, relative pricing of substitute products, such as poultry, pork and beef, and general economic conditions, such as levels of employment, inflation, growth in gross domestic product, or GDP, disposable income and consumer confidence. Demand for farmed salmon could decrease in the future and put downward pressure on salmon prices.

 

The supply of farmed salmon fluctuates strongly due to variations in factors, such as smolt release (which is determined one to two years prior to harvesting), feeding efficiency, biological factors, including seawater temperatures, sea lice and fish diseases. For example, in recent years, Chilean salmon production has been affected by Infectious Salmon Anemia, or ISA, significantly reducing global supply of salmon. As a result of the long production cycle (two to three years) with only a limited period available for harvesting, we and other salmon producers have limited flexibility in managing salmon supply from month to month. In addition, salmon is generally sold as a fresh commodity with a limited time span available between harvesting and consumption further limiting producers’ ability to control supply. The consequence of these dynamics is that salmon farmers are expected to be price takers in the market from week to week. Increases in harvests may therefore result in a significant reduction in salmon reference prices.

 

In addition, an increased utilization of current production licenses or issuance of new production licenses could result in short- and/or long-term over-production in the industry, which may result in a significant reduction in salmon reference prices.

 

Short-term or long-term decreases in the price of farmed salmon may have a material adverse effect on our revenues.

 

We may have limited flexibility to adjust our product mix away from salmon in order to accommodate changing pricing circumstances.

 

A reduction in the price of salmon may trigger a substantial reduction in the value of our biological assets.

 

We assess the value of our biological assets on a monthly basis, and the price of salmon is a significant factor in the valuation of our biological assets, which were valued at NOK 9,536.6 million and NOK 6,207.9 million as of December 31, 2013 and 2012, respectively. We recorded a net fair value adjustment on biological assets of NOK 2,742.9 million and NOK 395.9 million as of December 31, 2013 and 2012, respectively, with each adjustment being primarily driven by changes in the price of salmon. Future fluctuations in salmon prices may result in significant fair value adjustments.

 

We may be unable to effectively hedge our exposure to short- and medium-term fluctuations in salmon prices.

 

We seek to manage our exposure to short- and medium-term fluctuations in salmon reference prices through sales contracts and Fishpool financial futures as well as through our secondary processing activities (as prices for secondary processed salmon tend to be more stable than for primary processed salmon). However, our contracts and financial futures may not be fulfilled or may not be available in the future or may be ineffective in hedging our exposure to salmon price fluctuations. In addition, our sales contracts and financial futures may result in price achievement below reference prices in an environment of rising reference prices. Furthermore, our secondary processing activities may not reduce the impact of fluctuating salmon reference prices on our operations. An inability to effectively hedge our exposure to salmon prices may have a material adverse effect on our financial condition, results of operations or cash flow.

 

We could face higher costs for fish feed as a result of higher prices and reduced availability of the main ingredients used in fish feed production.

 

Fish feed costs accounted for approximately half of our “cost in box” in 2013, and as a result, our results of operations and financial condition are dependent upon the cost of fish feed. Cost in box refers to fish feed, other seawater and non-seawater costs of our Farming segment measured per kilogram of salmon packed in a standard box for shipping. The fish feed industry is characterized by three large, global suppliers typically operating under cost

 

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plus contracts (which is the case for all of our fish feed contracts) and fish feed prices are, accordingly, directly linked to the global markets for the main ingredients in fish feed: fish oil, fishmeal, canola oil, soy bean protein and wheat. Increases in the prices of these raw materials will result in an increase in our fish feed costs. The demand for fish feed is primarily driven by fish farming operations, which in turn depends on smolt stocking and farmed fish production levels, so increases in farmed fish production levels can lead to feed shortages and increases in fish feed prices (as demand for fish feed would increase demand for its ingredients). We may not be able to pass on increased fish feed costs to our customers.

 

Global inventories, currency fluctuations and seawater temperatures all affect the supply of feed ingredients. Limitations on the availability of certain commodities that are key inputs in fish feed, in particular marine resources such as fish oil, could lead to global shortages of the necessary raw materials. Fish oil and fishmeal are produced using wild caught fish such as anchovies. The extensive use of fish oil combined with a growing fish farming industry presents a sustainability challenge for the industry. Natural phenomena and global weather patterns, such as the recurring event El Niño in the Pacific Ocean, could result in a reduction in global access to raw materials for fish feed production. El Niño causes an increase in seawater temperatures in the South East Pacific, particularly along the coasts of Chile and Peru. As warmer oceans alter locations and types of fish stocks, fish catches of species suitable for fishmeal, such as anchovies, may decrease significantly. Other main ingredients such as canola oil, soy bean protein and wheat are subject to unpredictable price changes caused by supply and demand fluctuations, weather, size of harvest, transportation and storage cost, the state of the global and regional economy, geopolitical situation and the agricultural and other policies of governments throughout the world. As the cost of raw materials for fish feed increases so does the cost of feed itself. Because fish feed constitutes a significant percentage of our overall costs, an increase in the cost of fish feed directly increases our operating costs and could decrease our profit margins.

 

Termination of one or more of our feed contracts on short notice could result in material additional costs to us.

 

As the main feed suppliers normally enter into volume contracts and adapt their production volumes to prevailing supply commitments, there is generally limited excess of fish feed available in the market. If one or more of our feed contracts were to be terminated on short notice prior to their respective expiration dates, we may be forced to find alternative suppliers in the market on short notice, incurring additional costs. A shortage in feed supply may have a material adverse effect on our business, financial condition, results of operations or cash flow.

 

Reduction in the quality of our fish feed could have a material adverse effect on our production.

 

Fish feed is essential to our fish production as its quality affects the quality and volume of our harvests. Our feed conversion ratio, which measures the number of kilograms of fish feed needed to increase a fish’s bodyweight by one kilogram, may increase due to lower quality of ingredients used in the fish feed, an unfavorable mix of ingredients used in the fish feed or other factors beyond our control, including fish biology. Although we actively work with our fish feed suppliers to ensure that our fish feed is tailored to provide the highest fish growth at a low cost without sacrificing product quality, our efforts may not be successful. An increase in feed conversion ratio may have a material adverse effect on our production.

 

Market demand for our products may decrease.

 

We face competition from other producers of seafood as well as from other protein sources, such as pork, beef and poultry. The bases on which we compete include:

 

·                  price;

 

·                  product quality;

 

·                  brand identification; and

 

·                  customer service.

 

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Demand for our products is also affected by our competitors’ promotional spending. We may be unable to compete successfully on any or all of these bases in the future, which may have a material adverse effect on our revenues.

 

Moreover, although historically the logistics and perishability of seafood has led to regionalized competition, the market for fresh and frozen seafood is becoming increasingly globalized as a result of improved delivery logistics and improved preservation of the products. Increased competition, consolidation, and overcapacity may lead to lower product pricing of competing products that could reduce demand for our products and this may have a material adverse effect on our revenues.

 

Changes in consumer preferences or failure of our new products to appeal to consumers could adversely impact our business, especially our VAP Europe and Morpol Processing segments.

 

The food industry in general is subject to changing consumer trends, demands and preferences. Trends within the food industry change often. Failure to identify and react to changes in these trends could lead to, among other things, reduced demand for our products, especially for our VAP Europe and Morpol Processing segments. These segments comprise our European secondary processing and value added operations, as well as our European end product sales of secondary processed seafood, including logistics. Our secondary processed products are particularly susceptible to changes in consumer preferences.

 

In addition, our VAP Europe and Morpol Processing segments regularly introduces new products which may not appeal to our consumers’ preferences. To the extent such new offerings are unsuccessful, this business may suffer. Our continued success will depend in part on our ability to anticipate, identify and respond quickly to changing consumer preferences for fish, especially secondary processed seafood. Our inability to do so may have a material adverse effect on our business, financial condition, results of operations or cash flow.

 

Risks Related to Government Regulation

 

Failure to ensure food safety and compliance with food safety standards could result in serious adverse consequences for us.

 

As our end products are for human consumption, food safety issues (both actual and perceived) may have a negative impact on the reputation of and demand for our products. In addition to the need to comply with relevant food safety regulations, it is of critical importance that our products are safe and perceived as safe and healthy in all relevant markets.

 

Our products may be subject to contamination by food-borne pathogens, such as Listeria monocytogenes, Clostridia, Salmonella and E. Coli or contaminants. These pathogens and substances are found in the environment; therefore, there is a risk that one or more of these organisms and pathogens can be introduced into our products as a result of improper handling, poor processing hygiene or cross-contamination by us, the ultimate consumer or any intermediary. We have little, if any, control over handling procedures once we ship our products for distribution.

 

In 2012, we detected Listeria in cold smoked salmon processed at our factory in Chile. A voluntary recall was carried out in agreement with the U.S. Food and Drug Administration, or the FDA. No illness was experienced or reported in relation to the incident. The detection and resulting product recall resulted in inventory write-downs amounting to NOK 26.0 million. In July 2013, traces of crystal violet, a dye commonly used in textiles and ink found in pens and printer toner but also an anti-fungal agent banned in the United States, were found in salmon being imported into the United States from the secondary processing facilities of our Chilean third-party secondary processing facility. As a result, the FDA issued an import alert for the third-party Chilean secondary processing facility.

 

During 2013, our internal system for reporting food safety incidents captured eight incidents classified as more serious, none of which led to any reported illness or negative impact for consumers. In 2012 we reported 26 such incidents. We define a food safety incident as a situation that requires specific actions to maintain the safety of our products. Typical food safety incidents may be labeling errors related to ingredients that may cause allergies in sensitive individuals or to the product’s shelf life. Incidents defined as more serious are incidents that may have an

 

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impact on consumer health, e.g., such products may contain food-borne pathogens, foreign bodies or labeling errors related to allergens.

 

Furthermore, we may not be able to prevent contamination of our fish by pollutants such as polychlorinated biphenyls, or PCBs, dioxins or heavy metals. Such contamination is primarily the result of environmental contamination of fish feed raw materials such as fishmeal, fish oil and raw materials from crops, which could result in a corresponding contamination of our fish feed and our fish. Residues of environmental pollutants present in our fish feed may pass undetected in our products and may reach consumers due to failure in surveillance and control systems.

 

An inadvertent shipment of contaminated products may be a violation of law and may lead to product liability claims, product recalls (which may not entirely mitigate the risk of product liability claims), increased scrutiny and penalties, including injunctive relief and plant closings, by regulatory agencies, and adverse publicity.

 

Increased quality demands from authorities in the future relating to food safety may have a material adverse effect on our business, financial condition, results of operations or cash flow. Legislation and guidelines with tougher requirements are expected and may imply higher costs for the food industry. In particular, the ability to trace products through all stages of development, certification and documentation is becoming increasingly required under food safety regulations. Further, limitations on additives and use of medical products in the farmed salmon industry may be imposed, which could result in higher costs for us.

 

The food industry in general experiences high levels of customer awareness with respect to food safety and product quality, information and traceability. We may fail to meet new and exacting customer requirements, which could reduce demand for our products.

 

Governmental regulation, including food safety and aquaculture regulation, affects our business.

 

Fish farming and processing industries are subject to regional, federal and local governmental regulations relating to the farming, processing, packaging, storage, distribution, advertising, labeling, quality and safety of food products. New laws and regulations, or stricter (or otherwise adverse to us) interpretations of existing laws or regulations, may materially affect our business or operations in the future. Our operations are also subject to extensive and increasingly stringent regulations administered by environmental agencies in the jurisdictions in which we operate. Failure to comply with these laws, regulations or interpretations could have serious consequences, including criminal, civil and administrative penalties, loss of production, injunctions, product recalls and negative publicity. Some environmental Non-Government Organizations, or NGOs, have advocated for salmon farming to be restricted to farming in a contained environment, which would substantially increase our costs.

 

Relevant authorities may introduce further regulations for the operations of aquaculture facilities, such as enhanced standards of production facilities, capacity requirements, fish feed quotas, fish density, site allocation conditions or other parameters for production. Furthermore, authorities may impose stricter environmental requirements upon fish farming, e.g., restrictions or a ban on discharges of waste substances from the production facilities, stricter requirements for seabed restoration, stricter requirements to prevent fish escapes and new requirements regarding animal welfare. Investments necessary to meet new regulatory requirements and penalties for failure to comply with such requirements could be significant. Likewise, an absence of or ineffective government regulation may lead to unsustainable farming practices at an industry-wide level. The industry has historically been unable to cooperate to create sustainable practices in the absence of government regulation. We have therefore relied on such regulation to help create and enforce practices that ensure the long-term sustainability of the industry. Ineffective regulation can hinder our industry’s ability to implement sustainable and profitable practices. Accordingly changes in regulation or ineffective government regulation may have a material adverse effect on the fish farming industry as a whole, which could harm our business, financial condition, results of operations or cash flow.

 

Trade restrictions resulting in suboptimal distribution of salmon may be intensified, creating a negative impact on price in some countries.

 

Farmed salmon is produced in a limited number of countries and sold globally. Historically, trade restrictions have inhibited the optimal distribution of farmed salmon to the markets and impacted the price yield for

 

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the farmed salmon producers in the countries affected by such restrictions. Trade restrictions could include import prohibitions, minimum import prices and high import duties, reducing the competitiveness of our products as compared to other available products. Many of our production locations are located outside our principle markets, and therefore we are exposed to trade restrictions. Continuous effects of such trade restrictions or introduction of new trade restrictions may have a significant impact on our ability to sell in certain regions or our ability to charge competitive prices for our products in such regions.

 

We may not be permitted to continue to operate at sites located close to protected or highly sensitive areas or to use certain fish feed and medication at those sites.

 

Some of our sites are located close to protected areas or highly sensitive areas with respect to biodiversity. The effect of salmon farming on the environment and biodiversity is being intensively discussed among scientific groups. New developments in the perception of the impact of salmon farming on the environment (whether justified or not) may result in closure of sites located in vulnerable areas or requirements to implement costly measures. Specific additives used in fish feed and medication could become prohibited at these sites if found (or believed) to have an adverse impact on the environment. Compliance with such laws, rules and regulations, or a breach of them, may have a material adverse effect on our business, financial condition, results of operations or cash flow.

 

Our fish farming operations are dependent on fish farming licenses.

 

Most of the jurisdictions in which we operate require us to obtain a license for each fish farm owned and operated in that jurisdiction. We have obtained and currently hold a license to own and operate each of our fish farms where a license is required. In order to maintain the licenses, we have to operate our current farms and, if we pursue acquisitions or construction of new farms, we will need to obtain additional licenses to operate those farms, where required. Licenses in each country are subject to certain requirements, and we risk penalties (including, in some cases, criminal charges), sanctions or even loss of license if we fail to comply with license requirements or related regulations. See “Item 4. Information on the Company—B. Business Overview—Business—Regulation.” We are also exposed to dilution of our licenses where a government issues new licenses to fish farmers other than us, thereby reducing the current value of our fish farming licenses. Governments may change the way licenses are distributed or otherwise dilute or invalidate our licenses. If we are unable to maintain or obtain new fish farming licenses or if new licensing regulations dilute the value of our licenses, this may have a material adverse effect on our business.

 

Licenses generally require—and future licenses may require—that we leave the seabed under our fish farms fallow for a period of time following harvest. We may resume operation after a set period of time, provided that certain environmental and fish health targets are met. These requirements may increase or become more stringent, which could increase our costs.

 

Potential new licensing regime for the Norwegian salmon farming industry may increase the supply of salmon and biological risk.

 

The newly appointed government in Norway has signaled that it supports a more liberal licensing regime for the Norwegian salmon farming industry. One potential change is the introduction of an average calculation for the Maximum Allowed Biomass, or MAB. Under the current licensing regime, the standing biomass can at no time exceed the MAB. Given the significant variation in seawater temperatures during the year, Norwegian biomass fluctuates significantly throughout the year and normally peaks in October. Changing the applicability of MAB restrictions to an average instead of maximum biomass would significantly increase production capacity in Norway. This may result in significantly higher supply compared to the current regime and thereby drive down the price of salmon. It may also increase biological risks.

 

Norwegian salmon farming operation is subject to ownership restrictions and increased ownership may result in stricter requirements.

 

In Norway, acquisition of more than 15% of the production capacity for salmon and trout in seawater requires application to and approval by the Norwegian Ministry of Fisheries and Coastal Affairs, or the NMFCA. In addition, various ownership thresholds (15%, 20%, 25%, 30%, 35% and 40%) are accompanied by specific minimum requirements for R&D spending, secondary processing activities and contribution to the education of

 

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young talents. Furthermore, only in exceptional circumstances may the NMFCA approve acquisitions of licenses resulting in a company exceeding 40% of the total production capacity. We currently hold permission to own up to 25% of the total production capacity, and our total production in 2013 was approximately 22%. We may not be able to increase our production capacity in Norway, and if we increase our production capacity, our Norwegian operations could be subject to stricter requirements and conditions, increasing our operating costs. The ownership limitations and requirements have been subject to several amendments over the last decade due to shifting political circumstances, and until July 2013, no company was allowed to own more than 25% of the total concessionary biomass in Norway. If the newly adopted amendments are reversed or stricter regulations are otherwise implemented, this may limit our ability to expand our production in Norway and may have a material adverse effect on our business, financial condition, results of operations or cash flow.

 

Antitrust and competition regulation may restrict further growth in some of the jurisdictions in which we operate.

 

Our business and operations are subject to regulation by antitrust or competition authorities in Norway, the European Union and Canada, among other jurisdictions, particularly because of our significant market shares in the jurisdictions in which we operate. Risks of infringing competition laws and regulations are higher in markets in which we hold a leading position. In such markets, the applicable antitrust and competition laws and regulations could reduce our operational flexibility. Responsible authorities and jurisdictional bodies may take actions, potentially contrary to our interests, aimed at maintaining or reinforcing competition in our markets. We agreed with the European Commission to divest certain parts of Morpol in connection with the acquisition of Morpol. Further similar action could have a material adverse effect on our business, financial condition, results of operations or cash flow.

 

We could be adversely affected by violations of the applicable anti-corruption laws.

 

Applicable anti-corruption laws, including the U.S. Foreign Corrupt Practices Act and the UK Bribery Act of 2010, generally prohibit companies and their intermediaries from making improper payments (to foreign officials and otherwise) and require companies to keep accurate books and records as well as appropriate internal controls. Our training programs and policies mandate compliance with such laws. Such programs and policies, however, may not prevent a violation of applicable anti-corruption law. We now operate in some parts of the world that have experienced governmental corruption to various degrees, particularly Vietnam. If we were found liable for violations of anti-corruption laws (due to our own acts or inadvertence, or the acts or inadvertence of others, including employees of third-party partners or agents), we may incur civil and criminal penalties or other sanctions, or suffer significant internal investigation costs or reputational harm, which could have a material adverse effect on our business, financial condition, results of operations, cash flow or reputation.

 

Risks Related to Our Fish Farming Operations

 

Fish are adversely affected by sea lice, and we may incur significant sea lice mitigation costs and we may be exposed to regulatory actions for failing to maintain sea lice levels below the relevant trigger levels.

 

Sea lice, of which there are many species, are a naturally occurring type of crustacean parasite that attaches itself to the mucus and skin of several fish species, including salmon. Sea lice are a challenge in most of the territories in which we operate. High density of sea lice can result in lesions and affect the fish’s health, welfare, growth and immunity to diseases. Sea lice are found in all the countries in which we operate and are closely monitored by national governments, mainly from the perspective of limiting surrounding wild fish populations’ sea lice exposure from fish farms. Regulators set limits on the number of sea lice per fish on the farms, and treatment of the fish is mandatory if levels approach such limits. The parasite is controlled through specific anti-lice agents, hydrogen peroxide baths in well boats or enclosed cages, and biologically by using “cleaner fish,” which are fish species that eat the parasites directly from the fish’s skin. Treatment of sea lice is costly and the increased resistance against several types of medication used in sea lice control is a growing concern in the industry. There are also concerns over the interaction between farmed and wild salmon and the transmission of sea lice from one to another. As a response to these concerns, governments may require us to implement new or improved measures or require some of our sites to lie fallow for a certain period of time in order to control spreading of sea lice, thus increasing our costs.

 

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Although our ambition is to maintain sea lice levels below levels set by the government (also known as trigger levels), we may at times exceed such levels, for example, during periods of elevated seawater temperatures when sea lice levels can increase rapidly. Our failure to maintain our sea lice levels below the relevant trigger levels may result in a heightened need for treatment and/or regulatory action.

 

Costs associated with sea lice mitigation and treatment activities can be significant, and damage suffered by our fish due to sea lice infections or through treatment failures may reduce our harvests and can result in impairment charges. Where fish have already been substantially weakened by sea lice, additional treatment may result in fish mortality and further biomass loss. In addition, high levels of sea lice in any of our operations may result in slower growth rates and increased mortality, each contributing to increased costs of operations.

 

Our fish stocks, operations and reputation can be adversely affected by various diseases.

 

Our fish are affected by diseases caused by viruses, bacteria and parasites which may have adverse effects on fish survival, health, growth and welfare and result in reduced harvest weight and volume, downgrading of products and claims from customers. A significant outbreak of disease represents a cost for us through, for example, direct loss of fish, lost growth on biomass, accelerated harvesting, loss of quality of harvested fish and prevention and treatment costs, and may also be followed by a subsequent period of reduced production capacity and loss of income. Diseases are also a threat to the environment and the welfare of the fish. Some diseases are subject to governmental control measures and are monitored closely by relevant regulatory bodies. The most severe diseases may require the culling and disposal of the entire stock, disinfection of the farm and a long subsequent fallow period for preventative measures to stop the disease from spreading. In addition, market access could be impeded by strict border controls, not only for salmon from the infected farm, but also for products originating from a wider geographical area surrounding the site of an outbreak. Continued disease problems may also attract negative media attention and public concerns.

 

Salmon farming has historically experienced several episodes of extensive disease outbreaks. We have, and may in the future, experience extensive disease outbreaks. Epidemic outbreaks of diseases may have a material adverse effect on our business, financial condition, results of operations or cash flow. Set forth below is a description of the major diseases that have affected our operations:

 

·                  Gill disease, or GD, is a general term used to describe gill pathology occurring in seawater which may be caused by different infectious agents such as amoebae, viruses or bacteria, as well as environmental factors including algal or jelly-fish blooms. Little is known about the cause of many of the gill conditions and to what extent infection or environmental factors are primary or secondary causes of disease. Gill damage can lead to respiratory distress which can cause significant mortality. Currently there is no general cure applicable to all types of GD. In 2012, we experienced a dramatic increase in the prevalence of a particular type of GD called Amoebic Gill Disease, or AGD, in Scotland and Ireland which is caused by a ubiquitous microscopic marine amoebic parasite. AGD was also treated in Norway and the Faroe Islands in 2013. There is no vaccine for AGD, but treatment in freshwater or hydrogen peroxide baths, when used systematically and in a coordinated manner, limits the impact of the disease.

 

·                  Infectious Salmon Anemia, or ISA, is an infectious viral disease causing severe anemia for the infected fish. The disease has been reported in Norway, Scotland, Ireland, the Faroe Islands, Canada, the United States and Chile. ISA is subject to strict governmental control measures and will normally prompt compulsory culling of the entire stock and a subsequent fallow period. Suspected farms and farms in the vicinity of an outbreak will be placed under surveillance and subject to strict movement controls. The risk of an outbreak increases strongly with proximity to the source of infection, poor quality smolt and insufficient fallow periods. Vaccines have been developed the recent years, but their effectiveness varies when exposed to severe infection pressure. The infected fish represent no health risk for humans and may in most jurisdictions be sold in the open market if it is without clinical signs of disease and above marketable size, which is approximately 1.2 kilograms. Fish below this size will normally be destroyed. ISA has significant potential adverse consequences for us and the salmon farming industry in general. The serious ISA epidemic hitting Chile in 2007 to 2009 led to the closure of many farms. The disease led to substantial losses in Norway in around 1990, and the epidemic on the Faroe Islands from 2000 to 2005 laid the whole industry on the islands fallow for several years. ISA re-emerged in Chile in 2013, but so far there have been outbreaks only at a limited number of sites. In Norway, we have had two ISA outbreaks in 2014. Both sites were harvested out in the first quarter, and no additional sites have been diagnosed with ISA.

 

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·                  Pancreas Disease, or PD, is an infectious viral disease caused by a salmonid alphavirus, or SAV, and is frequently diagnosed in Norway. More recently and to a lesser extent it was also diagnosed in Scotland and Ireland. The disease attacks the pancreatic tissue, heart and skeletal muscles of the fish and results in lack of appetite, lethargy, reduced health and increased mortality. Chronic outbreaks can last several months and accumulated mortality can be high, normally in the range from 0% to 20%. More important is, however, the chronic damage that can occur to the survivors in terms of reduced growth capacity and scars in skeletal muscle. The scars can appear as patches of decolourisation or melanisation (black pigmentation), cause downgrading and make the product unsuitable for smokehouses. Approved vaccines exist, but the effectiveness is variable when infection prevalence increases. PD is subject to governmental control measures. Norway experienced a significant increase in PD outbreaks in 2012, mainly resulting from the SAV2 virus, which is one of six known genetic variants of the SAV virus and generally regarded as less pathogenic than other variants. The increased number of diagnoses is a concern for the further spread of the disease in Norway, but the number of PD outbreaks was lower in 2013 than in 2012. PD was still the number one cause of losses in the Group in 2013, with substantial fish losses in Ireland.

 

·                  Heart and Skeletal Muscle Inflammation, or HSMI, is another infectious disease which in recent years has become widespread in Norway and Scotland. The disease affects the fish’s heart and skeletal musculature, normally in the first half of the seawater phase, with increased mortality, reduced health and periods of reduced growth being the most important loss factors. Mortality normally varies from 0% to 20%. As HSMI often occurs or intensifies following grading, movement and other similar events which may create a stressful environment for the fish, the disease leads to challenges in relation to sea lice treatments and other events necessitating fish movement. HSMI is assumed to be a viral disease, but the exact cause of the disease is not yet fully understood. Vaccines are under development, but are currently not in use in the industry.

 

·                  Cardiomyopathy Syndrome, or CMS or heart rupture, is a disease primarily affecting the heart with secondary circulation failure and liver damage. The disease has been observed in Scotland, Ireland and the Faroe Islands, and has been increasingly diagnosed in Norway in the recent years. It is also suspected of being present in Canada. CMS affects farmed salmon in the seawater phase and during transportation to the primary processing plants. Occasionally, mortality may reach 30%, but it is usually much lower. Because the disease normally affects the fish at the end of the production cycle when the fish is ready for harvest, the economic losses can be substantial even though the rate of fish mortality is not high. There is no medical treatment or vaccine available for the disease.

 

·                  Infectious Pancreatic Necrosis, or IPN, is an infectious viral disease caused by a Birnavirus found throughout the world in a number of wild fish species both in freshwater and in seawater. IPN is prevalent in Norway, but is also found in Scotland and Chile. The disease is highly contagious, attacks the pancreas and causes swelling, lack of appetite, abnormal swimming and darkening of the skin of the fish. Juveniles and seawater phase smolt are more vulnerable to the disease and mortality could reach 40% in these phases. Outbreaks may necessitate a greater degree of handling resulting in extra stress which may lead to increased mortality in already weakened fish. Surviving fish may develop a persistent lifelong infection. IPN is a significant cause of loss in Norway. Commercial vaccines are available, but the effectiveness of the vaccine is variable under high infection pressure.

 

·                  Infectious Haematopoietic Necrosis, or IHN, is an infectious viral disease/virus found naturally in wild Pacific salmon. Atlantic salmon are very sensitive to the virus and could be exposed to wild fish infection in the sea. Epidemic outbreaks of IHN have been reported mainly on the Pacific Coast of Canada and the United States, but the virus is also found in continental Europe and Japan. The disease has several similarities with ISA, but is far more contagious. The disease can lead to mortality up to 80%, and mortality is particularly high for young fish. An effective vaccine is available.

 

·                  Salmonid Rickettsial Septicaemia, or SRS, is caused by Piscirickettsia salmonis, a parasitic intracellular bacterium that causes a fatal septicaemic condition of salmonids. SRS occurs mainly in Chile, but has also been found in Norway, Scotland and Canada. The disease typically leads to mortality between 10% and 30%, but mortality in Chile has, at times, reached up to 90%. Other symptoms are loss of appetite and lethargy. The disease is mainly controlled by vaccination and antibiotics and thus far the industry has been

 

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able to manage the disease. However, there is a significant risk of the dependence on antibiotics and risk of SRS becoming resistant towards commonly used drugs.

 

Other diseases include Viral haemorrhagic septicaemia, Bacterial kidney disease, furunculosis, vibrio, Saprolegnia parasitica and others. Today there exist vaccine protections or cures for many of these diseases, but the effectiveness of such treatments still vary.

 

New diseases could arise and excessive use of antibiotics by the industry could result in bacterial species developing antibiotic resistance and reviving diseases which today are subject to effective control. Exposure to any of these or other diseases may result in downgrading, slower growth rates, increased mortality and increased prevention and treatment costs. None of these diseases are harmful for humans and there is no health risk for the consumer and, typically, infected fish can be sold in the market. Any of the foregoing may have a material adverse effect on our business, financial condition, results of operations or cash flow.

 

Our salmon may be infected with Kudoa thyrsites parasites, causing soft flesh issues.

 

Our salmon in the past has been and may in the future be infected by the parasite Kudoa thyrsites, or Kudoa, commonly called “soft flesh” syndrome. Kudoa is naturally present in wild fish throughout the world. It is particularly prevalent on the Pacific Coast of Canada and the United States. Kudoa infects salmon’s muscle cells without causing any illness in live fish. Upon harvesting of the infected fish, spores from the parasite spreads through the body of the fish and activates the breakdown of the fish’s flesh, turning it soft and doughy three to ten days after the harvest. Kudoa represents no health risk for the consumer, but it can result in product downgrades, customer claims or discounts. Soft-flesh condition presents a significant challenge to the fish farming industry because it propagates a consumer stigma of farmed fish products. Because Kudoa can be difficult to detect during harvesting and primary processing, the effects of infection are not seen until after the fish has been delivered to the customer and, thus, the economic and reputational impact of Kudoa can be substantial. Even where Kudoa can be detected before the product reaches the customer, the product must be substantially downgraded or discarded, leading to a reduction in the commercial value of the fish. Downgraded fish is generally sold at prices substantially lower than superior quality fish.

 

Our Canadian salmon operations have experienced significant Kudoa challenges during recent years, resulting in substantial product downgrades. For the year ended December 31, 2013, the loss related to downgrading and customer claims amounted to NOK 16.9 million, compared to NOK 63.0 million in 2012.

 

We may experience Kudoa infections in our Canadian or other operations in the future, which may have a material adverse effect on our revenues, costs and business reputation.

 

Our fish stocks can be depleted by biological factors such as algal blooms, low oxygen levels and fluctuating seawater temperatures.

 

Our salmon farming operations are subject to a number of biological risks which may impact profitability and cash flows through adverse effects on growth, harvest weight, harvest volume, mortality, downgrading percentage and claims from customers. The biological factors that can affect our fish are algal blooms, jelly fish, contaminants, low oxygen levels and fluctuating seawater temperatures.

 

Algae and jelly fish are natural organisms with global prevalence in water environments. Most species of algae and jelly fish are harmless and serve as energy producers at the base of the food chain. Occasionally and when conditions are optimal, algae or jelly fish populations grow rapidly into a bloom and accumulate near the surface of the water. Algae can reduce the available oxygen in the water leading to reduced growth of the fish and in some cases to death from suffocation. Some algae species physically clog the gills leading to impaired gill function and respiratory distress and a few species produce potent fish toxins. Harmful algae represent a particular risk in fish farming because fish in cages cannot swim away as they would do in the wild. Jelly fish may accumulate on the net pens affecting water flow and oxygen levels. Some types of jelly fish can damage skin or gills and cause death. Blooms of algae and jelly fish are largely dependent on local marine, weather and temperature conditions. Algae and jelly fish have, from time to time, led to losses at individual sites, and represent a general threat to any open net cage facility. No uniform response is suitable for all types of algae and jelly fish and fish losses due to harmful algae and jelly fish blooms are difficult to predict and prevent.

 

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Our attempts to manage the exposure to biological risk factors and our countermeasures may not be effective. Our inability to control biological risks and costs associated with their prevention and counteractions may have a material adverse effect on our costs and production.

 

Our fish stocks are subject to risks associated with fish escapes and predation.

 

Salmon escapes are most commonly caused by human error, severe weather and structural issues at our production facilities. In addition to affecting our salmon count, escaped farmed salmon may impact wild salmon stocks by genetic interaction and the risk of transferring disease and may result in negative publicity and penalties or other sanctions from governmental authorities (including, in some cases, criminal charges) which could also affect our licenses.

 

We are also exposed to risks relating to predation and our inability to protect our fish from predators may significantly affect our fish count and adversely impact our results of operation. Our salmon is subject to prey by other animals, such as otters, herons, shags, cormorants, gulls, seals, sea lions and minks, which can affect our salmon count. The risk of predation in some cases results in the need for predator killing. Although killing predators is not a preferred option, it is in some cases the only alternative (e.g., birds may be caught in the protective netting) in order to protect the health and welfare of our fish, to avoid escapes and to protect the infrastructure and in cases of eminent danger to our employees. Increased incidents of interactions with predators increase our operating costs, expose us to liability from regulators and attract negative publicity.

 

Intense production may result in physical deformities, cataracts and other production related deformities, leading to downgrading and/or loss of biomass as well as to reputational harm.

 

The biological limits for how fast fish can grow have been challenged as the aquaculture industry has intensified its production. Intensive farming methods may cause production-related disorders in particular relating to physical deformities and cataracts. Research has shown that deformities can be caused by excessively high water temperatures of more than 14 degrees Celsius (57 degrees Fahrenheit) during the fish’s early life in freshwater, too little phosphorous or imbalanced mineral content in the diet, manipulation of light (simulation of daylight) to speed up the rate of growth, acidic water, too much carbon dioxide in the water during the freshwater phase and too rapid growth in the freshwater phase. These may lead to financial losses in the form of reduced growth and health, reduced quality on harvesting and damage to the industry or our reputation.

 

Our fish stocks may be exposed to contaminants such as dioxins, PCB, mycotoxins, pesticides, anti-oxidants, brominated flame retardants, lead, mercury, arsenic and cadmium, leading to product recalls, product liability, negative publicity and government sanctions.

 

Farmed salmon may be exposed to contamination by undesirable substances through raw materials and ingredients in the fish feed, polluted waters, poor processing hygiene and cross contamination during handling. Contamination could occur accidentally or on rare occasions deliberately through malicious product tampering and may affect food safety, fish health and the environment, and reduce the public’s confidence in eating salmon. Potential contaminants include organic contaminants such as dioxins and PCB, mycotoxins, pesticides, anti-oxidants (such as ethoxyquin, BHA and BHT), brominated flame retardants, inorganic contaminants such as lead, mercury, arsenic and cadmium and bacterial contamination. Future accidents that result in product contamination could result in recall of our products, product liability, negative publicity and government sanctions.

 

Our fish may be exposed to oil or petroleum products and other pollutants from open seas resulting in fish mortality and rendering the surviving fish inedible.

 

Fish farming is operated in open net cage systems located in marine environment and is hence exposed to the pollution of open seas. Coastal waterways are subject to traffic by large cargo carriers. This represents an environmental hazard in the form of a potential oil leak or spill. Oil or petroleum products floating into a farm will severely affect the fish’s ability for normal oxygen uptake, increase fish mortality and shed an unpleasant taste on surviving fish, which practically makes the fish inedible. Our concentrated location of farms in certain regions increases the vulnerability in case of oil spills. Oil spills and other pollution from accidents will accordingly affect farming locations adversely and may have a material adverse effect on our harvests.

 

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Inclement weather, such as extreme temperature or storms, could hurt our stocks, negatively affect our operations and damage our facilities.

 

The rate at which farmed salmon grows depends in part on weather conditions. Unusually warm or cold temperatures and altered oxygen levels in the sea resulting from annual variations can have a short-term, but significant, negative impact on growth rates and fish feed consumption. In addition, extreme weather in the regions where we operate, such as extreme temperatures, hurricanes, floods or other storms, could cause impairment of the health or growth of our fish or result in fish escape, loss of biomass, fish mortality, lost feeding days, repair costs relating to damage of facilities or interference with our shipping operations and could affect our business due to power outages; fuel shortages; damage to infrastructure from powerful winds, rising water or extreme temperatures; disruption of shipping channels; less efficient or non-routine operating practices necessitated by adverse weather or increased costs of insurance coverage in the aftermath of such events. Any of these factors could materially and adversely affect our operations. We may not be able to recover through insurance all or any of the damages, losses or costs that may result from weather events, including those that may be caused by climate change.

 

We derive a significant percentage of our revenue from our operations in Chile. Because Chile is prone to earthquakes due to its proximity to several major fault lines, our Chilean business may be adversely affected by seismic or climatic events or natural disasters. In February 2010, a major earthquake followed by a tsunami struck Chile. A similar earthquake, tsunami or any other catastrophic event arising from natural causes may have significant negative consequences for our operations and for the general infrastructure in Chile.

 

Disruptions to our supply chain may impair our ability to bring our products to market.

 

We source and transport our salmon over long distances. These products are often perishable and can only be stored for a limited amount of time. Disruptions to our supply chain due to weather, natural disaster, fire or explosion, terrorism, pandemics, strikes, government action, environmental incidents or other reasons beyond our control could impair our ability to bring our products to the market (timely or at all).

 

We are exposed to risks relating to biological events or natural phenomena, for which insurance coverage is expensive, limited and potentially inadequate.

 

Our business operations entail a number of adverse biological risks, including risks relating to sea lice, fish mortality, diseases, fish escapes and predation and other biological risks. As is typical in the industry, we have limited insurance coverage against adverse biological events. For certain biological events, it is currently not possible to obtain insurance coverage at all or at premiums that we consider to be commercially viable. The fish farming insurance industry is characterized by a limited number of providers. Even for insurable biological events, the coverage often involves a significant deductible in the form of an insurance excess or requirements regarding mortality per net cage or site. Coverage may furthermore be dependent on the insurance value of the fish, which may be at positive or negative variance with the book value. There will always be a risk that certain biological events or natural phenomena may occur for which no or only partial insurance coverage is payable.

 

Risks Related to Our Industry

 

Our facilities may be the target of sabotage by environmental organizations.

 

Some environmental organizations have stated aims to eradicate salmon farming. The degree of doctrinal belief varies from group to group, and the majority limit themselves to spreading information about fish farming which may or may not be accurate. However, a risk of sabotage (i.e., damage to production facilities with the intention of hurting us financially and/or exposing us to negative media coverage) cannot be ruled out and may have a material adverse effect on our business, financial condition, results of operations or cash flow.

 

The farmed salmon industry has been, and may continue to be, subject to negative press, which may adversely affect consumers’ perception of the industry and therefore consumers’ willingness to purchase farmed seafood.

 

Farmed salmon has in some instances been subject to critical journalism from various research communities and NGOs, such as environmental organizations and animal rights groups, which may negatively affect

 

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consumer attitudes towards farmed salmon. Such negative consumer attitudes may result in lower demand for our products. This type of publicity has resulted, and may in the future result, in temporary damage to the industry and various perceived health concerns, including the level of organic contaminants and cancer-causing PCB and dioxins in farmed salmon. New perceived health concerns, whether or not substantiated, or food safety issues relating to farmed salmon may arise in the future, which could affect our ability to market our products. Negative press may continue or intensify and such stories may increase in magnitude, resulting in harm to our reputation or lower demand for our products.

 

Risks Related to Our Business

 

We derive nearly all of our revenue from sales of and are heavily dependent on the market for Atlantic salmon.

 

Our business consists primarily of raising and selling Atlantic salmon. Atlantic salmon accounted for 91.0% of our total revenues for the year ended December 31, 2013 and we expect this trend to continue for the foreseeable future. Accordingly, our business is heavily dependent on the market for Atlantic salmon. Consumer preferences often change rapidly and without warning, moving from one trend to another among many products. Shifts in consumer preferences away from Atlantic salmon would have a material adverse effect on our revenue.

 

We rely heavily on the services of key personnel.

 

We depend substantially on the leadership of a small number of executive officers and other key employees. The loss of the services of these persons could have a material adverse effect on our business. In addition, many regions where we operate are remote areas and the location of our production facilities makes it difficult to attract the necessary employee resources. Also, we may not be able to attract, retain and train the new management personnel we need for our new operations, including our newly created Fish Feed segment, or do so at the pace necessary to sustain our growth.

 

The construction and potential benefits of our new fish feed facility are subject to risks and uncertainties.

 

In 2012, we broke ground on a fish feed plant in Bjugn, Norway. As of December 31, 2013, construction of the feed plant was on schedule and on budget with regards to completion and we expect the first deliveries to reach our farms in June/July 2014. The budget for the project was approximately NOK 825 million. Our ability to complete the construction on a timely basis and within budget, or at all, is subject to a number of risks, including carrying out and completing construction as planned and launching the fish feed production process.

 

In addition, fish feed is a new business for us. Our ability to achieve the expected benefits of the plant is subject to uncertainties, as we have no experience with operating a fish feed production facility. We may be unable to operate the plant to achieve the results that we expect.

 

We are subject to risks associated with our international operations and our expansion into emerging markets, which may negatively affect our operations.

 

We have fish farming operations in six countries and secondary processing plants in Norway, Ireland, France, the United States, the Netherlands, Belgium, Poland, the Czech Republic, Chile, Japan, Taiwan and South Korea. The acquisition of Morpol expanded our secondary processing operations in Poland and added secondary processing activities in United Kingdom and Vietnam. In addition, in 2013 we sold our products in 70 countries worldwide. We are subject to various risks and uncertainties relating to our international operations, including:

 

·                  the imposition of or increase in tariffs, quotas, trade barriers and other trade protection measures imposed by countries regarding the importation of fish and fish products, in addition to import or export licensing requirements imposed by various countries;

 

·                  corruption;

 

·                  the impact of currency exchange rate fluctuations between various currencies, particularly the USD, the NOK, the EUR, the GBP and the CAD;

 

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·                  political, social and economic conditions;

 

·                  difficulties and costs associated in complying with, and enforcement of remedies under, a wide variety of complex domestic and international laws;

 

·                  different regulatory structures and unexpected changes in regulatory environments;

 

·                  differing tax rates and tax regimes; and

 

·                  distribution costs, disruptions in shipping or reduced availability of freight transportation.

 

Negative consequences relating to these risks and uncertainties could jeopardize or limit our ability to transact business in one or more of those markets where we currently operate, or where we may seek to operate in the future.

 

We are also subject to economic risks and uncertainties in the countries in which we operate. Any slowdown in the development of these economies, any deterioration or disruption of the economic environment in these countries, or any reduction in private sector spending may have a material adverse effect on our business.

 

We may be involved in legal disputes.

 

We may from time to time be involved in legal disputes. We could be involved in criminal or civil proceedings related to, among others, product liability, environmental, food safety, anti-competition regulations or anti-bribery regulations or other types of disputes which may have a material adverse effect on our business, financial condition, results of operations or cash flow. In particular, we are engaged in a legal dispute in Canada with a private citizen over transfer of smolt into one seawater site in which the citizen alleges that the smolt were carrying a disease agent. We are also engaged in arbitration proceedings against a former director of Marine Harvest Chile and Salmones Sur Austral S.A. over certain contractual benefits and obligations. Salmones Sur Austral S.A. has countersued Marine Harvest for breach of contract and indemnification of damages, which were valued at USD 42 million. In June 2013, we lost an arbitration case and were ordered to pay USD 12.3 million as indemnification for breach of contract.  We are currently appealing that decision. On March 6, 2014, Salmones Sur Austral S.A. initiated collection procedures, asking for the payment of the USD 12.3 million awarded in the arbitration case. The court granted Salmones Sur Austral S.A.’s request to seize biomass owned by Marine Harvest Chile at two sites, Chequián and Peldehue. Marine Harvest has opposed the collection procedures and the seizure of the assets, alleging lack of jurisdiction of the court, and has also requested court authorization to release the fish for sale, on the condition that the proceeds from such sale be deposited in escrow. Permission to harvest the fish was granted on April 25. The proceeds from the sale will be deposited in escrow up to an amount of USD 6.4 million per site. We may also be subject to legal disputes arising from breaches of government regulations. See “Item 4. Information on the Company—B. Business Overview—Business—Legal Proceedings.”

 

We depend on the availability of, and good relations with, our employees.

 

We had 10,676 employees as of December 31, 2013, approximately 35% of whom are covered by collective bargaining agreements. Our operations depend on the availability, retention and relative costs of labor and maintaining satisfactory relations with employees and the labor unions. Labor relations issues may arise from time to time. Failing to maintain satisfactory relations with our employees or with the labor unions may result in labor strikes, slowdowns, work stoppages or other labor disputes. We are in the process of restructuring our VAP Europe operations. Accordingly, there has been a slowdown in production at our Rennes and Kritsen operations, as well as a strike at Kritsen in Poullaouen, France.

 

We depend on a small number of contractors for key industry supplies, such as fish feed and well boats.

 

We depend on major industry suppliers of well boats and fish feed. We rent most of our well boats that we use to transport our fish and, in some cases, harvest the fish. In addition, we currently purchase all of our fish feed requirements from third parties. There are a limited number of key suppliers of these items in our industry. Some of these suppliers may go out of business or discontinue production of the products we require for our operations. Failure to maintain good business relationships with these suppliers may lead to higher prices or inability to acquire optimal products for our operation. If these suppliers go out of business, fail to deliver the agreed upon amount of

 

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products, stop doing business with us or materially increase their prices, it may have a material adverse effect on our business, financial condition, results of operations or cash flow.

 

Natural disasters, catastrophes, fire or other unexpected events could cause significant losses for our primary and secondary processing operations.

 

Many of our business activities involve substantial investments in primary and secondary processing facilities and many of our products are produced at a limited number of locations. These facilities could be materially damaged by natural disasters, such as floods, tornados, hurricanes and tsunamis, or by fire or other unexpected events. We could incur uninsured losses and liabilities arising from such events, including damage to our reputation, and/or suffer material losses in operational capacity.

 

Some steps of the production process are outside of our control.

 

We purchase seafood as an input in some of our secondary processing activities. In particular, we purchase cod, Alaska pollock, shrimp, plaice, redfish and pangasius (a type of catfish native to Asia) from third parties to be used in our secondary processing operations. We do not control the production process for the seafood we purchase and it may contain bacteria or other foreign elements that are harmful or prohibited under the laws of the countries in which we distribute our product. Failure to identify such foreign elements may result in increased government scrutiny, trade prohibitions, harm to our reputation, remediation costs and negative press.

 

In addition, we distribute the majority of our products through secondary processors and distributors with the majority of our product branding occuring further down the production chain. As such, we do not control the brand under which our products are sold and may be identified adversely with other companies’ products which do not meet our standards. Also, our customers may choose to purchase salmon from another provider without the end customer being made aware of the change in salmon providers. Accordingly, our reputation may be damaged and we may be unable to build brand loyalty.

 

Risks Related to Acquisitions and Expansions

 

We may not achieve the expected benefits of the Morpol acquisition.

 

We acquired Morpol with the expectation that the acquisition would result in various benefits to us, including expansion of our secondary processing capabilities. Some of those benefits may not be achieved or, if achieved, may not be achieved in the time frame in which they are expected. Also, any benefits may not outweigh the management and personnel resources which will need to be diverted from our operations to achieve those benefits. Whether we will actually realize anticipated benefits depends on future events and circumstances, some of which are beyond our control. Future growth in revenues, earnings and cash flow will be partly dependent on future economic conditions and conditions in the seafood industry. Also, the potential synergies we currently anticipate may not be realized.

 

Our inability to effectively integrate the business and operations of Morpol with our own could disrupt our operations and force us to incur unanticipated costs.

 

Our ability to integrate Morpol’s operations with our own will be important to the future success of the combined Group. However, the acquisition of Morpol may not improve, and may even adversely affect, our results of operations, and the integration of Morpol into our existing business may expose us to additional risks and losses unknown as of the date of this annual report. Achieving the anticipated benefits of the acquisition of Morpol depend in part on our ability to integrate Morpol’s businesses in an effective and efficient manner. The process of integrating the operations of the organizations is expected to take time and we may be unable to accomplish the integration smoothly or successfully. Our failure to do so may result in a significant diversion of management’s time from on-going business matters, and may have a material adverse effect on the business, results of operation and financial condition of the combined company.

 

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If we are unable to retain key Morpol personnel or maintain Morpol’s corporate culture—our business may suffer.

 

The success of the Morpol acquisition will depend in part on our ability to retain key personnel currently employed by Morpol. We may be unable to do so. If key employees terminate their employment, management’s attention might be diverted from successfully integrating Morpol’s operations to hiring suitable replacements, and our business may suffer. In addition, we might not be able to locate suitable replacements for any key employees that leave Morpol. Morpol’s founder and former CEO, Jerzy Malek, left Morpol along with two senior executives in 2013. We may be unable to find suitable replacements for these individuals.

 

Furthermore, Morpol maintains a unique corporate culture. We may be unable to maintain that corporate culture or otherwise integrate Morpol’s culture into our own. Failure to do so may have a material adverse effect on our business.

 

We would be adversely affected if we expand our business through acquisitions or greenfield projects but fail to successfully integrate them or run them efficiently or retain the associated fish farming licenses.

 

We regularly evaluate expansion opportunities such as acquiring other businesses or building new processing plants, fish farming operations or fish feed plants. Significant expansion involves risks such as additional debt incurred to finance the acquisition or expansion and risks relating to integrating the acquired business or new plant or farm into our operations and attracting and retaining customers. If we are unable to integrate acquired businesses or newly formed operations, expansion may have a material adverse effect on our business, financial condition, results of operations or cash flow. In many jurisdictions there are consents or other regulatory requirements to be met when there is a change in ownership in a company holding fish farming licenses. When making acquisitions we run the risk of being denied the necessary consents from governmental bodies.

 

Developments related to antitrust investigations by government regulators could have a material adverse effect on our financial condition, results of operations and cash flows, as well as our reputation.

 

We are subject to a variety of laws and regulations that govern our business both in Norway and internationally, including those relating to competition (antitrust). After having approved our takeover of Morpol on September 30, 2013, the European Commission has informed us that it is began investigating whether we have committed an infringement of the suspension obligation and of the notification requirement under the European Merger Regulation by acquiring an initial shareholding in Morpol, before the related acquisition was notified to and approved by the European Commission. The investigation proceedings do not affect the approval granted by the European Commission for our acquisition of Morpol, but may lead to a monetary fine for the infringement of the suspension obligation and of the notification requirement under the European Merger Regulation.

 

While the duration and outcome of the European Commission’s investigation is uncertain, a determination that we have violated European competition (antitrust) laws could result in penalties which could have a material adverse effect on our financial condition, results of operations and cash flows, as well as our reputation. At this point, we cannot estimate the ultimate financial impact resulting from the European investigation.

 

Risks Related to Our Financing Arrangements

 

If we are unable to access capital, we may be unable to grow or implement our strategy as designed.

 

Salmon farming and seafood processing are capital intensive industries. As the production cycle from eggs to finished products takes approximately three years, substantial working capital is required both in a steady state and in particular when increasing production. Our future development and growth may be dependent on access to external capital in the form of debt and/or equity capital. A lack of access to such capital or material changes in the terms and conditions relating to our external financing could limit our future growth and strategy.

 

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We are highly leveraged and subject to restrictions in our financing agreements that impose constraints on our operating and financing flexibility.

 

We have significant indebtedness outstanding including a EUR 775 million syndicated borrowing facility, EUR 725 million principal amount of convertible bonds and NOK 1,250 million principal amount of unsecured bonds. We may need to refinance some or all of our indebtedness and may not be able to do so on attractive terms or at all. We may incur additional debt in the future, subject to limitations under our credit facilities and bond terms. The covenants in our credit facility include the following:

 

·                  our equity ratio must be above 40% at all times; and

 

·                  we must maintain a maximum ratio of net interest bearing debt to EBITDA of 3.25 until the second quarter 2014, declining to 3.00 from (and including) the second quarter 2014. As a consequence of the acquisition of Morpol, the maximum ratio has been temporarily lifted to 3.99 from and including the first quarter of 2013 until the end of the first quarter where consolidation of Morpol occurs or the end of the fourth quarter of 2013 (whichever is earlier). The degree to which we are leveraged could also have important consequences to ADS holders, including:

 

·                  limiting our ability to obtain additional funding for future capital expenditures, working capital requirements, debt service requirements, acquisitions, joint ventures and other general corporate purposes;

 

·                  requiring us to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions, joint ventures and other general corporate purposes;

 

·                  limiting our flexibility in planning for, or reacting to, changes in our business and the markets in which we operate;

 

·                  increasing our vulnerability to downturns in our business or in economic conditions generally;

 

·                  placing us at a competitive disadvantage compared with our competitors that have less debt;

 

·                  making it more difficult for us to satisfy our debt obligations; and

 

·                  limiting our ability to pay dividends.

 

Fluctuations in value of our derivatives used to hedge our exposure to salmon prices may adversely impact our operating results.

 

Our business is exposed to fluctuating salmon prices and we use derivative financial instruments to reduce such exposure. We hold certain positions in salmon derivatives that do not qualify as hedges for financial reporting purposes. These positions are marked to fair value and realized and unrealized gains and losses are reported in profit. In addition, although these contracts reduce our exposure to changes in prices for commodity products, the use of such instruments may ultimately limit our ability to benefit from a favorable trend in salmon prices. We also hedge our exposure to salmon prices through short to medium contracts for physical delivery of salmon. Such contracts can adversely affect our profitability when spot prices are increasing.

 

Fluctuations in value of our currency exchange rates may adversely impact our operating results.

 

We are also exposed to changes in currency exchange rates as a part of our business operations. Our reporting currency is NOK, our main financing currencies are EUR, USD, NOK and GBP, and our revenues are primarily denominated in EUR, USD, GBP and JPY. Our main currency exposure is accordingly to EUR, USD, GBP and JPY. Although we seek to hedge our exposure to fluctuations in these currencies, such hedging arrangements may not be effective. Failure to adequately hedge our exposure may have a material adverse effect on our business, financial condition, results of operations or cash flow.

 

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We are subject to fluctuations in interest rates due to the prevalence of floating interest rates in our debt.

 

With the exception of the EUR 725 million principal amount convertible bonds, we are generally financed using floating interest rates. Our hedges (interest rate swaps) against interest rate fluctuations in our main financing currencies (EUR, USD and GBP) related to our non-current interest-bearing debt, may be ineffective in protecting us from the effects of interest rate increases.

 

If our customers fail to fulfill their contractual responsibilities, we may suffer losses.

 

We are exposed to the risk of losses if one or more contractual partners do not meet their obligations. We cannot guarantee that we will be able to recover losses from trade receivables from the credit insurance companies or that our credit evaluations of trading partners will be effective.

 

Risks Related to Climate Change

 

Significant physical effects of climatic change, if they should occur, have the potential to damage fish farming facilities, disrupt production activities and could cause us to incur significant costs in preparing for or responding to those effects.

 

Climate change could have an effect on the severity of weather (including hurricanes and floods), sea levels and temperatures of the seawater and availability of fish feed raw materials. If any such effects were to occur, they may have a material adverse effect on our business, financial condition, results of operations or on our suppliers.

 

Climatic change rules and regulations, if enacted, could increase the costs of operating our facilities or transporting our product.

 

Climate change and its association with the emission of greenhouse gases are receiving increased attention from the scientific and political communities. Certain countries and regions have adopted or are considering legislation or regulation imposing overall caps or taxes on greenhouse gas emissions from certain sectors or facility categories or mandating the increased use of electricity from renewable energy sources. These actions could increase the costs of operating our businesses and our transportation costs.

 

Risks Related to Our ADSs

 

We are exempt from some of the corporate governance requirements of the New York Stock Exchange.

 

We are a foreign private issuer, as defined by the SEC for purposes of the Securities Exchange Act of 1934, or the Exchange Act. As a result, for so long as we remain a foreign private issuer, we will be exempt from some of the corporate governance requirements of the New York Stock Exchange, or the NYSE. We are permitted to follow the practice of companies incorporated in Norway and listed on the Oslo Stock Exchange in lieu of the provisions of the NYSE’s corporate governance rules, except that:

 

·                  we are required to have an audit committee that satisfies the requirements of Rule 10A-3 under the Exchange Act;

 

·                  we are required to disclose any significant ways in which our corporate governance practices differ from those followed by U.S. domestic companies under NYSE listing standards;

 

·                  our chief executive officer is obligated to promptly notify the NYSE in writing after any of our executive officers becomes aware of any non-compliance with any applicable provisions of the NYSE corporate governance rules; and

 

·                  we must submit an executed written affirmation annually to the NYSE. In addition, we must submit an interim written affirmation as and when required by the interim written affirmation form specified by the NYSE.

 

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The standards applicable to us are considerably different than the standards applied to U.S. domestic issuers with shares listed on the NYSE. As a foreign private issuer listed on the NYSE we intend to rely on certain exemptions, including:

 

·                  to not have a compensation committee or corporate governance committee of our Board of Directors as of the date of this annual report; and

 

·                  to use an alternate definition of director independence than that recognized by the NYSE.

 

As a result, holders of our ADSs will not be provided with the benefits of certain corporate governance requirements of the NYSE, which may affect the market price for our shares.

 

We have not yet completed our evaluation of our internal control over financial reporting in compliance with Section 404 of the Sarbanes-Oxley Act.

 

We will be required to comply with the internal control certification requirements of Section 404 of the Sarbanes-Oxley Act in our 2014 annual report. Our preliminary assessment is that our current system of internal controls requires enhancements in order to be compliant with Section 404, and while we intend to achieve compliance within the time required, we may not be able to meet the Section 404 requirements in a timely manner. If it is determined that we are not in compliance with Section 404, we will be required to implement new internal control procedures and re-evaluate our financial reporting. We may experience higher than anticipated operating expenses as well as external auditor fees during the implementation of these changes and thereafter. We will need to hire additional qualified personnel in order for us to be compliant with Section 404. If we fail, for any reason, to implement these changes effectively or efficiently, such failure could harm our operations, financial reporting or financial results and could result in our conclusion that our internal control over financial reporting is not effective.

 

Our ADSs cannot be traded on any exchange outside the United States.

 

Our ADSs are listed only in the United States on the NYSE and we have no plans to list our ADSs in any other jurisdiction. As a result, a holder of our ADSs outside the United States may not be able to effect transactions in our ADSs as readily as the holder would if our securities were listed on an exchange in that holder’s home jurisdiction.

 

Future sales of ADSs or ordinary shares by existing shareholders could cause the price of our ADSs to decline.

 

If our existing significant shareholder who as of December 31, 2013 controlled over 28.6% of Marine Harvest ASA, sells, or indicates an intention to sell, substantial amounts of our ADSs or ordinary shares in the market the trading price of our ADSs could decline significantly. We cannot predict the effect, if any, that future sale of these ADSs or ordinary shares or the availability of these ADSs or ordinary shares for sale will have on the market price of our ADSs.

 

ADS holders have no legal interest in the underlying ordinary shares.

 

ADS holders acquire the beneficial, and not the legal, interest in the underlying ordinary shares, which the depositary holds in trust for them, under the terms of the deposit agreement. The intended effect of the trust is to ring-fence the ordinary shares in the hands of the depositary by conferring a property interest on ADS holders as beneficiaries. The interest of the ADS holders as beneficiaries in trust assets, which are the ordinary shares, is indirect, in the sense that in the normal course they do not have any direct recourse to the ordinary shares nor do they have any direct right of action against us.

 

ADSs may be subject to transfer limitations.

 

ADSs are transferable on the books of the depositary. The depositary however, may close its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deem it advisable to do so because of any

 

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requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason in accordance with the terms of the deposit agreement.

 

Because U.S. investors may be unable to participate in future rights offerings, their percentage shareholding may be diluted.

 

Except in limited circumstances, shareholders in Norwegian public limited liability companies have preemptive rights proportionate to the aggregate amount of the shares they hold with respect to new shares issued by the company. For reasons relating to U.S. securities laws or other factors, U.S. investors may not be able to participate in a new issuance of our ordinary shares or other securities and may face dilution as a result. You can find a further description of the preemptive rights of shareholders of Norwegian public companies under “Item 10. Additional Information—B. Memorandum and Articles of AssociationAdditional Issuances and Preferential Rights.”

 

The relative volatility and limited liquidity of the Norwegian securities markets may adversely affect the liquidity and market prices of the ordinary shares and the ADSs.

 

The Norwegian equity market is smaller and less liquid than the major U.S. and some other EU securities markets. The Oslo Stock Exchange is significantly less liquid than the NYSE, or other major exchanges in the world. As of December 31, 2013, the aggregate market capitalization of the Oslo Stock Exchange was equivalent to approximately NOK 265,377.1 million (USD 43,721.67 million). In contrast, as of December 31, 2013, the aggregate market capitalization of the NYSE was approximately USD 17,949,883.8 million. The relative volatility and illiquidity of the Norwegian securities markets may substantially limit your ability to sell the units or ADSs at the time and price you desire (or at all) and, as a result, could adversely impact the market price of these securities.

 

Our ADS holders’ ability to bring an action against us may be limited under Norwegian law.

 

We are a public limited liability company incorporated under the laws of Norway. The rights of holders of ordinary shares underlying ADSs are governed by Norwegian law and by our articles of association. These rights differ from the rights of shareholders in typical U.S. corporations. In particular, Norwegian law limits the circumstances under which shareholders of Norwegian companies may bring derivative actions. Under Norwegian law, any action brought by us in respect of wrongful acts committed against us takes priority over actions brought by shareholders in respect of such acts. In addition, it may be difficult for our ADS holders to prevail in a claim against us under, or to enforce liabilities predicated upon, U.S. securities laws.

 

Judgments of Norwegian courts with respect to the ADSs may be payable only in Norwegian krone.

 

If proceedings are brought in a Norwegian court seeking to enforce the rights of holders of the ADSs, any judgment made in favor of such holders, even if the judgment is on an obligation deemed to be denominated in USD, could be made or awarded in Norwegian krone based on the exchange rate in effect at the time the judgment is entered. The prevailing party in such proceeding would therefore bear exchange rate risk until the judgment could be collected.

 

By purchasing ADSs, holders will irrevocably submit to the jurisdiction of state or federal courts in New York, New York in connection with any legal suit, action or proceeding relating to the deposit agreement or the ADSs.

 

By purchasing ADSs or an interest therein, holders of ADSs irrevocably agree that any legal suit, action or proceeding against or involving us or the ADR depositary, arising out of or based upon the deposit agreement or the ADSs, may only be instituted in a state or federal court in New York, New York, and by purchasing ADSs or an interest therein, holders irrevocably waive any objection to the laying of venue of any such proceeding. We have agreed to indemnify the ADR depositary and its agents under certain circumstances.

 

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Neither the ADR depositary nor any of its agents will be liable for indirect, special, punitive or consequential damages.

 

Neither the ADR depositary nor any of its agents will be liable to holders or beneficial owners of ADSs or interests in ADSs for any indirect, special, punitive or consequential damages (including, without limitation, lost profits) of any form incurred by any person or entity, whether or not foreseeable and regardless of the type of action in which such a claim may be brought.

 

Holders of the ADSs may experience losses due to increased volatility in the U.S. capital markets.

 

The U.S. capital markets have experienced extreme price and volume fluctuations as a result of the global economic and financial crisis and its aftermath that have affected, and continue to affect, the market prices of equity securities of many companies. These fluctuations have often been unrelated or disproportionate to the operating performance or results of operations of those companies. These broad market fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, as well as volatility in international capital markets, may cause the market price of shares of the ADSs to decline.

 

In addition, on August 5, 2011, S&P lowered the long-term sovereign credit rating of U.S. government debt obligations from AAA to AA+. On August 8, 2011, S&P also downgraded the long-term credit ratings of U.S. government-sponsored enterprises. These actions initially have had an adverse effect on capital markets in the United States and elsewhere, contributing to volatility and decreases in prices of many securities trading on the U.S. national exchanges. Other ratings agencies may, in the short or long-term, also lower the sovereign credit rating of the United States or of other sovereigns. Any volatility in the capital markets in the United States or elsewhere, whether resulting from a downgrade of the sovereign credit rating of U.S. debt obligations or otherwise, may have an adverse effect on the price of the ADSs.

 

Exchange rate volatility may adversely affect the market price of the ADSs and the dividends payable to ADS holders.

 

From time to time, there have been significant fluctuations in the exchange rate between the Norwegian krone and the USD. Unforeseen events in international markets, fluctuations in interest rates, changes in capital flows, political developments or inflation rates may cause exchange rate instability that could, in turn, depress the value of the NOK, thereby decreasing the USD value of the ADSs and any dividends or distributions paid on the ordinary shares underlying the ADSs.

 

Risks Related to Tax Matters

 

We are exposed to potentially adverse changes in the tax regimes of each jurisdiction in which we operate.

 

We have operations in 22 countries around the world, and any of these countries could modify its tax laws in ways that would adversely affect us. Most of our operations are subject to changes in tax regimes in a similar manner as other companies in our industry. Significant changes in the tax regimes of countries in which we operate may have a material adverse effect on our liquidity and results of operation.

 

ITEM 4.    Information on the Company

 

A. History and Development of the Company

 

We were incorporated in Norway on May 18, 1992 pursuant to the Norwegian Public Limited Liability Companies Act. Our organization number in the Norwegian Register of Business Enterprises is 964 118 191. The legal and commercial name of the company is Marine Harvest ASA, a public limited liability company, or allmennaksjeselskap, under Norwegian law.

 

Our principal and registered office is located at Sandviksboder 77 A/B, 5035 Bergen, Norway. Our telephone number at this address is + 47 21 56 23 00. We also have offices in several cities throughout the world.

 

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For further information on important events in the company’s business, see “—B. Business Overview—Business.” For further information on the company’s principal capital expenditures and divestitures, see “Item 5. Operating and Financial Review and Prospects—Capital Expenditures.”

 

B. Business Overview

 

In this annual report we use live weight equivalent, or LWE, which measures the weight of the fish swimming in the sea, and gutted weight equivalent, or GWE (also referred to as head on, gutted, or HOG), which measures the weight of the fish head on, gutted.

 

Overview

 

We are a leading seafood company and the world’s largest producer of farmed salmon, offering fresh salmon, processed salmon and other processed seafood to customers in 70 countries worldwide. We engage in two principle types of activities:

 

·                  fish farming and primary processing of fish in Norway, Scotland, Canada, Chile, Ireland and the Faroe Islands, and

 

·                  secondary processing of seafood in Norway, Chile, Ireland, the United States, the United Kingdom, France, Belgium, the Netherlands, Poland, the Czech Republic, Japan, Vietnam, Taiwan and South Korea.

 

Our fish farming operations consist of raising farmed salmon throughout their life cycle, from egg to adult, in a controlled environment and subsequently harvesting and primary processing the fish. The primary processing of fish involves slaughtering and gutting operations. Our customers of our primary processed salmon include our own secondary processing operations, distributors and other secondary processors of salmon.

 

Our secondary processing entails using the gutted fish to prepare products such as fillets, steaks and other portions of fish. Secondary processing activities include packaging the products and further preparation to create ready-to-heat or ready-to-eat products. Our customers of secondary processed salmon include other secondary processors of salmon, retailers such as grocery stores and food service providers such as hotels and other service and catering entities.

 

In 2013, 65% of our sold volume derived from Norway, 8% from Chile, 14% from Scotland, 10% from Canada, and the remaining 3% from the Faroe Islands and Ireland.

 

In 2012, we began transforming ourselves from a production-driven fish farming company into an integrated marine protein producer, expanding into fish feed and broadening our secondary processing operations. To this end, in 2012 we broke ground on a fish feed plant in Norway, which we expect to supply up to 60% of our Norwegian fish feed requirements by 2015 (representing approximately 40% of our global fish feed needs based on 2013 production). As of December 31, 2013, construction of the feed plant was on schedule and on budget with regards to completion and we expect the first deliveries to reach our farms in June/July 2014. Also, in 2012 and 2013, we acquired Morpol, a world leading secondary processor of salmon with processing facilities in Poland, United Kingdom and Vietnam.

 

We harvested 343,772 tons of salmon GWE for the year ended December 31, 2013 and 392,306 tons of salmon GWE in 2012. Our EBIT was NOK 4,661.8 and NOK 1,009.8 million for the years ended December 31, 2013 and 2012, respectively. Our Group Operational EBIT was NOK 3,212.4 and NOK 643.4 million for the years ended December 31, 2013 and 2012, respectively. Our return on capital employed, or ROCE, was 18.5% and 3.9% for the years ended December 31, 2013 and 2012, respectively. Group Operational EBIT and ROCE are non-IFRS financial measures. See “Item 3. Key Information—A. Selected Financial Data” for a description of how we define and calculate Operational EBIT and ROCE and for a reconciliation of Group Operational EBIT to EBIT.

 

Corporate Foundation

 

Our foundation is based upon the belief that through cultivating seafood we can produce healthy, nutritious and affordable food for the wider society. The Food and Agricultural Organization estimates that only

 

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approximately 2% of the world’s food supply (including farmed and wild fish harvest) comes from the ocean. We believe that global consumption of seafood will increase in the future, both in terms of overall volumes and as a percentage of global food supply, for the following reasons:

 

·                  Global population growth—the global population is expected to grow from over seven billion in 2013 to over nine billion by 2050, resulting in an increased global demand for food, including proteins;

 

·                  Increasing per capita income in emerging markets—as populations in emerging markets become wealthier, their disposable income and consumption of proteins is expected to increase;

 

·                  Health benefits of seafood—a diet that includes fish one to two times per week helps address obesity and forms part of a healthy lifestyle, according to the American Health Organization;

 

·                  Carbon efficiency of aquaculture—we believe that aquaculture can provide healthy proteins in a carbon efficient way. On the basis of the feed conversion ratio, which measures kilograms of feed needed to increase an animal’s bodyweight by one kilogram, and edible yield, which measures the percentage of the animal that can be consumed, Atlantic salmon provides a more carbon efficient source of proteins than beef, pork or chicken.

 

The wild fish supply is not expected to meet the increased demand for fish driven by the global population growth. According to the Food and Agricultural Organization, the wild fish harvest has been relatively stable since the late 1980s. However, as the global population has increased, the wild fish catch per person has dropped from 17 kilograms per person at its height in 1988 to 13 kilograms in 2012, a 37-year low (in each case including fish not used for human consumption). In contrast, the output from fish farming has increased from 24 million tons per year in the mid-1990s to an estimated 68 million tons in 2013. Fish farming is the only way of securing access to fish protein at an affordable price for the increasing population.

 

We have a challenging and ambitious vision — “Leading the Blue Revolution” — that sets direction and shows possibilities, and our goal is to be the leader in the three key fields of the salmon aquaculture value chain: salmon feed, salmon farming and salmon processing. By integrating the full value chain, we can control our products from feed to fork, which will enable us to be a more efficient producer of salmon and salmon products and allow us to be proactive in addressing challenges related to sustainable feed, farming and processing.

 

The seafood industry must be environmentally and socially sustainable to be profitable over the long term. Our growth must be sustainable from an environmental, social and financial perspective. We need attractive financial results to have the financial strength to drive the sustainable development of our operations. This interdependency has led us to develop four equally important guiding principles for our operations—Profit, Planet, Product and People.

 

·                  Profit: Our profits hinge on our ability to provide customer value from healthy, tasty and nutritious seafood, farmed both cost-effectively and in an environmentally sustainable way that maintains the aquatic environment and respects the needs of the wider society.

 

·                  Planet: Our operations and the long-term profitability ultimately depend on sustainable and environmentally responsible interactions with the natural environment. We rely on qualified personnel to maintain fish health, avoid escapes and minimize the environmental impact of our operations.

 

·                  Product: We aim to continually deliver assuredly healthy, tasty and responsibly produced seafood to our customers to deliver long-term financial profitability.

 

·                  People: Employee safety and employees’ self-respect and personal pride in their work cannot be compromised if we are to succeed as a company with good relationships with the local communities.

 

Our mission is to produce and sell seafood for a better life for our customers (Product), shareholders (Profit), our colleagues (People), all other stakeholders and for the world (Planet). We seek to farm in the ocean through a sustainable model so that fish harvests can grow over time and we aim to be a leader in the continued

 

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development of sustainable protein production. These goals are embodied in our vision: “Leading the Blue Revolution.”

 

Closely linked to our vision are our common values: “Passion,” “Change,” “Trust” and “Share.”

 

·                  Passion for the company and product: Passion is the key to our success and how we make a difference

 

·                  Change is the new “normal”: We are ready for change and continuously work to improve our operations.

 

·                  Trust is essential in everything we do: Our operations provide safe, good and healthy food and we deliver on our promises.

 

·                  Share is the backbone of our more than 10,000 employees: We share knowledge and experiences, we are open and transparent and we cooperate with key stakeholders globally.

 

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The illustration below summarizes how vision, values, strategy and guiding principles in Marine Harvest are connected:

 

GRAPHIC

 

Operational —Strengths and Strategies

 

As a leading seafood company and the world’s largest producer of farmed salmon, we are well-positioned to take advantage of the attractive dynamics in the seafood industry globally, and in particular the salmon farming industry. The key strategies of our business include the following:

 

Strengths

 

Our leading market position allows us to benefit from economies of scale and our geographic diversity reduces our exposure to regional trends

 

We are the largest producer of farmed salmon and, with the acquisition of Morpol, the largest salmon processor in the world. In the year ended December 31, 2013, we harvested 343,772 tons of salmon GWE, compared with 392,306 tons in 2012.

 

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Our size and scale allow us to benefit from economies of scale in farming and processing of fish, as well as to leverage expertise and production methods across our operations, which make us an economically efficient producer of premium quality Atlantic salmon and secondary processed seafood. In addition, our size and scale reduce our exposure to regional trends in salmon prices, disease cycles and other issues with salmon farming that tend to be manifested at a regional rather than a global level.

 

We expect demand for farmed fish, in particular farmed Atlantic salmon, to increase in the coming years and we are well positioned to benefit from an increase in demand

 

We believe that demand for protein, and fish protein in particular, will increase in the future due to an increasing global population and an increasing per capita income in emerging markets. We believe that the health benefits of eating salmon and the carbon efficiency of salmon farming (more efficient feed conversion ratio and edible yield compared to other protein sources such as beef, pork and chicken) will result in an increase in demand for farmed salmon. The feed conversion ratio measures the number of kilograms of feed needed to increase an animal’s bodyweight by one kilogram. For farmed salmon, the ratio is approximately 1.2 kilogram of feed per one kilogram of bodyweight, which is below other animals such as cattle, pigs and chicken, which have feed conversion ratios of 30, three and two kilograms, respectively. Edible yield measures the percentage of an animal that can be consumed by humans. Once harvested, the yield out of one kilogram of salmon is 68% of edible meat. This is significantly higher than pork and chicken which have an edible yield of 52% and 46% respectively. Because wild catch harvest has remained constant in recent decades as wild catch harvest has reached the natural capacity of the ocean for sustainable harvest, farmed fish production will need to increase to meet this anticipated increase in demand. As the world’s largest producer of farmed salmon, we believe that we are well-positioned to benefit from increases in demand in future years.

 

We have established fish farming and processing facilities in a number of countries across four continents

 

We have fish farming operations and primary and secondary processing activities across four continents, enabling us to farm, harvest and process fish closer to our customers, limiting the time required to bring our product to market and expanding our potential customer base.

 

Our vertically integrated business model reduces our exposure to input costs fluctuations and gives us greater control over our operations

 

We believe that there are significant benefits associated with being an integrated producer of salmon, from fish feed production and salmon farming to secondary processing of the fish. These benefits include the following:

 

·                  Our farming operations ensure a consistent supply of high quality salmon as input for our secondary processing operations and reduces our exposure to the volatility in prices of farmed salmon.

 

·                  With the importance of food safety to the consumer, our vertically integrated platform will provide increased traceability from feed to consumption of the salmon product.

 

·                  Controlling the full spectrum of the fish farming process from feed to fork will allow us to meet varying customer specifications—for example, many of our customers demand differentiated products, including organic salmon, and with control over the entire production processes, we will be well-positioned to meet that demand.

 

·                  By producing our own fish feed, we will be able to control the quality of the fish feed, and also the margins that currently goes to the fish feed producers.

 

Our Research and Development promotes fish health and welfare, environmental safety and product quality and food safety

 

Our research and development activities are conducted by experienced technical personnel within our operating segments. R&D activities within the operating segments are supervised by our Global R&D Department. Our R&D activities include research in the areas of biometrics, fish feed and nutrition, fish health and welfare, food safety and product quality, technology and the environment as well as breeding and genetics.

 

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Our research and development efforts help us solve operational challenges faced by our farming and processing operations. We view research and development as crucial for further development and strengthening of the relatively young salmon farming industry. Our technical staff is involved in government and industry-led research projects and programs, and we believe this reflects the strength of our R&D staff. In addition to collaboration with and outsourcing of R&D activities to external research institutions, we own and operate three research facilities in Norway, Scotland and Chile.

 

Our experienced management team and technicians maintain institutional knowledge and increase efficiency

 

Our management team consists of highly experienced professionals in the seafood industry, with backgrounds across all disciplines of seafood cultivation and processing and significant experience managing a vertically integrated platform. We believe that our emphasis on research and development, nutrition, health and quality assurance has made us a technological leader in the industry. Some of our accomplishments include the identification of the major gene controlling IPN resistance in the Mowi strain broodstock and farming our own wrasse, a cleaner fish used to combat sea lice. We have also started a trial project for land-based post-smolt production.

 

Our chairman, Ole-Eirik Lerøy, and CEO, Alf-Helge Aarskog, aspire to be pro-active in their management of our business by identifying opportunities in the markets we serve. We continue to look and position ourselves for future growth. Recently, our management team has positioned us for vertical integration through the introduction of fish feed production and expansion within secondary processing through the acquisition of Morpol and the construction of more facilities.

 

We also have a vast network of highly trained, knowledgeable technicians who manage our farms and processing facilities. We believe that such institutional knowledge and human resource capital enable us to operate our farms and processing facilities more efficiently.

 

Strategies

 

Maintain rigorous controls over our operations help to ensure safe, innovative, quality Products

 

We believe that we deliver healthy, tasty and responsibly produced seafood to our customers supported by our quality assurance systems and controls. These controls include monitoring programs for microbiology, residue and nutritional value. We also continue to invest in research and development projects and activities to improve product quality-related parameters. Production and processing of fish is a complex and heavily regulated process. Strict adherence to regulations, license terms and best practices is necessary to ensure that the seafood we produce meets our rigorous safety and quality standards as well as regulatory standards. To this end, we have established Group-wide standards and controls to help us comply with applicable regulations and best practices. For example, we adhere to the Best Aquaculture Practices and the Aquaculture Stewardship Council’s guidance on environmentally responsible salmon farming. We are also implementing a new standard for sustainable salmon farming, called the ASC salmon Standard, promulgated by Salmon Aquaculture Dialogue, with the goal of having all of our farms certified by 2020.

 

In 2013, we also strengthened our product innovation and branding efforts, introducing three new brands to the market (Olav’s — fresh salmon portions with a sauce, Supreme Salmon — a flagship restaurant, store and retail brand and the re-launch of the Sterling brand for Canadian salmon in the US business to business market). In order to cater to our customers’ increased attention to salmon products, we also work to continuously strengthen our customer relationships and strive to achieve seafood category leadership with all our retail customers.

 

Lead sustainability and environmental movement in aquaculture to help preserve our Planet

 

Sustainability is a prerequisite for long-term value creation in salmon farming. We are focused on reducing our carbon footprint by optimizing our use of energy throughout our value chain. Efficient use of fish feed is a key variable in reducing our carbon footprint. By reducing the animal content of the fish feed and replacing it with more carbon efficient sources, we are reducing our own carbon footprint and improving sustainability of our operations. Fish feed is one of the main sources of greenhouse gas emissions in the fish farming value chain, and the cost of

 

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feed represented approximately half of our “cost in box” in 2013. The efficient use of fish feed is therefore key to both profitability and improving our carbon footprint.

 

Climate change poses a potential challenge to our industry. Fish farming is dependent on thriving aquatic ecosystems which are particularly vulnerable to the effects of a warming planet. Rising ocean temperatures and ocean acidification are the two main threats our business may face due to climate change. As climate change could potentially entail detrimental effects for our industry, it is important that we do our part to contribute to reducing greenhouse gases in the atmosphere, both through providing a more climate friendly protein alternative and by reducing our own emissions.

 

Furthermore, we remain focused on energy consumption in our operations and seafood processing. We monitor energy use and work on identifying steps in our value chain to improve energy efficiency. In 2013, we were recognized for our transparency in climate reporting when, for the first time, we achieved a top position in the Carbon Disclosure Project’s, or CDP, Nordic 260 Carbon Disclosure Leadership Index. This annual index, compiled by FirstCarbon Solutions on behalf of CDP, highlights those companies listed on the Nordic stock exchanges that have displayed a strong approach to the disclosure of information relating to climate change.

 

We believe our commitment to the ASC salmon Standard and our commitment to a major industry-led sustainability initiative, the Global Salmon Initiative, where 15 global salmon producers have taken the initiative towards greater industry cooperation and transparency in order to achieve significant and continuous progress in industry sustainability, are important initiatives for bringing about change in the industry.

 

Upstream and downstream integration to deliver Profit, improve the quality of our Product, lower the impact on our Planet and ensure development of our People

 

We refer to activities occurring after farming (i.e., secondary processing) as downstream operations and activities occurring prior to farming (i.e., feed production) as upstream operations. During 2013, capital was re-invested to strengthen our three pillars: Feed, Farming and Sales and Marketing. As of December 31, 2013, construction of the feed plant in Bjugn, Norway was on schedule and on budget with regards to completion and we expect the first deliveries to reach our farms in June/July 2014. We are also considering the construction of a second plant in Norway. We will pursue selective acquisitions in Norway and Chile in order to substantially increase our share of global salmon production. By integrating the full value chain, we can control our products from feed to fork, be more proactive in addressing challenges related to sustainable feed, farming and processing and supply the world with healthy innovative seafood products.

 

Integrated production helps us stabilize our costs, control quality of our products and improve efficiency. With upstream integration into fish feed production and a world-leading farming and secondary processing platform, we are well-positioned to become a leading, global, integrated protein producer. Over time, upstream and downstream integration is expected to result in more stable earnings and unlock future growth. We will be less exposed to the cyclicality of salmon prices and better able to control the quality of our products. Although our primary focus is on salmon, with approximately 91.0% of our revenue derived from salmon products in 2013, we also produce halibut and we may expand into other fish species in the future.

 

Promote upstream integration—by establishing our first fish feed production facility

 

Fish feed is the single most significant cost in the production of Atlantic salmon. Fish feed is also important with regards to sustainability and quality of the end product. We are currently constructing a 220,000 ton per annum fish feed plant located in Bjugn, Norway, which at full capacity is expected to account for approximately 60% of our Norwegian fish feed needs (representing approximately 40% of our total global fish feed needs), based on our 2013 production. We selected the location and the size of the plant, based on the location of the majority of our farming sites in Norway. We expect the plant to reach full capacity by 2015. Fish feed production is a new field of operation for us, and, by establishing our first factory, we seek to increase our knowledge of fish feed ingredients and better understand how to adapt the feed to our fish. We believe the fish feed plant will strengthen the production side of our business model, secure access to high quality fish feed and improve our ability to control, trace and understand the key input of our product. We continue to explore other alternatives in expanding our fish feed operations.

 

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Promote downstream integration by constructing greenfield secondary processing facilities and acquisition of Morpol

 

In line with our strategy to expand our secondary production capacity, our new greenfield secondary processing facility in Boulogne Sur Mer, France commenced operations in May 2012. The 8,000 square meter processing and packing plant engages in secondary processing of salmon and white fish. In addition, in 2012 we opened a small processing line in the Czech Republic and a new greenfield factory in Osaka, Japan to produce secondary processed products close to our customers. In 2013, we opened secondary processing facilities in South Korea and Taiwan and we expanded our smoked salmon capacity at our facilities in Belfast, Maine. In December 2013 our Board approved the plan to complete the first section of our secondary processing facilities outside Edinburgh, Scotland, acquired through the Morpol acquisition. The plant is expected to start operations in October 2014, producing fresh fillets and smoked salmon for the UK and export markets.

 

On September 30, 2013, the European Commission approved our acquisition of Morpol, subject to divestment of Morpol’s Scottish farming capacity on Shetland and the Orkneys of approximately 18,000 GWE. We acquired 100% of Morpol on November 12, 2013. Morpol is the world’s largest value-added producer of salmon measured by volume of salmon produced in 2013, and the acquisition is part of our strategy to further integrate our production process and expand our sales in markets where we previously have not been very active. Morpol’s fish processing plant in Ustka, Poland is the largest in Europe as measured by processing capacity in 2013, with 753,000 square foot of space. In 2013, Morpol processed 83,913 tons of salmon GWE. In addition to its secondary processing activities, Morpol has fish farming operations and harvested a total of 29,796 tons GWE of salmon in 2013 from sites in Norway and Scotland, 18,000 tons GWE of which we agreed to divest as discussed further below. Morpol sells primary and secondary processed fish in more than 30 countries in the world and its main markets are Germany, France, the United Kingdom and Italy. Morpol’s revenues for the year ended December 31, 2013 were NOK 4,937 million and its profit after taxes before minority interests was NOK 444 million. Operations held for sale are included in the figures for the first nine months of the year.

 

On March 27, 2014 Marine Harvest announced an agreement to divest its integrated farming operations on the Shetland and Orkney Islands to Cooke Aquaculture Inc. acquired as a part of the Morpol acquisition.  The agreement is conditional on the EU commission approving that the purchaser, the transaction as well as the sales terms satisfy the remedies agreed in the approval of the Morpol acquisition. Closing of the transaction is expected in the second quarter.

 

Product—How We Create Tasty and Healthy Seafood

 

We farm Atlantic salmon and engage in primary and secondary processing of salmon and other seafood. Our main product is Atlantic salmon, with salmon sales accounting for 91.0% and 89.8% of the total revenue for the years ended December 31, 2013 and 2012, respectively. Our non-salmon products include cod, Alaska pollack, shrimp, plaice, redfish and pangasius.

 

Salmon Farming Operations

 

We farm our salmon in Norway, Chile, Scotland, Canada, the Faroe Islands and Ireland.

 

Salmon farming entails transforming salmon eggs to smolt to a full-grown salmon of typically four to five kilogram. The salmon production cycle has five linked phases: freshwater, seawater, harvesting, processing and distribution. Salmon farming follows the same cycle as takes place naturally for wild salmon. The overall life cycle of salmon typically takes between 24 and 36 months, starting in freshwater and involving several stages in freshwater before the young salmon, or smolt, is ready for the sea.

 

The freshwater phase occurs in hatcheries (pools on land) or in freshwater lakes. Initially, broodfish, which are salmon selected for breeding purpose are stripped for eggs. The eggs are then fertilized under controlled conditions, or spawned, and transferred to hatching trays. Once the eggs hatch into alevins, they grow in the hatching trays until they become fry and are ready to be moved into freshwater tanks on land (outdoor or indoor) or to cages in freshwater lakes. The fry grows until it becomes smolt, a stage at which the fish is normally between 60 and 120 grams and is ready to transition into the seawater phase, a process called smoltification.

 

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In the seawater phase smolt are transferred to seawater in large tanks on trucks and in boats known as well boats. During the journey, the salinity of the water is gradually increased to approach the natural salinity of seawater. The smolt are then transferred to net pens in seawater. The seawater phase lasts until salmon reaches a harvest weight of typically four to five kilograms over a period of 14 to 20 months. The grow-out facilities used for fish at sea are circular or square pens (either steel or plastic), equipped with a series of floating docks, walkways, moorings, nets, cameras, feed barges and boats. The pens are anchored to the seabed.

 

Our ambition is to apply best production practices across geographies to optimize production in a sustainable way. Managing all of our farming activities in one business area facilitates the transfer of knowledge and best practices within the Group. Close cooperation with our R&D department contributes to improvements in fish health, feeding efficiency and use of medicines. Each geographic operation is fully integrated, with operating units in each country where we farm salmon having full control of the value chain from smolt production and farming, via processing to packaging activities.

 

When salmon reaches market weight, it is harvested. The fish may be gutted at the site at the time of harvesting or at a central point prior to preparing the fish for sale. Fish not yet gutted are transferred to primary processing plants. Fish gutted on site are transported to secondary processing facilities or to the market.

 

In 2013, 65% of our sold volume derived from Norway, 8% from Chile, 14% from Scotland, 10% from Canada and the remaining 3% from the Faroe Islands and Ireland. The following chart shows harvest volume of salmon in tons GWE in 2013, 2012 and 2011 by region of origin:

 

 

 

Year ended December 31,

 

 

 

2013

 

2012

 

2011

 

 

 

(in tons gutted weight)

 

Region of Origin:

 

 

 

 

 

 

 

Norway

 

222,494

 

255,306

 

217,510

 

Scotland

 

48,389

 

40,261

 

50,174

 

Canada

 

33,059

 

40,217

 

33,917

 

Chile

 

28,281

 

40,222

 

25,960

 

Ireland

 

5,883

 

9,407

 

9,332

 

Faroe Islands

 

5,665

 

6,893

 

5,927

 

Total harvested volume of salmon

 

343,772

 

392,306

 

342,820

 

 

The following graphic shows our global farming operations by harvest volume in 2013 as well as the locations of our primary and secondary processing facilities:

 

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GRAPHIC

 

Processing

 

Seafood processing is divided between primary and secondary processing.

 

Primary processing entails slaughtering and gutting of the fish. The salmon we harvest is processed by our own primary processing facilities, except for the Faroe Islands where the primary processing is done by third parties. In addition, we primary process some salmon that is farmed or harvested by other companies. The majority of our primary processed salmon is sold to third parties, while the remainder goes to our secondary processing facilities. We also purchase from third parties gutted salmon and other seafood for secondary processing by us. In all processing plants, we operate with high levels of quality and hygiene, meeting rigorous specifications of relevant authorities and leading retailers around the world.

 

Our secondary processing operations entail using the gutted fish to prepare products such as fillets, steaks, and other portions of fish — smoked, fresh and frozen - for retail and food service. Secondary processing activities include packaging the products and further preparation to create ready-to-eat and ready-to-heat products. Our secondary processing activities take place in our own processing facilities in Norway, France, the United Kingdom, the Czech Republic, Poland, Ireland the Netherlands, Belgium, Chile, the United States, Japan, Taiwan, Vietnam and South Korea. Some of the secondary processing takes place in our primary processing facilities. The main

 

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products produced by our secondary processing facilities are fillets, steaks, portions and loins of salmon and white fish, coated seafood, smoked seafood and elaborated seafood. We offer a wide range of value added products of approximately 60 different seafood species; the main species used in our secondary processing operations are Atlantic salmon, cod, pangasius, Alaska pollack, redfish, plaice, haddock, shrimp and halibut. Atlantic salmon comprised the large majority of the inputs used by our secondary processing facilities in 2013 and most of it was produced in our farming operations. Other input used in secondary processing are purchased from third parties.

 

The following table shows our processing facilities by location and their 2013 production, broken down between primary processing and secondary processing facilities:

 

Country

 

Harvest
Volume
2013

 

Secondary
Processing
Production
2013(1)

 

 

 

(in GWE tons)

 

(in tons)

 

Norway

 

222,494

 

39,800

 

Scotland

 

48,389

 

 

Ireland

 

33,059

 

900

 

Chile

 

28,281

 

13,000

 

Canada

 

5,883

 

 

Faroe Islands

 

5,665

 

 

France

 

 

22,700

 

Netherlands

 

 

7,900

 

Belgium

 

 

11,700

 

Poland

 

 

8,300

 

Japan

 

 

2,646

 

United States of America