Lerøy’s strategic framework

Our values – open, honest, responsible and creative – shall represent the very foundations for our decisions and actions. Lerøy maintains a very strong focus on the customer. We succeed when our customers succeed. It is our goal to help our customers succeed in terms of sustainable growth and an integrated, efficient and innovative value chain. If we are to achieve this goal, we will need access to human resources and organisation (knowledge) and capital. Our goal over the next three to five years is to create the world’s most efficient and sustainable value chain for seafood. The elements in our strategic framework are described in more detail below.

The ultimate goal: We succeed when our customers succeed
If we are to achieve our vision, we must continue to develop to achieve a position as a preferred supplier of seafood on a global scale. Our customers aim for growth and increased market shares by offering competitive solutions with focus on cost and quality, innovation, security of supply and food safety. We need to understand the needs of our customers, and our value chain must be built upon competitive processes that ensure success for our customers. Feedback from customers represents opportunities for improvement.

Strategic goals/objectives: An efficient and sustainable value chain
The seafood business has a long history and has developed into a global industry, but remains very fragmented with complex value chains, which at times are not compatible with the requirements made by the Customer on, e.g., food safety, traceability, sustainability, stability and efficiency.

Lerøy has therefore focused on achieving growth by means of securing access to raw materials that are fully traceable and governable. Lerøy's value chain comprises a large product range and allows for development of activities and products to increase customer satisfaction and willingness to pay, which in turn helps our customers gain new market shares.

Lerøy believes that values are created in value chains and in businesses in value chains that form a network and competitive processes for their customers. Lerøy's goal is to create the world’s most efficient and sustainable value chain for seafood. This must be the result of development of long-term customer relationships and an in-depth understanding of the customer's requirements; continuous improvement of the processes in the Group's own value chain, and development of binding alliances with suppliers.

Beyond successful customers, the table below shows key KPI's for the group in moving toward the world's most efficent and sustainable valuechain for seafood. The fundamental principles in the method utilised to achieve our goals are continuous work on achieving optimal flow of goods to the customer and optimal flow of information from the customer, by means of continuous improvement. This requires a decentralised organisation that is able to solve problems where and when they emerge, but also a Group that has the capacity to distribute information from the customers back to the value chain, so that all parties are aware of the challenges to be solved. Problem-solving shall be based on facts.

Strategic goals/objectives: Sustainable growth
Our customers aim to achieve growth, and our vision is dependent upon growth. Lerøy works hard to ensure that growth for the Group has been and shall remain sustainable. Sustainability is defined according to a holistic perspective that includes economic, environmental and social sustainability. All these areas are essential for our existence and competitive strength.

Social sustainability is a prerequisite to gain the support of society at large and competitive access to the Group's most important resource, people. Environmental sustainability is a prerequisite for the perpetuality perspective upon which the Group's operations are based. Economic sustainability is a premise for access to capital. These are not new requirements and expectations, and Lerøy has focused on these throughout the Group's history, but in recent years, the requirements made by the various stakeholders are increasingly coinciding. This gives rise to an accelerated rate of development, for which Lerøy is well prepared.

Historically, Lerøy’s growth has been sustainable, and will continue to be so. The Group has developed a number of KPIs within the different areas relating to sustainability, and will focus on these moving forward.

Lerøy aims to sustain its rate of organic growth via acquisitions, development of alliances and partnerships, and shall play an active role in the consolidation of the seafood industry.

If the Group is to successfully achieve its vision and develop the world's most efficient and sustainable value chain, it requires access to knowledge (human resources, organisation and methods) and capital.

Prerequisites for fulfilling our goals: Human resources and organisation
Lerøy's employees are the most important resource for the Group. Lerøy shall be a recognised and attractive employer, with the capacity to attract employees with the appropriate competencies, succeeding in building an organisation where employees are happy and work together to meet our customers’ needs. Lerøy has a clearly defined HR strategy focusing on recruitment, retaining and developing the right employees.

Lerøy shall also focus on strengthening the role of manager in the Group. Our leadership culture shall feature involvement and cooperation, where the individual manager is expected to take responsibility for getting the best out of their employees in order to ensure continuous development. The interaction between Lerøy's employees and partners shall help create the most efficient and innovative value chain for seafood. Our competitive strengths depend on our ability to continue to develop the organisation in every part of the value chain.

In order to ensure good interaction throughout the value chain, it is important to create and develop an organisation that is willing both to learn and change. Lerøy has a governance model that entails a substantial level of local decision-making authority. Decentralised governance requires an organisation hungry for new knowledge in the work to achieve a lasting competitive edge, but also an organisation that can share best practice across all parts of the value chain.

Prerequisites for fulfilling our goals: Capital
The confidence of the capital markets and access to capital have been and remain an essential prerequisite for the Group's existence and growth. The Group's financial strength and financing structure shall be adapted to its operations and framework conditions.
The Group operates in an industry that has historically been highly cyclical, and requires a rate of capitalisation and a business model that reflect this. This cyclical nature can be challenging, but has afforded and will continue to afford substantial opportunities in the future. The Group's financial position will therefore typically be very strong during good periods, coupled with a strategy to exploit this position for acquisitions, preferably during more challenging times.

In relation to acquisitions, it is essential to monitor developments on the seafood markets, including the customers’ requirements and expectations in terms of future developments, along with in-depth knowledge of the acquisition object. The Group has achieved growth by means of a number of acquisitions. Moving forward, the Group shall continue to maintain the knowledge required to carry out such acquisitions with an appropriate risk profile and returns.

The Group’s long-term goal for earnings is to maintain an annual return on the Group’s average capital employed of 18% before tax.

Lerøy's history is a demonstration of the Group's strategy in practice.
Today, Lerøy Seafood Group ASA is a fully integrated company with control of the entire value chain from egg or catches to end product delivered to the consumer, and this is essential if we are to build the world’s most efficient and sustainable value chain for seafood.

This has not always been the case, but Lerøy has remained very loyal to its strategy. Over the past 20 years, Lerøy has grown from a family-run Norwegian wholesaler/exporter to a fully integrated international seafood supplier. This growth would not have been possible without professio- nalisation, organisational development and access to capital once the company was listed on the Stock Exchange in June 2002.

The Group has developed a strong base of resources via acquisitions, developing alliances and strong relationships with suppliers. Such access to raw materials, coupled with the development of downstream operations, has allowed the Group to develop customer relationships that are increasingly strategic, thanks to the Group's capacity to meet customer requirements.

This development would not have been viable without access to capital, clear evidence that Lerøy holds the confidence of players in the capital markets. This confidence has been and remains an important prerequisite for Lerøy's growth and development. Acquisitions have been a key part of the strategy, and new acquisitions are assessed on a continuous basis. The acquisition of Villa Organic in 2013 was the last major acquisition within redfish. The Group's largest acquisition to date took place in 2016, with the acquisition of Lerøy Havfisk and Lerøy Norway Seafoods. Downstream, the Group has carried out both start-ups and acquisitions, and currently has substantial processing capacity in locations close to the consumer.

Focus areas in 2020
Lerøy works continuously on the development of its own value chain, from raw material to end product. Lerøy reports within three segments.

Wild Catch Segment – focus on improving value chain efficiency
The Group's whitefish operations comprise fisheries and land-based facilities that work closely together. For a more detailed description, please refer to the business overview at www.leroyseafood.com.

The Group's fisheries are currently very efficient. Historically, the Group's fleet has suffered at times from low profitability, but the Group has been able to invest in renewing and developing its fleet in recent years. The new vessels, Nordtind (delivered in 2018) and Kongsfjord (delivered in 2020), are effective within traditional fisheries and have increased efficiency for shrimp catches with the use of triple trawls. Kongsfjord represents a further development of the design for Nordtind, both vessels developed for catch management with fittings to ensure optimal quality and exploitation of the entire fish. Kongsfjord will provide further improvements to the quality of catches, and includes innovations that take Lerøy one step further in improving customer satisfaction. The new vessels have improved propulsion systems that help minimise CO2 and NOx emissions, areas in which we expect to see more stringent requirements in the future. The Group is closely monitoring developments in propulsion systems.

For many years now, the Norwegian land-based industry for whitefish has struggled with low profitability. Framework conditions for the land-based industry are challenging, partly driven by the seasonal fluctuations in raw material supply and partly the political, regulatory framework conditions that make it difficult to aggregate large volumes for industrial units, obstruct specialisation and investments in automation. A comprehensive effort is required to improve profitability in this industry, and the Group's strategy centres around three lines of action.

A. What to produce where?
How can we pave the way for new activity, preferably all year round, or initially target reduced seasonal fluctuations in relation to our historic operating model? Several factors may be players here, but increased specialisation will allow for investments and higher profitability. Examples of completed investments are a new production line for boiling and packaging king crab in Kjøllefjord, salted fish production in Rypefjord, the start-up of a new processed fish and filleting factory in Stamsund and substantial improvements to the facility in Melbu. A number of investments have also been made along with improvements in smaller facilities.

2020 was a difficult year, with the Group commissioning a number of facilities and with an extremely challenging market situation. There are clear signs of improvements at the start of 2021.

In summary, the overall objective for the land-based industry for whitefish is to ensure that production is less reliant on seasons, to introduce more standardised fillet production based on fresh, seasonal raw materials and frozen raw materials outside of the catch seasons. A more stable supply of raw materials to the industrial facilities will help boost productivity and provide an improved flow of goods to the factories close to the markets.

B. Stabilisation, continuous and gradual improvements
The second line of action is the systematic work to improve operations via continuous and gradual adjustments at each facility, in addition to improved flow of goods between different facilities in the value chain. To move this process and other similar work in other parts of the value chain forward, the Group has developed a new business system, the Lerøy Way. This is an important part of the Group's toolbox to ensure that we develop production methods, that afford the best possible interaction between production employees, increased exploitation of machinery and better raw material utilisation.

Implementation of Lerøy Way started in Melbu and Stamsund in 2018, with roll-out of the system continuing among the other land-based facilities in 2020. By the start of 2020, clear improvements were already evident in a number of facilities, but the market impact of the COVID-19 pandemic had a negative effect. Implementing Lerøy Way requires meticulous and time-consuming work, but the system gradually results in increased profitability, satisfied employees and safety improvements. The Group aims to continue working at the same rate on implementation in 2021.

C. A more efficient value chain for whitefish
The Group works continuously on forming closer links between the different whitefish businesses, together with Lerøy's growing downstream operations. Investments are also being made in replacing machinery and auxiliary systems with new, more modern production technology along with gradual upgrades to buildings to make the Group an even more competitive purchaser of whitefish from the coastal fleet. Last, but not least, investments are being made in improving expertise and product development.

Farming Segment – focus on growth and cost reductions per produced kilogram of salmon and trout
Up to and including 2019, the Group's harvest volume of salmon and trout has remained relatively stable since 2012, due to a lack of new licence capacity and challenges for Lerøy and the industry in adapting to new political regulations on lice, introduced in 2013. The Group has a major potential in increasing exploitation of its own licences. The Board of Directors acknowledges that the lack of growth, unsatisfactory utilisation of licences and related increase in costs are the main challenges for the Group's farming operations.

Thanks to our skilled employees and new technology, the Group has implemented major investments in recent years, some still ongoing, in order to provide a significant increase in the Group's post-smolt capacity. Investments in new smolt facilities, based on RAS technology (recirculating aquaculture systems), where the smolt are kept longer in the facility than with traditional smolt plants, have resulted in the supply of larger smolt that are more robust before they are released to the sea. The Board of Directors and management believe that these investments will generate growth, scale down the cost base and provide reductions for the Group's production on the cost side.

Large-scale investments in RAS technology for the Group started in 2012, and we have developed significant expertise and capacity with this type of production. In 2020, the final stage of the development in Laksefjord (North Norway) was completed. Stage 2 of the development work in Belsvik (Lerøy Midt) is the final stage of the smolt investment programme initiated prior to 2016 (Central Norway), and is now completed. With these investments, the Group has gradually developed a substantial knowledge base within RAS technology, but acknowledges that this technology is still somewhat new and requires new operating methods and implies risk. It is nonetheless rewarding to see that these investments, combined with a high number of other measures, allowed the Group to report a record high volume of production in the sea in 2020. The Group remains loyal to its ambition to continue to increase the rate of utilisation of its licence capacity, and expects to see an increase in production in the years to come.

Notwithstanding development of existing operations, a high rate of return over time provides incentives for investments in new technology and regions. Lerøy has chosen not to invest in new regions as these tend to be more costly and the Group is confident that the return on post-smolt investments is higher. The Group is actively involved in new technology, such as land-based production of salmon and offshore fish farming.

The RAS technology in which the Group has invested both knowledge and capital in recent years is the same as that used for land-based production of fish. In a move to further develop this expertise, the Group is now in the final stages of assessing a further extension to the facility in Fitjar for post-smolt capacity, but which can also be utilised for testing land-based production of fish. The Group’s ambition is to achieve a position where they are able to invest in land- based technology on end markets, if this technology proves successful.

Lerøy is also involved in a number of concepts for closed production in the sea, including our own concept, Pipefarm.

The Group is also involved in various concepts for offshore salmon production, in close collaboration with potential suppliers, thus developing knowledge within this field.

VAP, Sales & Distribution segment
– an efficient value chain that creates innovation
As described in detail in the “Business overview”, ref. www. leroyseafood.com, Lerøy sells most categories of seafood to an increasing number of global markets. Over the past decade, there has been a particular focus on developing a more efficient value chain for distribution of seafood by building a number of distribution centres in a higher number of central seafood markets. These centres are secured a supply of raw materials via local sourcing and raw materials in the form of fillets produced at the Group’s facilities in Norway. Having facilities close to the markets allows the Group to provide a high level of service, extensive interaction and innovation with customers on each specific market. The Group is also gradually building up capacity for sushi and so-called “ready-to-eat meals”.

In 2020, the Group has witnessed significant changes in the way in which end consumers purchase food. Sales channels within the hotel, restaurant and catering market have seen a substantial reduction in sales, while retail sales have increased. The Group has benefited greatly from its strong position in relation to key grocery markets in Europe, and the value of having long-term customer relationships has once again been validated in 2020.

The Group has recently made a number of decisions relating to sustainability, with one example being the launch of “Lerøy SalmonTM” certification at the start of 2021. To achieve this certification, the entire value chain has to be audited by a third party. Salmon with this certificate has a higher Omega 3 content than the Norwegian industrial standard, zero use of antibiotics, zero accidental release and full traceability. This is one example of why Lerøy believes that an integrated value chain is the best way to meet the future requirements made by consumers.

At the start of 2021, Lerøy has unique access to raw materials via their Farming operations, and from catches and purchases from third parties. Access to raw materials, in combination with the Group's processing plants in Norway and factories worldwide in close proximity to the markets, represent a strong platform for continued commercial development with strategic customers. The Group’s investments in this part of the value chain are expected to produce an increase in activities, a more robust business model and improved earnings. In 2021, the Group aims to achieve further progress towards reaching the vision of being the most efficient and sustainable value chain for seafood.

The Group – key focus areas

Lerøy shall continue to have a decentralised organisation, In order to ensure the most efficient flow of goods possible to the customer and flow of information from the customer, however, the Group intends to implement some initiatives centrally. Key focus areas include:

HR strategy 2020-2025
As an employer, Lerøy is responsible for developing and retaining human resources in the organisation, and for attracting and recruiting employees with the appropriate competencies required to solve future challenges. The Group's HR strategy for 2020-2025 shall support Lerøy's vision and values, and facilitate a learning and dynamic organisation well-equipped to be the leading and most profitable global supplier of sustainable, high-quality seafood.

Strategic prioritisation within HR involves making choices that help move both people and the organisation in the right direction towards achieving principal, strategic, commercial goals. The HR strategy is developed to support the ambition of having “One Lerøy” and, on this basis, has five defined strategic focus areas for HR: attractive employer, leadership and leadership development, employee development, organisational development as well as standardisation and digital tools.

The Group initiated leadership development training programmes at different levels in 2020, providing employees from different parts of the Group with the opportunity to meet and become familiar with the implications of working as a manager at Lerøy. This was a popular new move within the organisation, and the process will continue in 2021.

“Lerøy Way”
Over the past four years, the Group has developed a “business system” or principles for how to improve together. Lerøy's ultimate goal is satisfied customers. Based on the Group's values, defined fundamental principles and methods relating to people, machinery/technology and processes, Lerøy Way is a toolbox used to ensure continuous improvement. Lerøy Way has now been implemented in a number of the Group's operations, particularly in our factories, where empirical data have shown that the method works. Implementation will continue in 2021, including in the Group's farming operations.