Bond report for the three months ended 31 March 2016

Transcription

1 Bond report for the three months ended 31 March 2016 Published 10 May 2016 Silk Bidco AS (issuer) 455,000, % Senior Secured Notes due 2022 Silk Bidco AS c/o Hurtigruten AS, Fredrik Langes gate 14, P.O. Box 6144 Langnes, 9291 Tromsø, Norway Booking: , Switchboard: Business register number: NO VAT

2 Table of contents Cautionary notice 3 Summary 4 Risk factors 5 Management's discussions and analysis of our financial condition and results of operation 6 Recent developments 19 Description of other indebtedness 20 Definitions key performance measures and key line items 21 Appendix Silk Bidco Group Unaudited Consolidated Financial Statements for the first quarter

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 forwardlooking 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-ifrs 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 The first quarter 2016 s operational results for Silk Bidco AS and its subsidiaries characterised as generating higher operating results than in first quarter 2015 but was hit by irregularities in the capacity availability and costs related to cancellations. Total revenue from continuing operations increased by 5% year-on-year to NOK million, driven by increased revenue and occupancy rate in all segments, including a increase in the net ticket revenue of +18.7% in the Explorer segment, together with a favourable bunker oil price and a weak NOK vs. the EUR, GBP and USD. However, Normalised Adjusted EBITDA decreased by NOK 26.8 million to a loss of NOK 0.9 million as compared to first quarter 2015 due to a lower operating performance on the Norwegian Coast segment whose share decreased from 84.0% to 77.6% in total revenue and mobilized 11 vessels in Hurtigruten s fleet of 12 units to date. First quarter 2016 has witnessed the development of the Explorer segment from 9.4% to 14.2% in total revenue, that shall be strengthened from June on with MS Spitsbergen Explorer and further by MS Midnatsol for the winter campaign in Antarctica. Norwegian Coastal segment has mainly been affected by an extensive docking programme that impacted the available capacity, in connection with normal repair and maintenance as well as refurbishment costs for some 90s class vessels (NOK million) that are expected to have a positive impact on booking and onboard sales going further. In addition, Normalized Adjusted EBITDA in first quarter has been affected by a change in the customer mix in Spitsbergen segment. Based on the above, Normalized Adjusted EBITDA margin decreased to 0.1% from 3.4% on a yearon-year basis. The Hurtigruten Norwegian Coast segment increased its total revenues by NOK 6.8 million, or 1.1%, to NOK million for the three months ended 31 March 2016 from NOK million in the three months ended 31 March The increase is both a result of an increase in PCNs of 4.1% driven by the New Global, French and US markets as well as an increase of 0.9% in Gross ticket revenue per PCN. Occupancy rate increased by 6.7 percentage points to 56.2% as compared to first quarter 2015 but showed a lower net ticket revenue per PCN combined with increased net cruise costs per APCN which explains the negative EBITDA margin, partly mitigated by continuing cost savings initiative that produced positive results on SG&A costs and by both a lower fuel consumption per nautical mile (-0.4% at 81.5 litre) and lower fuel cost (-6.6% at 3.71 NOK per litre). MS Fram total revenue in the three months ended 31 March 2016 increased 22.1% to NOK million, with an increased occupancy rate by 9.0 percentage points to 74.7% mainly driven by a 15.0% increase in PCNs. Although the commissions and cost of goods sold have increased by 34.3%, the net ticket revenue per PCN increased 3.2% at 4,690 NOK and was still well above the net cruise costs per APCN of 2,042 NOK, showing the Explorer segment s solid profitability. Spitsbergen segment also increased its share from 6.6% to 8.3% in total revenue from continuing operations but its positive contribution to the group s EBITDA margin decreased from 13.2% in March 2015 to 10.8% as at 31 March 2016 (and from 18.1% to 11.0% for the Normalised Adjusted EBITDA margin). A change in the customer mix, involving less groups and therefore lower package sales, explains this evolution, as well as the exceptional impact of the solar eclipse in March However, the refurbishment of lodging facilities and an enlarged products offer is expected to generate good results during the summer season. 4

5 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 annual bond report. EFTA Surveillance Authority State Aid Investigation The EFTA Surveillance Authority (ESA) announced 11 December 2015 they had decided to open an in-depth investigation in order to clarify whether Hurtigruten has received any over-compensation which goes against the state aid rules of the EEA Agreement. The Authority also investigates whether Hurtigruten ensures that everyone has access to the public service. The Ministry of Transport has prepared a letter to the ESA which was distributed mid-february. On the further process we do not expect any development until the ESA respond on the letter, and for the time being we have no indications on when to expect the response. As of today the investigation does not affect our ongoing operation and cash flow. Any proceeding 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, we may be required to modify our current practices, to agree to new terms and conditions or to pay a settlement amount, fee or penalty, in an amount representing the amount, which could be significant, of the illegal state aid received as determined by the ESA, plus interest, any of which may adversely impact our operations and 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 heavy port taxes and fees we mentioned in our previous report, that were amounting to NOK million in the twelve months ended 31 December 2015 and NOK 24.6 million as at 31 March 2016 for the Hurtigruten Norwegian Coast segment, Hurtigruten has received on 6 May a positive ruling from the District Court towards the Bodø port court case. Under this decision, the court held that although the cooperation between the ports could not be characterized as a violation of the Competition Act 10, acknowledging however that some statements were close to it, 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 required to repay more than 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 NOK 3.18 million in total. As a reminder, Hurtigruten was involved in a dispute with Stranda Hamnevesen KF regarding an increase in port taxes and fees charged by Stranda Hamnevesen KF in relation to the port in Geiranger. Hurtigruten successfully challenged the increase in port taxes and fees in both the District Court, the Court of Appeal and on 25 June 2015 the Supreme Court also ruled in favour of Hurtigruten. The final 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 its fight against high fees in a number of other Norwegian ports. The Coastal Directorate is now reviewing accounts in several ports and may support Hurtigruten s cases within its authority area. 5

6 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 three months ended 31 March 2016 compared to the three months ended 31 March 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. You should read this discussion in conjunction with the previous annual and quarterly bond reports for 2015, the annual bond report for 2014 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 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" Overview We are an exploration tourism operator, also providing local transport and cargo shipment on the Norwegian coast as well as Polar waters. Hurtigruten s vision is to be the world leader in exploration travel. It will lead the world for expedition-based tourism, a niche with substantial potential on an international basis. With a fleet of 13 ships specially built for expedition voyages in Polar waters, the company is already the front runner. Twothirds 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 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 84.0% of our total revenues from continuing operations for the twelve months ended 31 December 2015 and 77.6% for the three months ended 31 March of our 13 ships provide services along the Norwegian coast under this segment, making 34 northbound and 33 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 9.4% of our total revenues from continuing operations for the twelve months ended 31 December 2015 and 14.2% for the three months ended 31 March The segment consists of our MS Fram explorer ship, which takes our guests on distinct Polar voyages year-round in Antarctic, Spitsbergen and Greenland waters. Going forward the segment will expand its services with a second ship introduced in Antarctica from September 2016, the MS Midnatsol. Additionally, the new ship acquired end of June 2015, given the name MS Spitsbergen Explorer, increases the capacity and gives opportunities to expand our services in Polar waters. 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, cruise with the former Hurtigruten ship MS Nordstjernen was introduced in the summer season This segment accounted for 6.6% of our total revenues from continuing operations for the twelve months ended 31 December 2015 and 8.3% for the three months ended 31 March

7 Factors affecting our results of operations Factors affecting our results of operation which have not changed substantially since the publication of our previous annual and quarterly bond reports for 2015, annual bond report 2014 and the offering memorandum at 30 January 2015 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. The period from November 2015 to April 2017 is hedged through a fuel swap covering 75% of the expected fuel consumption. In April 2016, we have hedged 30% of the consumption for the May 2017 to October 2018 period through fuel swaps. The company will continue to monitor the price fluctuations and cover the risk through hedges in order to limit the impact on results. 7

8 Key Performance Measures The following table 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 For the quarter ended For the three months ended 31 March March March March 2016 (NOK thousands except for PCNs, APCNs, occupancy rate, fuel consumption and fuel cost per liter) Hurtigruten Norwegian Coast: PCNs APCNs Occupancy rate % 56.2% 49.5% 56.2% Gross ticket revenues Less: Commissions, costs of goods for flights, hotels, transportation and other passenger services Food, beverage, shop, excursions Net ticket revenues Gross ticket revenues per PCN (NOK) Net ticket revenues per PCN (NOK) Ship operating costs Selling, general and administrative expenses Gross cruise costs Less: Commissions, costs of goods for flights, hotels, transportation and other passenger services Food, beverage, shop, excursions Net cruise costs Net cruise costs per APCN (NOK) Fuel consumption (liter/nautical mile) Fuel cost per liter

9 Key operating metrics for MS Fram For the quarter ended For the three months ended 31 March March March March 2016 (NOK thousands except for PCNs, APCNs, occupancy rate, fuel consumption and fuel cost per liter) MS Fram: PCNs APCNs Occupancy rate % 74.7% 65.7% 74.7% Gross ticket revenues Less: Commissions, costs of goods for flights, hotels, transportation and other passenger services Food, beverage, shop, excursions Net ticket revenues Gross ticket revenues per PCN (NOK) Net ticket revenues per PCN (NOK) Ship operating costs Selling, general and administrative expenses Gross cruise costs Less: Commissions, costs of goods for flights, hotels, transportation and other passenger services Food, beverage, shop, excursions Net cruise costs Net cruise costs per APCN (NOK) Fuel consumption (liter/nautical mile) Fuel cost per liter

10 Results of Operations The following table presents, for the periods indicated, our operating results: For the quarter ended For the three months ended 31 March 2015 % Change 31 March March 2015 % Change 31 March 2016 (NOK thousands, except as otherwise indicated) Continuing Operations: Operating revenues , , Contractual revenues (7,4) (7,4) Total revenues , , Payroll costs.. ( ) 10,4 ( ) ( ) 10,4 ( ) Other operating costs ( ) 1,7 ( ) ( ) 1,7 ( ) Depreziation, amotization and impairment losses.. (97 283) 2,9 ( ) (97 283) 2,9 ( ) Other (losses)/gains - net (73 917) (50,7) (36 440) (73 917) (50,7) (36 440) Operating profit/(loss).. ( ) (20,5) ( ) ( ) (20,5) ( ) Finance income , , Finance expense ( ) (28,0) ( ) ( ) (28,0) ( ) Finance expenses - net ( ) (96,7) (4 301) ( ) (96,7) (4 301) Share of profit/(loss) of associates - #DIV/0! #DIV/0! 908 Profit/(loss) before income tax from continuing operations. ( ) (51,3) ( ) ( ) (51,3) ( ) Income tax expense from continuing operations (100,0) (100,0) - Profit/(loss) for the period from continuing operations.. ( ) (51,2) ( ) ( ) (51,2) ( ) Dicontinued Operations: Profit/(loss) for the period from discontinued operations.. - #DIV/0! - - #DIV/0! - Profit/loss for the period. ( ) (51,2) ( ) ( ) (51,2) ( ) 10

11 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 For the three months ended 31 March 2015 % Change 31 March March 2015 % Change 31 March 2016 (NOK thousands, except as otherw ise indicated) Continuing Operations: Total revenues: Hurtigruten Norwegian Coast MS Fram Spitsbergen Other business. 214 (191.4) (195) 214 (191.4) (195) Eliminations.. (163) (66.0) (271) (163) (66.0) (271) Total revenues from continuing operations Operating profit/loss for the period: Hurtigruten Norwegian Coast. ( ) 12.7 ( ) ( ) 12.7 ( ) MS Fram Spitsbergen (20.3) (20.3) Other business.. (92) NM (1 033) (92) NM (1 033) Total operating profit/(loss) from continuing operations.. ( ) 20.5 ( ) ( ) 20.5 ( ) Normalised Adjusted EBITDA: Hurtigruten Norwegian Coast.. (13 382) (216.8) (42 391) (13 382) (216.8) (42 391) MS Fram Spitsbergen (26.4) (26.4) Other business (394.6) (893) 303 (394.6) (893) Total continuing operations (103.3) (866) (103.3) (866) Normalised Adjusted EBITDA margin: Hurtigruten Norwegian Coast.. (2.2%) (4.4) (6.5%) (2.2%) (4.4) (6.5%) MS Fram % (0.3) 30.5% 30.8% (0.3) 30.5% Spitsbergen 18.1% (7.1) 11.0% 18.1% (7.1) 11.0% Other business.. NM NM NM NM NM NM Total continuing operations % (3.5) (0.1%) 3.4% (3.5) (0.1%) Comparison of the three months ended 31 March 2016 with the three months ended 31 March 2015 The financial information for the three months ended 31 March 2015 discussed below has been derived from the unaudited consolidated financial statements of Silk Bidco Group as of and for the three months ended 31 March Total revenues Our total revenues from continuing operations for the three months ended 31 March 2016 increased by NOK 38.7 million, or 5.0% to NOK million from NOK million in the three months ended 31 March 2015, as a result of an increase in revenues from all our business segments. Hurtigruten Norwegian Coast increased its total revenues by NOK 6.8 million, or 1.1% to NOK million for the three months ended 31 March 2016 from NOK million in the three months ended 31 March Operating revenues increased by NOK 20.7 million, or 4.8%, to NOK million for the three months ended 31 March 2016 from NOK million in the three months ended 31 March The overall increase in our Hurtigruten Norwegian Coast operating revenues was driven by both an increase in PCNs of 4.1% and an increase of 0.9% in Gross ticket revenue per PCN. The increase in PCNs was driven by the New Global, French and US market. The increase in Gross ticket revenues per PCN was partly driven by the decrease in the value of the Norwegian kroner in relation to the euro, pound sterling and U.S. dollar, among others, compared to the prior corresponding period, and partly by a significant increase in on-board spending of 10.6% per PCN. Underlying prices is lower than last year driven by the British and French market, partly offset by higher prices in the Continental Europe, Nordic and US Market. All markets except for the British market are providing a revenue growth year-on-year for the Norwegian Coast segment. Contractual revenue amounted to NOK million in the three months ended 31 March 2016 from NOK million in the three months ended 31 March 11

12 2015. The decrease of NOK 13.9 million is related to off hire in relation to the refurbishment of our ships and cancellations due to technical reasons for MS Midnatsol and MS Finnmarken. MS Fram total revenues in the three months ended 31 March 2016 was NOK million, compared to NOK 94.2 million in the three months ended 31 March The increase of NOK 20.8 million, or 22.1%, is mainly driven by a 15.0% increase in PCNs and a 6.2% increase in Gross ticket revenue per PCN. The volume increase is driven by the New Global, Continental Europe and Nordic market. The increase in Gross ticket revenue per PCN is driven by the decrease in the value of the Norwegian kroner in relation to the euro, pound sterling and U.S. dollar. Underlying prices is slightly down from last year. During the first quarter the MS Fram had sailings in the Antarctica and in March she did the crossing to the Arctic which includes a cruise along the Atlantic coast. Spitsbergen total revenues for the three months ended 31 March 2016 increased by NOK 11.6 million, or 21.0%, to NOK 67.0 million from NOK 55.3 million for the three months ended 31 March The increase is both due to 17.5% increase in guest nights and 3.0% increase in gross revenue per guest night, the latter driven by higher sales of activities per guest night. In the first quarter there has been a change in the mix between the groups and the FITs (individual travellers). The latter have increased substantially and are the reason for the volume increase, while the guests coming from groups have decreased. The change in the mix of guests gives a lower average room rate, RevPAR (Revenue per Available Room) and sales of food & beverage per guest night in the three months ended 31 March 2016 compared to the three months ended 31 March Also the solar eclipse in March 2015 drove the average room rate and F&B sales last year. Payroll costs Payroll costs from continuing operations for the three months ended 31 March 2016 increased by NOK 24.2 million, or 10.4%, to NOK million from NOK million in the three months ended 31 March 2015, mainly due to project costs related to the refurbishment of our ships and training for our new Going Premium concept together with salary increase of 2.0%. Other operating costs Our other operating costs from continuing operations for the three months ended 31 March 2015 and 2016 are set forth below: For the quarter ended For the three months ended 31 March 2015 % Change 31 March March 2015 % Change 31 March 2016 (NOK thousands, except as otherwise indicated) Other Operating Costs: Cost of goods sold Operating costs Sales and administrative costs (23.3) (23.3) Total Other operating costs from continuing operations for the three months ended 31 March 2016 increased by NOK 9.6 million, or 1.7%, to NOK million from NOK million in the three months ended 31 March Cost of goods sold increased by NOK 29.0 million, or 19.6%, related to the revenue increase. Operating costs increased by NOK 15.7 million, or 6.0%, mainly related to an increase in repair and maintenance costs on the Norwegian Coast due to a more extensive docking programme than in the comparable period. Sales and administrative costs decreased by NOK 35.0 million, or 23.3%. The three months ended 31 March 2015 includes NOK 51.3 million in transaction and acquisition costs related to Silk Bidco AS buying the shares in Hurtigruten ASA while the three months ended 31 March 2016 includes one-offs in relation to project costs related to the refurbishment of our Norwegian coastal ships, the rebuild of MS Spitsbergen Explorer, introducing the Going Premium concept on board our ships and other efficiency projects within some administrative functions. The project costs are expensed mainly as administrative costs, but a smaller part has been expensed as operating costs. Sales and marketing costs show an increase of NOK 7.2 million and is expected to have a positive impact on pre-bookings. Depreciation, Amortization and Impairment Losses Depreciation, amortization and impairment losses from continuing operations for the three months ended 31 March 2016 increased by NOK 2.8 million, to NOK million from NOK 97.3 million in the three months ended 31 March

13 Other losses net Other losses net from continuing operations for the three months ended 31 March 2016 ended at NOK 36.4 million compared to a net loss of NOK 73.9 million for the three months ended 31 March These net losses are in principal related to derivative financial instruments. Other losses net for the three months ended 31 March 2016 includes net losses on bunker swaps of NOK 36.2 million. Other losses net for the three months ended 31 March 2015 includes net losses on forward exchange contracts and bunker swaps of NOK 74.1 million of which net losses of NOK 62.3 million are related to derivative contracts which were terminated as part of the refinancing of the company. EBITDA Our EBITDA from continuing operations for the three months ended 31 March 2016 increased by NOK 42.4 million, or 44.1%, to a loss of NOK 53.6 million from a loss of NOK 96.0 million in the three months ended 31 March The increase is the result of a revenue increase on all our business segments partly offset by increased repair and maintenance costs in the Norwegian Coast segment due to a more extensive docking programme. Non-recurring items for the three months ended 31 March 2016 totals NOK 52.7 million where the following are the major ones: i) project costs of NOK 42.3 million mainly related to the refurbishment of our Norwegian coastal ships, the rebuild of MS Spitsbergen Explorer, introducing the Going Premium concept on board our ships and other efficiency projects within some administrative functions and ii) a NOK 7.9 million related to interim positions within the Maritime land based organisation and lawyer fees related to the harbour and ESA case. In the comparable period, the three months ended 31 March 2015, non-recurring items totalled NOK million where the following were the major ones: i) a NOK 51.3 million in administrative expenses as a result of the acquisition of Hurtigruten ASA and ii) a NOK 62.3 million net loss on foreign exchange and bunker derivatives terminated in January In addition, the EBITDA is affected by reduced revenue and increased costs from technical deviations on two of our ships in the Norwegian Coast segment in the three months ended 31 March 2016 which has not been adjusted as non-recurring items. The Normalised Adjusted EBITDA from continuing operations does not include the above mentioned nonrecurring items among other smaller effects, and decreased by NOK 26.8 million, to a loss of NOK 0.9 million for the three months ended 31 March 2016 from NOK 25.9 million in the three months ended 31 March The decrease in the Normalised Adjusted EBITDA is related mainly to the Norwegian Coast segment and higher repair and maintenance costs due to a more extensive docking programme. There is also a decrease in the Spitsbergen segment due to a change in the mix between the groups and the FITs since it is more efficient to handle FITs. Hurtigruten Norwegian Coast EBITDA for the three months ended 31 March 2016 increased by NOK 28.9 million, or 23.6%, to a loss of NOK 93.7 million from a loss of NOK million in the three months ended 31 March The EBITDA increase is related to increased revenue partly offset by higher repair and maintenance costs from a more extensive docking programme. EBITDA is influenced by a NOK 51.3 million share of non-recurring items where the major ones are the ones mentioned above. In the comparable period, the three months ended 31 March 2015, non-recurring items totalled NOK million. MS Fram EBITDA for the three months ended 31 March 2016 increased by NOK 14.5 million, or 75.3%, to NOK 33.6 million from NOK 19.2 million in the three months ended 31 March The decrease is primarily attributable to increased revenue. In the three months ended 31 March 2016 non-recurring items totalled NOK 1.4 million and for the three months ended 31 March 2015 non-recurring items totalled NOK 9.8 million. Spitsbergen EBITDA for the three months ended 31 March 2016 came to NOK 7.3 million, on par with the three months ended 31 March Non-recurring items totalled NOK 0.1 million in the three months ended 31 March 2016 and NOK 2.7 million in the three months ended 31 March Other business EBITDA for the three months ended 31 March 2016 decreased by NOK 0.9 million, to a loss of NOK 0.8 million from NOK 0.1 million in the three months ended 31 March EBITDA margin Our EBITDA margin from continuing operations for the three months ended 31 March 2016 increased by 5.8 percentage points, to -6.6% from -12.4% in the three months ended 31 March 2015 due to increased revenue and a lower net loss on derivatives. However, Normalised Adjusted EBITDA margin for the three months ended 31 March 2016 decreased by 3.5 percentage points, to -0.1% from 3.4% in the three months ended 31 March 2015 due to a more extensive docking programme and a decrease in the non-recurring items adjustment. Hurtigruten Norwegian Coast EBITDA margin for the three months ended 31 March 2016 increased by 4.8 percentage points, to -14.9% from -19.7% in the three months ended 31 March The Normalised 13

14 Adjusted EBITDA margin for the three months ended 31 March 2016 decreased by 4.4 percentage points, to -6.5% from -2.2% in the three months ended 31 March MS Fram EBITDA margin for the three months ended 31 March 2016 increased by 8.9 percentage points, to 29.3% from 20.4% in the three months ended 31 March The Normalised Adjusted EBITDA margin for the three months ended 31 March 2016 decreased by 0.3 percentage points, to 30.5% from 30.8% in the three months ended 31 March Spitsbergen EBITDA margin for the three months ended 31 March 2016 decreased by 2.4 percentage points to 10.8%, from 13.2% in the three months ended 31 March The Normalised Adjusted EBITDA margin for the three months ended 31 March 2016 decreased by 7.1 percentage points, to 11.0% from 18.1% in the three months ended 31 March Other business EBITDA margin for the three months ended 31 March 2016 increased by percentage points, to 428.0% from 49.0% in the three months ended 31 March Operating profit/(loss) Operating loss from continuing operations for the three months ended 31 March 2016 increased by NOK 39.6 million, or 20.5%, to NOK million from NOK million in the three months ended 31 March 2015, primarily due to the reasons stated above with respect to EBITDA. Finance expenses net Finance expenses net from continuing operations for the three months ended 31 March 2016 decreased by NOK million, or 96.7%, to NOK 4.3 million from NOK million in three months ended 31 March Finance expense for the three months ended 31 March 2016 decreased by NOK 48.8 million, or 28.0%, to NOK million from NOK million in the three months ended 31 March The decrease was principally a result of i) a decrease in interest expenses due to fees and termination costs in the three months ended 31 March 2015 related to the refinancing of the company following the acquisition of Hurtigruten ASA totalling NOK 39.5 million and ii) a foreign exchange loss of NOK 32.9 million related to the repayment of the bridge financing in the three months ended 31 March 2015 which is partly offset by an increase in unrealised losses related to the translation of monetary assets and liabilities in foreign currency to our functional currency, which is the Norwegian kroner, in the three months ended 31 March The finance expense was partially offset by a finance income of NOK million in the three months ended 31 March 2016 and NOK 44.8 million in the three months ended 31 March 2015, representing an increase of NOK 76.2 million, or 169.9%. Such increase in finance income was primarily due to an increase in realised and unrealised gains of NOK 76.5 million related to i) an unrealised foreign exchange gain in the fair value evaluation of the bond of NOK 93.0 million due to strengthening of the Norwegian kroner since 31 December 2015 and ii) the translation of monetary assets and liabilities in foreign currency to our functional currency, which is the Norwegian kroner, in the three months ended 31 March Share of profit/(loss) of associates Share of profit of associates from continuing operations for the three months ended 31 March 2016 came to NOK 0.9 million compared to zero in the three months ended 31 March Income tax expense from continuing operations Income tax expense from continuing operations for the three months ended 31 March 2016 came to 0 compared to NOK 0.7 million in the three months ended 31 March Profit/(loss) for the period from continuing operations As a result of the factors discussed above, loss from continuing operations for the three months ended 31 March 2016 increased by NOK million to a loss of NOK million from a loss of NOK million in the three months ended 31 March 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 three 14

15 months ended 31 March 2016, these sources of liquidity, together with existing available borrowings under our Revolving Credit Facility, will be sufficient to fund our operations, 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 three months ended 31 March March March March 2016 (NOK thousand) Net cash flows from/(used in) operating activities. ( ) ( ) Net cash flows from/(used in) investing activities.. ( ) ( ) ( ) ( ) Net cash flows from/(used in) financing activities Cash, cash equivalents and bank overdrafts 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 three months ended 31 March March March March 2016 (NOK thousand) Profit/(loss) before income tax from continuing and discontinued operations.. ( ) ( ) ( ) ( ) Adjustments for: Depreciation, amortization and impairment losses from continuing and discontinued business Other (losses)/gains - net (162) 200 (162) 200 Foreign exchange (losses)/gains - net.. (12 431) (94 282) (12 431) (94 282) (Losses)/gains on derivatives (58 771) - (58 771) - Interest expenses Share of profit/(loss) of associates from continuing and discontinued operations.. - (908) - (908) Difference between expensed pension and payments (4 420) (4 420) Change in working capital: Inventories Trade and other receivables (11 459) (11 459) Financial assets at fair value through profit or loss Trade and other payables Interests paid.. (42 136) ( ) (42 136) ( ) Income tax paid.. (7 488) (13 186) (7 488) (13 186) Net cash flows from/(used in) operating activities.. ( ) ( ) 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. 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 increased by NOK million, to NOK million in the three months ended 31 March 2016 compared to negative NOK million in the three months ended 31 March The increase reflects that the three months ended 31 March 2015 included transaction costs related to the acquisition of the shares in Hurtigruten ASA and an increase in a positive change in the working capital. The latter is due to higher deposits from a positive pre-booking compared to the same time last year and increased 15

16 accounts payables mainly due to the refurbishment programme and the rebuild of MS Spitsbergen Explorer. Interests paid increased by NOK million and came to NOK million in the three months ended 31 March 2016 compared to NOK 42.1 in the three months ended 31 March 2015 as a result of the financing of Silk Bidco Group which is higher and at other conditions than in the comparable period for Hurtigruten Group. 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 three months ended 31 March March March March 2016 (NOK thousand) Purchases of property, plant and equipment ( PPE ). (60 359) ( ) (60 359) ( ) Net proceeds from sale of PPE Purchases of intangible assets. (8 424) (7 577) (8 424) (7 577) Loans to associates and other companies Settlement of derivatives.. ( ) - ( ) - Change in restricted funds Net cash flows from/(used in) investing activities ( ) ( ) ( ) ( ) 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 decreased by NOK million to NOK million in the three months ended 31 March 2016 compared to NOK million in the three months ended 31 March The major items explaining this increase is for the three months ended 31 March 2016; i) capital expenditure related to rebuild of our new expedition ship and the refurbishment programme as well as a more extensive docking programme than in the comparable period partly offset by; ii) the settlement of almost all derivatives in relation to the refinancing in the comparable period of the three months ended 31 March 2015, totalling NOK million. In total our capital expenditure increased by NOK million in the periods discussed, and includes in the three months ended 31 March 2016 expenses with respect to scheduled dry-dockings of our ships during this period, NOK million related to the rebuild of our new expedition ship MS Spitsbergen Explorer and the refurbishment programme on our Norwegian Coast. We expect our normalised capital expenditures in 2016 to be at about NOK 200 million per year (2014 Norwegian kroner) based on our current operations. Such capital expenditure will be incurred primarily in relation to ongoing maintenance of our fleet including minor upgrades to public areas; NOx saving projects in 2016 such as work on the engines with respect to MS Finnmarken and MS Trollfjord, the propulsion systems on MS Midnatsol and MS Trollfjord as well as new propellers on MS Kong Harald and MS Nordkapp; further development of our IT infrastructure, including our e-commerce channel; and the upgrade of our Spitsbergen hotels. In addition to this amount, in 2015 we have incurred capital expenditures of approximately NOK 19 million with respect to the 305 Classification rebuild. In 2016 we expect to incur another NOK 10 million related to the 305 Classification rebuild. The 305 Classification rebuild was reduced from a worst case scenario of approximately NOK 118 million since the publication of the offering memorandum, after the Ministry of Trade and Industry sided with us in our appeal. We are now in progress with implementation of our equivalent solution for dividing the car deck area for our one compartment ships, which can be done during operations. In 2016 we also expect capital expenditure of about NOK 350 million related to renewal of four Norwegian coastal ships of which NOK 57.8 million have been paid in 2015 and is included as prepayments in the balance sheet as of 31 December Additionally, we will incur capital expenditure on the docking of these ships which is included in our normalised adjusted capital expenditure. We also expect about NOK 247 million related to the rebuild of MS Spitsbergen Explorer. The main part of the capital expenditure will incur in 2016, but NOK 42.4 million has been paid in 2015 and is included in the capital expenditure for the twelve months ended 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: 16

17 For the quarter ended For the three months ended 31 March March March March 2016 (NOK thousand) Proceeds from borrowings Repayments of borrowings ( ) (10 637) ( ) (10 637) Net cash flows from/(used in) financing activities 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 came to NOK million in the three months ended 31 March 2016 and reflect the utilisation of the Revolving Credit Facility totalling NOK million in relation to the refurbishment of the four Norwegian coastal ships and the rebuild of MS Spitsbergen Explorer. Repayment of borrowings reflects the repayment of the indebtedness of the limited partners in the SPEs and Spitsbergen Travel AS. The proceeds from borrowings and redemption of debt in the three months ended 31 March 2015 reflects the refinancing of the company. Off-balance Sheet Arrangements Hurtigruten AS has deferred income tax assets recognised in the balance sheet of NOK million at 31 March 2016 and NOK million in deferred income tax assets not recognised in the balance sheet. 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 the 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 31 March 2016: Total Payments Due By Period Less than 1 year 1-5 years After 5 years (NOK equivalent in millions) Notes (1) , ,6 Local Line Facilities.. 19,9 2,4 7,6 9,9 Bareboat charter obligations (2)... 55,0 30,2 24,8 - Capital expenditure commitments (3) ,0 350,0 - - Total ,6 382,7 32, ,5 (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. (3) Capital expenditure commitments are contractual commitments for dry-dockings, work on the engines with respect to MS Finnmarken and MS Trollfjord, replacement of the propulsion system on MS Trollfjord, new propellers on MS Nordkapp, rebuilding the side gate on MS Spitsbergen Explorer, renewal of two Norwegian coastal ships, docking for one of these ships, rebuild of MS Spitsbergen Explorer, and capital expenditures with respect to the development of our IT infrastructure. A portion of the capital expenditure commitments related to our NOx saving projects in 2015 and 2016 may be reimbursed by the Confederation of Norwegian Enterprise s NOx fund. See Net Cash Flows from Investing Activities. The decrease in the total contractual obligations from the publication of the annual bond report 2015 is both due to the foreign exchange rate and decreased capital expenditure commitment since renewal of two of four Norwegian coastal ships, including docking for these two ships, were completed during the first quarter