Policy on capital allocation and dividend distribution

1. Background

Financial leverage has been reduced significantly in recent years. Financial leverage amounted to 1.8 at the end of 2019, 0.7 at the end of 2020, and 0.4 at the end of 2021 where the interest-bearing debt equalled approximately five months of EBITDA (earnings before interest, tax, depreciation and amortisation).

In addition, the solvency ratio increased from approximately 30 % in 2017 to more than 46 % at the end of 2021, where the financial solidity target was met. In 2022, the solvency ratio declined due to acquisitions, but it is still above 40%.

2. Financial objectives

The Board of Directors has set the following financial objectives:

• An annual growth that exceeds the growth of the market. This growth is to take place through a combination of investments in organic growth and acquired growth.
  
  
• A profit margin that equals an EBITDA of 10%. The increase in the profit margin is to take place primarily via continuous economies of scale achieved through increased sales.
  
  
• A cash flow from operating activities that equals 7.5% of revenue.

• Solid capital resources that are compliant with the adopted capital resources policy.

3. Policy on capital allocation and dividend distribution

It is Brødrene A & O Johansen A/S’s policy to ensure and maintain robust capital resources with a solvency ratio of at least 40% and an indicative financial leverage of 0.5 to 1.5¹. Financial leverage can be increased in connection with acquisitions.

In compliance with the capital resources policy, AO wants to allocate the free cash flow in the following order of priority:

1. Reduction of the interest-bearing debt if AO is above the financial leverage target. 
   
   
2. Investment in profitable growth, both investment in the existing business and acquisitions, where acquisitions, including synergies, are expected to generate a return on the invested capital before tax of at least 15%.
   
   
3. Allocation to shareholders in the form of ordinary dividends defined as 33-50% of the profit for the year after tax.
   
   
4. Excess liquidity is used for additional allocation to shareholders in the form of extraordinary dividends, share buy-back programmes, etc.

AO’s Board of Directors may deviate from the above-mentioned policy, if it is deemed necessary out of consideration for future market conditions, acquisitions, or other conditions.

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¹Financial leverage is calculated as the interest-bearing net debt in relation to the last 12 months’ EBITDA.

As adopted by the Board of Directors on 8 December 2022