Bond report for the twelve months ended 31 December 2016

Transcription

1 Bond report for the twelve months ended 2016 Published 17 March 2017 Silk Bidco AS (issuer) 455,000, % Senior Secured Notes due 2022

2 Table of contents Cautionary notice 3 Summary 4 Risk factors 6 Management's discussions and analysis of our financial condition and results of operation 7 Recent developments 21 Description of other indebtedness 23 Definitions key performance measures and key line items 24 Appendix Silk Bidco Group Unaudited Consolidated Financial Statements for the fourth quarter and for the twelve months ended 2016 Previous page: kayaking in Antarctica. Photo Copyright Esther Kokmeijer / Hurtigruten 2

3 Cautionary notice This quarterly report may contain forward-looking statements, which reflect expectations of Silk Bidco AS (together with its subsidiaries and affiliates, the Company ) regarding its future operational and financial performance. Although any forward-looking statements contained in this quarterly report reflect management s current beliefs based upon information currently available to management and upon assumptions which management believes to be reasonable, actual results may differ materially from those stated in or implied by these forward-looking statements. A number of factors could cause actual results, performance or achievements to differ materially from the results expressed or implied in any forward-looking statements. These factors should be considered carefully and readers should not place undue reliance on any forward-looking statements. Except as required by law, the Company undertakes no obligation, and specifically declines any obligation, to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The Company has included certain non-ifrss financial measures in this presentation, including EBITDA, Normalised Adjusted EBITDA, Normalised Adjusted EBITDA Margin, Capital Expenditure, Normalised Capital Expenditure, Gross Cruise Costs, Gross Ticket Revenues, Net Cruise Costs, Net Ticket Revenues and certain other financial measures and ratios. These measurements may not be comparable to those of other companies and may be calculated differently from similar measurements under the indenture governing the Company s 7.50% Senior Secured Notes due Reference to these non-ifrs financial measures should be considered in addition to IFRS financial measures, but should not be considered a substitute for results that are presented in accordance with IFRS. 3

4 Summary 2016 has been a pivotal year in Hurtigruten history. Four vessels operating on the Norwegian Coast were fully refurbished, MS Spitsbergen was launched in the Fall and will be utilized both in the Coastal and Explorer segments, and MS Midnatsol sailed to Antarctica and delivered a full Explorer product on a 500-passenger vessel. The company decided to build new vessels to serve the Explorer segment, with the first new vessel (MS Amundsen) currently under construction. The organization has gone through significant investments in terms of commercial organisation, branding and optimization of processes which will allow it to maintain its position as a leader in Expedition Travel. During the year, there were a number of missed sailing days related to delays in planned dockings and material technical issues. This resulted in significant refunds to passengers, additional passenger costs and loss of State Contract revenue, as well as requiring the focus of the organization and extra internal costs. We have adjusted for these in the Bond Reporting for the first three quarters of However, in this quarterly report for Q4, we have made some revisions with regards to the calculation of some of these adjustments. We have illustrated the impact of these adjustments in the commentary below in order to provide an accurate like for like comparison to the same period in the previous year. Please also note that the Full Year 2016 Bond Report will contain the final version of the figures as well as the Audited 2016 Financial Statements. Operational results for Silk Bidco AS and its subsidiaries continued to develop as expected for the twelve months ended Normalized adjusted EBITDA went to NOK million in 2016 from NOK million in the twelve months ended December 2015, a decrease of 0.2%. This stable Normalised Adjusted EBITDA was driven by strong top-line revenue growth, with Normalized Total Revenue from Continuing Operations going to NOK 4,452.1 million in 2016 from NOK 4,065.7 million in the twelve months ended December 2015 (an increase of 9.5%), while investments in the business including a strengthening of the commercial organization over the year have resulted in higher operating costs including selling and administrative. The fourth quarter 2016 once again significantly outperformed the same period in the prior year. Normalized adjusted EBITDA increased to NOK 22.7 million in the three months ended December 2016 from NOK 3.4 million in the three months ended December This improvement is coming from the two main segments of Hurtigruten; the Norwegian Coastal segment, where occupancy and onboard spending continue to rise in the winter season, and the Explorer segment, where the introduction of MS Midnatsol in Antarctica has increased capacity and proven to be very successful. Occupancy on the Norwegian Coast improved from 41.2% in the three months ended December 2015 to 47.8% in the three months ended December For the Explorer segment, occupancy improved from 64.6% in the three months ended December 2015 to 68.7% in the three months ended December 2016, even with an increase in available passenger cruise nights of c. 180% due to the addition of MS Midnatsol. The Hurtigruten Norwegian Coast segment increased its total revenues by NOK 86.2 million, or 2.5% to NOK 3,500.4 million for the twelve months ended 2016 from NOK 3,424.2 million in the twelve months ended The increase is mainly a result of an increase of 5.7% in Gross ticket revenue per PCN. Due to the significant refurbishment plans as well as technical delays in 2016, the APCNs dropped by 5.5% (from 1.76 million to 1.66 million), however PCNs still increased slightly by 0.9%. The Gross ticket revenue growth is driven by steady underlying price increases on selected cabin categories and departures / seasons, however was negatively impacted by the weakening of the Norwegian Kroner in Normalized Adjusted EBITDA declined, from NOK million in 2015 to NOK million in The drop in EBITDA relates mainly to the increased selling and administrative costs, which will see a full revenue and profitability impact in 2017 and 2018, as well increased repair and maintenance and other operating partly due to the large number of technical incidents and delays in For the fourth quarter 2016, the Normalised Adjusted EBITDA for the Hurtigruten Norwegian Coast segment fell slightly, to NOK 2.1 million, from NOK 3.9 million in fourth quarter However, excluding the impact from the reclassified exceptional items, the underlying improvement is mainly driven higher volumes (PCNs increased by 5.3% from fourth quarter 2015 to fourth quarter 2016) but was offset by slightly lower yields (Gross ticket revenue per PCN went from NOK 1,923 in fourth quarter 2015 to NOK 1,792 in the same period 2016) mainly due to the weakness of the Norwegian Kroner and larger volumes of international passengers in this period. The Explorer segment has seen the most transformations in the business in 2016, with the second season of MS Nordstjernen sailing in Svalbard in the summer, MS Spitsbergen being launched late summer and sailing along the Norwegian Coast as an Explorer product before taking over MS Midnastol s place in the Coastal Schedule. MS Midnatsol successfully sailed to Antarctica for its first Explorer season, and received extremely positive feedback on 4

5 the logistics, landings and general satisfaction from the passengers. This demonstrates that there is demand for the product and that Hurtigruten is able to deliver an active exploration product on a 500-passenger vessel in Polar Waters. MS Fram has also shown a positive pricing trend and demand for a differentiated, smaller-ship product Total revenues for the Explorer segment in the twelve months ended 2016 were NOK million, compared to NOK million in the twelve months ended The development is mainly driven by the 74.2% increase in PCN (building off of the 63.0% increase in APCN) leading to occupancy rates improving from 72.0% in 2015 to 77.0% in MS Midnatsol is offering a product with a lower price-point than MS Fram, as its size (500 passengers) allows for significant economies of scale; as a result, the Gross ticket revenue per PCN has dropped from NOK 6,102 in 2015 to 5,263 in 2016, in line with the company s strategy. Normalized Adjusted EBITDA went from NOK million in 2015 to NOK million in Total revenues for the Explorer segment in the three months ended 2016, where the impact from MS Midnatsol is the strongest, were NOK million, compared to NOK 90.2 million in the three months ended 31 December Occupancy rates went from 64.6% in fourth quarter of 2015 to 68.7% in fourth quarter 2016, as APCNs went from 22.3 thousand in fourth quarter 2015 to 62.6 thousand in fourth quarter 2016 (+181.2%). Normalized Adjusted EBITDA went from NOK 8.4 million in the three months ended December 2015 to NOK 34.4 million in the three months ended December

6 Risk factors Other than the ones described below, there have been no material changes in the risk factors relating to our business and operations since the publication of the latest quarterly bond report. EFTA Surveillance Authority State Aid Investigation The EFTA Surveillance Authority (ESA) announced 11 December 2015 that they had decided to open an in-depth investigation in order to clarify whether Hurtigruten had received any overcompensation which goes against the state aid rules of the EEA Agreement. The Authority is also investigating whether Hurtigruten ensures that everyone has access to the public service. The Ministry of Transportation, based partly on input from Hurtigruten, has answered all of the ESA s questions. In the Ministry s opinion, the funding from the State was and is merely a compensation for the supply of services of general economic interest, and the Coastal Agreement does not entail State aid. Hurtigruten discharges public service obligations, which have been clearly defined. Hurtigruten is not overcompensated, and the public service obligations are chosen pursuant to a public procurement procedure. Any proceedings would be made against the Ministry of Transport. However, to the extent that a formal proceeding is launched and the ESA finds that unlawful state aid has been granted to Hurtigruten, the company may be required to modify current practices and to agree to new terms and conditions. In addition, the company may be asked to pay a potentially significant settlement, fee or penalty, for an amount representing the total illegal state aid received as determined by the ESA, plus interest, any of which may adversely impact operations and the company s financial position. An increase in port taxes or fees or other adverse change of our terms of business with the authorities operating the ports in which we call could increase our operating costs and adversely affect our business, financial condition, results of operations and prospects. With respect to the port taxes and fees mentioned in previous reports, amounting to NOK million in the twelve months ended 2016 for the Hurtigruten Norwegian Coast segment, Hurtigruten received a positive ruling from the District Court on May with regards to the Bodø port court case. Under this decision, the court did not find the cooperation between the ports to be a violation of the Competition Act 10, but acknowledged that some statements were close to it. However, the court held that Hurtigruten was unduly charged double fees (calculated on a basis of 2 x 24 hours a day due to two port calls) obviously to secure income for the port and that such practice constituted abuse of power and was therefore partially invalid. The port of Bodø has been ordered to repay 50% of the fees charged since 2012 and the entirety of the ISPS fees, found to be clearly arbitrary, irrelevant and unreasonable, which amount to a total of c. NOK 4million. The port of Bodø has accepted the decision regarding ISPS fees, which is now final. The port has appealed the other part of the case to The Court of Appeal, where it was heard in January The case was re-opened by the court after it took note of a Board decision from November 2016 increasing the price to Hurtigruten by 40 per cent. This was withheld from the court during the appeal court proceedings. Due to this new information, the court s ruling will be delayed, and is now expected to come in second half of March Hurtigruten was previously involved in another court case with Geiranger port (Stranda Hamnevesen) regarding an increase in port taxes and fees charged in relation to the port in Geiranger. This case was won by Hurtigruten in the Supreme Court in June The outcome of the dispute is also likely to impact the amount of port fees we will be charged in future periods at the port in Geiranger and elsewhere. Hurtigruten is continuing to challenge the high fees in several other Norwegian ports. The Norwegian Coastal Administration has decided that Kristiansund has overcharged approach fees over a period of almost five years, and that funds must be repaid to Hurtigruten and other users. It has also ordered other ports to stop charging such fees, based on complaints by Hurtigruten. It is now reviewing accounts in several other ports. Kristiansund port has appealed this decision to the ministry of Transport. The ruling for this case is expected during first half

7 Management's discussion and analysis of our financial condition and results of operation The following is a discussion of the consolidated financial condition and results of operations of Silk Bidco AS and its subsidiaries for the quarter and twelve months ended 2016 compared to the quarter and twelve months ended Accordingly, all references to we, us or our in respect of historical consolidated financial information in this discussion are to Silk Bidco AS and its subsidiaries on a consolidated basis. Note that for Silk Bidco Group, the foundation of the company in September and the acquisition of Hurtigruten AS in December 2014 are part of the annual accounts for 2015 for Silk Bidco AS and its subsidiaries. According to the Norwegian Accounting Act, the first financial year may be longer than 12 months. However, the financial year may not in any circumstances exceed 18 months. In the following discussions for the three and twelve months ended 2016, the comparable period of three and twelve months ended 2015 is shown. You should read this discussion in conjunction with the previous annual and quarterly bond reports for 2014, 2015 and 2016, and the annual report 2014 for Hurtigruten Group, as well as our historical consolidated financial statements included in the offering memorandum dated 30 January 2015 offering the % Senior Secured Notes due 2022 issued by Silk Bidco AS. The following presentation and analysis contains forward looking statements that involve risks and uncertainties. Our future results may differ materially from those expected or implied in these forward looking statements. The sections "Risk Factors" and "Factors affecting our results of operations" in the offering memorandum mentioned above as well as the update in the first, second and third quarterly bond reports for 2016, the annual and quarterly bond reports for 2015 and the annual bond report for 2014, should be regarded reading this Management s discussion and analysis of our financial condition and results of operations" At year-end 2015, there was a reclassification of certain Fuel derivatives which led to an increase in Operating profit of million. This has been normalized in the Bond report in order to show a like-for-like comparison, unless specifically stated. Overview We are an exploration cruise and travel operator in Polar Waters, as well as providing local transport and cargo shipment along the Norwegian coast. Hurtigruten s vision is to be the world leader in exploration travel. It will lead the world for environmentally friendly expedition-based tourism, a niche with substantial potential on an international basis. With a fleet of 13 ships (14 including MS Nordstjernen) specially built for expedition voyages in polar waters, the company is already the front runner. Two-thirds of the Bergen-Kirkenes route lies north of the Arctic Circle. Hurtigruten thereby has more than half its fleet in Arctic waters throughout the year. Its goal is to reinforce and expand this position, differentiated from the rest of the cruise industry with authentic and active experiences on land and at sea. The group s business segments are divided into the following product areas: Hurtigruten Norwegian Coast, Explorer and Spitsbergen. Activities which do not naturally fall within these areas are grouped in Other business. Our Hurtigruten Norwegian Coast segment is our largest segment, accounting for 79.7% of our total revenues from continuing operations for the twelve months ended 2016 compared to 83.9% of our total revenues from continuing operations for the twelve months ended of our 14 ships provide services along the Norwegian coast under this segment, making 33 northbound and 32 southbound daily departures from ports located between Bergen in the south and Kirkenes in the north. Freight and passenger transport remain an important part of our offering, which includes basic transport infrastructure, carrying cargo and local residents across shorter distances, and for which we receive a fixed fee from the Norwegian government each year under the coastal service contract. We leverage this vessel schedule and infrastructure to offer distinct expedition based services and activities to leisure seekers through our cruise voyage products. The ships that we use to provide local transport services and cargo shipments are also used to offer exploration based voyages for leisure travellers, including a high proportion of international guests. Our second largest segment, the Explorer segment, accounted for 14.1% of our total revenues from continuing operations for the twelve months ended 2016 compared to 10.4% of our total revenues from continuing operations for the twelve months ended The segment consists of vessels MS Fram, MS Spitsbergen and MS Midnatsol (the latter two vessels alternating between Norwegian Coast and Explorer segment) as well as MS Nordstjernen which is leased and operated in Svalbard in the summer season. In Q3 2016, MS Fram was deployed to Svalbard and Greenland, MS Spitsbergen sailed along the Norwegian Coast as an 7

8 Explorer product and replaced MS Midnatsol on the Coastal Service as of early September. MS Midnatsol sailed from Norway and began the Transatlantic crossing to reach Antarctica by early November and MS Nordstjernen ended its summer season early September. Note that in order to better define our Explorer Cruise segment, we are reporting MS Nordstjernen as an Explorer product from 2016 (previously included in the Spitsbergen segment). Additionally, the Explorer segment shall be strengthened from 2018 and onward with two new polar cruise ships, the first of which is currently under construction. Our Spitsbergen segment comprises year-round hotel and restaurant activities as well as Arctic experience tourism in Svalbard. Spitsbergen Travel operates three hotels and an equipment store. Additionally, cruises with the former Hurtigruten ship MS Nordstjernen was introduced in the summer season 2015 (which has been shifted to the Explorer segment in 2016). This segment accounted for 6.2% of our total revenues from continuing operations for the twelve months ended 2016 compared to 5.6% of our total revenues from continuing operations for the twelve months ended Factors affecting our results of operations Factors affecting our results of operation which have not changed substantially since the publication of our previous bond reports including the latest for Q are not included here, but should nevertheless be considered. Price of bunker fuel We are exposed to fluctuations in the price of bunker fuel, which is used to operate our ships. In order to reduce the risk related to the fuel price we have entered into hedges. At the time of this report, the Company has hedged the consumption of its Coastal fleet as follows: 85.5 % of the estimated bunker oil consumption in 2017 hedged at a Brent price equivalent of $56.9/bbl 84.1 % of the estimated bunker oil consumption in 2018 hedged at a Brent oil price equivalent of $52.9/bbl The company shall continue to monitor the price fluctuations and cover the risk through hedges in order to limit the impact on results, as appropriate. Foreign Exchange rates We are exposed to different currencies in the normal course of business, and will from time to time enter into hedges to limit the risks associated with wide fluctuations. In the context of the construction of a new vessel, where c. 50% of the contract is denominated in NOK and longterm financing is expected to be EUR denominated, we have entered into a foreign exchange risk hedge in order to limit our exposure. On 18 th July 2016 we entered into a zero premium collar contract of a notional amount of 60 million EUR, with a call strike at 9.86 NOK/EUR, a put strike at 9.20 NOK/EUR and a two-year maturity. 8

9 Key Performance Measures The following tables presents, for the periods indicated, certain key performance measures with respect to our Hurtigruten Norwegian Coast and Explorer segments: Key operating metrics for Hurtigruten Norwegian Coast NB. This report does not include the State Contract s revenue neither the goods and other operating revenue originated by the Norwegian Coast activity. The perimeter of the activity is slightly changed as of September 2016, with MS Spitsbergen replacing MS Midnatsol on the Coast. For the quarter ended For the twelve months ended (NOK thousands except for PCNs, APCNs, occupancy rate, fuel consumption and fuel cost per liter) Hurtigruten Norwegian Coast: PCNs 183, ,815 1,118,028 1,127,823 APCNs. 444, ,295 1,757,854 1,660,818 Occupancy rate % 47.8% 63.6% 67.9% Gross ticket revenues. 352, ,528 2,597,510 2,734,482 Less: Commissions, costs of goods for flights, hotels, transportation and other passenger services... 53,063 55, , ,505 Food, beverage, shop, excursions. 47,591 57, , ,600 Net ticket revenues.. 251, ,133 1,865,669 1,918,378 Gross ticket revenues per PCN (NOK).. 1,923 1,880 2,323 2,425 Net ticket revenues per PCN (NOK) 1,373 1,297 1,669 1,701 Ship operating costs. 417, ,177 2,108,681 2,260,081 Selling, general and administrative expenses 155, , , ,328 Gross cruise costs.. 573, ,186 2,727,103 2,960,409 Less: Commissions, costs of goods for flights, hotels, transportation and other passenger services. 53,063 55, , ,505 Food, beverage, shop, excursions. 47,591 57, , ,600 Net cruise costs.. 472, ,791 1,995,262 2,144,305 Net cruise costs per APCN (NOK). 1,062 1,361 1,135 1,291 Fuel consumption (liter/nautical mile) Fuel cost per liter

10 Key operating metrics for Explorer NB. The perimeter of Explorer segment has changed as of Q with the introduction of MS Nordstjernen in May and MS Spitsbergen in June, replaced by MS Midnatsol in September. Vessels operating under the Explorer segment in Q are MS Fram and MS Midnatsol. For the quarter ended For the twelve months ended (NOK thousands except for PCNs, APCNs, occupancy rate, fuel consumption and fuel cost per liter) Hurtigruten Explorer: PCNs 14,378 42,993 69, ,274 APCNs. 22,264 62,606 96, ,572 Occupancy rate % 68.7% 72.0% 77.0% Gross ticket revenues 90, , , ,262 Less: Commissions, costs of goods for flights, hotels, transportation and other passenger services.. 25,244 51,769 88, ,267 Food, beverage, shop, excursions. 4,833 9,801 19,678 39,158 Net ticket revenues 60, , , ,837 Gross ticket revenues per PCN (NOK). 6,274 4,275 6,102 5,263 Net ticket revenues per PCN (NOK).. 4,182 2,843 4,548 3,685 Ship operating costs. 66, , , ,576 Selling, general and administrative expenses 15,153 29,829 67,418 95,221 Gross cruise costs.. 82, , , ,796 Less: Commissions, costs of goods for flights, hotels, transportation and other passenger services 25,244 51,769 88, ,267 Food, beverage, shop, excursions. 4,833 9,801 19,678 39,158 Net cruise costs.. 51, , , ,371 Net cruise costs per APCN (NOK). 2,335 1,674 2,132 2,014 Fuel consumption (liter/nautical mile) Fuel cost per liter

11 Results of Operations The following table presents, for the periods indicated, our operating results: For the quarter ended 2015 % Change 2016 For the twelve months ended 2015 % Change 2016 (NOK thousands, except as otherwise indicated) Continuing Operations: Operating revenues.. 486, ,424 3,311, ,674,439 Contractual revenues.. 189,599 (5.4) 179, ,590 (6.8) 703,588 Total revenues , ,690 4,065, ,378,027 Payroll costs.. (239,408) 14.8 (274,916) (975,197) 12.7 (1,098,925) Other operating costs (453,058) 28.7 (583,151) (2,265,178) 14.0 (2,582,780) Depreciation, amotization and impairment losses.. (93,831) 22.2 (114,641) (387,077) 9.3 (423,157) Other (losses)/gains - net 125,537 (117.6) (22,097) (71,545) 34.0 (95,838) Operating profit/(loss).. 15,813 NM (226,115) 366,662 (51.6) 177,326 Finance income.. 55,328 (176.1) (42,125) 156, ,217 Finance expense (143,162) (38.6) (87,936) (935,852) (49.5) (473,006) Finance expenses - net (87,834) 48.1 (130,061) (779,149) (78.3) (168,788) Share of profit/(loss) of associates (172.9) (215) ,534 Profit/(loss) before income tax from continuing operations. (71,726) (356,391) (411,493) NM 10,072 Income tax expense from continuing operations.. 11, ,997 (22,026) (25.4) (16,431) Profit/(loss) for the period from continuing operations.. (60,404) (334,393) (433,519) NM (6,359) Dicontinued Operations: Profit/(loss) for the period from discontinued operations Profit/loss for the period. (60,404) (334,393) (433,519) NM (6,359) 11

12 The following table presents, for the periods indicated, the revenues, operating profit, Normalised adjusted EBITDA and Normalised adjusted EBITDA margin by reporting segment and for the Group as a whole: For the quarter ended 2015 % Change 2016 For the twelve months ended 2015 % Change 2016 (NOK thousands, except as otherwise indicated) Continuing Operations: Total revenues: Hurtigruten Norwegian Coast. 558, ,129 3,414, ,500,430 MS Fram. 90, , , ,324 Spitsbergen 28,730 (27.8) 20, , ,733 Other business. 806 (121.7) (175) 1,880 (54.7) 851 Eliminations.. (1,863) (65.9) (636) (2,365) NM (15,312) Total revenues from continuing operations.. 676, ,690 4,065, ,378,027 Operating profit/loss for the period: Hurtigruten Norwegian Coast. (142,886) 47.2 (210,388) 99,879 (22.1) 77,765 MS Fram. 1,632 (8.3) 1,497 73,895 (5.4) 69,912 Spitsbergen (11,119) 24.8 (13,881) 24, ,898 Other business.. 32 NM (3,343) 417 (159.6) (248) Reclassification of derivatives in 2015 (1). 168,153 NM - 168,153 NM - Total operating profit/(loss) from continuing operations.. 15,813 NM (226,115) 366,662 (51.6) 177,326 Normalised Adjusted EBITDA: Hurtigruten Norwegian Coast.. 3,890 (153.3) (2,074) 766,460 (5.8) 722,039 MS Fram.. 8, , , ,036 Spitsbergen (9,092) 8.3 (9,848) 38, ,275 Other business ,553 (67.9) 498 Total continuing operations 3,350 NM 22, ,121 (0.2) 920,848 Normalised Adjusted EBITDA margin: Hurtigruten Norwegian Coast.. 0.7% (169.3) (0.5%) 22.4% (9.6) 20.3% MS Fram.. 9.3% % 27.4% (12.7) 23.9% Spitsbergen (31.6%) 50.0 (47.5%) 17.1% (3.1) 16.6% Other business.. NM NM NM NM NM NM Total continuing operations % % 22.7% (7.4) 21.0% (1) At December 2015, Fuel Derivatives for a total amount of NOK 168.2mil were reclassified and added to the Operating Profit. This does not affect the underlying performance and is normalized from the remaining sections of this commentary on the Bond Report. 12

13 Comparison of the twelve months ended 2016 with the twelve months ended 2015 The financial information for the twelve months ended 2016 discussed below has been derived from the unaudited consolidated financial statements of Silk Bidco Group as of and for the twelve months ended 31 December Total revenues Our total revenues from continuing operations for the twelve months ended 2016 increased by NOK million, or 7.7% to NOK 4,378.0 million from NOK 4,065.7 million in the twelve months ended 2015, as a result of an increase in revenues from the Coastal as well as the Explorer segments. Hurtigruten Norwegian Coast increased its total revenue by NOK 86.2 million, or 2.5% to NOK 3,500.4 million for the twelve months ended 2016 from NOK 3,414.2 million in the twelve months ended This was driven mainly by 5.7% increase in Gross ticket revenue per PCN. The Trade channel continues to grow, with demand originating from all of Hurtigruten s key markets. This has resulted in higher commissions, as well as some investments in the commercial organization, leading to increased direct costs. Contractual revenue amounted to NOK million in the twelve months ended 2016 from NOK million in the twelve months ended The decrease of NOK 51.0 million is partly related to the contractual payment schedule (reduction of c. NOK 20 million per year; c. NOK 15 million in the first nine months of 2016). In addition, due to a number of missed ports after delays in dockings and unplanned technical maintenance, there was a negative impact of c. NOK 28 million related to the contractual off-hire clause. Explorer segment s total revenue in the twelve months ended 2016 was NOK million, compared to NOK million in the twelve months ended The development is mainly driven by the 74.2% increase in PCN (building off of the 63.0% increase in APCN) leading to occupancy rates improving from 72.0% in 2015 to 77.0% in Spitsbergen segment s total revenue for the twelve months ended 2016 increased by NOK 45.5 million, or 20.0%, to NOK million from NOK million for the twelve months ended The increase is due to higher gross revenue per guest night, the latter also driven by higher sales of activities per guest night, for the first three quarters of the year, while the fourth quarter of 2016 was weaker than expected. Payroll costs Payroll costs from continuing operations for the twelve months ended 2016 increased by NOK million, or 12.7%, to NOK 1,098.9 million from NOK million in the twelve months ended 2015, mainly due to introducing new capacity, project costs related to the refurbishment of our ships, training for our new Going Premium concept continuing from the first quarter 2016, and some additions to the shore-side Commercial teams. Other operating costs Our other operating costs from continuing operations for the twelve months ended 2015 and 2016 are set forth below: For the quarter ended 2015 % Change 2016 For the twelve months ended 2015 % Change 2016 (NOK thousands, except as otherwise indicated) Other Operating Costs: Cost of goods sold 108, , , ,853 Operating costs , ,922 1,153, ,288,438 Sales and administrative costs.. 112, , , ,489 Total. 453, ,151 2,265, ,582,780 Other operating costs from continuing operations for the twelve months ended 2016 increased by NOK million, or 14.0%, to NOK 2,582.8 million from NOK 2,265.2 million in the twelve months ended 31 December The majority of these costs relate to product improvements and investments in the growth of the business where the costs have been expensed and not capitalized. 13

14 Depreciation, Amortization and Impairment Losses Depreciation, amortization and impairment losses from continuing operations for the twelve months ended 31 December 2016 increased by NOK 36.1 million, to NOK million from NOK million in the twelve months ended The increase relates to the investments made in PP&E over the year and reflect an increase in the value of the fleet. Other losses net Other losses net from continuing operations for the twelve months ended 2016 were of NOK 95.8 million compared to a net loss of NOK 71.5 million for the twelve months ended EBITDA Our EBITDA from continuing operations for the twelve months ended 2016 increased by NOK 14.9 million, or 2.5%, from NOK million in 2015 to NOK million in the twelve months ended Non-recurring items for the twelve months ended 2016 totals NOK million, of which i) NOK million of Project costs, including c. NOK 70 million relating to cancellation costs and loss of revenue after the Technical issues and delays, c. NOK 40 million of launch costs for the Marketing of MS Amundsen (newbuild vessel launching in 2018) and c. NOK 30 million of exceptional Repair & Maintenance costs; ii) unrealized losses on Derivatives of NOK 95.0 million. In the comparable period, the twelve months ended 2015, non-recurring items totalled NOK million. The Normalised Adjusted EBITDA from continuing operations does not include the above mentioned non-recurring items among other smaller effects, and decreased from NOK million for the twelve months ended December 2015 to NOK million for the twelve months ended For the Norwegian Coast, Normalized Adjusted EBITDA slightly declined, from NOK million in 2015 to NOK million in The drop in EBITDA relates mainly to the increased selling and administrative costs, which will see a full revenue and profitability impact in 2017 and 2018, as well increased repair and maintenance and other operating due to the high number of planned dockings in 2016 as well as to the large number of technical incidents and delays in For the Explorer segment, Normalized Adjusted EBITDA went from NOK million in 2015 to NOK million in 2016, reflecting the growth in capacity and improved occupancy as well as steady yield development. Spitsbergen EBITDA for the twelve months ended 2016 increased by NOK 6.4 million, or 16.3% to NOK 45.3 million from NOK 38.9 million in the twelve months ended The EBITDA increase comes from an increase in guest nights and gross revenue per guest night, particularly in the first three quarters of the year. Other business EBITDA for the twelve months ended 2016 decreased by NOK 1.1 million to NOK 0.5 million from NOK 1.6 million in the twelve months ended

15 EBITDA margin Our EBITDA margin from continuing operations for the twelve months ended 2016 decreased by 0.7 percentage points, to 13.7% from 14.4% in the twelve months ended 2015 due to the non-recurring items related to the disruption on the Norwegian Coast from technical issues and delays, as well as the higher SG&A cost base reflecting the investments in the growth of the business. Normalised Adjusted EBITDA margin for the twelve months ended 2016 sees a similar trend, with the margin going from 22.7% in 2015 to 20.7% in Hurtigruten Norwegian Coast EBITDA margin for the twelve months ended 2016 decreased by 0.6 percentage points, to 12.5% from 13.1% in the twelve months ended The Normalised Adjusted EBITDA margin for the twelve months ended 2016 decreased by 2.1 percentage points, to 20.3% from 22.4% in the twelve months ended Explorer EBITDA margin for the twelve months ended 2016 decreased by 4.8 percentage points, to 19.0% from 23.8% in the twelve months ended The Normalised Adjusted EBITDA margin for the twelve months ended 2016 decreased by 3.4 percentage points, to 24.0% from 27.4% in the twelve months ended Spitsbergen EBITDA margin for the twelve months ended 2016 increased by 0.5 percentage points to 16.3%, from 15.8% in the twelve months ended The Normalised Adjusted EBITDA margin for the twelve months ended 2016 decreased by 0.5 percentage points, to 16.6% from 17.1% in the twelve months ended Operating profit Operating profit from continuing operations for the twelve months ended 2016 decreased by NOK million, or 51.6%, to NOK million from NOK million in the twelve months ended 2015, primarily due to the reasons stated above with respect to EBITDA. Finance expenses net Net financial items (financial results) from continuing operations for the twelve months ended 2016 improved by NOK million to a loss of NOK million from a loss of NOK million as at Finance expenses for the twelve months ended 2016 decreased by NOK million, to NOK million from NOK million in the twelve months ended The decrease was principally a result of i) a normalisation of the financial expenses in 2016 as compared to the expenses incurred in 2015 following the acquisition of Hurtigruten ASA and ii) slightly lower lease rentals under the SPEs agreements; financial result was impacted by losses on derivatives, offset by gains on the physical. Finance expenses were partially offset by a financial income of NOK million in the twelve months ended 31 December 2016 vs. NOK million in the twelve months ended 2015, representing an increase of NOK million. Such increase in finance income was primarily due to an increase in realised and unrealised gains related to i) an unrealised foreign exchange gain in the fair value evaluation of the Euro-denominated bond due to strengthening of the Norwegian kroner since 2015 and ii) the translation of monetary assets and liabilities in foreign currency to our functional currency, which is the Norwegian kroner, in the twelve months ended Share of profit/(loss) of associates Share of profit of associates from continuing operations for the twelve months ended 2016 came to NOK 1.0 million, principally on par with the twelve months ended

16 Income tax expense from continuing operations Income tax expense from continuing operations for the twelve months ended 2016 came to NOK 16.4 million which related to a profit before income tax for some of the subsidiaries. In the twelve months ended 31 December 2015 the income tax expense was NOK 22.0 million. Profit/(loss) for the period from continuing operations As a result of the factors discussed above, loss from continuing operations for the twelve months ended 31 December 2016 increased by million to a loss of NOK 6.4 million from a loss of NOK million in the twelve months ended Liquidity and capital resources Our primary source of liquidity is cash flows from operating activities. Our primary cash needs relate to capital expenditures for dry-dockings, maintenance and refurbishment of our ships, meeting debt service requirements and funding our working capital requirements. The most significant components of our working capital are cash and short-term deposits, trade and other receivables, trade and other payables and other current liabilities. We believe that, based on our current level of operations, as reflected in our results of operations for the twelve months ended 2016, these sources of liquidity, together with existing available borrowings under our Revolving Credit Facility, will be adequate to fund our operations, budgeted capital expenditures and debt service obligations for at least the next twelve months. The following table summarizes our consolidated statements of cash flows for the periods indicated. For the quarter ended For the 12 months ended (NOK thousand) Net cash flows from/(used in) operating activities. 25,702 74, , ,977 Net cash flows from/(used in) investing activities.. (146,631) (157,911) (788,217) (1,257,767) Net cash flows from/(used in) financing activities. 119, , , ,554 Cash, cash equivalents and bank overdrafts.. 256, , , ,929 Net cash flows from/used in operating activities The following table reconciles our profit/loss to net cash flows from/(used in) operating activities for the periods indicated: For the quarter ended For the 12 months ended (NOK thousand) Profit/(loss) before income tax from continuing and discontinued operations.. (71,726) (356,391) (411,493) 10,072 Adjustments for: Depreciation, amortization and impairment losses from continuing and discontinued business. 93, , , ,157 Other (losses)/gains - net (93) 1, ,204 Foreign exchange (losses)/gains - net.. 22,237 17, ,325 (231,550) (Losses)/gains on derivatives (146,366) 3,314 12,161 (7,119) Dividends received (91) - (496) (279) Interest expenses.. 66,823 95, , ,113 Share of profit/(loss) of associates from continuing and discontinued operations.. (295) 215 (995) (1,534) Impairment on financial investments (94) Difference between expensed pension and payments. (17,792) 2,122 6, Change in working capital: Inventories (1,929) (12,001) (7,938) (28,950) Trade and other receivables. (76,243) 2,589 (67,779) (117,219) Trade and other payables. 161, , , ,134 Interests paid.. (1,928) (13,911) (269,370) (367,647) Income tax paid.. (1,963) (1,175) (12,448) (16,228) Net cash flows from/(used in) operating activities.. 25,703 74, , ,977 The principal factors affecting our net cash flows from operating activities in the periods presented are the change in our operating profit, the impact of changes in our working capital, the amount of interest paid and the movement with respect to our income taxes. 16

17 A number of our operating costs are fixed; however certain of our costs, such as costs of goods, vary on a seasonal basis in line with our peak season, which typically occurs in the second and third calendar quarters of each year. We also collect a portion of pre-booked revenues at the time of booking and our peak booking periods are from September to October and January to February. The amount of revenues collected in advance is approximately 10 to 30% of the total cost of the trip booked. Therefore, due to the seasonal nature of our business, we tend to have positive working capital during our peak season in the second and third calendar quarters, and negative working capital during the first and fourth calendar quarters (our non-peak period) when we collect less revenues. Our operating costs are generally lower during our non-peak season. However, in addition to our fixed costs, the phasing of certain of our expenses does not track the seasonality of our revenues. For example, we typically schedule dry-docking of our ships during the winter season, and this has a negative effect on our working capital during our non-peak period. Net cash flows from operating activities decreased by NOK 28.8 million, to NOK million in the twelve months ended 2016 compared to NOK million in the twelve months ended 2015, where the underlying operations reflecting an increase in the cash flows but an FX loss due to the weakening of the Norwegian Kroner negatively impacted the results. Net cash flows from/used in investing activities The following table summarizes the principal components of our net cash flows from/(used in) investing activities for the period indicated: For the quarter ended For the 12 months ended (NOK thousand) Purchases of property, plant and equipment ( PPE ). (155,468) (132,148) (418,837) (1,152,910) Net proceeds from sale of PPE (901) 629 1,087 Purchases of intangible assets. (16,507) (21,954) (79,654) (38,376) Loans to associates and other companies. 8,867 11,670 9,006 12,045 Advance payment of property, plant and equipment (PPE) - (15,855) - (64,609) Proceeds from sale of shares and shareholdings Settlement of derivatives (311,109) - Dividends received and payments from associates.. 91 (200) Change in restricted funds.. 16, ,753 (15,631) Net cash flows from/(used in) investing activities (146,630) (157,911) (788,216) (1,257,767) Cash flows from investing activities principally relates to capital expenditures on property, plant and equipment and intangible assets, less any proceeds from the sale or disposal of property, plant and equipment and shares and shareholdings. Net cash flows used in investing activities increased by NOK million to NOK 1,257.8 million in the twelve months ended 2016 compared to NOK million in the twelve months ended In total our capital expenditure increased by NOK million in the period discussed, where 2016 was a year of heavy investments in the fleet, both through new capacity (MS Spitsbergen), full refurbishments of four vessels and the conversion of MS Midnatsol in order to be optimized for the Antarctica sailings starting in Q We expect our normalised capital expenditures to be at about NOK 200 million per year (2014 Norwegian kroner) based on our current operations. 17

18 Net cash flows used in financing activities The following table summarizes the principal components of our net cash flows used in financing activities for the periods indicated: For the quarter ended For the 12 months ended (NOK thousand) Proceeds from borrowings. 98, ,312 3,270,314 1,201,446 Repayments of borrowings (2,122) (9,545) (2,978,313) (388,572) Proceeds from borrowings from group companies.. 23,000 4,000 23,000 14,500 Dividend paid to non-controlling interests.. - (18,000) (40,694) (62,820) Net cash flows from/(used in) financing activities.. 119, , , ,554 Cash used in financing activities reflects the repayment of our previously outstanding debt, including our senior facility, notes and revolving credit facility, as well as the indebtedness of the limited partners in the SPEs. Net cash flows from financing activities amounted to NOK million in the twelve months ended 2016 and reflect the quasi-full utilisation of the Revolving Credit Facility and the financing of MS Spitsbergen (see below). Financing of MS Spitsbergen Hurtigruten has signed a 12-year sale and lease-back contract for MS Spitsbergen with Bank of Communications, the fifth largest bank in China. The transaction s amount of EUR 55 million covers the full acquisition and refurbishment cost of the vessel and is structured as a bareboat charter lease between Jiaye International Ship Lease Co., Ltd, a leasing subsidiary of Bank of Communications Financial Leasing Co. Ltd, as a Lessor and Explorer I AS, a 100 % owned subsidiary of Hurtigruten Explorer AS that is not a Restricted Group entity, as a Lessee. Under the head bareboat charter lease, Explorer I AS has a purchase obligation and the head lease qualifies as a finance lease. Further, Explorer I AS has entered into an operational sub-bareboat charter lease agreement with Hurtigruten AS, which keeps control over the ship s operations but has no purchase obligation during the sub-lease term. Off-balance Sheet Arrangements Silk Bidco and its subsidiaries has deferred income tax assets, the main part of which are related to Hurtigruten AS. In the future when taxable profit is sufficient to utilise deferred income tax assets, Hurtigruten will first utilise deferred income tax assets that is not recognised in the balance sheet. Tax losses may be carried forward for an indefinite period in Norway. Except for these off balance deferred income tax assets, we do not have any material off-balance sheet arrangements. Contractual Obligations The following table summarizes certain categories of our contractual obligations owed to third-parties by period as at 2016: Payments Due By Period Total Less than After 1-5 Years 1 Year 5 Years (NOK equivalent in millions) Notes offered (1). 4, ,134.3 Local Line Facilities Bareboat charter obligations (2) Capital expenditure commitments (3) 2, , Total.. 7, , ,143.0 (1) Represents million in aggregate principal amount of the Notes. (2) Bareboat charter obligations consist of charter hire agreements relating to our bareboat charter lease agreements with Kirberg Shipping KS and Kystruten KS for the MS Nordlys and MS Richard With, respectively, as well as for MS Spitsbergen since July 1 st (3) Capital expenditure commitments are contractual commitments for dry-dockings, work on the engines with respect to MS Trollfjord, dockings of MS Nordlys and Richard With, Construction of the Newbuild Vessels and investments in IT Systems. 18

19 The changes in the total contractual obligations from the publication of the third quarter bond report are mainly due to the foreign exchange rate variations, and the completion of the large docking plan in 2016 which have mostly been paid by December Other contractual obligations not included in the table above include outstanding purchase contracts with product suppliers and payments due to trade creditors. Capital Resources We are highly leveraged and have significant debt service obligations. As of 2016 we have a total debt of NOK million which includes NOK million drawn on the Revolving Credit Facility, which represents a quasi-full utilisation of the Revolver Credit Facility (EUR 64 million). Quantitative and qualitative disclosure of market risks We are exposed to various market risks as part of our business activities, which are intrinsically linked to our business dealings. See Risk Factors in the annual bond report for 2014 and the "Risk Factors" chapter in the offering memorandum. We handle these risks using a risk management system, which forms an integral part of our business process and is a key factor in business decisions. It aims to identify potential risks in connection with our business activities at an early stage, to monitor them and to take suitable measures to limit them. The key elements of the risk management system include the planning system, internal reporting and integrated risk reporting. 19