Annual Report 2017

DIVIDEND PROPOSAL

The Board is recommending the same dividend per share of ISK 6.80 as last year. This is a total dividend payment of ISK 1,269.1 million, the equivalent of approximately EUR 10.2 million, or about 61.0% of net earnings, which is within the stated dividend policy range of 10-65% of net earnings.

NEW VESSELS

In January 2017, Eimskip signed a cooperation agreement regarding potential sharing of capacity with Royal Arctic Line. At the same time, the Company signed a contract to build two 2,150 TEU container vessels at a cost of approximately USD 64 million, of which a down payment of USD 12.8 million has been made. Once completed in 2019, Eimskip will finance USD 51.2 million, or 80%, with a 15 year loan with attractive rates. The two vessels are built to Polar Code, fitted with scrubbers, will be very fuel-efficient and meet the highest environmental standards. This will allow us to serve Greenland with Royal Arctic Line in a vessel sharing agreement that will lower the cost per TEU for both carriers and better serve our customers. These vessels are part of our fleet renewal program that will help our reliability and quality of service. Together with Royal Arctic Line we will open new markets for exports and imports to and from Greenland and should grow inter trading within our sailing system. This strategic cooperation will help connect the nations of the North Atlantic. The Icelandic Competition Authority is evaluating the intended cooperation.

2018 AND 2019

Our guidance for 2018 EBITDA is EUR 60 to 65 million, without acquisitions. In our liner services, we will focus on increasing our profitability and growing our revenues organically with the benefits of offering weekly services and providing more services to our customers. The costs of adding vessels will impact our results in the first half of the year as we invest in growth.  We have and are investing in our infrastructure to build a strong foundation to support our growth and be able to handle the larger 2,150 TEU vessels being delivered in 2019. In 2018 and 2019, we will also be investing in modernizing and expanding the port of Sundahöfn in Reykjavík that we will keep you informed about. On the forwarding side of the business, we have been experiencing slow markets in West Africa for the first two months of the year that now are coming back to normal. Depending on our March results, our forwarding business could be softer in the first quarter, although for the full year we are not changing our guidance.

Eimskip’s financial condition remains strong and we are an asset rich company, which adds to our financial flexibility. We look forward to good revenue and EBITDA growth in 2018. The outlook in 2018 for the economies of Iceland, the Faroe Islands, Norway, Eastern Coastal Canadian States, the US and EU is favorable.

CONCLUSION

I would like to thank our customers, shareholders and Eimskip’s employees all over the world for their support. Our customers are our lifeblood and we strive to provide them with the most efficient solutions to their needs with great service and systems. In addition to our long tradition of dependable service, we are active in the communities we serve and we support many cultural and communal projects. The welfare of the communities, our customers, our employees and the environment are all-important to us.

The new vessels we have ordered set new environmental standards. We are conscious of the need to minimize our ecological footprint. Eimskip is a registered participant in the UN Global Compact, the United Nations initiative for social responsibility with respect to human rights, labor, environment and anti-corruption.

I want to thank Gylfi Sigfússon and all of our team members in Iceland and all over the world for their great daily efforts that make a difference to our customers. It is important for Eimskip to provide an enthusiastic and innovative work place environment.

We are enthused with the weekly sailing system, the new vessels being built, the infrastructure investments and the forwarding companies, all of which will contribute to Eimskip’s future growth.

MISSION, VISION AND STRATEGIC PRIORITIES

Eimskip’s values are Achievement, Cooperation and Trust and these are the Company’s guiding principles in its behavior towards the Company’s stakeholders. Eimskip’s mission is clear: to be a leading transportation company in the North Atlantic with connections to international markets and to be specialized in worldwide freight forwarding services. The Company’s vision is excellence in transportation solutions and services.

The Company’s six strategic priorities set forward for the year 2018 are the following:

• Optimize the sailing system and utilization of the vessel fleet, after having achieved the goal of weekly sailings in all the six sailing routes.
• Improve IT solutions and integrate common platforms across the Company.
• Implement strategic procurement processes to reduce costs and improve processes to reach operational excellence.
• Integrate Eimskip’s global team of employees, work on synergies between the different divisions and companies within the Group and on integration of new Group companies to ensure maximized synergy.
• Be proactive in our approach in sales and services, both in our liner services and in the forwarding services.
• Improve business processes and Key Performance Indicators.

Eimskip has been working on lowering its carbon footprint in the recent years with good results. The Company will continue to focus on reducing its ecological footprint throughout the supply chain as a part of its social responsibility.

THE ROLE IN THE NORTH ATLANTIC

Eimskip plays a very important role in the North Atlantic, operating a strong and reliable sailing system. The Company is proud to be a niche carrier in the Arctic and to be able to serve the communities in the North Atlantic. The service network spans from Murmansk in Russia and Northern Norway, through the Faroe Islands, Iceland, Greenland, Newfoundland and Labrador, Nova Scotia and the northeastern states of the US through Portland, Maine. Eimskip is aware of its responsibility in connecting countries in the North Atlantic and has as of November 2017 secured a weekly service in the market area, which is a milestone achievement and will enable the Company to grow in additional volume from current and new customers.

FORWARDING IS AN IMPORTANT SOURCE OF REVENUE

Eimskip’s forwarding services now contribute 34% of the Company’s total revenue and 31% of its EBITDA. The forwarding services have been growing constantly over the past years, driven by organic growth and growth through new acquisitions, adding on new trade lanes, markets and commodities. The Company’s emphasis are not only on temperature-controlled cargo, but also on dry cargo and project cargo. Eimskip’s forwarding services are an asset-light business, carried out through cooperation between the Company’s own offices, its worldwide network of associates and various international deep-sea lines. The freight consists mainly of frozen or chilled seafood, meat, fruit and vegetables. The trade lanes have transformed from mainly transporting fish between China and Europe/US, to being an Intra-Asian business with a more even balance of imports and exports in and out of Asia.

ORGANIC GROWTH AND STRATEGIC ACQUISITIONS

During the last five years, Eimskip has been focusing on its vision by investing in organic growth. This has been achieved by adjusting the sailing system through investments in vessels, equipment and IT solutions and by building up infrastructure to create value for customers. As a part of its organic growth strategy, Eimskip began offering weekly coastal service in Iceland in February 2017 and late 2017 the Company strengthened its Trans-Atlantic services by offering a new weekly service between Northern Europe and North America. Eimskip’s Trans-Atlantic volumes are now three times larger than they were in 2009 and the volumes were up by 30.9% in 2017. This volume growth, together with a new short-sea agreement with the international shipping company CMA CGM between Halifax, Nova Scotia and Portland, Maine in the US, supports the weekly service. This weekly service on the Trans-Atlantic route opens doors to a broader customer base with additional volume that demands more frequency in shipping. Previously, the Company’s foundation has been strengthened with investments in infrastructure in the market area, e.g. cranes, port facilities and other equipment.

In January 2017, Eimskip and Royal Arctic Line signed a cooperation agreement regarding potential sharing of capacity on larger vessels that will increase efficiency and service reliability. The Icelandic Competition Authority is evaluating the intended cooperation.

Eimskip finalized a contract with a reputable shipyard in China for building of two 2,150 TEU ice class Polar code container vessels. The contract price of each vessel is approximately USD 32 million. The progress of building the vessels is on track and the expected delivery is in the middle of 2019. The vessels will be the largest and most efficient in Eimskip’s vessel fleet and are built in line with environmental standards.

Eimskip acquired an 80% share in the specialized Belgian forwarding company Mareco in January 2017. The acquisition gives the Group access to new commodities and new markets in Africa and South America.

In June 2017, Eimskip acquired 75% of the freight forwarding company SHIP-LOG A/S, headquartered in Århus, Denmark. The company has a strong niche position in the temperature-controlled food and pharmaceutical cargo sector.

The integration of the acquisitions creates a more powerful network and growth opportunities through new commodities, new trade lanes, cross selling and synergies. The Company has also achieved other goals with the acquisitions, by increasing the proportion of asset-light EBITDA, generating higher return on capital and geographically diversifying revenues and EBITDA. The forwarding operations are becoming more important to Eimskip and we will continue to grow the business both organically and through further acquisitions.

THE YEAR AHEAD

Eimskip is working on increasing its margins in various ways. In 2018, our focus is on increasing liner sales and lowering operating expenses. We are placing special emphasis on improved processes by reviewing our end-to-end booking processes to further increase efficiency and profitability.

Eimskip’s capital structure is solid and well prepared for future investments and opportunities, both in the North Atlantic and around the globe. The Company is constantly reviewing and optimizing its sailing system, listening to customer needs and monitoring market trends, seeking ways to reduce vessel and container fleet costs and improve utilization of its transportation system.

The Company will continue to follow its vision by strengthening its organic base, but will also look for external growth opportunities and diversification of the operations, as was done with dynamic strategic acquisitions in 2017. Eimskip will put extra emphasis on exploiting the synergy potentials with the new acquisitions within the Group.

Eimskip’s future is exciting and I look forward to working with our almost 1,900 dedicated employees in the 20 countries in which we operate. Our intention is to keep on growing through our strong asset base in the North Atlantic, but also to grow through our forwarding services network, through diversification of commodities and trade lanes and through strong acquisitions. Evaluation of vessel investments will continue on an ongoing basis, as Eimskip seeks to take advantage of the attractive second-hand vessel market. I have great faith in the team spirit of the Eimskip Group and know that we have the capacity to achieve good results and increase shareholder value in the coming years.