Chairman's Address

BALDVIN THORSTEINSSON

Eimskip has focused on growth in recent years by investing in the development of our liner system and through acquisitions of global forwarding companies. Considerable energy has been spent on managing these investments and on integrating them within our company operations.

Eimskip is a leading transportation company in the North Atlantic. Our infrastructure provides a solid foundation, enabling us to access key markets within the industry and provide our customers with excellent solutions and services. Our planned cooperation with Royal Arctic Line in Greenland will strengthen our infrastructure even further.
The company’s performance fell below expectations in 2018. The Board of Directors and executive team are fully aware of the need for increased profit. The company will now focus on core operations with the aim of streamlining operations and simplifying the company’s operational structure wherever possible. A new organizational structure was introduced in January 2019 alongside various other measures implemented to support these objectives.

External conditions will prove challenging in 2019. Competition in Eimskip’s key markets remains fierce and the Icelandic economy has slowed after a period of steady growth. Unresolved disputes on collective labor agreements could also potentially negatively impact the Icelandic economy. A reduction in allocated fishing rights in Norway will affect transport volumes from Northern Norway and Brexit could potentially impact our transportation services in that area.

However, various opportunities await us in 2019. The volume in Trans-Atlantic service increased substantially towards the end of 2018 and has continued to grow in 2019. The integration of forwarding services in our international operations and a wider global service network are creating new opportunities and possibilities for revenue generation. A new service connecting Eimskip’s liner system to Greenland would bring about various revenue opportunities and cost efficiency but must first be approved by the Competition Authority in Iceland.

The Board of Directors and executive management will focus on internal issues in 2019 to improve the company’s performance, protect our position as a leading player in key markets and to secure opportunities for continued revenue growth.

Eimskip has been criticized for its remuneration policy. An improved remuneration policy that recognizes the priorities of new shareholders and past criticism has been submitted for consideration at the Annual General Meeting. The Remuneration Policy is designed to align objectives and attract talent to the Company.

Nomination committees are a relatively new phenomenon for Icelandic companies listed on the NASDAQ but are relatively commonplace elsewhere in large corporations with a large number of smaller shareholders. The advantages and disadvantages of appointing a nomination committee for Board elections will be carefully examined by Eimskip in the near future.

In November 2018, we lost a good colleague and friend. Víglundur Thorsteinsson became Vice Chairman of the Board in 2013, shortly after Eimskip was re-registered on the stock exchange. Viglundur was a prominent figure in the Icelandic business community and we would like to offer our sincerest condolences to his family.

We would like to take the opportunity to thank Gylfi Sigfússon, who left the position of CEO in 2018 after serving for ten years. He became CEO during a very difficult period and led the company through various challenges. Financial restructuring resulted in a complete reorganization of operations at that time and he successfully guided the company through the process, during a period of extensive change in the operating environment. He will return to his previous position as the Managing Director of North America’s operations. Gylfi leaves the company in a strong position and ready to take on the future.

We would also like to welcome our new CEO, Vilhelm Thorsteinsson. We believe we are extremely fortunate to have him on our team and we have every confidence in him as the new leader of the company.

Chief Executive Officer Address

VILHELM MÁR THORSTEINSSON

Expectations and disappointments

The company's performance fell below expectations in 2018. Revenue and volume increased in our container liner system and forwarding services but decreasing contribution margins, higher costs and depreciation affected the group‘s operating results between years.

The decrease in operating results between years can mostly be attributed to few specific factors. Liner services in Iceland and the Faroe Islands and associated operations have been performing well but revenue from our reefer cargo operations in Norway fell below expectations. We subsequently made various changes to our operations in Norway including the decommissioning of two vessels; one vessel in the middle of 2018 and a second vessel at the beginning of 2019. We have now increased our sales focus and are assessing the need for further changes.

Our forwarding services in Europe also experienced a downturn this year, particularly in the first part of the year. Decreased volume in some of our markets and lower margins affected operations but we experienced a positive turnaround in the second half of the year, which has continued into the first months of 2019.

Eimskip introduced weekly services on the North America line at the end of 2017, adding a third vessel to the Trans-Atlantic line, a historical first for the company. Achieving the necessary increase in volume to this third vessel took more time than we expected, which partly explains negative developments in the operating results between years. However, we saw an increase in volume in our Trans-Atlantic and Short-Sea services in the last few months of 2018 and this has continued into 2019. We also experienced a downturn in certain import commodities into Iceland including vehicles, machinery and equipment, which can partly be attributed to various uncertainty factors in the Icelandic economy.

Operations in 2018

Eimskip‘s revenue for the year 2018 amounted to EUR 689.2 million, an increase of 3.8%. Transported volume in our scheduled container liner system increased by 4.2% and can be attributed to a 7% increase in the Icelandic, Faroese and Trans-Atlantic freight container systems. However, there was a 13.6% decrease in liner volume in our operations in Norway. Volume growth in our forwarding services was 4.3% and can be attributed to a 23.7% increase in dry cargo. However, there was a 1.9% decrease in reefer cargo and forwarding (reefer logistics).

Operating expenses increased by EUR 33.1 million in 2018, or by 5.5%. The increase can be attributed to the increased capacity of the Trans-Atlantic line, higher fuel costs, increased activity between years and wage increases. Higher costs in international forwarding services and supplier costs, as well as unexpected costs associated with reefer vessel breakdowns, also had an effect.

EBIDTA amounted to EUR 49.2 million in 2018, a decrease of 13.9%. The decrease can mainly be attributed to decreased revenue from Eimskip‘s operations in Norway and decreases in reefer cargo services. The increased capacity of our Trans-Atlantic and short sea services resulted in decreased EBITDA in the first half of the year but we saw an increase in volume and, subsequently in operating margins, in the second half of the year.

Depreciation and amortization for the year amounted to EUR 32.5 million, an increase of 8.0%. The increase can mainly be attributed to investments in infrastructure such as new containers and equipment in recent years.

Net earnings amounted to EUR 7.4 million in 2018, a decrease of EUR 9.4 million. Cash from operations amounted to EUR 29.0 million, a decrease of EUR 8.4 million between years. The company's cash position, after taking into account cash flow from operations, investments, sale of assets, financing and debt repayment, amounted to EUR 21.9 million at year-end which is a decrease of EUR 1.2 million between years. An emphasis will be placed on delivering increased cash flow from operations in the coming months.

Organizational changes, streamlining initiatives and internal growth

Considerable changes were made to the company's structure at the beginning of 2019 with the aim of improving operations and increasing long-term profits. A new operations division was established which, among other things, is responsible for the operation of the company's sailing system, including the operation of Eimskip's vessels and container fleet. This should provide us with a much better overview of this area of costs and fixed assets. The last few years have been characterized by extensive external growth, which can mostly be attributed to investments in forwarding services companies in Europe. We will now focus on increased profitability and efficiency and on strengthening our infrastructure. We are integrating work and processes between units in our operations and increased automation will also be a key factor in achieving these objectives. Eimskip‘s management monitors developments and trends in the international transportation market with the aim of making well-informed decisions and adopting innovations that are beneficial for Eimskip.

We review the company‘s sailing system on a regular basis to monitor market developments, customer needs and to improve efficiency. We place an emphasis on maintaining a system that serves our customers in the North Atlantic region, which is flexible but also as efficient as possible at any given time.

Moving forward

The outlook for the liner system in Iceland and the Faroe Islands in 2019 is positive even though the downturn in capelin fisheries in Iceland will affect export volumes. Uncertainties in the Icelandic economy could also affect imports. The North-Atlantic market is tremendously competitive and weather conditions can be challenging. Eimskip will continue to offer excellent transportation and logistic services to its broad and diversified customer base.

In 2019, we expect growth in Trans-Atlantic and Short-Sea transport, which performed well in the latter half of last year and the beginning of this year. We expect improvements in Norway with better utilization of the reefer fleet although the operational environment will remain challenging.

Organic growth and realized synergies within the Eimskip’s worldwide forwarding network will improve the volume growth and financial results in 2019. We also expect that volume in reefer logistics will increase in 2019 especially due to improved market conditions. Various long-term infrastructure investments will be made in 2019, including two new vessels, each of which is able to carry up to 2150 teus and are currently being built in China. The investment is part of the preparation phase for a potential future collaboration with Royal Arctic Line. The group is also investing in a large harbor crane and associated changes to the docking area in Sundahöfn in Reykjavík to provide the necessary services. Cash flow from operations and new loans provide the finance needed for these infrastructure investments and the company has secured long-term finance for the vessels on good terms.

Eimskip is entering a period of transition in its future operations. We have experienced extensive external growth in the last few years but will now focus on increased profitability and internal growth.

I would like to take this opportunity to thank Eimskip's employees for their dedication and valuable contribution to the company and their ambition to always do better and express my gratitude for the warm reception I have received in the last few weeks as the Company’s new CEO. The team‘s attitude, knowledge and experience are the key to achieving our objectives.

I would also like to thank our customers for their valuable business relation with Eimskip. I look forward to continuing cooperation and communication with our diverse and important customer group.

Board of Directors

BALDVIN THORSTEINSSON

BALDVIN THORSTEINSSON
CHAIRMAN OF THE BOARD

Baldvin was born in 1983 and works at Samherji hf. He has worked for the Company in various roles since 2007 after earning a B.S degree in Industrial Engineering from University of Iceland. In the years 2013-2016 was the CEO of Iceland Drilling, where Samherji is a major shareholder. When rejoining Samherji in 2016 he was made Manager of Business development. Baldvin joined the Board of Olíuverzlun Íslands in 2011, became the Board‘s Chairman in 2016 until he stepped down at the end of 2018 when the company was sold. Baldvin owns 160,000 shares in the Company but does not have a share options agreement with the Company. He is not independent of Samherji Holding ehf., which own 50.6 million shares in the Company.

HRUND RUDOLFSDÓTTIR

HRUND RUDOLFSDÓTTIR
VICE-CHAIRMAN OF THE BOARD

Hrund was born in 1969 and lives in Iceland. She is the CEO of Veritas Capital ehf. Previously she was Corporate Director of Human Resources at Marel hf. from 2009 and Director of Operations and Investments at Moderna Finance ehf./Milestone ehf. from 2007 to 2009. Hrund was CEO of L&H Holding, CEO and Chief of Operations of Lyf & heilsa hf. from 2001 to 2006. She is currently the Chairman of Stefnir hf. and is a Board Member of Iceland Chamber of Commerce, Artasan hf., Distica hf. and Lumina ehf. Hrund took her Master’s degree in International Marketing and Management at Copenhagen Business School in 2000 and AMP in IESE NY in 2018. She also earned a Cand.Oecon. degree at the University of Iceland in 1994. Hrund has been on the Board of Directors since 3 April 2013 and currently serves as the Vice Chairman of the Board and as a Chairman of the Remuneration Committee. She is an independent Board Member and does neither own shares nor share options in the Company. She has no interest links with the Company’s main clients, competitors or major shareholders.

GUDRÚN Ó. BLÖNDAL

GUDRÚN Ó. BLÖNDAL
BOARD MEMBER

Gudrún was born in 1960 and lives in Iceland. She was a CEO of Nasdaq CSD Iceland (Nasdaq Central Securities Depository Iceland) from 2013 to March 2018. Previously she was a CEO of Arion Custody Services, subsidiary of Kaupthing hf., from 2002 until it merged with Arion bank hf. in 2012. She held various positions in Kaupthing hf. from 1984 to 2002 such as an Executive Director, Human Resource Manager, Marketing Manager and Asset Manager. In 2012 until 2013 she was a Board Member at the Enterprise Investment Fund slhf., Reginn hf., Míla ehf., Vördur Insurance Company and Vördur Life Insurance. Gudrún is an alternate Board Member at Landsbankinn hf. Gudrún earned a Cand.Oecon degree at the University of Iceland in 1990. She is an independent Board Member and does neither own shares nor share options in the Company. She has no interest links with the Company’s main clients, competitors or major shareholders.

LÁRUS L. BLÖNDAL

LÁRUS L. BLÖNDAL
BOARD MEMBER

Lárus was born in 1961 and lives in Iceland. He is a Supreme Court Attorney and a Partner at Juris Law Offices. Lárus was a Partner at Almenna lögfrædistofan from 1990 to 2008. Lárus is currently a Board Member of Orkusalan hf. and the Chairman of the Board of ISFI (Icelandic State Financial Investments). He has been a member of the Competition Appeals Committee since 2000 and its Vice-Chairman since 2009 and a member of the National Olympics and Sport Association’s executive committee since 2001, becoming its Vice-President in 2006 and its President in 2013. He has previously been a Board Member of the Icelandic Bar Association, the University of Iceland’s Human Rights Institute, the University of Iceland’s Research Centre in Environmental and Natural Resources law, Hótel Borg ehf., Fastus ehf., the Housing Financing Fund, Chairman of the National Olympic and Sport Association’s legal committee, and a member of various other official Committees and Boards. Lárus has been a Supreme Court Attorney since 1998 and a District Court Attorney since 1990. He graduated with a Cand.jur. degree from the University of Iceland in 1987. Lárus has been on the Board of Directors since 27 March 2014 and is currently a member of the Audit Committee. He is an independent Board member and owns 3,190 shares in the Company but no share options. He has no interest links with the Company’s main clients, competitors or major shareholders.

JÓHANNA Á BERGI

JÓHANNA Á BERGI
BOARD MEMBER

Jóhanna was born in 1970 and lives in the Faroe Islands. She is the CEO of Atlantic Airways Ltd. Jóhanna was the CEO of P/f Faroe Ship, Eimskip’s subsidiary in the Faroe Islands, from 2006 to 2015, Sales Director of JFK and Kósin Seafood from 1998 to 2006 and Sales Manager of Faroe Seafood France from 1994 to 1998. She is currently a Board Member of the Faroese Confederation of Sports and Olympic Committees, Nordoyatunnilin, Föroya Grunnurin and Visit Faroe Islands. Jóhanna has a Master’s degree in Management from Robert Gordon University in the UK. She further holds an EE degree from the Danish School of International Marketing and Export. Jóhanna has been an alternate member of the Board since 3 April 2013, is an independent Board Member and does neither own shares nor share options in the Company. She has no interest links with the Company’s main clients, competitors or major shareholders.

PHILIP G QUINLAN

PHILIP G QUINLAN
ALTERNATE MEMBER OF THE BOARD

Philip was born in 1952 and lives in Canada. He is a Chartered Professional Accountant and a Partner at Quinlan & Taylor, a CPA Professional Corporation providing audit, corporate and personal tax planning and management consulting services. Philip is currently a Board Member of Northern Coalition Corporation, Northern Shrimp Research Foundation, Northern Shrimp Advisory Committee, Madsen Construction Equipment Inc. and Madsen Controls Inc. Philip has been actively involved in his profession throughout his career having served on numerous Committees of both the provincial and national institutes of Chartered Accountants including serving as president of the provincial institute of Chartered Accountants and a Board Member of the Board of Governors of the Canadian Institute Of Chartered Accountants. Phillip has a wide range of experience providing services to clients in almost every sector of the economy, including audit, corporate and personal income tax planning, management consulting services focusing on operational efficiencies, business valuations, capital acquisitions and related financing, together with cash flow planning and management. He participates in the ownership and management of private companies that provide synchronized control solutions for engines and turbines, along with the sale of heavy construction equipment. Philip is an independent Board Member and does neither own shares nor share options in the Company. He has no interest links with the Company’s main clients, competitors or major shareholders.