avatar Marel Poultry B.V. Manufacturing

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    ANNUAL REPORT 2006


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    Contents Marel Food Systems in figures 2 Marel Food Systems in brief 3 Marel Food Systems worldwide 4 Marel shares 5 Chairman’s address 6 CEO’s address 8 To Shareholders 11 Board of Directors and CEO 12 Organizational structure 14 Corporate governance 15 Risk management 17 Corporate social responsibility 18 Human resources 19 Shares and shareholders 20 Investor relations 22 Development 2006 23 Acquisitions 24 Opportunities and outlook 27 Integration in the USA 27 Performance 2006 29 Financial performance 30 Business operations 33 Innovation 36 Consolidated financial statements for 2006 39 The Board and CEO’s report 41 Independent auditors’ report 42 Financial ratios 43 Consolidated income statement 44 Consolidated balance sheet 45 Consolidated statement of changes in shareholders’ equity 46 Consolidated cash flow statement 47 Notes to the consolidated financial statements 48 1


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    H I G H L I G H T S Marel Food Systems in figures Purchase of property, plant and Sales in thous. EUR equipment in thous. EUR Operating profit before depreciation, EBITDA as a percentage of sales Equity ratio Profit from operation in thous. EUR Total assets in thous. EUR 2


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    H I G H L I G H T S Marel Food Systems in brief Marel Food Systems thrives on imagination and ingenuity. Cutting edge equipment and software components The company uses these elements to innovate solutions for created and serviced by Marel Food Systems help food all food processors, which then directly and positively affect processors of all sizes, in all markets, to operate at peak the quality and value of fish, meat, poultry, cheese and productivity. From harvesting raw materials to packaging prepared food products around the world. case-ready products – from standardized stand-alone units to all inclusive custom-designed turnkey solutions – Marel Marel Food Systems began putting innovation to work Food Systems effectively and significantly enhances the early in the 20th century by introducing equipment that overall value of food. improved product utilization. In the 1980s, a transformation occurred when the company harnessed computer The company’s internationally known brand names technology to develop intelligent graders and scales that – Marel, Carnitech, AEW Delford and Scanvaegt – along revolutionized food processing. Since then it has grown with a global network of subsidiaries and sales & service into an industry leader by developing an extensive mix of agencies, have become a benchmark for consistent high-tech processing equipment to fit current, emerging reliability and service. and projected needs. New corporate identity Marel has a new corporate identity, Marel Food Systems. Marel Food Systems’ local roots, cultures and product An international, market-leading company needs one brands will continue to exist, but seizing this great unified front and one image. Integrating into one name opportunity to build a stronger company will and one policy is a step forward that makes the best use undoubtedly bring more value to customers, staff of all the companies’ resources. The change is expected to and shareholders alike. grant better results, less costs and fewer complications; more value and better service to customers, and better interaction and economic benefits within the value-chain. 3


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    H I G H L I G H T S Marel Food Systems worldwide Marel Food Systems consists of four main segments that are complementary to each other: the parent company Marel hf in Iceland, Carnitech A/S in Denmark, AEW Delford Systems Ltd in the UK and Scanvaegt International A/S in Denmark. Together the brands supply a complete range of processing equipment to all sectors of the food processing industry. 4 main brands Marel Food Systems is a leader in its field with subsidiaries Production in 5 countries in 22 countries. Most of the company’s products are manufactured in Iceland, Denmark, and Slovakia with Subsidiaries in 22 countries smaller production facilities in Singapore and Brazil. In addition, the company operates a network of 60 agents Network of 60 agents and and distributors in about 40 countries that market, sell distributors covering 40 countries and service the company’s products around the world. Over three-quarters of overall sales are achieved through subsidiaries. 4


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    H I G H L I G H T S Marel shares Share performance Marel shares (Symbol: MARL) are listed on the OMX Nordic Exchange and are included in the ICEX-15 (the 15 largest companies by market capitalization listed on the ICEX) and ICEX MAIN indices. The share price rose from ISK 65.0 at year’s end 2005 to ISK 77.0 at year’s end 2006, an increase of 18.5%. During the same period the ICEX-15 index increased by 15.4%. The year’s highest end-of-day share price was ISK 81.5 and the lowest end-of-day share price was ISK 62.0. MAREL SHARE PRICE COMPARED TO THE ICEX-15 INDEX Marel ICEX-15 TOP 10 SH ARE HOLD E RS A S OF 3 1 . OF D E C E MBE R 2006 Name No. Of shares % Eyrir Invest ehf 108,675,840 29.61 Landsbanki Íslands hf,aðalstöðv 87,942,955 23.96 Grundtvig Invest ApS 52,200,943 14.22 Lífeyrissjóðir Bankastræti 7 8,457,835 2.30 Lífeyrissjóður verslunarmanna 6,752,105 1.84 Ingunn Sigurðardóttir 5,437,733 1.48 Helga Sigurðardóttir 5,348,749 1.46 Súsanna Sigurðardóttir 5,308,774 1.45 Egill Vilhjálmur Sigurðsson 4,278,999 1.17 Eignarhaldsfélag Hörpu ehf 4,195,671 1.14 Total 288,599,604 78.62 Others 78,481,128 21.38 Registered share capital 367,080,732 100.00 5


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    Chairman’s address Marel Food Systems is a strongly financed and fast growing years, and is expected to grow at the same rate of 5-6% global company with Scandinavian roots. The company annually for the next years. The industry is fragmented is listed on the OMX Nordic Exchange with a broad base with no clear industry leader, as the largest players control of investors and a market value of approximately EUR 300 less than 10% of the market. million at year-end 2006. Marel Food Systems’ expansion Marel Food Systems has developed a dynamic sales and in recent years has been based on profitable internal marketing operation, and provides customer services and external growth through the acquisitions of other on all its markets. The company sells products to over 60 companies operating in similar fields. countries with a wide diversity of languages, cultures, Marel Food Systems is at the forefront of developing and operating practices and technological capabilities. marketing high-tech applications for the international fish, meat and poultry industries. Marel Food Systems has Growth strategy and execution also moved into the cheese, vegetable and convenience Marel Food Systems’ strategy is clear and management food business in general. By using Marel Food Systems’ is executing the strategy vigorously. Marel Food Systems technology, customers have managed to increase is growing fast organically, and is now developing an productivity significantly through better utilization of raw extensive operation in Slovakia. Growth by acquisition material and manpower. is an important part of the strategy. At the AGM in the beginning of 2006, the company set ambitious growth Marel Food Systems is well placed in a fast- targets; strategic acquisitions will be made that will growing market expand Marel Food Systems’ unique technological position The industry in which Marel Food Systems operates is and improve access to markets, enabling it to achieve a 15- an interesting, fast-growing business driven by changes 20% market share compared to its estimated 4% market in consumer habits and geographical expansion. It has share in 2005. exceeded economic growth considerably in the last 10 TURNOVER 1983–2006 250.000 Income in EUR ‘000 200.000 150.000 100.000 50.000 0 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006* * Pro forma turnover due to acquisitions of AEW Delford UK and Scanvaegt DK 6


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    During 2006, the board and the management showed committee and a compensation committee – to discuss their determination in reaching these goals by acquiring and prepare matters between board meetings. The two of Marel’s main competitors, AEW Delford in the auditing committee has reviewed the internal and UK and Scanvaegt in Denmark, and thus doubled the external audit of the company, and held meetings with revenues and the market share of the company. the company’s statutory auditors. A stock option plan was recently approved for a wide group of employees, Marel Food Systems is a strongly financed which is intended to intertwine their interests with those company with a broad base of investors of company shareholders. The stock option plan was a Marel Food Systems strengthened its capital base cooperative effort between the compensation committee significantly in 2006 and finalized a public offering that and the CEO, and was later approved by the board. broadened the strong shareholder base significantly. Additionally, Marel issued long-term bonds. Both the Outlook shares and the bonds are listed on the OMX Nordic Marel Food Systems is leading the consolidation in the Exchange. The financial strengths and back-up from food system industry. Today, consolidation is mainly financial markets will enable the company to reach its between companies with headquarters in Europe and targets of global leadership faster. At year end, the total North America and with main focus on those markets. A number of shareholders tripled to almost 3000, up from stronger and larger company will have a greater ability 1100 at the beginning of the year, and pension funds and to take advantage of the development of new markets other financially sound investors increased their shares in in Eastern Europe, Asia and South America and therefore the company. In addition, the previous owner of Scanvaegt grow faster than anticipated. showed their belief in the company’s bright prospects The year of 2006 was a year of great transformation, and by taking Marel shares as a significant portion of the in coming months it will be necessary to utilize fully the purchase price of Scanvaegt. After the equity increase and competitive edge and get back on the “growth path” with substantial purchase at market, Eyrir Invest is the leading double digit growth as has been seen in the past, and investor with close to 30% of total shares. profitability in excess of 10% EBIT. By the year 2015, Marel Food Systems’ goal is to lead the industry with annual OMX Nordic Exchange revenues in excess of 1 billion euros and profitability well At the beginning of 2007, the Icelandic Stock Exchange above industry standards. became part of the OMX joint market for Nordic and Baltic countries, considerably increasing the visibility and liquidity of Marel shares. This will also make it easier to compare the management and the added value of the companies with peer groups. Árni Oddur Þórðarson The board of Marel has decided to seek permission from Chairman of the Board the shareholders to convert the company’s shares from ISK to EUR. This is a logical step forward as company accounts and base currency are already denominated in EUR and over 97% of the income is generated outside of Iceland, Strong internal growth 400-500 million with EUR being the largest currency in the revenue stream. 1000 Trading in EUR will decrease the risk of holding the shares and make the shares more attractive to global investors. Strong Corporate governance external growth Million EUR In 2005, the board of Marel approved corporate 270 governance guidelines for the purpose of meeting the highest standards in relation to the stock market. The 130 board has appointed two committees – an auditing 2005 3-5 years 2015 7


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    CEO’s address The year 2006 was an eventful one for Marel. At the In 2006, the company secured major contracts with many beginning of the year, the company set the ambitious of the largest fish, meat, and poultry processors in the goal of tripling its size over the next three to five years. world. These large contracts for processing solutions are The main premises for this policy are the demands of the a result of long-term sales and marketing efforts that will company’s customers for total solutions and increased support the company’s organic growth in the future. product development, while at the same time increasing the company’s value for shareholders with increased Customers economy of scale. Subsequently, Marel purchased two As one of the leading manufacturers of processing companies: the UK company AEW Delford in April and equipment, Marel Food Systems has provided solutions to the Danish company Scanvaegt International in August. all major producers over the last decades. The company Following the merger of the companies, Marel has constantly monitors current and emerging trends and strengthened its position as a leading company in the requirements within each industry sector and continues to development and sales of high-tech equipment for the emphasize cooperation with customers when developing fish, meat, and poultry industries. new solutions. Our customers are operating in competitive environments Operation where demand for food safety and traceability, along with Considerable external growth put its mark on 2006, with performance demands and changing consumer behavior, turnover increasing 62% over the course of the year. constantly create new challenges. It is the company’s The year’s activities were characterized by the extensive goal to support its customers in achieving better yield, integration process of the operations of Marel, Scanvaegt, increase productivity and better manage their raw AEW Delford, and Carnitech, with associated one-time material processing. Our focus is on maximizing profits by expenses. Operating profits (EBIT), therefore, decreased increasing yield, throughput, and efficiency. during the year, although the company will start to reap the benefits of the integration in the latter part of 2007 Product development and fully in 2008. One of the principal factors in a successful operation is progressive product development. Marel Food Systems Markets annually invests 6-7% of revenues in R&D to strengthen its The company’s key markets have been North America and leading position on the market and fulfill customer needs. Europe, and in 2006, the company continued to reinforce Product standardization continued in 2006, and proved operations in these markets. The merger with Scanvaegt to be a successful factor in increasing efficiency, lowering has significantly increased the company’s presence in production costs, and strengthening the company’s South America. Efforts were also focused on market competitive position. expansion by increasing operations in key growth markets such as Eastern Europe, Asia, and Australia, where excellent opportunities exist for the company’s solutions. 8


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    Integration activities Prospects The acquisition of AEW Delford in April and Scanvaegt Intensive product development and the ongoing work in August of 2006 has doubled the company’s annual over the years to bolster the company’s marketing turnover on a pro forma basis. The companies have very operations have placed the company in a strong similar product ranges and operate on the same markets. competitive position. Prospects on the company’s primary It is therefore vital to integrate operations with the aim markets are currently satisfactory. of improving and coordinating customer services and Prospects for the company’s operations are good. The clarifying employee positions, while improving the consolidation of Marel, Carnitech, AEW Delford, and performance of the companies. Major integration activities Scanvaegt will create a company with a broad product have been embarked on within the company with the range, a strong marketing network, an outstanding participation of key employees from all companies. The service network, and a unique position in various product goal is to develop the strengths of each company and categories. The economy of scale of the new company is thereby support Marel Food Systems’ future growth. Since considerable, as are its opportunities for increased sales the operations of the companies are similar, integration and cross-selling. will inevitably lead to changes in individual companies, with associated one-time expenses. In the short term – particularly during the first half of 2007 – one-time expenses resulting from the integration of the The principal goals of integration work within Marel Food companies will impact the company’s performance. It is Systems are to ensure that everyone knows they work for anticipated that the synergistic effect will start to appear the same company, to double the number of new products in increased operating profits in 2007 and be fully realized with unchanged investment in product development and in 2008. to improve customer service while expanding revenue potential. At the same time Marel Food Systems will focus on laying the foundation for strong inner growth and creating an interesting and challenging work environment for all employees. Dr. Hörður Arnarson Chief Executive Officer Share performance One of the main corporate goals is to maximize the company’s share value. An 18.5% increase in share value occurred in 2006, on top of a 32.0% increase in 2005. The company’s share turnover rate on the Iceland Stock Exchange in 2006 was 27.9%. Market-making is provided by Landsbankinn, which has led to a lower spread and more active trading. The average end of day spread in 2006 was 0.9%. Marel Food Systems paid a dividend of ISK 0.2 per share in 2006. 9


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    To Shareholders “Innovation is the process of turning ideas into manufacturable and marketable form.” Watts Humprey 11


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    CEO and Board of Directors Chief Executive Officer Dr. Hörður Arnarson Education: Engineering, Ph.D., 1990, Technical Hörður Arnarson joined Marel hf in 1985, two years after the company University of Denmark. Electronic Engineering, was founded, as a project manager. In 1994, he became Director of B.Sc., 1985, University of Iceland. Product Development, and Director of Production in 1998 until 1999 Holdings in Marel, including those of financially when he became the CEO of Marel and now Marel Food Systems. Hörður related parties: 1,669,009 shares. is vice chairman of the board of the Association of Icelandic Industries, and on the board of the Icelandic Chamber of Commerce. Chairman of the Board Árni Oddur Þórðarson Education: MBA from IMD in Switzerland, 2004. Árni Oddur is the CEO of Eyrir Invest, and has extensive experience Cand. Oecon, Business Administration from the working in the financial markets. Before co-founding Eyrir Invest he was University of Iceland, 1993. head of Corporate Finance and Capital Markets at Búnaðarbanki Íslands, Elected: 2005 which later merged with Kaupthing Bank. Árni Oddur has been a director Holdings in Marel, including those of financially of Ölgerð Egils Skallagrímssonar ehf., since 2003, and on the advisory related parties: 108,704,944 shares. board of Artic Ventures, a high-tech fund in Stockholm, since 1999. Board Members Arnar Þór Másson Education: Political Science with a M.Sc. in Arnar has been a specialist at the Ministry of Finance for the past five Comparative Politics from the London School of years. Alongside his work at the ministry, Arnar is an adjunct in the Political Economics and Political Science, 1997. BA in Science Dept. at the University of Iceland. Arnar does not sit on the board Political Science from the University of Iceland of any other company than Marel. He was on the boards of Hjaltadalur 1996. Currently studying Investment Management Heating Utility sf. from April 2003 to November 2005, and the Weights and at Reykjavík University. Measures Office from April 2003 until July 2005. Elected: 2001 Holdings in Marel, including those of financially related parties: 20,342 shares. Friðrik Jóhannsson Education: Business Administration from the Friðrik became CEO of the Straumur-Burðarás Investment Bank hf. in June University of Iceland, 1982. CPA 1987. 2006. Previously, Friðrik was the CEO of Burðarás hf. from March 2004 until Elected: Alternate 1997-2004. Board member September 2005. Friðrik is the chairman and largest shareholder of TM since 2004. Chairman of the Board from the AGM Software hf., and a member of the Board in Cyntellect since April 2006. 2005 until October 2005. Friðrik is the Chairman of the Board of the Iceland Stock Exchange, Icelandic Holdings in Marel, including those of financially Securities Depository and Eignarhaldsfélag Verðbréfaþing hf. Friðrik has related parties: 0 shares. sat on the boards of the following companies: Iceland Genomic Ventures Holding, Alfesca hf., Þróunarfélag Íslands hf., Eimskipafélag Íslands ehf., Haraldur Böðvarsson og Co hf., Skagstrendingur hf., Flow Matrix Inc., Urður Verðandi Skuld hf., Og fjarskiptum hf. 12


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    T O S H A R E H O L D E R S Helgi Magnússon Helgi is the largest owner, chairman of the board and CEO of Eignarhaldsfélag Education: Business Administration from the Hofgarða ehf., and Eignarhaldsfélags Hörpu ehf. Helgi is the chairman University of Iceland, 1974. CPA 1975. of Flügger Harpa Sjöfn ehf., chairman of the Federation of Icelandic Elected: 2005 Industries, member of the board of directors and the executive board of Holdings in Marel, including those of financially the Confederation of Icelandic Employers. Helgi is also on the board of Blue related parties: 4,366,426 shares. Lagoon hf., Icelandic Pension Fund and Skipasmíðastöðvar Njarðvíkur. Helgi has sat on the boards of the following companies: Íslandsbanki hf. (now Glitnir hf.), Lífeyrissjóðurinn Framsýn and VVÍB investment fund. Margrét Jónsdóttir Margrét is the CFO of Eyrir Invest ehf. Margrét was the director of the finance Education: Business Administration from the department at Edda Publishing hf. from December 2001 until October 2002. University of Iceland, 1983, Master of Accounting She was the director of finance at Kreditkort hf. from August 2000 until and Auditing from the University of Iceland, 2006. December 2001. She was also the Manager of accounts and planning at Elected: 2006 Fjárfestingarbanki atvinnulífsins hf. (FBA) from January 1998 until June 2000. Holdings in Marel, including those of financially related parties: 85,243 shares. Alternates Hanna Katrín Friðriksson. Elected: 2004. Education: BA in Philosophy and Economics from the University of Iceland, 1995, MBA University of California, 2001. Holdings in Marel, including those of financially related parties: 0 shares. Hanna Katrín became head of Organizational Development at Eimskip in 2005. Hanna Katrín was a department head at Reykjavík University from 2002 until 2005. Hanna Katrín sat on the board of Íslenska Útvarpsfélagið hf. Þórður Magnússon. Elected: 2006. Education: Business Administration from the University of Iceland, 1974 MBA from the University of Minnesota, 1976. Holdings in Marel, including those of financially related parties: 108,683,047 shares. Þórður is the Chairman of Eyrir Invest ehf., which he founded in 2000 along with Árni Oddur, Chairman of Marel Food Systems. Before Þórður formed Eyrir Invest, he held the position of Director of Finance and Administration at Eimskip for over twenty years. Þórður sat on numerous boards in connection with his position at Eimskip. In addition to being chairman of Eyrir Invest and Marorka hf., Þórður sits on the board of Össur hf., Byko hf. and Kaupáss hf. Dr. Hörður Arnarson, Friðrik Jóhannsson, Margrét Jónsdóttir, Arnar Þór Másson, Árni Oddur Þórðarson and Helgi Magnússon. 13


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    T O S H A R E H O L D E R S Organizational structure Marel Food Systems consists of four main segments that Marel Food Systems is a leader in its field with subsidiaries are complementary to each other: the parent company in 22 countries. Most of the company’s products are Marel hf in Iceland, Carnitech A/S in Denmark, AEW Delford manufactured in Iceland, Denmark, and Slovakia with Systems Ltd in the UK and Scanvaegt International A/S in smaller production facilities in Singapore and Brazil. In Denmark. Together the brands supply a complete range of addition, the company operates a network of 60 agents processing equipment to all sectors of the food processing and distributors in about 40 countries that market, sell and industry. service the group’s products around the world. Over three- quarters of overall sales are achieved through subsidiaries. BOARD OF DIRECTORS HÖRÐUR ARNARSON CEO Hörður Arnarson Thorkild Christensen Lárus Ásgeirsson Ásgeir Ásgeirsson 14


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    Corporate governance Corporate governance at Marel Food Systems is Shareholder rights determined by the company’s Articles of Association The supreme authority in all affairs of the company, and Rules of Procedure of the Board of Directors. These within the limits established by the company’s articles procedures and the activities of the board follow in all and statutory law, is in the hands of lawful shareholders ways the guidelines concerning corporate governance meetings. At shareholders meetings each share carries one issued by the Iceland Stock Exchange, Confederation of vote. Icelandic Employers and Iceland Chamber of Commerce. The Annual General Meeting (AGM) shall be announced The company is managed by the shareholders meetings, with advertisements in newspapers and on the radio, at the Board of Directors of the company and the Chief least one week prior to the meeting. The announcement Executive Officer (CEO). Within Marel Food Systems’ shall be written and sent to those shareholders who board are two working committees: the compensation have specifically requested it and are registered in committee and the auditing committee. the shareholder register. The same procedures apply Members of the Compensation Committee are Arnar Þór when calling a shareholders meeting as for the AGM. Másson, Árni Oddur Þórðarson and Friðrik Jóhannsson. A shareholder may authorize another person to act for Its field of work involves negotiating wages and other him, and vote, by proxy. The right to sit at a shareholders benefits for the CEO and senior management, framing the meeting is given only to shareholders, and the company company’s wage policy including wage incentives and auditors and CEO, even if they are not shareholders. share option rights for company shares. However, the board can invite specialists to individual meetings if their expertise or assistance is required. Members of the Auditing Committee are Friðrik Shareholders are permitted to bring along consultants, but Jóhannsson, Helgi Magnússon and Margrét Jónsdóttir. they do not have the right to address the meeting, make Its field of work includes monitoring Marel Food Systems’ proposals, or vote. financial status, evaluating the company’s internal control system and risk management system, evaluating The AGM shall be held before the end of May each year. management reporting on finances, evaluating whether laws and regulations are followed as well as evaluating the The board of directors and senior management work of the company’s statutory auditors. The board of directors comprises five members. They and two alternates shall be elected yearly at the AGM. Shareholders are bound, without specific undertaking on Election of directors shall be by ballot if more candidates their part, to abide by the company’s articles. are proposed than the positions available. A new board for the company was elected at the company’s AGM held on February 28, 2006. The board is elected for a term of one year. At the same meeting, a monthly payment to each board member for the next operating year of EUR 2000 was approved, and double that amount for the chairman. 15


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    T O S H A R E H O L D E R S The board chooses a chairman from among its members. discharges all company employees. The CEO is obligated The chairman takes the floor and calls the meeting to abide by all board directives. He is required to provide to order. Meetings shall be held whenever he deems the board and auditors with all information requested. A necessary. The chairman is required to call a directors’ director may be the CEO. However, the same person may meeting at the request of a director or the CEO. Directors not be the CEO and the Chairman. The Board of Directors shall take the minutes of board meetings, and confirm shall, in the Annual Report, make proposals regarding them with their signatures. distribution of profits or balancing of loss. The board is the highest authority in company matters No unusual business has been conducted between Marel relating to shareholders. Its primary responsibilities are the Food Systems and its board. Board members do not have following: any buy or put options in the company. 1) To hire a Chief Executive Officer (CEO), determine his No member of the Marel board has been convicted of salary and benefits, establish his responsibilities, and fraud, gone bankrupt, been taken into receivership or arrange his discharge. been indicted. 2) To make policy decisions regarding company A board member shall only act according to his own operations. conviction, not to the instructions of those electing him. 3) To steadfastly and thoroughly monitor all aspects of Immediately following the AGM each year, the board shall company operations, and ensure that the infrastructure allocate responsibilities among themselves. and operations are in good order. In particular, the board shall ensure that there is sufficient supervision Auditors and accounting with accounting and the management of the An auditing firm shall be elected at the AGM for a term company’s financial affairs. of one year. The auditor however, shall not be a member 4) To represent the company in matters pertaining to of the Board of Directors, CEO or an employee of the judicial and government issues. company. The auditor shall examine the company’s annual 5) To resolve other matters when deemed appropriate. accounts in accordance with generally accepted auditing The board has the authority to obligate the company, for standards, and shall for this purpose, inspect account example hypothecate, with the signatures of a majority of records and other material relating to the operation and board members. financial position of the company. The auditors shall at all times have access to all the books and documents of the The CEO is responsible for daily operations in accordance company. with those directives that he has been given by the board, or by the Articles of Association. Daily operations do not Marel’s auditors are PricewaterhouseCoopers hf., on their include matters that are irregular or of major significance. behalf Þórir Ólafsson and Kristinn Freyr Kristinsson have The CEO shall see that company accounts are entered in audited and signed without reservation the company’s accordance with law and convention, and that company consolidated financial statements for the year 2006. Ólafur assets are handled in a reliable manner. The CEO hires and Þór Jóhannesson and Þórir Ólafsson, audited and signed without reservation the company’s consolidated financial statements for the years 2005 and 2004. Insider information The company complies with the rules of the Icelandic Financial Supervisory Authority in handling inside information and insider trading according to Act no.33/2003 on Securities Transactions from 4 December, 2006. 16


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    Risk management Marel Food Systems’ activities expose it to a variety of Liquidity risk financial risks: market risk including foreign exchange Prudent liquidity risk management implies maintaining risk and price risk, credit risk, liquidity risk, cash flow risk sufficient cash and marketable securities, the availability of and fair value interest-rate risk. The company’s overall risk funding through an adequate amount of committed credit management program focuses on the unpredictability facilities and the ability to close out market positions. Due of financial markets and seeks to minimize potential to the dynamic nature of the underlying businesses, the adverse effects on the company’s financial performance. company aims to maintain flexibility in funding by keeping The company uses derivative financial instruments to committed credit lines and current financial assets available. hedge certain risk exposures. Risk management is carried out within the group where applicable under policies Cash flow and fair value interest rate risk approved by the Board of Directors. The company will The company’s income and operating cash flows are continue to improve its risk management guidelines even substantially independent of changes in market interest further in 2007. rates. The interest rates of finance leases to which the company is lessor or lessee are fixed at the inception of Foreign exchange risk the lease. These leases expose the company to fair value The company operates internationally and is exposed interest rate risk. The company’s cash flow interest rate risk to foreign exchange risk arising from various currency arises from long-term borrowings. Borrowings issued at exposures primarily with respect to euros. Financial variable rates expose the company to cash flow interest exposure is partly hedged within the company’s general rate risk. Borrowings issued at fixed rates expose the policy and within set limits. Entities in the company use company to fair value interest rate risk. forward contracts to manage their foreign exchange risk arising from future commercial transactions, recognized The company manages its cash flow interest rate risk by assets and liabilities. Translation risk arising from the using floating-to-fixed interest rate swaps. Such interest company’s financial currency is not hedged. rate swaps have the economic effect of converting borrowings from floating rates to fixed rates. The risk, Credit risk measured as the potential increase in interest paid during The company minimizes credit risk by monitoring credits the coming year of a defined move in interest rates, is granted to customers, and assigns collateral to cover monitored and evaluated regularly. potential claims. The company has policies in place to ensure that sales of products and services are made to Insurance policies customers with an appropriate credit history and products The company maintains global and local insurance are not delivered until payments are secured. The company programs. The coverage comprises of property damage, has policies that limit the amount of credit exposure to any business interruption, product liability, marine and transit one financial institution. and directors and officers liability. The company believes that its current insurance coverage is reasonable. 17


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    T O S H A R E H O L D E R S Corporate social responsibility Responsible corporate behavior and community Supporting the scientific community involvement are important principles in the operation of Marel Food Systems maintains strong ties with universities Marel Food Systems. The management and employees and research bodies to support innovation and excellence demonstrate support, commitment and participation in science exploration and research. By applying financial in identifying and monitoring issues important to all resources as well as the knowledge and time of the stakeholders. employees, the company strives to increase the awareness Marel Food Systems is committed to upholding best of science and innovation in all walks of life and on all practices in all areas of operations to maintain the trust educational levels. and confidence of all stakeholders in the business, In 2006, Marel Food Systems continued to implement including investors, employees, customers and suppliers as its long-term strategy of science support with several well as the local communities and environments. initiatives. Marel Food Systems works closely with The company supports the involvement of all the local municipalities to support science teaching and subsidiaries in implementing the company’s strategy. coordination as well as supporting major innovation or While social responsibility actions and projects can differ science events. The main focus in 2006 was on younger from country to country, depending on local conditions, innovators and science learners where the company the basic principles remain the same. The objective is to became either main or co-sponsor of youth science meet the expectations of the communities as well as the projects. Long-term support to a children’s science customers. museum in Iceland and the sponsorship of a full-time teaching position at elementary level fall under this The company’s commitment to promote safety, accident category. prevention, and environmental preservation ensure compliance with corporate ethics as well as laws and The strategy is always based on close partnership with regulations. the parties involved and long-term cooperation. With its contributions Marel Food Systems strives to support and Marel Food Systems strives to forge long-term working enrich innovation, science and mathematical education, relationships with its suppliers based on fairness as well as increase the awareness of the value of a strong and respect. The company fosters an environment of scientific education in the communities where it operates. partnership commitment for cooperation on new product development in order to deliver the best solutions to its valuable end customer. The aim is to create a dynamic and creative environment with suppliers and customers to invent valuable solutions. 18


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    Human resources Marel Food Systems employs over 2000 people in 22 countries worldwide, up from about 1200 employees prior to the acquisition of AEW Delford and Scanvaegt in 2006. The largest number of employees, about 700, is located in Denmark. Number of employees, average per year Marel Food Systems strategy is to create a good working environment for its employees that enables them to make the company vision their own. Constant innovation and originality are needed to maintain leadership within the company’s field, and Marel Food Systems recognizes that the skills, education, curiosity and experience of employees are the most important resource. Motivated by the company culture of striving passionately to be the best, the highly qualified and dedicated employees are encouraged to focus their efforts on creativity, leadership, initiative, innovation and teamwork. The company’s further education and job development practices are supported by the operation of Marel Mentor, a continuing education program. Marel Mentor helps Number of employees by continents employees stay abreast of the latest developments in at the end of year 2006 their fields, acquire new skills and maintain their levels of expertise in all areas of their work life. Integration strategy Knowledge transfer between countries, regions and departments is a key factor in maintaining Marel Food Systems’ global leadership position. Each national subsidiary has its own distinctive traditions and customs. While all employees are viewed as members of one company it is understood that different cultures have different ways of achieving best results. In the integration work Marel Food Systems will benefit most by implementing a strategy of creating a superior workplace that encourages creativity, leadership, teamwork and independent thinking. This opens up a myriad of possibilities for the company and its employees to grow and prosper simultaneously with a common vision. 19


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    T O S H A R E H O L D E R S Shares and shareholders TOP 1 0 SHAREHOLD ERS Share performance AS OF 3 1st OF D ECEM BER 2 00 6 Marel shares (Symbol: MARL) are listed on the OMX Nordic Exchange and are included in the ICEX-15 (the 15 largest Name No. Of shares % companies by market capitalization listed on the ICEX) and Eyrir Invest ehf 108,675,840 29.61 ICEX MAIN indices. The share price rose from ISK 65.0 at Landsbanki Íslands hf, aðalstöðvar 87,942,955 23.96 year’s end 2005 to ISK 77.0 at year’s end 2006, an increase Grundtvig Invest ApS 52,200,943 14.22 Lífeyrissjóðir Bankastræti 7 8,457,835 2.30 of 18.5%. During the same period the ICEX-15 index Lífeyrissjóður verslunarmanna 6,752,105 1.84 increased by 15.5%. The year’s highest end-of-day share Ingunn Sigurðardóttir 5,437,733 1.48 price was ISK 81.5 and the lowest end-of-day share price Helga Sigurðardóttir 5,348,749 1.46 was ISK 62.0. Súsanna Sigurðardóttir 5,308,774 1.45 Egill Vilhjálmur Sigurðsson 4,278,999 1.17 Share capital Eignarhaldsfélag Hörpu ehf 4,195,671 1.14 Following an approval at a shareholders’ meeting, the Total 288,599,604 78.62 company’s board decided to increase the common shares Others 78,481,128 21.38 Registered share capital 367,080,732 100.00 by 127,016,732 shares, or 52.9% of total share capital. The share offering was placed to finance the acquisition of Scanvaegt (52,016,732 shares) and to provide capital to Shareholders strengthen the company’s investment activities. The number of shareholders was recorded on the shareholders register to be 2,975 at year end 2006, The offering took place between the 13th and 14th of compared to 1,176 shareholders at the end of 2005. As September. A total of 75 million new shares were divided of December 31st, 2006, Marel holds 1,249,339 treasury between pre-emptive right holders, institutional investors shares. and the general public at a price of ISK 74 per share, giving a total offer size of ISK 5,550 million. Investors subscribed Liquidity of shares to shares for a market value of ISK 35.8 billion, substantially An agreement was made on market making for issued more than the total market value of the company. shares with Landsbanki Íslands. The purpose of the Following the share offering and the registration of shares agreement is to improve liquidity and enhance the issued for the acquisition of Scanvaegt, Marel shares transparent price formation of the company’s shares on totaled 367,080,732. Landsbanki Corporate Finance acted the OMX Nordic Exchange. as manager of the offering. 20


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    Shares in Marel were traded 1,736 times for a total market value of ISK 5.8 billion (down from 6.8 billion in 2005), which corresponds to a turnover rate of 27.9%. The average end-of-day spread was 0.9%. The market value of the company at year-end 2006 was ISK 28.3 billion. DIST RIBUT IO N OF S H ARES AS OF 3 1 s t OF D ECEM BER 2 00 6 Number of Shares Shareholders % Shares % 1 9,999 2,250 75.63 10,419,117 2.84 10,000 99,999 610 20.50 16,302,116 4.44 100,000 199,999 49 1.65 7,219,143 1.97 200,000 799,999 40 1.34 16,136,676 4.40 800,000 1,399,999 8 0.27 8,418,233 2.29 1,400,000 2,999,999 6 0.20 11,822,275 3.22 3,000,000 9,999,999 9 0.30 47,943,434 13.06 10,000,000 99,999,999 2 0.07 140,143,898 38.18 100,000,000 + 1 0.03 108,675,840 29.61 2,975 100.00 367,080,732 100.00 Dividend Marel paid a dividend ISK 0.2 per share in 2006. Share options to key employees Two share option programs are currently in place for employees at Marel Food Systems. Excercisable Number of shares (in 1,000) Exercise price (ISK) Exercisable in Option 1 3,379 42 2007 Option 2 14,235 70 2007-2011 Total 17,614 MAREL SHARE PRICE COMPARED TO THE ICEX-15 INDEX Marel ICEX-15 21


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    T O S H A R E H O L D E R S Investor relations The company abides by the rules laid down by the company’s strategy of supplying accurate and thorough Financial Supervisory Authority on the treatment of insider information to investors, analysts and shareholders. information and insider trading from 4 December 2006, cf. Efforts are made to ensure that both domestic and Act No. 33/2003 on Securities Transactions. Furthermore, foreign investors have access to information about the the company has adopted procedures applicable to the activities of the company by publishing such information insider trading of primary insiders and financially linked simultaneously in Icelandic and English. parties before and after the publication of financial Marel Food Systems publishes in-depth investor statements. information on the www.marel.com website. Online The company endeavors to ensure transparency and services include complete share overview, graphs and to promote the correct price structuring of its shares. interactive tools for analysis and comparison of the shares, The Board of Directors has appointed a Compliance share price look-up, historic share price information, an Officer, who monitors share trading by employees interactive analysis tool with historical financial data to and primary insiders according to Act No. 33/2003 on analyze trends, investment calculators and WAP services Securities Transactions. The Compliance Officer also for share quotes. All investor related publications are oversees investor relations and the implementation of the available online for download. 22


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    Development 2006 “Innovation is not the product of logical thought, although the result is tied to logical structure.” Albert Einstein 23


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    D E V E L O P M E N T 2 0 0 6 Acquisitions At the 2006 Annual General Meeting, Marel announced In August 2006, it was announced that Marel had bought that the company’s development strategy was to conclude all shares in Danish company Scanvaegt International two to four strategic acquisitions in order to expand its A/S for EUR 109.2 million, that is broken down as follows: unique technological position, and improve access to Marel paid upon concluding the agreement EUR 23.5 markets. It is expected that this could triple the company’s million, assumed liabilities of EUR 26.1 million, paid with turnover over the next 3-5 years. Since this strategy was Marel shares EUR 40.2 million, and in two years will pay announced, Marel has purchased two companies. EUR 19.4 million. In April 2006, Marel announced the purchase of assets and When making investments, Marel has focused on operations of AEW Thurne and Delford Sortaweigh. After complementing the company’s strategy, and supporting the purchase, Marel established a new company, AEW its future growth. The following table gives an overview of Delford Systems, around the assets and operations of the the company’s main investments in other companies for companies. AEW Delford Systems entered Marel’s accounts 2006 to date, and for the previous three years. on 7 April 2006. SUMMARY OF INVESTMENTS 2004-2006 Year Company Country Holding Purch.price Financing 2006 Scanvægt International A/S Denmark 100% EUR 109.2 million1) New share/loan 2006 AEW Delford Systems Ltd. UK 100% EUR 19.5 million2) Loan financing 2006 LME ehf Iceland 20% EUR 8.2 million3) Loan financing 2005 DanTech Food Systems pte. Ltd. Singapore 100% EUR 2.0 million From operations 2004 Póls hf Iceland 100% EUR 1.3 million4) From operations 2004 Geba Germany - EUR 3.9 million5) From operations 1) All equity, purchasing price on a debt and cash free basis. 2) Acquisition of the assets and operations on a debt and cash free basis. 3) Investment in the form of subordinated debenture loan. 4) Under certain circumstances, if operation goals will be reached within three years, maximum EUR 285,000 has to be paid in addition to the purchase price above. 5) Part of Röscherwerke GmbH operations in Germany, operations under the trademark Geba. 24


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    AEW Delford Systems Ltd. The companies that comprise AEW Delford Systems were Scanvaegt was founded in 1932 by Knud Grundtvig, and previously owned by a British holding company AEW was fully owned and run by the Grundtvig family until Delford Group Ltd. AEW Thurne manufactures automatic the acquisition. Over the years, Scanvaegt has become slicing machines with portion control, along with sawing well established and trademarks such as ScanVision, and shaping equipment for the food industry. Delford DreamBatcher and ScanPortioner are among the best Sortaweigh manufactures checkweighers, graders, weight known in the industry. Most of Scanvaegt’s products are price-labeling machines, film-wrapping machines, plastic manufactured in Denmark, with the remainder being sleeving machines and robot portion-loading machines. produced in Brazil. Production takes place in Norwich and Harwich in Britain, The following table shows key figures from Scanvaegt and sales offices were located in Illinois and Arkansas in International A/S’s accounts for the past three fiscal the USA, and in France. years. Scanvaegt’s fiscal year is from 1 May to 30 April. AEW Delford Systems emphasizes improving productivity Scanvaegt’s financial statements are in accordance with and efficiency for its customers, from slicing and packing generally accepted accounting principles in Denmark with fast, precise and highly reliable solutions to maximize (Danish GAAP). Danish accounting principles differ in yield, capacity and profitability. some ways from methods according to the International Financial Reporting Standards (IFRS). Sums in Scanvaegt’s AEW Delford Systems’ leading products fit very well with accounts, therefore, are not fully comparable to sums in Marel Food Systems’ current product range. Synergy in Marel Food Systems’ accounts. Sums in the table below purchasing and manufacturing is anticipated, as well have been converted into euros. as increased sales through Marel Food Systems’ global sales and distribution network. AEW Delford Systems will strengthen the Group’s position in the meat sector, and move it into new markets in cheese production and case- K E Y F I G U R E S – S C A N VA E G T A / S . ready production. 2005/06 2004/05 2003/04 Sales 92,088 89,124 87,316 Scanvaegt International A/S Gross profit 24,905 25,400 23,995 The acquisition of Scanvaegt was an important step in Profit before depreciation (EBITDA) 5,966 7,418 6,331 Marel Food Systems’ strategy of being an international Profit from operations (EBIT) 2,031 3,306 2,155 leader in developing and marketing high-tech equipment Net profit 394 1,521 473 for the food processing industry, and the goal of tripling Cash flow statement turnover in the next three to five years. Significant sales Net cash from operating activities 2,350 3,806 2,760 Investing activities (2,640) (2,817) (1,752) increases are anticipated when new products join the Financing activities 204 (955) (1,008) existing product range after the companies’ sales networks Financial position merge. Geographically, Scanvaegt strengthens Marel Total assest 63,438 62,487 63,202 Food Systems’ position in Southern Europe and South Working capital 11,193 9,951 8,876 America while also strengthening its product range with Equity 16,130 15,464 14,071 Amounts in thousands of EUR the design and manufacture of equipment for case- ready vegetables, cheese, etc. About 19% of Scanvaegt’s Other key ratios Current ratio 1.4 1.3 1.3 turnover for the last fiscal year is from the food industry Quick ratio 0.8 0.7 0.9 that is outside Marel Food Systems’ current market sectors Equity ratio 25.4% 24.7% 22.3% of fish, meat and poultry processing. Return on owners’ equity 2.5% 10.8% 3.4% 25


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    D E V E L O P M E N T 2 0 0 6 Scanvaegt’s revenue for the fiscal year 1 May 2005 to 30 increased by about EUR 4.2 million from the time the April 2006 totaled EUR 92.1 million; the company’s EBITDA purchase was agreed to until Scanvaegt entered the was EUR 6.0 million during the same period or 6.5%. accounts on 4 August 2006. The market price of Marel on 4 August 2006 was 77.0, and the agreed price was 72.5. The enterprise value of Scanvaegt International A/S was EUR 109.2 million, of which EUR 26.1 million are liabilities Marel applied the so-called fair value approach in assumed by Marel. The purchase was provisionally based accordance with International Financial Accounting on the issuance of 52,016,732 new shares in Marel. The Standards (IFRS 3) when entering the purchase, which contractual price of their shares was EUR 40.2 million, involved valuing the fair value of assets and debts based equivalent to ISK 72.5 for each share in Marel. on 4 August 2006. Marel has not used Scanvaegt’s previous financial statements, except when assets and The accompanying table shows the breakdown of the debts were evaluated on 4 August 2006. The impact of purchase price of Scanvaegt shares as it appears in the purchase on cash, according to Marel’s cash flow, Marel’s financial statements as of 31 December 2006. is EUR 24.7 million. The accompanying table shows the breakdown of the impact on cash flow. SC A NVA E G T ’S I M PAC T O N MAREL’S BAL ANCE SHEET SC ANVAEGT ’S IM PAC T ON Property, plant and equipment 13,279 MAREL’S C ASH FLOW Intangibles 4,134 Investments in associates 876 Cash flow from investing activities: Receivables non-current 116 Acquisition of Scanvaegt without cash ( 88,602 ) Inventories 15,444 Cash flow from financing activities: Production contracts 1,556 New shares 44,429 Receivables and prepayments 23,412 Borrowings (NPV) 19,430 Cash and cash equivalents 781 Changes in cash and cash equivalents ( 24,743 ) Non-current liabilities ( 14,199 ) Deferred income tax liabilities ( 770 ) Amounts in thousands of EUR Trade and other payables ( 20,583 ) Current tax liabilities ( 302 ) Provision ( 505 ) Borrowings ( 12,006 ) Fair value 11,233 LME ehf. Goodwill 78,150 Marel, Eyrir Invest and Landsbanki Íslands, The Icelandic 89,383 Amounts in thousands of EUR National Bank, founded the holding company LME ehf., in February 2006 for the purpose of purchasing shares in the Dutch company Stork NV. This investment was The price of all shares in Scanvaegt was EUR 89.4 million, made to contribute to continued good cooperation with the appendant takeover of interest bearing debt for between the companies. LME owns 8% of shares in Stork EUR 26.2 million. NV. Landsbanki and Eyrir Invest each own about 40% of According to IFRS, it is required to enter delivered shares at shares in LME. Marel’s share in LME is 20%, and capital tied the market price on the day that Scanvaegt enters Marel’s up because of this investment is in accordance with its accounts. The value of delivered shares in Marel therefore shareholding. 26


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    Opportunities and outlook Work has been continuing on a development strategy Strong internal growth 400-500 million and implementation plan for Marel Food Systems for 1000 the coming years. This work has involved studying Marel Food Systems’ competitive position and the position of the industry. The current outlook is that no single Strong company has a decisive leadership position in the industry; external instead, there are numerous smaller companies. Marel’s growth Million EUR management anticipates major integration will occur in 270 the coming years, which the company intends to lead. 130 Marel Food Systems aims at attaining a 15-20% market share over the next 3-5 years and a turnover of EUR 400- 500 million. This will be accomplished by strong internal 2005 3-5 years 2015 growth, strategic acquisitions/mergers of two to four key companies with good growth potential and strong integration with the company, and by developing the best The management expects that it will be able to achieve products and services. the company’s goal of EUR 400 - 500 million in turnover Marel’s turnover in 2005 was EUR 129 million. With the over the next three to five years with internal growth. purchase of AEW Delford and Scanvaegt, projected annual However, opportunities for external growth will continue turnover for the company in 2007 is double that of 2005. to be explored. Integration in the USA In April 2007, the US sales and service networks of Marel image throughout the entire food processing industry. USA, Marel Canada, AEW Delford and Scanvaegt will be Marel Food Systems’ product portfolio has grown fully integrated under one roof in a new 25,000 sq. ft. substantially with the recent acquisitions. facility in Kansas City, USA. The North American operation will continue to provide Over 100 employees from Marel USA, AEW Delford and sales and services to all sectors of the food processing Scanvaegt will be working together as a single unit industry featuring solutions from AEW Delford, Scanvaegt, providing sales and services for all Marel Food Systems and Marel. With the merger the company will be in a equipment to the US market. The President of the new position to serve the core industries – fish, meat and operation is former Marel USA director Einar Einarsson. The poultry – in a much stronger way with solutions and new complex is the first major step in bringing the Marel services that span a broad spectrum of the processing Food Systems together and establishing a new company value chain. 27


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    Performance 2006 “Make a technical contribution; innovate, don’t emulate.” David Packer 29


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    P E R F O R M A N C E 2 0 0 6 Financial performance Operating revenues and expenses Marel’s operating revenues amounted to EUR 208.7 As a ratio of operating revenue, the expenses have million, compared to EUR 129.0 million for the year 2005, developed as follows: which represents an increase of EUR 79.7 million, or Year Year 61.7%. The acquisitions of AEW Delford Systems in United 2006 2005 Kingdom and Scanvaegt in Denmark were included in Selling and marketing expenses 13.9% 12.4% the consolidated accounts from 7 April and 4 August, Research and development expenses 5.6% 6.1% respectively. Administrative expenses 10.6% 8.7% Any assessment of operations in 2006 and comparison with previous results must take into account operating Operating profit before depreciation, financial items and expenses that include major acquisition related items such taxes ( EBITDA), and operating profit before financial items as one-time costs totaling about EUR 4.0 million. and taxes (EBIT) were as follows: Cost of goods sold was EUR 139.9 million compared to Year 2006 Year 2005 EUR 85.4 million for the previous year, an increase of EBITDA in thous. of EUR 15,679 14,814 63.8%. Gross profit was 33.0% and 33.8% in 2006 and EBITDA as a % of sales 7.5% 11.5% 2005, respectively. Other operating expenses totaled EUR EBIT in thous. of EUR 7,527 9,721 63.0 million for the year or 30.2% of revenue compared EBIT as a % of sales 3.6% 7.5% to 27.1% for the previous year. The ratio of sales and marketing expenses to operating revenue was 13.9% The companies’ extensive integration process has compared to 12.4% for the previous year. Administrative progressed well and on schedule. The integration of expenses increased 98.1%, to EUR 22.2 million compared the companies will generate significant operational to EUR 11.2 million in 2005. This was partly due to one- rationalization, which will begin impacting performance time integration costs. in 2007. Marel’s operation in millions of EUR Q4 ‘ 06 Q3 ‘ 06 Q2 ‘ 06 Q1 ‘ 06 Q4 ‘05 Sales 71.9 57.6 46.6 32.5 34.8 Operating profit (EBIT) 1.1 1.7 4.3 0.4 1.3 EBIT % 1.5% 2.9% 9.3% 1.4% 3.7% Net finance expenses ( 1.3 ) ( 1.9 ) ( 2.0 ) 0.1 ( 0.6 ) Net profit ( 0.5 ) ( 0.7 ) 0.8 0.5 0.6 EBITDA 3.7 4.1 6.0 1.9 2.8 30


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    Financial items Assets and liabilities Net finance cost totaled EUR 5.0 million, compared to Total assets amounted to EUR 364.8 million, having more EUR 2.6 million for the previous year. The increase is a than tripled from the previous year. This increase is mainly result of borrowing in the form of a debenture of ISK 6.0 due to the new acquisitions, AEW Delford and Scanvaegt, billion. In conjunction, an agreement was made to swap debenture offering and new share capital. the debenture to insure financing in foreign currency Net investment in property, plant and equipment during with payment of the interest and principal due in 2012. 2006 was EUR 8.1 million, compared to EUR 3.4 million in The proceeds were used to purchase the companies AEW 2005. The principal of this increase can be attributed to the Delford and Scanvaegt, as well as shares in the Dutch expansion of the production facility in Gardabaer, Iceland. company Stork NV through LME ehf., and to invest in property, plants and equipment. The company’s share in the operational loss of associated Owners equity companies totaled EUR 1.4 million, which may be The meeting of the Board of Directors of Marel, held attributed to investments by LME in Stork NV. Marel owns on Thursday, 24 August 2006, voted to exercise an 20% of LME which currently owns 8% of Stork NV’s shares. authorization in the company’s Articles of Association to increase its share capital. The Board agreed to The company has entered into forward exchange rate increase share capital by 127,016,732 shares. Of this contracts to offset all estimated costs in Icelandic Krona amount, 52,016,732 shares were issued and delivered to through March 2008. The average exchange rate of these shareholders of Scanvaegt International A/S as partial contracts from January 2007 through March 2008 is just payment for all their shares in Scanvaegt International over ISK 100 per EUR. A/S. The difference, 75 million shares, was issued to The company applies natural exchange rate hedging to pre-emptive right holders, institutional investors and the the extent possible. At the end of the year, approximately general public at the price of ISK 74 per share. The total 68.1% of the company’s consolidated long-term liabilities amount paid was ISK 5,550 million. The total number were in Euros and Danish Krona, while 26.6% were in of shares at year end 2006 was 365,831,393, excluding British pounds. Approximately 54.0% of sales were in Euros 1,249,339 treasury shares. and Danish Krona, while the ratio of operating expenses was 57.0%. The weight of the Icelandic Krona was 3.0% in sales and 15.0% in expenses. Further breakdown of sales and expenses by currencies is as follows: Year 2006 Year 2005 Profit 146 5,715 Changes in own shares 271 3,679 Issue of shares 103,843 0 Paid dividend ( 601 ) ( 590 ) Other ( 313 ) 633 Increase in equity before minority interest 103,346 9,437 Minority interest 45 0 Increase in total equity 103,391 9,437 31


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    P E R F O R M A N C E 2 0 0 6 Current ratio The equity ratio was 39.6% in 2006 compared to 35.7% at year end 2005. Current ratio was 1.9 and 1.4 in 2006 and 2005, respectively. The ratio of pure gearing - interest bearing liabilities less cash and cash equivalents divided by shareholders’ equity - was 0.66 compared to 0.98 in the previous year. Dividends Marel paid a dividend of ISK 0.2 per share in 2006. Cash flow Net cash to operation was EUR 3 million. The main Equity ratio reason for this is an increase in net working capital assets, especially inventory and accounts receivable. Net cash used in investing activities amounted to EUR 69.8 million compared to EUR 10.2 million in 2005. The main investments were the acquisition of AEW Delford and Scanvaegt as well as the expansion of the manufacturing facility in Gardabaer, Iceland. Net cash from financing activities amounted to EUR 132.3 million compared to EUR 7.2 million in 2005. This increase is mainly due to issuance of new shares, EUR 59 million, and a debenture offering totaling EUR 84.3 million. Net Working capital from operation cash was EUR 63.1 million at the end of 2006, compared to 3.9 million at the end of 2005. Implementation of IFRS Marel financial statements are prepared in accordance with the International Financial Reporting Standards (IFRS) and have been since 2005. Annual figures for the year 2004 have been changed in accordance with the IFRS standards. 32


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    Business operations Marel Food Systems provides equipment to three main in these areas. The company’s presence in South America segments of the food processing industry: fish, meat and increased significantly after the merger with Scanvaegt poultry, and also offers solutions for cheese processing and International in August 2006. Effort also focused on market prepared foods. The company’s brands cover numerous expansion by increasing operations in key growth markets aspects of processing, from slaughtering and primary such as Eastern Europe, Asia and Australia where excellent processing of raw material to packing and labeling of opportunities exist for the company’s components and finished products. The company’s comprehensive portfolio turnkey solutions. of components is designed to provide customers with In 2006, the company secured major contracts with many integrated solutions from a single, reliable source. of the world’s largest fish, meat and poultry processors. Marel Food Systems’ key markets are North America and These large contracts for processing solutions are a result Europe, and in 2006 operations continued to be reinforced of long-term sales and marketing efforts, which will support the organic growth of the company. Primary Secondary Estimated Processing Slaughtering processing/ processing/ market size, segment Packaging Packaging million EUR Product subgroup Slaughtering Basic Advanced Further processing COLD HOT Raw material segment Poultry Meat Fish Estimated market size, 3,000 million EUR 33


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    P E R F O R M A N C E 2 0 0 6 Fish industry In 2006, Scanvaegt experienced a growing interest in Seafood processors worldwide have been gradually its Superior Salmon Solution concept, and two new moving towards case-ready and net-weight tray packing Marel products were introduced and sold to the salmon and integrated traceability. These and other retail-oriented processing industry. The new systems, SureTrack Grading trends have underlined the need to optimize yield and System, a new concept for sizing and packing whole monitor production flow, as well as effectively track salmon, and the ITM, a high-tech automatic trimming products from source to consumer. This has created a machine that intelligently trims fillets, strengthened the myriad of new possibilities and opportunities for Marel salmon solutions offered by the Group. Food Systems, as the industry is expected to continue investing in new processing solutions that focus on Meat industry these trends. Marel Food Systems sales to the meat industry were In 2006, the global fish and fish farming industry continued good in 2006, although performance varied between to undergo a consolidation period with the merger of brands. The year was very successful for AEW Delford and such giants as Connors/Bumblebee and Pan Fish/Marine Scanvaegt, with the latter more than doubling sales in this Harvest/Fjord Seafood. These major players increasingly sector. Operations remained stable for Carnitech, while look to a single-source provider for complete processing Marel sales to the meat industry were under expectations. solutions, a role well suited to Marel Food Systems. Red meat remained the strongest sector for AEW Delford Systems, accounting for almost a third of order intake in Whitefish 2006. This figure is even larger when sales to the bacon Marel and Scanvaegt experienced a significant increase and deli industries are included. The market position in in sales to the fisheries industry in 2006. Several large bacon slicing will continue to strengthen in 2007 with new contracts were signed, and processing lines sold well in product offerings. Iceland where the first fully automatic pin-bone removal solution was installed. Scanvaegt was particularly active The Meat Division at Scanvaegt experienced a surge in the South American and southern European markets in order intake during 2006, resulting in turnover during the year. One of the largest projects was a Scanvaegt almost doubling budget projections. Sales of efficient weighing and packing line that was installed in Cofradia management tools for yield control have been the driving de Bueu, Spain’s largest fishing auctions. Carnitech’s sales force behind Scanvaegt’s success during the year. Other to the white fish industry were steady, in line with the factors such as traceability, hygiene and lack of available previous year. labor also play an important part in determining industry needs. Turn-key solutions are another trend in the industry. Fish remains a relatively weak segment for AEW Delford In 2006, Scanvaegt initiated and completed several large Systems. As with poultry, the product offering is mostly projects for major processors. Its solutions have proven checkweighers and weigh-price labeling systems. However, highly effective for customers, and often have a pay-back with increased opportunities for robotic loading systems, on investment of well below 12 months. along with Marel’s strong position in fish processing, this industry will be one of the focus areas in 2007. The year was stable for Carnitech’s firmly established meat- processing division. Core competence within this segment Salmon processing has also been large turnkey projects. Efforts to strengthen Marel Food Systems fortified its market position in the the division internally were successful. The strategy in 2006 salmon industry in 2006. The successful integration of CP was to build on the good success of the further processing Food Machinery and Geba with Carnitech Salmon created product line, including mixers and grinder solutions, in a strong unit, which introduced the new slicing concept effort to become a key player in that field. The brand has – IPS3000 – and significantly increased sales on the a strong foothold in the North European markets, and French market. is progressively moving into the American and Eastern European markets as well. 34


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    Sales of Marel equipment to the meat industry were a model for other industry-specific expert groups at below expectations in 2006 due to weak sales in the USA. Scanvaegt. The DreamBatcherTM fixed weight packing Performance on other markets was better. Special effort concept has been a success for some years, and 2006 was put into promoting a deboning and steak cutting was no exception. During the year, Scanvaegt fortified its Flowline Concept, which resulted in lines being sold to leading market position, particularly in the UK, Holland, several countries. Marel portioning solutions continued France and Germany. to enjoy a strong market position. A new solution for The poultry sector produced strong results for AEW portioning and loading directly into trays – the OptiCut Delford in 2006. This is largely due to increased and QuickLoader solution – was successfully introduced opportunities that AEW Delford poultry products have and sold to major processors in 2006. Prospects for this enjoyed as part of Marel Food System sales network. New new portioning solution are excellent. product offerings of robot loading and grading systems will further enhance the company’s position in poultry Poultry industry during 2007. Sales to the poultry sector remained good in 2006. Increased sales and growth in this sector were evident Other across Marel Food Systems. Bird flu is still a predominant Software solutions issue in the industry, but the effect on Marel Food Systems The company focuses on dynamic software development. has not been negative. To the contrary, the company’s Sales of Marel software grew by 85% over the previous proven traceability solutions have made it a preferred year, well beyond projections. This success can be supplier to many of the major poultry producers in the attributed to very comprehensive and reliable processing- world. The company’s ability to provide large-scale turnkey plant software, as well as the restructuring of the Software solutions has helped it maintain its leadership position in group into a business unit two years ago. Continued an industry where intense global competition focuses on revenue growth is expected from this segment in the need to improve efficiency and yield while reducing the future. giveaway. The company maintained a strong market position on Cheese all of its markets, while increasing its coverage of new AEW Delford offers weigh-price labeling systems to the markets. A breakthrough occurred in Russia with large cheese processing industry and other industry segments turn-key sales from both Marel and Scanvaegt. Sales are outside the main fish, meat and poultry sectors. The also picking up momentum in other countries in Eastern cheese industry remained strong for AEW Delford in 2006 and Central Europe. and sales to other industry segments were good, mostly reflecting the non-industry specific nature of the weigh- The USA poultry market is one of the largest for Marel’s price labeling systems. poultry portioning solutions, and sales were good in 2006. The TSM template slicing machine has been a best seller Prepared foods on the US market. The IPM III portioning machine also Scanvaegt offers a range of equipment and applications sells well. for handling and packing prepared foods. In 2006, Scanvaegt experienced the highest turnover to date The first Marel poultry X-ray bone-detection systems in prepared foods, and increased market share in all were sold during the year, and have been performing segments. A strategic goal for the seafood industry very well. There are high expectations for sales of the contributed to this success, as did increased sales to SensorX solution in 2007, as the market has long awaited a countries such as Spain, Portugal and Chile where several machine that could fulfill the challenging need to produce large projects were sold in 2006. Innovations such as boneless products. Automatic Feeder Adjustment technology, available on The poultry division has been a substantial contributor all ScanCombinators, are having a significant impact on to Scanvaegt’s success over the years, and has become increasing future prospects. 35


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    P E R F O R M A N C E 2 0 0 6 Innovation Marel Food Systems strives to be an international leader Research and development in developing and marketing high-tech processing Marel Food Systems employs a highly qualified team equipment for the food processing industry in order of researchers and technicians whose primary task is to increase the productivity of its customers. To fulfill to increase knowledge of new technologies, which that goal the company operates strong research and strengthen the company ‘s technological base. This development teams that focus on using new and existing research work is an addition to product development, technologies to create innovative solutions to current and which continues to play a key role in the company’s emerging production challenges. operations. The strong research and development strategy is Marel Food Systems maintains strong connections with supported by an annual investment of 6-7% of revenue the scientific community by participating in international in innovation, which is above the average expenditure research projects, welcoming research guests, and by of competitors in the field. Highly qualified researchers providing scientists with research facilities for special and technicians, a great working relationship with projects that are applicable to the company’s operational leaders in the food processing industry and a pioneering fields. It also supports the teaching of science and mindset contribute to the company’s successful product mathematics. development that has kept it at the forefront of the industry in the last decades. Patents and trademarks Patent protection is vital to Marel Food Systems, as its In 2006, product standardization work continued, which value and strong position are to a large degree built on has contributed considerably to increased efficiency and technological innovation and employee experience. The lower production costs. Marel Food Systems concentrates company’s investments are primarily in the knowledge and on best serving its customers by working closely with expertise of its employees. For this reason, the company them on developing market-focused products. This has is very involved in protecting the proprietary rights of its translated into one of the company’s largest strengths: product development activities. its capability to respond quickly to emerging needs. The result is an 18% turnover ratio of new products on average. In 2006, Marel Food Systems applied for about 15 patents. On average, the company applies for five to ten patents Around 200 of the company’s employees worked in yearly. Marel Food Systems has 20 registered trademarks product development during 2006. The acquisitions of on all of its main markets, and 62 patents in 20 countries. AWE Delford and Scanvaegt have strengthened product development activities within the company. Increased cooperation will maximize knowledge utilization and strengthen the product mix even further as the company focuses on being a single source provider for the entire production process. 36


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    New products introduced in 2006 For meat processing • Portioning and Tray Packing Solution with OptiCut and For all industries QuickLoader that automatically portions meat and then • ProLine, new generation of midsize graders, is stacks it into trays for packing. a versatile suite of standardized, modular options, designed to fulfill all general grading and batching needs. For poultry processing • ScanVision uses dynamic weighing and 3D laser vision • SensorX Poultry Bone Analysis System that scans the to batch products based on weight, length, height and product for bone content using X-ray computer vision. width. • ScanFeeder 7700TM – an automatic infeed technology • Superflow MK II impingement freezer for efficient crust for poultry, which virtually does away with feed line freezing and improved shelf life. operators. • Automatic Feeder Adjustment-technology (AFA) for • ScanPortioner B22 uses a high-speed laser vision system multi-head weighers, which enables the ScanCombinator to maintain high accuracy. to adjust the feeder system automatically within 30 • Cut N’ Batch concept – a new system that allows a seconds. ScanPortioner portion cutter to function as a batcher for making fixed weight trays of meat. For fish processing • Intelligent Trimming Machine for the Salmon Industry with an advanced computer vision system that automatically evaluates and trims salmon fillets. • CT 2620 Deheader for deheading as well as tail cutting of salmon. 37


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    “All truths are easy to understand once they are discovered; the point is to discover them”. Galileo Galilei 38


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    Consolidated financial statements for 2006 39


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    The Board of Directors' and CEO's Report The consolidated financial statements for the year 2006 comprise the financial statements of Marel hf and its subsidiaries. The consolidated financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. The companies AEW Delford Systems and Scanvaegt were acquired in April and August respectively. Further information is provided in note 29. Marel hf issued debentures for ISK 6 billion in February 2006. Marel hf has concluded interest swap agreements which are connected with the issuance of debentures that ensure the company financing in foreign currency with payment of the interest and principal due in 2012. A public offering of 75 million new shares in Marel hf were sold for ISK 5,550 million in September. The total number of Marel hf shares after the offering and delivery of 52 million shares as a payment for Scanvaegt is 367,080,732. Total sales of the Group according to the income statement were EUR 208 million in the year compared to EUR 129 million in the year 2005. Net profit of the Group amounted to EUR 0.1 million compared to EUR 5.7 million in the preceding year. Assets of the Group amounted to EUR 364 million according to the balance sheet and shareholders' equity amounted to EUR 144 million at year-end. During the year an average of 1,615 employees were employed by the Group, with 356 employed by the parent company (at year end 2,116). Total wages and salaries for the group amounted to EUR 79.9 million. The number of shareholders in Marel hf at year end 2006 was 2,975, an increase of 1,799 during the year. Three shareholders had a holding interest of more than 10% in the company, Eyrir Invest, with 29.61%, Landsbanki Íslands hf, with 23.96% and Grundtvig Investment with 14.22%. The Board of Directors suggests that a dividend amounting to ISK 73.2 million, 0.2 per share, to be paid in the year 2007, but refers to the financial statements regarding appropriation of the year's net profit and changes in share- holders' equity. The Board of Directors and CEO of Marel hf hereby ratify the Financial Statements of Marel hf for the year 2006 with their signatures. Garðabær, 13 February 2007 Board of Directors Árni Oddur Þórðarson Arnar Þór Másson Friðrik Jóhannsson Helgi Magnússon Margrét Jónsdóttir Chief Executive Officer Hörður Arnarson 41


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    Independent Auditors' Report To the Shareholders and Board of Directors of Marel hf We have audited the accompanying consolidated financial statements of Marel hf and its subsidiaries (the Group) which comprise the consolidated balance sheet as of 31 December 2006 and the consolidated income statement, consolidated statement of changes in equity and consolidated cash flow statement for the year then ended and a summary of significant accounting policies and other explanatory notes. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as adopted by the European Union. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditors' Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the accompanying consolidated financial statements give a true and fair view of the financial position of the Group as of 31 December 2006, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union. Garðabær, 13 February 2007 PricewaterhouseCoopers hf Þórir Ólafsson Kristinn Freyr Kristinsson 42


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    Financial Ratios 2006 2005 2004 2003* 2002* Operating results Sales .......................................................... 208,700 129,039 112,301 106,104 100,654 Gross profit ................................................ 68,803 43,625 41,016 34,617 - Profit before depreciation (EBITDA) .......... 15,679 14,814 16,527 10,129 5,712 Profit from operations (EBIT) ..................... 7,527 9,721 12,066 6,568 2,278 Profit for the period .................................... 159 5,715 7,984 3,749 50 Cash flow statement Net cash from (to) operating activities ....... (2,992) 2,987 13,207 4,724 1,004 Investing activities ..................................... (69,754) (10,180) (6,389) (1,955) (17,959) Financing activities .................................... 132,318 7,210 (7,263) (1,153) 16,906 Financial position Total assets ............................................... 364,793 114,890 95,482 81,334 82,602 Working capital .......................................... 87,989 16,557 19,807 17,700 12,740 Equity ......................................................... 144,423 41,032 31,595 25,167 22,724 Various figures in proportion to sales Gross profit ................................................ 33.0% 33.8% 36.5% 32.6% - Selling and marketing expenses ................ 13.9% 12.4% 12.4% 12.8% - Research and development expenses ...... 5.6% 6.1% 5.8% 6.8% - Administrative expenses ............................ 10.6% 8.7% 8.1% 8.1% - Wages and benefits ................................... 42.7% 42.5% 41.9% 41.0% 43.5% Profit before depreciation (EBITDA) .......... 7.5% 11.5% 14.7% 9.5% 5.7% Depreciation/amortization .......................... 3.9% 3.9% 4.0% 3.4% 3.4% Profit from operations (EBIT) ..................... 3.6% 7.5% 10.7% 6.2% 2.3% Profit for the period .................................... 0.1% 4.4% 7.1% 3.5% 0.0% Other key ratios Current ratio ............................................... 1.9 1.4 1.6 1.7 1.4 Quick ratio ................................................ 1.2 0.6 0.7 0.8 0.7 Equity ratio ................................................. 39.6% 35.7% 33.1% 30.9% 27.5% Return on owners' equity ........................... 0.2% 18.1% 30.5% 16.5% 0.2% Return on total assets ................................ 0.1% 5.4% 9.0% 4.6% 0.1% Earnings to price last 12 months ............... 0.00 0.03 0.06 0.05 0.00 Price to earnings (P/E) last 12 months ...... - 36.7 17.7 19.7 990.0 *Amounts 2002-2003 are not in conformity with IFRS. Marel hf. Consolidated financial statements for the year 2006 Amounts in thousands of EUR 43


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    Consolidated Income Statement 2006 2005 2006 2005 Notes Q4 Q4 YTD YTD Sales .................................................................. 5 71,946 34,785 208,700 129,039 Cost of sales ..................................................... (48,296) (23,518) (139,897) (85,414) Gross profit 23,650 11,267 68,803 43,625 Other operating income ..................................... 642 349 1,722 1,052 Selling and marketing expenses ........................ (10,990) (4,425) (29,085) (15,937) Research and development expenses ............... (4,291) (3,024) (11,744) (7,828) Administrative expenses .................................... (7,933) (2,892) (22,169) (11,191) Profit from operations 1,078 1,275 7,527 9,721 Finance costs - net ............................................. 7 (1,264) (576) (5,026) (2,639) Share of results of associates ............................ 27 (236) 0 (1,449) 0 Profit before income tax (422) 699 1,052 7,082 Income tax expense ........................................... 9 (93) (120) (893) (1,367) Profit for the period (515) 579 159 5,715 Attributable to: Equity holders of the Company .......................... (520) 579 146 5,715 Minority interest .................................................. 5 13 (515) 579 159 5,715 Earnings per share for profit attributable to equity holders of the company during the period (expressed in EUR cent per share): - basic .............................................................. 10 (0.14) 0.25 0.05 2.42 -diluted ............................................................ 10 (0.14) 0.24 0.05 2.38 The notes on pages 48-70 are an integral part of the consolidated financial statements. Marel hf. Consolidated financial statements for the year 2006 Amounts in thousands of EUR 44


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    Consolidated Balance Sheet Notes 31/12 2006 31/12 2005 ASSETS Non-current assets Property, plant and equipment ....................................................................... 12 56,125 33,242 Goodwill ......................................................................................................... 13 97,117 9,580 Other intangible assets .................................................................................. 13 16,510 8,518 Investments in associates .............................................................................. 27 939 0 Available-for-sale investments ....................................................................... 28 744 680 Receivables .................................................................................................... 7,021 29 Derivative financial instruments ..................................................................... 18 37 0 Deferred income tax assets ........................................................................... 21 1,991 1,231 180,484 53,280 Current assets Inventories ...................................................................................................... 14 53,263 25,274 Production contracts ..................................................................................... 15 13,118 8,921 Receivables and prepayments ....................................................................... 16 54,003 23,517 Derivative financial instruments ..................................................................... 18 846 18 Cash and cash equivalents ............................................................................ 17 63,079 3,880 184,309 61,610 Total assets 364,793 114,890 EQUITY Capital and reserves attributable to equity holders of Marel Ordinary shares .............................................................................................. 25 4,048 2,637 Treasury shares ............................................................................................. 25 (3) (8) Share premium ............................................................................................... 115,369 12,671 Fair value and other reserves ........................................................................ 26 (88) 225 Retained earnings .......................................................................................... 25,052 25,507 144,378 41,032 Minority interest 45 0 Total equity 144,423 41,032 LIABILITIES Non-current liabilities Borrowings ..................................................................................................... 20 119,744 24,881 Deferred income tax liabilities ........................................................................ 21 4,306 3,520 Derivative financial instruments ..................................................................... 18 0 404 124,050 28,805 Current liabilities Trade and other payables .............................................................................. 19 54,861 24,719 Derivative financial instruments ..................................................................... 18 445 0 Current income tax liabilities .......................................................................... 709 278 Borrowings ..................................................................................................... 20 38,803 19,262 Provisions ....................................................................................................... 22 1,502 794 96,320 45,053 Total liabilities 220,370 73,858 Total equity and liabilities 364,793 114,890 The notes on pages 48-70 are an integral part of the consolidated financial statements. Marel hf. Consolidated financial statements for the year 2006 Amounts in thousands of EUR 45


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    Consolidated Statement of Changes in Shareholders' Equity Attributable to equity holders of the Company Share Share Other Retained Minority Total Notes capital premium reserves earnings Total interest equity Balance at 1 January 2005 2,562 9,059 (408) 20,382 31,595 0 31,595 Cash flow hedges: – net fair value gain/(loss), net of tax ........ 26 (257) (257) (257) Currency translation differences ............... 26 890 890 890 Net income/(expenses) recognised directly in equity ........................................ 0 0 633 0 633 0 633 Sale of treasury shares ............................. 145 8,250 8,395 8,395 Purchases of treasury shares ................... (78) (4,638) (4,716) (4,716) Dividend related to 2004 ........................... (590) (590) (590) Profit for the period .................................. 5,715 5,715 5,715 67 3,612 633 5,125 9,437 0 9,437 Balance at 31 December 2005 2,629 12,671 225 25,507 41,032 0 41,032 Cash flow/net investment hedges: – net fair value gain/(loss), net of tax ........ 26 676 676 676 Currency translation differences ............... 26 (989) (989) (989) Net income/(expenses) recognised directly in equity ........................................ 0 0 (313) 0 (313) (313) Business combination ............................... 0 32 32 Sale of treasury shares ............................. 29 1,651 1,680 1,680 Purchases of treasury shares ................... (24) (1,734) (1,758) (1,758) Employee share option scheme: - value of services provided ...................... 349 349 349 Dividend related to 2005 ........................... (601) (601) (601) Profit for the period .................................. 146 146 13 159 Issue of share capital - acquisition ............ 1,411 102,432 103,843 103,843 1,416 102,698 (313) (455) 103,346 45 103,391 Balance at 31 December 2006 4,045 115,369 (88) 25,052 144,378 45 144,423 The notes on pages 48-70 are an integral part of the consolidated financial statements. Marel hf. Consolidated financial statements for the year 2006 Amounts in thousands of EUR 46


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    Consolidated Cash Flow Statement 2006 2005 Notes YTD YTD Cash flows from operating activities Net profit ..................................................................................................................... 159 5,715 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and impairment of fixed assets .............................................................. 3,834 2,444 Amortisation and impairment of intangible assets ....................................................... 4,318 2,649 Currency fluctuations and indexation .......................................................................... (5,428) 1,056 Changes in deferred taxes .......................................................................................... (788) 595 Share of results of associates, net of tax .................................................................... 1,460 0 Other changes ............................................................................................................. (817) 49 Working capital provided by operating activities 2,738 12,508 Changes in operating assets and liabilities: Inventories and production contracts .......................................................................... (8,214) (4,649) Trade and other receivables ........................................................................................ (2,137) (6,108) Short-term liabilities, increase ..................................................................................... 4,621 1,236 Changes in operating assets and liabilities (5,730) (9,521) Net cash (to) from operating activities (2,992) 2,987 Cash flows from investing activities Acquisition of subsidiary, net of cash acquired ........................................................... 29 (45,732) (1,939) Purchase of property, plant and equipment (PPE) ...................................................... 12 (10,402) (3,752) Purchase of intangibles ............................................................................................... 13 (7,817) (4,811) Purchase of associate investments ............................................................................. 27 (1) 0 Loans made ................................................................................................................ (8,223) 0 Proceeds from sale of PPE ......................................................................................... 2,303 322 Proceeds from sale of shares ..................................................................................... 118 0 Net cash used in investing activities (69,754) (10,180) Cash flows from financing activities Proceeds from issue of ordinary shares ...................................................................... 59,018 0 Proceeds from (purchase of) treasury shares, net ...................................................... 271 3,678 Proceeds from borrowings .......................................................................................... 84,294 6,033 Repayments of borrowings .......................................................................................... (10,095) (1,429) Finance lease principal payments ............................................................................... (569) (482) Dividend paid to group shareholders ........................................................................... (601) (590) Net cash from financing activities 132,318 7,210 Net increase in cash and cash equivalents 59,572 17 Exchange losses on cash and bank overdrafts ........................................................... (373) (503) Cash and cash equivalents at beginning of year ......................................................... 3,880 4,366 Cash and cash equivalents at end of year 63,079 3,880 Other information Interest paid ................................................................................................................ 2,431 1,959 Income tax paid ........................................................................................................... 1,143 816 The notes on pages 48-70 are an integral part of the consolidated financial statements. Marel hf. Consolidated financial statements for the year 2006 Amounts in thousands of EUR 47


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    Notes to the Consolidated Financial Statements 1. General information Marel hf (the Company) is a limited liability company incorporated and domiciled in Iceland. The company has its listing on the Icelandic stock exchange. These consolidated financial statements have been approved for issue by the board of directors on 13 February 2007. 2. Summary of significant accounting policies The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to the years presented, unless otherwise stated. 2.1 Basis of preparation The consolidated financial statements of Marel (the Group) have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU). The accounting policies, as adopted by the EU, depart from full IFRS in few standards, interpretations and amendments that will have minor effects on future reporting of the group. At date of authorisation of these financial statements, the following standards were in issue but not effective: Effective date IFRS 7 Financial Instruments: Disclosure ............................................... 1 January 2007 IFRS 8 Operating Segments ................................................................... 1 January 2009 The following interpretentations to existing standards have been published that are mandatory for the Group's accounting periods beginning on or after 1 May 2006 or later periods but that the Group has not early adopted: Effective date for annual periods beginning IFRIC 8 Scope of IFRS 2 ........................................................................ on or after 1 may 2006 IFRIC 10 Interim Financial reporting and Impairment ............................. on or after 1 November 2006 Adoption of these standards will have no material impact on the financial statements of the Group. The preparation of financial statements in accordance with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise judgment in the process of applying the Company’s accounting policies. 2.2 Consolidation Subsidiaries Subsidiaries, which are those entities in which the Group has an interest of more than one half of the voting rights or otherwise has power to govern the financial and operating policies are consolidated. The existence and effect of potential voting rights that are presently exercisable or presently convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date on which control ceases. The principal subsidiaries are listed in note 33. The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement (see Note 2.6). Inter-company transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. Marel hf. Consolidated financial statements for the year 2006 48

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