Salmon Evolution ASA
OSE:SALME
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Salmon Evolution ASA
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Good morning, and welcome to this presentation of Salmon Evolution's First Quarter 2022 Results. My name is Håkon André Berg, and I'm the CEO of the company, and I will be giving this presentation together with our CFO, Trond Håkon Schaug-Pettersen.
Questions can be asked throughout the presentation and after the presentation is ended. We will go through the questions and try to answer them the best way we can. We will start this presentation by looking at some highlights for the quarter before we go through the main headlines of our approach to land-based farming and our choice of technology. We will then take a look at the operations in Norway and our joint venture in South Korea. Before we go through the financials. We will end this presentation with some comments on outlook.
The main highlight from the first quarter is, of course, that we were able to deliver on our promise to have the first part of our facility ready for smolt release in March. At the same time, we were also able to prepare our smolt at Kraft Laks for the transfer to Indre Harøy. This was a major achievement and milestone for our company, and we are so grateful for all the hard work put in by our employees and by our suppliers and partners. I think we all felt the excitement as the first fish were flowing into the tank after 22 months of construction and preparation for this great moment.
After the smolt was released, the focus shifted towards the farming operation and the welfare and living conditions for the fish. We saw earlier that the smolt was taking feed and enjoying its new surroundings. But we kept the feeding at moderate levels as we were still in an early phase of operations and tuning of our facility. As time went, we increased feeding and we're happy to see immediate response from the fish. And as we can now look back on 2 months of operations, the fish has grown with more than 425 grams in average and now have a size of around 725 grams. And we have seen levels of feeding and appetite that has well exceeded our plans and some of our major hypothesis.
In the first quarter, we also signed a Heads of Terms agreement with Artec Aqua regarding our phase 2 build-out. And after the quarter was ended, we completed that NOK 300 million private placement due partly from our phase 2 build-out as well as the expansion of our smolt facility. Before we take a deeper look at our ongoing operations, we will spend a few minutes to give more information about our company and our approach to land-based farming.
Salmon Evolution is a land-based farmer located in the heart of the salmon farming cluster in Møre og Romsdal in Norway. The company was founded in 2017, and we are now 47 employees within all important areas such as farming, technology, project management, sales and marketing and administration. As we define ourselves as a true farming company, we have been eager to develop our value chain according to industry best practice and position ourselves to partner with the best suppliers and partners available. This is why we decided to integrate the smolt supplier Kraft Laks into our group last year and why we have developed strong relationships with industry leaders such as Cargill, Benchmark and Vikenco. Since inception, we have mainly focused our efforts on our first facility at Indre Harøy, where we now have released the first batch of smolt and is in the final stage of construction of our phase 1 build-out.
But in 2021, we also established a joint venture with Korean seafood giant Dongwon Industries, called K Smart Farming, which will enable the same concept and technical platform to develop, construct and operate a land-based smolt and grow-out facility on the East Coast of South Korea.
In Salmon Evolution, we aim to take salmon farming into the future by combining the deep competence and experience found in the Norwegian aquaculture industry with new perspectives on international production and market development. The core foundation of our strategy is to stick to the main success factor of all salmon farming operation, which is to provide excellent living conditions for our salmon and to ensure optimal fish welfare throughout the full life cycle. These priorities have been a driving factor in our choice of technology, in the choice of locations and in how we build our organization. Only through optimized biology can a farmer maintain a stable and profitable operation, and this also represents the core values that our company is founded on and this is why we have been so dedicated about our Norwegian land-based facility and why we are so proud to see it happen.
We want our Indre Harøy facility to be the best land-based facility in the world. And to be the flagship in Salmon Evolution as well as in the industry. This is also why we see it natural to continue to improve this facility beyond phase 1. As both our operational and technical experience and track record is developing, we have a unique opportunity to bring our personnel, our experience and data as well as our partners and suppliers to new facilities in new markets, where the human capital and supplier network are far from the levels we see in Norway. Thus, we are confident that a strong Norwegian-based operation is the best way to ensure successful development in overseas market.
As a young company, we are aware of the timeline and risk connected when doing heavy infrastructure investments overseas. And in this stage of the company's development, we are convinced that the best way to expand internationally is together with a strong local player like Dongwon in South Korea. As these projects require local knowledge about regulatory framework and trustworthiness when relating to local stakeholders, our experience has been that the timeline can be shortened and the execution risk lowered when we team up with someone who understands the local dynamics better than us.
We will, therefore, continue to develop relationships with potential partners and look at this from both a financial and an industrial perspective. For a land-based facility, long-term profitability and cost levels are driven by the steadiness of the output of the production over the course of many years. We strongly believe that our choice of technology and concept provides such long-term stability and high performance in production. The diagram to the left is an attempt to illustrate some of the basic experiences from decades of land-based farming in the smolt, post-smolt and bridge stock segments.
One important factor here is that reuse of water is an economical and effective way to increase production capacity. At the same time, all empirical and theoretical evidence shows that an increase of the level of reuse beyond 65% to 70%, meaning that more than 2/3 of the water that flows into the tanks at any given time is recirculated water. Brings an exponential increase in operational and biological risk and complexity. It causes a bio filter and advanced water treatment then is necessary. This means that over time, the risk for reduced water quality and even high mortality incidents increases in a facility that relies on heavy recirculation.
Our chosen hybrid flow-through system will ensure that we stay away from the complex water treatment at the same time as we will get a strong productivity in our facilities. The main reason for this is that we use continuous supply of sufficient high-quality seawater as our primary water treatment element. This dilutes all unwanted elements in the water and thus provides excellent growth conditions for the salmon.
In our hybrid filter system, our only water treatment besides providing new seawater will be to add oxygen and aerate for CO2, which is something that we have done in the smolt and well-boat industries for decades. And as we stay away from the risky and complex elements of water treatment, we can operate with significant lower risk of unwanted events to occur. And we have also designed our systems to have each tank as a completely individual bio zone, where we'd reduced the effects of a potential event to the minimum as we never mix water from 1 tank with another. By being dependent on significant amounts of seawater, we do accept that our hybrid system have some limitations when it comes to geography and potential locations.
At the same time, we do see that our opportunity to use water from different depths make this solution possible in areas that previously have not been suitable for salmon farming. By looking at ocean temperatures, but also other parameters, we see a significant potential for our hybrid solution internationally, and our first international project in Korea is a great testament to this technology.
Yes, we do have to be located along the coastline. And yes, there still are some areas in the world where we cannot build a facility with this solution. But at the same time, there are many locations where this system will work very well. Our focus again is to find optimal entry to the most attractive locations at the same time as we execute on our ongoing projects. And as our company has developed over the last years, we have seen an increase in interest from companies that want to discuss partnership opportunities for project in overseas market. Our experience is that we have a unique opportunity to leverage our human capital to different partnership models.
In South Korea, we've been able to obtain an attractive financial structure for our joint venture company and we have also been discussing other equity-light models with other companies as our international strategy has been developed. For Salmon Evolution operations can at this point, divided into 4 main areas. Most importantly, we are now in operational mode at Indre Harøy as we release the first smolt in our facility about 2 months ago. But we're also managing a complex building project at Indre Harøy, together with our main contractor Artec Aqua. We have an ongoing smolt operation at Kraft Laks, where we prepare for several deliveries to Indre Harøy in 2022 and 2023. And we're also working with design, scope and permits among many things in Korea to ensure that we have progress in K Smart Farming.
As mentioned earlier, we successfully released our first smolt at Indre Harøy in late March this year. The smolt had an average size of around 300 grams when it was released. And after 2 months of operation, the smolt now has an average weight of 725 grams. When the fish was transferred to Indre Harøy, we had some weeks of reduced feeding and tuning of the facility. After this initial period, we have seen a significant increase in feeding, appetite and growth and the feeding levels we have experienced the last month are well beyond our production plan.
The mortality rates for our first batch has been very low so far and the general condition of the fish is very strong. We have taken 2 tanks, an important infrastructure at Indre Harøy into operation. And at the same time, we have seen good progress on the remaining parts of the build-out of the facility. We will have a gradual ramp-up of our production as we take over more and more of the facility this year and expect to reach steady-state release volumes during the fourth quarter of 2022. This is a recent picture taken from our first tank where we have around 100,000 smolts, eating around 1.8 tonnes of feed per day at the current feeding levels. The first batch consists, as I just said, of around 100,000 fish, which was hatched at Kraft Laks in early 2021.
The fish was transferred to Indre Harøy on the 26th of March by the use of a wellboat and was released into our facility with an average rate of around 300 grams. This means that the total biomass of our first batch was around 30 tonnes at the time it was released. After 2 months of farming, the batch now has a biomass of around 73 tonnes and an average weight of 725 grams. At Kraft Laks, we now have around 2.5 million smolt in our tanks where some are meant to be delivered to an external customer during the second quarter. From then on, Kraft Laks will only supply Indre Harøy with smolt and its production plan will be perfectly tuned to the production plan at Indre Harøy.
As mentioned, the feeding levels we have seen in the last month has been significantly higher than the levels we have in our plants. We reached levels of around 1 tonne per day in late April, and have now been at 1.7 to 1.8 tonnes per day the last week. In relative terms, this means that the feeding has been well above 2% of standing biomass per day for more than 30 days now. And in our view, this is a solid indication that our production plans are not at all aggressive in any way and that there may be potential for growth and productivity well above the levels we have in our budget, plans and estimates.
As the relative growth of the salmon falls as the size increases, we do not expect to be at 2% plus feeding throughout the whole life cycle. But again, the strong appetite and growth we have seen so far underlines our main hypothesis regarding the capability of a well-managed hybrid flow-through facility. As you can see on this picture, all buildings and structures at Indre Harøy are now close to 100% complete, and the remaining work will mainly consist of installation of process equipment, pipes and other equipment in the parts of the facility, where we are not operating.
Our ambition is to commence construction of phase 2 on the back of completion of phase 1 and a successful ramp-up in production throughout 2022. As already mentioned, we signed a Heads of Terms agreement with Artec Aqua in February, which sets the overall terms and conditions for the planning, engineering and construction of phase 2. Phase 2 will be an improved version of phase 1, where we will implement the experience gained from engineering, building and operations. The Heads of Terms will function as a basis for a final design and construction agreement with Artec Aqua. An important principle here is that the actual decision to commence construction is subject to financing restorations for Salmon Evolution, which gives us flexibility to fully align this project with our overall financing plan.
And in April, we completed a private placement of NOK 300 million to fund the initial CapEx of the second phase as well as the planned expansion at our smolt facility. Before I give the word to Trond Håkon, I will now give some comments on our joint venture project in Korea. The good work with K Smart Farming continued in the first quarter with focus on engineering and permits. K Smart signed an agreement with Billund Aquaculture for the design and engineering of the process facilities at Jeongseon and Yangyang and are also working closely with Korean engineering firm, Yooshin, and construction company, DCI, to ensure partnerships that will handle process engineering, civil engineering and construction. Billund was selected as engineering partner due to their strong experience with work in Asia and other international markets as well as their experience in participation in the Consortium of Civil Engineers and Construction Companies. An important part of this project will be the contribution and dedication from Salmon Evolution's project and technical teams. And in the second quarter, the first employees from Salmon Evolution has moved to Korea to ensure even closer cooperation with Dongwon and our Korean partners. We still estimate construction start in late 2022 and production to commence in 2024.
I now give the word over to Trond Håkon, so he can go through the financials.
Salmon Evolution has now gone from being a building project into being a full-fledged salmon farmer with both smolt and grow-out production. As explained in the previous quarterly update, we have, over the last year, spent a lot of time in preparing for this, both on the organizational side as well as on securing agreements for the most relevant input factors and services. We now have an organization of almost 50 people throughout the group, and we have really seen that there is a lot of interest in our region to work for Salmon Evolution. This has enabled us to recruit Tier 1 people across the organization, and this makes us confident that we have the necessary human resources, which is absolutely critical in our operation. As to OpEx, we are obviously also exposed to the inflation pressure currently facing the industry, especially on the feed side. However, with unexpected feed conversion ratio of just over 1 due to our ability of fine-tuning the feeding in our hybrid flow-through system, the relative impact of higher feed prices should be less for us than for a conventional farming operation.
On the smolt side, which is a critical input factor as well. We have an in-house and profitable smolt production through Kraft Laks when it comes to the other critical input factors such as oxygen, energy and slaughter services, the prices we have secured are in line with our original budget assumptions. This, combined with the fact that we will not have any issues with respect to sea lice treatment, make us confident that the relative cost position of Salmon Evolution compared to conventional farming has significantly improved over the last year. And thus increasing our confidence that we will have an operating cost on par with conventional farming once we reach steady state production.
As Håkon mentioned, we released our first 100,000 smolt in late March, and this was a major milestone for us. Throughout 2022, we will gradually ramp up production in a controlled manner, and we are now in process of planning our second smolt release, which is expected to take place in June. In Q3, we plan 2 releases of smolt before we, in Q4, expect to reach our steady-state smolt release volume of 280,000 smolt. From then on, 280,000 smolt will be released every second month. We also remain increasingly confident to start harvest of batch 1 in Q4, especially given the solid growth performance we have seen so far.
Given that we are gradually ramping up smolt release volumes throughout 2022, steady-state harvest volumes of 7,900 tonnes on an annualized basis is first expected from Q3 next year. Now moving over to our P&L for the first quarter. We had NOK 6.8 million in revenues, which relates to external smolt sales. This contract, as Håkon mentioned, will be finished in Q2 with approximately 650,000 smolt remaining to be delivered.
From Q3 and onwards, Kraft Laks will exclusively serve our facility at Indre Harøy. EBITDA for the quarter ended at minus NOK 10 million as the smolt was released very late in the month, only minor operating costs was added to the biomass. During the first quarter, we also had an unrealized profit of NOK 8.6 million relating to interest rate swaps used to hedge our interest rate exposure, reflecting positive mark-to-market valuations following the general increase in interest rates seen in the quarter.
In sum, this gives us a loss for the period of NOK 1.6 million compared to a loss of NOK 5.2 million for the same period last year. We had a very high activity level during the first quarter with CapEx ending at NOK 244 million compared to NOK 215 million in the fourth quarter. The high CapEx was a result of good progress on the site as well as timing effects relating to the delivery dates for high-value equipment. This means that the total accumulated CapEx since project initiation now stands in excess of NOK 1.1 billion.
Our full phase 1 CapEx remains unchanged at NOK 1.4 billion. With the buildings and structural facilities now being mostly completed, focus going forward will be on installation of equipment and piping. This means that the CapEx will come significantly down over the coming quarters, and we estimate a remaining CapEx of NOK 236 million as per 31st of March. We obviously also note the ongoing inflation pressure facing almost all industries, and we monitor the potential impact on our project closely. A good thing in this respect is that we have a significantly reduced raw material intensity in our remaining construction work. In light of the buildings and structural facilities being mostly completed and this should leave us less exposed to the ongoing inflation pressure for phase 1 completion. Salmon Evolution continues to enjoy a strong financial position, and we remain fully funded for our committed projects. In April, we also completed a NOK 300 million private placement to part finance our planned phase 2 expansion at Indre Harøy as well as an expansion of our Kraft Laks facility to ensure that we also are self-supplied with smolt for phase 2.
Including this private placement, we had over NOK 1 billion in available liquidity and also including committed undrawn credit facilities. And this gives us a lot of flexibility as to the remaining financing package for phase 2 at Indre Harøy as phase 2 CapEx, the coming 12 months will be moderate. As we continue to build operating track record at Indre Harøy, we are also very confident that the loan to value for phase 2 will be higher than for phase 1, and we expect to finance a significant portion of phase 2 CapEx with bank debt.
Finally, we also want to highlight that no investment decision has been taken regarding phase 2, and this is something that we plan on doing during the second half of this year, upon confirmation of final phase 2 CapEx target. I then leave the word back to Håkon for some final remarks.
Thank you, Trond Håkon. Before we summarize with some words on outlook and we want to give a comment on our goals for development of harvest volumes in the coming years. The facility at Indre Harøy is divided into 3 phases, where phase 1 construction is ongoing and operation has commenced. We see a double value in this project as it both functions as our main contribution to harvest volumes in the years to come, but also in how we will seek to develop this as our best-practice facility. Where we will have the opportunity to continuously develop our concepts and technological platform as well as our operations. By doing this, we will be able to contribute with supreme experience in future projects, which should enable us to execute both the building and operational phase at a very high standard. We expect our facility in Korea to start construction in late 2022 and from there, we have a great foundation for future scaling our involvement in Asia and Korea. We thus see that we have a very tangible pipeline for a production capacity of around 24,000 tonnes in 2024, which will continue to grow in the years following that.
The main point of my summary is that we are now a salmon-farming company with an ongoing smolt and grow-out production. We will continue to release smolt at Indre Harøy during 2022 and estimate first harvest during the fourth quarter of this year. At the same time, we see progress in our project in Korea, where a strong team of engineering and construction companies are working together with K Smart Farming and its owners. We are preparing for expansion at Indre Harøy as we expect to see a successful ramp of production in phase 1 this year. And Salmon Evolution has a strong balance sheet as we are fully capable to fund our committed projects in both Norway and Korea. So I think this was the last slide of this presentation. And now we give the opportunity for you to ask questions, and we will try to answer them the best way we can.
Yes. And we have received a couple of questions so far. So we just take them one by one. First question you can take that Håkon. What is the mortality on the fish as of now than thinking of mortality in comparison with sea?
Yes. I think we can say that the mortality rates so far has been very low, stable on low terms and yes, on some digits maybe, but very low. But at the same time, of course, it's an early stage to compare it to a sea-based operation. It would be natural, of course, to look at the whole life cycle as we know that a lot of fish mortality is occurring during fish handling and de-licing and so on. But what we see now is obviously levels that are well below -- significantly below the levels that we see on average in the sea-based operation. And if you want to add something Trond Håkon, please do.
I think it's good. And then we have 2 more questions, basically covering the same topic. It's relating to our project in Korea and the design and engineering contract awarded to Billund Aquaculture. First question is on that. It's sort of the rationale and a little bit more on the rationale on why Billund Aquaculture was chosen. And what are the similarities and differences between the facility Billund will provide to K Smart and the facility on Indre Harøy?
Yes. First, I think we can say that we definitely will seek to sort of replicate all the sort of solutions and the technology and the concept and the structure that we have in Indre Harøy in the Korea project. So it's nothing structurally that will be different other than sort of the site-specific modifications that we need to do. And then, of course, as we have changed because there is another engineering partner, there might be some sort of company-specific solutions and products that will be different, but that will be a very little part of the project. So I think in overall, we want to build a copy, improved version as we also say for phase 2 in Norway in Korea. And obviously, Billund has a long experience with land-based facilities. They have done mostly RAS, I think, but also have done other technologies. And obviously, again, as a flow-through and a hybrid flow-through facility, it's a much simpler technology, a simpler facility to engineer and construct than a RAS facility. We are more than 100% sure that Billund has the competence and capability to deliver a very good project, and we are very satisfied with their work so far.
As of sort of to the choice between Billund and Artec, I think there are a couple of differences, we could say, between the companies, Billund has a very long experience working in international projects. And as I said earlier, also to partner up with like local civil engineers and local contractors. And we have identified sort of the international element of this project as a higher risk than sort of the process design element as we know that both Artec Aqua and Billund have an extremely high competence on the engineering of the process facility. And then at the same time, we have, of course, seen that we seek to progress on phase 2 at Indre Harøy, and we are satisfied with the work Artec Aqua has done there. And we naturally seek to develop our relationship with them, so they could focus their efforts on Indre Harøy. And then we're very happy to work with an excellent company like Billund in an international project.
Very good. We also have 1 additional question here. What is the status with regard to a potential increase of capacity at Kraft Laks, timeline and CapEx? Do you want to start Håkon?
I can start on that. And if you want to add something, please do. I think the increase of capacity at Kraft Laks is a twofold matter. First, we are now already working on some smaller CapEx related to sort of increasing and securing the capacity at the current infrastructure that is there, which will give us more flexibility and a higher capacity. And then we will build -- seek to build an add-on or an extension, a new department, so to say, of tanks in the facility, which we are in the early days of engineering on. And I think sort of the full investment decision will be somewhat correlated with the investment decision for the phase 2. So we will work on the engineering and planning part through the summer and then we seek to execute sort of on that building as we move into the fall and into the winter.
Yes. I think that's very good. We also have 1 more question here. Do you have an indication of total CapEx for phase 1 in Korea?
I think I can answer that shortly. Obviously, we are working now on the design and engineering and a lot of activities are planned for the remainder of the year. So I think it's a little bit too early to come out with a sort of an official CapEx following that work. What's worth noticing is obviously the structure we have in Korea on the financing side. So CapEx is yes, we have a very high financing apart from our Korean partner. So our equity component in that project is very limited.
We also have 1 more question here on. Could you give some more color on the debt level for phase 2, remind us on the debt level of phase 1.
In phase 1, we have a debt financing package consisting of several facilities. The first is the construction facility, which will be converted into a long-term debt facility at completion. This is at NOK 525 million. In addition, we have a working capital facility of NOK 100 million, overdraft facility. And we also have a little over NOK 50 million facility relating to Kraft Laks. I think if you take phase 2 and sort of purely the construction facility, I think as also explained earlier in the presentation, we see that and expect that upon sort of gaining further operational track record for the remainder of 2022, we remain confident that we will have a higher debt level for phase 2 than phase 1. The exact amount is something that we need to come back to and we are working on that. But at least sort of what we guided is that we target at least NOK 600 million to NOK 700 million.
And then we also have 1 comment here, a question on what are the committed projects that are fully funded. And that is obviously Indre Harøy phase 1. We are also fully funded for our commitment in Korea. And now with the last private placement, we have sort of started the financing of phase 2, and we'll continue to work on that alongside the initial preparatory work that is currently ongoing.
And we have 1 more question here. Can you quantify what the delta from phase 1 to phase 2 is with regards to efficiency gains and increased raw material costs. Do you want to have a go on that Håkon?
Yes, I think we are, of course, I would say still sort of working on all the efficiency gains. I can say that we had sort of direct CapEx connected to phase 2 done in phase 1 at significantly above NOK 100 million. So that's sort of more of an economies of scale game, then we definitely see increase in productivity at the building site. And also, obviously, we have done the engineering for more than NOK 60 million for phase 1 that will highly benefit phase 2, and we definitely will see significantly lower engineering amounts for phase 2. And then, of course, as the market has been developing sort of on the raw material cost. We do see a significant increase in some of the building material, and we'll work more on that into -- over the summer and the fall before the final investment decision is done. And I think that is what we can say on that so far.
Then we also have a question here on the harvest that is expected in Q4 whether that is only related to the batch 1 that was released in March, and that's correct. We will start harvesting a batch 1 in March and -- in Q4, and then gradually throughout 2023, we will obviously then also start harvesting the other batches. And given that we are gradually ramping up smolt release volumes throughout 2022, the sort of full steady-state harvest volumes is expected from Q4, and also a question here on the market and how we view that. And I think -- so we have a very -- as Håkon mentioned, a very positive view on the market going forward.
One more question. Have you actively started marketing the salmon on Indre Harøy? Are there possible possibilities to achieve a land-based premium to spot? Håkon?
Yes, I can say partly, I think we've said we have actively started to market. We had -- we've been -- it was in Barcelona at the seafood exhibition. We were able to arrange a lot of meetings there with potential customers. We have had, I would say, a good dialogue over time with interested customers. And then at the same time, we are sort of in the development phase of our, if you would call it marketing or profiling concept as well. So we are doing the most important parts we are discussing quite actually and closely with customers that we assume or think will be interested in our product, and then we will develop our sort of a broadened market approach as we move forward in 2022. And regarding the price premium, we are convinced that there are opportunities to achieve that. I think there are some structural things that we have also talked about earlier, regarding the size regarding the stability of harvest throughout the year regarding some of those base certifications that ASC, for instance, that we find in the industry which we are compliant with. And then we also see that there are potential opportunities for sort of ESG, high-quality product to achieve a price premium, and especially as we see more and more proof that our salmon is very well suited for raw consumption due to the quality and the meat quality. We definitely see potential for price premiums in different segments and markets.
Yes. I don't think we have received any more questions. We can hold on for a little while and see if they come any more questions.
Yes. I think we say that this is it. If anyone has more questions, please contact Trond Håkon or me or our company, and we will try to answer the questions the best way we can. And we want to thank you all for the participation of this quarterly presentation and for your interest in our company, and we wish you all a pleasant day.