Salmon Evolution ASA

OSE:SALME

Earnings Call Transcript 2024-Q1

[Trond Schaug-Pettersen, executive]

Good morning, everyone, and welcome to this presentation of Salmon Evolution's results for the first quarter. My name is Trond Hakon Schaug-Pettersen, I'm the CEO of the company. And with me here today to also present is our CFO, Trond Vadset Veibust. I think -- or definitely, I think our first quarter results is a huge milestone for Salmon Evolution and I think also for the entire land-based salmon farming industry, where we really have demonstrated that it's not only possible to produce salmon on land at scale, but also to do this in a very profitable way.I would also very much like to use this opportunity to thank all of our employees who have made this happen. We built a fantastic organization and this milestone is the result of all the hard work that is put into this over many, many years. So thank you.I will start the presentation by going through the highlights for the quarter. Then we'll move over to the operations, both in Norway and internationally, before our CFO will go through the financials for the quarter. And finally, we will end the presentation with some comments on outlook, and then we will open up for questions. And for those of you who are attending virtually, you can submit the questions via the webcast.So as to the highlights, I think it's fair to say that the first quarter really shows the inherent potential in our business, where we achieved a farming EBITDA of NOK 36 million, which corresponds to a margin of NOK 40 per kilo. And this is obviously something we are very satisfied with, especially with harvest volumes being fairly moderate in the quarter. So total harvest volumes ended at around 900 tonnes with an average rate of 4.6 kilo live weight and also with a very strong superior grade share of 96%. And this generated sales revenues of almost NOK 100 million.We'll come back to it more later in the presentation. But in this quarter, we've really seen the value of having an industry-leading superior grade share as the price difference between superior fish and downgraded fish has been at all-time high levels, given the huge amount of downgraded fish in the market.Also, on group level, we are satisfied with the results. EBITDA on group at NOK 24 million and also a positive operational EBIT of NOK 6 million. We saw a record high biomass production in Q1, which was up 8% from Q4 and ended also the quarter with an all-time high biomass of almost 2,700 tonnes.Looking forward, we are very excited about Q2, where we expect to harvest about 1,600 to 1,800 tonnes of gutted weight. The market is strong, and we've already had a good start so far in Q2 with harvest volumes of around 600 tonnes in April alone.So moving over to the operations in Norway. As I said, harvest volumes ended at 900 tonnes. This is slightly down from Q4, but we have been prioritizing to grow the biomass. On harvest weight, we saw a good uptick from Q4 to Q1 and ended at 4.6 kilo live weight.And as I said initially, we have really benefited in Q1 from having a very high superior grade share, which ended at 96%. And this again led to strong price realization in the quarter. We had an average sales price of NOK 108 per kilo. And I think it's also worth mentioning that if you only look at our superior fish, we are also consistently outperforming the NASDAQ.And as you can see here on the chart to the right, we have over time had a consistent, very high product quality. And also, now alongside having more volumes available for the market, we are seeing more and more interest for our salmon, and we also get very good feedback from customers, especially when it comes to the taste of the product, which I hope you have been able to verify this morning.We also see that our salmon is very versatile and also a strong fit for both the high-end raw consumption market as well as smoking and conventional cooking.Looking into Q2, as I said, the expectation is 1,600 to 1,800 tonnes of gutted weight in harvest volume. This is a significant increase from Q1. As I said, good start so far, 600 tonnes in April, and we're also seeing the same high superior share of 96% on what we've harvested so far this quarter.In Q2, we have somewhat lower harvest weights compared to Q1, which is due to low stocking weights on the batches that we stopped spring/summer last year. But with the way prices are, this will be offset by strong prices, we think.We also include at this slide as an illustration of the exceptional tight weight spread that we have in our population. This is a snapshot of our harvest in week 7. This was for a fish with an average weight of around 4 kilo gutted. And as you can see here, we have -- 60% of the volume is above 4 kilo and only 5% below 3 kilo gutted. And obviously, this has a positive impact, both in terms of price realization, and also production cost and really shows the value of this concept where we grade the fish on size throughout the production cycle.As to production, we continue to see stable operations within the farm and saw a further uptick in production in the first quarter, which ended with a net biomass growth of 1,560 tonnes. This is up 8% from Q4, and this again led to an all-time high standing biomass of 2,700 tonne, which is very close to our targeted steady state biomass. Also worth mentioning here is that we had a good development in feeding during the quarter with an average feeding of 21 tonnes per day in March, which is up 25% compared to January.We also stocked a new group of smolt in March. And although the group has been exposed to a stable and good environment at Indre Haroy since arrival, we see that poor smolt quality has impacted the fish's ability to handle the transfer from the freshwater phase to the seawater phase, which has led to reduced stocking volume on this batch.We are considering further actions for this group, and we'll have to see how the performance develop. But we have already secured overcapacity on smolt through external sourcing and we'll also upsize stocking volumes in Q2, which will minimize the impact on future harvest volumes. Where we possibly see that some of the volumes that we planned for Q4 will be moved into Q1 next year.But the overall mortality in the facility continues to be very low. And as an example, the batches that we plan to take out now for the remainder of Q2 have an accumulated mortality of 2.6% to 3.7%, which is, I would say, exceptionally low.So over to our operational priorities going forward. We have now been producing salmon at Indre Haroy for over 2 years. And the company is in a much more industrial and mature phase compared to earlier. We have learned to know the facility and how everything works, and we've had stable operations over time. And hence, now our focus is much more on optimization and improving operations every day. And this is what's going to take us to steady state production levels, which we target in the second half.And I think also, it's fair to say that long-term we see opportunities well beyond this point as we continue to optimize some feed on biology and also other things.Also, another key focus area for us is smolt. Our facility is built up with production lines and for us to take out the full potential is very important to have smolt with the right quality at the right time and with the right size. And here we have taken a solid step in 2024 with a much more harmonized production plan between the smolt facility and the grow-out facility.And we have also, as I mentioned, secured overcapacity on smolt through external sourcing, which gives us more operational flexibility going forward.And finally, we are now very much focused on growth on the back of having a, I would say, unique and profitable operational platform in Phase 1. And Phase 2 is obviously our first priority, but we're also closing in with respect to our international projects.So in Salmon Evolution, we define operational excellence as our core DNA, and that is something we strive to have implement that in everything we do. And this is also something we are seeing the effect from every day. And I wanted to share one very good example on this, which is our feed conversion ratio, which has improved significantly since our first batch. This is calculated based on actual feeding and harvest results.And as you can see here, on batch 6, which we harvested out in April, we managed to achieve a biological feed conversion ratio of 1.03, which is actually in the low end of our target range of 1.03 to 1.05. So I think this also really demonstrates the potential of operating in a closed and controlled environment. And obviously, when you're talking about production cost, this is something that's going to have a big impact.We are also investing heavily in our people, that now total 70 highly skilled employee, covering all critical functions, both on the biological side and also on the technical side. And I think in land-based salmon farming you need both of those. And our success will ultimately be defined by our ability to merge those 2. And that is why we have launched Salmon Evolution Academy, which is our in-house multidiscipline learning platform for all employees, and the target here is institutionalize our human capital base and making sure that we have a scalable platform.On the smolt, as I mentioned, supply of high-quality smolt with the right size at the right time is very important for streamlining the operations at Indre Haroy. And we have over the last year had a lot of focus on harmonizing the production plan with -- at a smolt site with the grow-out site.One of the challenges here has been that during the winter months at the smolt facility we have had limited heating capacity, and this is an area where we have made upgrades to the facility and are also doing additional upgrades. We have also altered the production plan somewhat.And as you can see here, in 2023 we had 3 batches at suboptimal stocking weights and smolt deliveries were also not evenly spread out in time. For 2024, the picture is very different, which will have a positive impact going forward. And as I mentioned, we've also secured overcapacity on smolt through external sourcing, which gives us additional operational flexibility, which is very important, and this also open up for utilizing access tank capacity for post smolt production and external sales.So Phase 2, as I said, that's our first priority with respect to growth, and this is progressing as planned, and we target to make the investment decision before the summer and commence construction there after the summer holiday. We really look forward to Phase 2, especially given the level of detail and experience we have going into the construction phase. Also compared to when we started Phase 1, a lot of the initial groundwork and infrastructure is also completed.We have been working very actively to navigate inflation pressure, which is real and therefore, focus on cost optimization and making sure that we have competitive tendering processes has been very important. But at the same time, the salmon market is very strong and also with expected margins, higher than what we foresaw a few years ago. So we definitely see a very attractive project economics in Phase 2, not also to mention the scaling effects we will have on our OpEx as we then can allocate our fixed cost to a larger volume.When it comes to financing, we have a strong financial platform, comprised both of a solid cash position and also over NOK 1 billion in committed undrawn debt financing. We are now also at a stage where we have a cash flow generating Phase 1, which is very different from earlier. And we also see that the replacement cost of Phase 1 is substantially higher than invested capital, which gives us a lot of optionality, which we are currently assessing, depending on where we end up finally on CapEx.When it comes to our international projects, the work is progressing here. In North America, we have identified a very interesting site that we classify as a high potential location. I had hoped to be able to share more details on this now, but there are some initial clarifications that we want to have sorted out before we go out public with the details. But this is progressing as planned.As to Korea, not much new to report since our last update. We have completed the design and engineering. We have good sight on the permitting site. So we are more or less ready to start construction. As communicated, we've had a lot of focus on cost optimization. And together with a partner, we are also working with the authorities with respect to financial support in which we expect to have further clarifications during Q2. But it's important for us to stress that in this project, we have a special JV structure, where our main contribution is our human capital and that we are very much focused on capital discipline and making sure that we have attractive financial returns. But with the Phase 1 up and running and also with a very strong organization in place, we truly believe that we have a fantastic platform to go also overseas.So with that, I leave the word over to our CFO, which will go through the financials.

[Trond Veibust, executive]

Thank you, Trond Hakon. Okay. Yes, it's a pleasure being here today. I guess for our CFO, this is the definition of a good day on the job. Farming Norway consists of the farming activities at Indre Haroy, including smolt production at Dale and sales. Without ambitions to leverage our technological advantage, this is basically how Salmon Evolution would look.In the segment, we delivered an EBITDA of NOK 36.2 million in the first quarter, equaling a margin of NOK 40 per kilo. This is a significant, but not unexpected improvement from previous periods. We generated revenues of NOK 98.3 million, primarily after harvesting 901 tonnes of gutted salmon with a strong price realization of NOK 108 per kilo driven by minimal downgrades following our industry-leading superior grade share of 96%.The improvement in the farming EBITDA cost from Q4, a decrease of about NOK 9 per kilo or 12% was primarily driven by the previously mentioned effect of our decreasing cost base batch by batch as we are harvesting fish that has been standing in a fuller facility following the substantial biomass buildup we did for most of 2023.However, the fact that we also harvested bigger fish in the first quarter also contributed. We expect the farming EBITDA cost to continue to improve, albeit not as quickly as between Q1 this year and Q4 last year.In the Other segment, all the resources related to projects and technology are employed as well as general corporate functions. A significant portion of costs are related to future expansion. This is basically the cost of scaling and internationalizing Salmon Evolution. And for sake of simplicity, let's just call this the expansion cost.The revenues of NOK 6.5 million came from sale of services to group companies and services rendered to the K Smart joint venture. The expansion cost after allocation of G&A to the farming segment and invoicing of services to the K Smart joint venture ended at NOK 12.1 million in the first quarter. As harvest volumes grow, we expect the expansion cost to have a gradually lesser impact on the overall group results.Looking at the combined Salmon Evolution Group, we have both positive group EBITDA and EBIT in the first quarter. This highlights that even at relatively modest harvest volumes, all expansion costs were covered in the first quarter.Diving a little bit more into the details. We had revenues of slightly above NOK 100 million, primarily sales revenues from harvest, but also some revenues related to sale of services.The EBITDA ended at NOK 24.1 million, and we reported an EBIT of NOK 5.8 million before fair value adjustment. The fair value adjustment ended at approximately NOK 1 million. Additionally, we had capacity adjustments, negatively affecting the profit and loss of NOK 7.9 million in the quarter. Net financials primarily driven by interest rate expenses, partly offset by interest income on the cash holdings ended up negative NOK 7.9 million.Profit and loss for the period ended at negative NOK 1.2 million Salmon Evolution have a strong financial position with available liquidity of NOK 593 million at the end of the quarter, including available committed undrawn credit facilities, but excluding the committed construction facility of NOK 775 million. The operational cash flow came very close to being in positive territory, but it still reflects that we were building biomass in the quarter, adding about 470 tonnes of standing biomass.At the end of the quarter, we had the standing biomass of about 2,700 tonnes, which is close to the full run rate. Investments in the quarter was primarily driven by design and engineering for Phase 2 at Indre Haroy as well as a negative one-off effect related to VAT of NOK 7 million.As you are all aware, [ have ] -- the conventional industry in Norway had significant challenges with downgrades in the first quarter and at the start of 2024. And according to the Norwegian Food Safety Authority, the share of downgrades has actually never been higher in the industry.For all salmon farmers, downgrades has a significant impact on the all-in price realization, meaning the price realized on all the fish sold, including downgrades. Here we have illustrated this using objective market data in the first quarter as well as making some assumptions on our own.On the left-hand side, you have the comparison of the Salmon Evolution superior grade share compared to the conventional industry. With our industry-leading superior grade share of 96% in the first quarter, we have a price realization far above the expected price realization of the conventional industry. Do also note that we did not harvest every week. So we will have a natural divergence towards the NASDAQ benchmark price.And of course, on top of a premium on a high superior grade share comes price premium related to certifications as well as other unique product characteristics.Unlike the conventional industry where you only buy the license once, a high portion of our investments are non-recurring, with no future replacement costs. Examples are indirect project costs, capitalized internal costs and groundworks and other infrastructure.However, unlike the conventional industry where you do not depreciate the licenses, we depreciate these non-recurring investments. So even with investments at par, the accounting depreciations for Salmon Evolution are higher than compared to our conventional industry peers. The effect of this is calculated to about NOK 3.7 per kilo with full run rate production and would in Q1 result in an adjusted EBIT of about NOK 28.5 per kilo in the farming segment. Comparing Salmon Evolution on an EBIT per kilo basis to the conventional industry, this is an important distinction.And on cost, cost leadership is our objective and having our first facility located in Norway in the middle of the global aquaculture and salmon farming cluster carries a significant cost benefit for Salmon Evolution. Here, we can seamlessly tap into the world's most efficient value chain for salmon farming, achieving industrial level costs on certain parameters from day 1.We believe that Norway as the cost leader in conventional salmon farming will also be the cost leader in land-based salmon farming and Salmon Evolution will be the driving force of this development. In full run rate, we estimate a farming EBIT cost of NOK 57 per kilo. This is based on current input factors and currency rates, expect for feed, where we have applied a slight reduction and use a long-term delivered feed costs of NOK 20 per kilo in this estimate.Parts of the costs at Indre Haroy is front-loaded. We have already invested in all the functions that is needed to operate a facility like this. And many of those functions does not need to be scaled as rapidly as harvest volumes will increase in Phase 2 and Phase 3. We, therefore, see a gradual decrease in the cost base as we scale the facility of roughly NOK 2 per kilo per phase, which is reflected in the cost estimates we display.With that, I leave the word to you, Trond Hakon, for the summary and outlook.

[Trond Schaug-Pettersen, executive]

Thank you, Trond. So to sum up, we believe that Salmon Evolution is in a very strong position with a very solid growth platform. In Q1, we have demonstrated strong profitability, EBITDA margin of NOK 40 per kilo, which we think is quite impressive and this was done even at moderate harvest volumes. And the market is also record strong and with a solid uptick in volumes in Q2 and also with an expected very high superior grade share, we feel that we are very well positioned to capitalize on this.And also, as Trond mentioned, we are seeing that the production costs are where we expect them to be. And this means that we have a concept that is competitive with conventional farming, but also with a very tangible pathway for sustainable growth.So for us now going forward, it's all about doing more of the same and continue to strive for operational excellence every day. I think as a company we've come a long way over the last couple of years, and we are more confident than ever at what we do makes a lot of sense, both from a biological, operational and financial perspective. So with the current setup that we have, we believe that we are very well positioned to take this to the next level.And with that, we will open up for questions. We will start with questions from the audience here today, and then we will move on to questions submitted via the webcast.

[Christian Nordby, analyst]

Christian Nordby, Arctic Securities. You say that you have more than enough smolt now because of external sourcing. Are you planning to maybe build more smolt capacity yourself at site or at all during Phase 2 as well?

[Trond Schaug-Pettersen, executive]

I think, as to smolt, we have several options. So the facility at Dale has a production capacity today of 1.8 million to 2 million smolt. There we have a license of up to 5 million, but that will require -- at least if we are to take out the full potential, then we would have to do some investments. We could potentially reduce the weights and increase the numbers, but -- so there is some flexibility there.At Indre Haroy, we have -- we also have a license in place for a smolt facility. And I think we are assessing what to do on the smolt [ site ], [ the site ], but that will take some time to build, obviously. So from what we can see now is that for Phase 2, it will be a combination of what we have internally today, and then we will have to rely upon external sourcing. And then long-term, I think definitely that we will have to think the full build out -- think about the full build-out and we sort of make those decisions.So we are assessing what to do. But I think very importantly now is to have overcapacity. That's a very important thing. And that obviously also open up for potentially utilizing some access tank capacity if we have that for post-smolt production. So we are doing quite a lot there and working very actively to making sure that we are very well supplied on the smolt site.

[Unknown Analyst]

[indiscernible] You say you're assessing the capital structure of Phase 1. Could you give some indication of how much additional debt Phase 1 could release?

[Trond Veibust, executive]

I think it's a little bit premature to come out with any specific numbers. But as we mentioned, we obviously see that what we have today, to build that over again. That would have costed a lot more, especially given all the infrastructure investment. So I think that is things we will have to come back to later. But we obviously note that there is a potential there.

[Unknown Analyst]

But it would be reasonable to assume that we should look at the replacement value and multiply that with a debt level?

[Trond Veibust, executive]

Yes. I think, again, it's a little bit early to say, but the values -- the replacement value is higher. And obviously, that creates some opportunity for us.

[Trond Veibust, executive]

Okay. Anyone else? All right. [ Let me just update this ]. All right. So questions submitted via the webcast.Okay. First question, how have you solved the initial problem concerning the long Korean shoreline? Have you been able to find a workaround to secure water at the right temperatures?

[Trond Schaug-Pettersen, executive]

Yes. No, as we pointed out to earlier, given that you have a long shoreline, that has some impact on how we need to set up the intake pipe. So it's not a question of sort of solving it. It's more a cost question. So that is taken care of from a technical perspective. And as the temperatures, there are -- when you get down at that, you have quite good temperatures also in Korea.

[Trond Veibust, executive]

Yes. That concludes the questions submitted via the webcast. So unless anyone else has anything they want to ask us, we can conclude the first quarter 2024 presentation, and we look forward to see you all in August. Thank you.