Salmon Evolution ASA
OSE:SALME
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Salmon Evolution ASA
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Hello, and welcome. My name is Håkon André Berg. I'm the CEO of Salmon Evolution, and I will give this quarterly presentation together with our CFO, Trond Håkon Schaug-Pettersen. And for those of you that are not here but are following us on via the web stream. I can say that we have all had a tiny but very tasty and delicious meal of salmon from our facility at Indre Harøy. So you might wish you being here, but you'll be able to taste these products at the end of this year, as we said, in the movie.
So the agenda today, I will go through the highlights of the second quarter. Then I will just make a brief introduction to Salmon Evolution and our approach to land-based farming. For those of you who don't know our company really well. I will go through the operations, both in Norway and also the project we are involved in overseas before Trond Håkon take us through the financials, and then we give a few words on outlook as we summarize the presentation.
So the highlights for the quarter for us now as we are a farming company, truly a farming company. We have been farming for some months. It's really that we see a strong performance in our first batches. We see our batch #1 performing well above our plans and our prognosis. We have seen a good response from our second batch as well as we released it in July, post quarter. And we have been doing extensive testing and really looking into the quality, the taste, the texture, the color of the fish that we have, and we see very good results as we have seen here today, and we will continue to do that as the time develops.
During the quarter, we also launched our North America expansion or our plans to expand into North America. We are looking with a very interesting perspective on that continent. As we have said all the time, our strategy is really to capitalize on the learnings and the experience we have gained in Norway and to take that to the attractive overseas market. And we've been working on preparing for our Phase 2 at Indre Harøy, implementing learnings and working more with a building project there. And also in the quarter, we completed a private placement of NOK 300 million of important events after the quarter.
As I said, we released our second batch in July, which have shown very good results. And then we have done a limited slaughter and been testing the fish at Vikenco. So Salmon Evolution is a land-based company, land-based salmon farming company. And we were established in 2017 by a group of well-experienced farmers from deep in the industry. And the basis for establishing the company is really to do salmon farming in a way and with a technology and an approach, which is more sustainable and more suited for future growth and future demands from customers and other stakeholders.
So as the company was founded, the approach was really to just use the fundamentals that's been in the industry and been a success factor in the industry since day 1 is to focus on fish welfare, focus on the quality of living for the fish and to provide excellent living conditions. And that is why we decided to go with a system where we supply continuous amount of very high-quality seawater. We provide enough water that the fish has perfect place to live and to grow and have good appetite. And that has been sort of the driving factor also in our growth and our strategy for looking at overseas market.
We're looking at places where we have access to high-quality water so we can provide excellent living conditions for the fish. And this is what we call the hybrid flow-through system, which is based on providing seawater, reusing some of that water, but always pumping in high-quality water in our facilities. We started to build our Indre Harøy facility in May 2020. We have been building for more than 2 years. It will be completed in around 5 to 6 months.
And last year, we also signed and established a joint venture with a Korean company, Dongwon, a joint venture called K Smart Farming for the sign, construction, building and operation of a similar facility in Korea. And then as I mentioned, we have now also taken and been very explicit about our plans to also establish a similar facility based on the capacity and the structure of Indre Harøy in North America.
Again, back to what I mentioned in the highlights. The batch one was 277, 280 grams when it was released in late in March. It has been showing really good progress and this now has an average size of about 2.3 kilos, which is pretty close to 20% above the production plans and the growth parameters that we have in our production and also in our financial models.
Of course, now we are on track for harvesting in the fourth quarter, as we have said since the first release. And then the batch 2 which we'll go more into has -- was released in July, and we saw an even faster response as the batch was released in the tanks. We saw appetite coming in real sort of true appetite coming faster and the feeding has been higher, and the growth has been higher than expected also there.
We have seen mortality levels being very low. That's sort of the experience since day 1 that in the land-based farm, when you provide and you monitor and you make sure that the conditions are really good. You don't handle the fish. We don't treat the fish. And the way you do at sea, the running mortality levels are very low. And of course, it's a very high and good testament to good fish welfare and good fish health.
So as we said, the first batch was 100,000 fish released in March. Now it is the low mortality. The numbers are the same and the average weight is 2.3 kilos. The second batch was actually 2 batches. We were going to release, but we combined them as we saw that the facility has the capacity to hold a larger biomass in one tank, and we leased 230,000 smolt at 125 grams in July, which is now -- also has shown really good growth.
And I think what I can say is what we, as a company, and I think the employees in Salmon Evolution has seen during these 5, 6 months is that the sort of the core and the basic hypothesis about the ability to provide conditions to provide feed to see growth, to see low mortality, good fish, quality fish welfare is even -- I think we're more than convinced now and more convinced than we were, of course, 6 months ago.
The results we have seen so far has really given us not only faith but true understanding that hybrid flow-through system, well-designed, well-built and well operated is really the way to go in land-based farming, and we see very strong opportunities to take that into overseas market and to -- where the financials are even more attractive. And also, of course, the ESG opportunities or story is even stronger.
Here, we have tried to show the growth in a -- on a compounded daily rate. So as you know, the fish has a growth rate which is highest when it's small as natural, then the growth rate related to its own volume in percentage is falling as the fish gets bigger. And by this graph or this diagram, we see the growth that we've had in batch 1. So now after around 135, 140 days, the batch has been growing at 1.5% of its weight per day on a -- daily on that, those 135 days. It was higher, of course, in the beginning, then it's falling as it always does, but still, this is well above what we have expected.
For the second batch, it was a little bit smaller when it was released. So you -- normally, you will see a somewhat higher growth. But again, the daily rate growth rate is really high, really fast on getting into the feed, taking feed starting to grow. And the growth rate is significantly higher than for what we saw for batch 1 in the same time period.
And of course, this is a new facility. So even though it is -- we have taken over the tanks, we have taken over the technical rooms, there's always modifications and tuning and things that are installed as we are developing in this sort of trial first period. So sort of there's -- there has been days where we have had less feeding, and there has been days where we have had other that we have had temperature falling, maybe a degree, falling a little bit more turned off the heating because we're doing some sort of tuning. And still, we have seen just a consistent high growth, consistent high performance for both batches.
On the project side, you can now see when -- if you are in the harder that all the buildings are in place. Almost all of the equipment, the technical equipment is at the site, and we are now working really with installing the equipment and installing the pipes on the different technical rooms and on the tanks that we have not yet taken over.
We have 2 tanks currently in operation. Then we see the next month, we will move the first batch. We split it into 2 tanks. And then we will -- after that, we will release new smolt into the first tank. So we will take over more tanks during September, and we will take them in use, and then we will have a gradually take over of the rest of the facility in the coming months.
So what we have seen is that the finished work of the tanks and the technical rooms has been more complex and has been taking a little bit more time than we first expected. So we have seen some delays on the construction side with the completion of the technical rooms and the tanks. So we have said that, and we have worked really hard with our entrepreneur contractor to set a new time line where we have seen the time for completion is moved from November to basically February.
This will not affect our production plan as we are -- we have more tanks available than we are using the first 9, 10 months. But the delay that is caused by -- first, we see a lack of workers. We have had a hard time actually getting enough workers to the project. But also sort of the coordination and the efficiency and the final assembly of all the technical equipment in the tanks and especially in the technical rooms.
So this is our production plan, ramp-up plan for the coming season. It's the same as it has been all the time. We released 100,000 smolt in March, 230,000 in July. Then we will do another 200,000 in the third quarter, and then we get into the run rate of 280,000 smolt in November, which is the run rate release of 280,000 smolt 130 grams every second month going forward.
Before I give the word to Trond Håkon, I will go through the Korea project and also what we're doing in North America. So in Korea, we have been working with our partners, Dongwon and with Billund, who is the engineering firm and also a civil engineering firm in Korea called Jeongseon with the engineering of the facility. We are building both a smolt facility up in the mountains and then grow our facility on the East Coast.
The progress has been going really well. And I hope and we plan on the next presentation for the third quarter to show more the science drawings and really more visible sort of understanding of what this project is going to look like. We're also working with the permits with the Korean government. There is a strong momentum in Korea, driving towards self-supply of salmon and development of the land-based industry. So we have a very good dialogue and close dialogue with both regional, national and also local authority. And the plan is to start the work on the smolt facility in late in this year.
And in North America, which is a project we launched recently. We are now working with the site search. We have been doing a very thorough job to identify potential sites on the East Coast and also on the West Coast. We have secured some options for sites, and now we're working to really to do a due diligence on the sites with regards to water quality, regulatory risks, and then we're also already in close dialogue with stakeholders in the government, in the local government, in the state government and also other stakeholders in the area.
We see a very strong opportunity for this project. Again, we see that our technology is really well suited for this market. We have access to very high-quality water with really relevant temperatures on these coasts and have strong -- we expect a strong development in the coming year. Even though the time line is long, this is a new thing in the U.S. So the regulatory structure is different than in Norway. So some years until we are in production mode, but we will see development going forward.
So then Trond Håkon, I give the word to you, so you can take us through the financials.
Thank you, Håkon. Obviously, up until now, our P&L has been relatively uneventful. But over the coming quarters, as we continue to ramp up production, grow our biomass and also very soon start harvesting and selling the fish. This will become more and more interesting. In the quarter, we had NOK 12.7 million in revenues. This relates to external smolt sales. This was a contract that was in place when we acquired our smolt company last year. This contract is now completed. So going forward, we will only sell smolt in-house.
EBITDA for the quarter and before fair value adjustment of biomass was minus NOK 15.1 million. Please note that this includes NOK 3.7 million in charges taken directly over the P&L due to unutilized production capacity, given the fact that we are in a ramp-up phase. In the quarter, we also had NOK 2.6 million in fair value adjustments on the biomass, leading to an EBIT after fair value adjustment of minus NOK 13.9 million. Last year, we also hedged part of our interest rate exposure before the interest rate started to increase and the positive net financials year-to-date of about NOK 13 million is mainly driven by that. So in sum, this gives us a loss for a quarter of NOK 10 million, similar to last year. And year-to-date, we have a loss of NOK 12 million compared to minus NOK 16 million last year.
Looking at the cash flow for the quarter. We start then with a cash balance of NOK 430 million and ended with NOK 525 million. On the investment side, obviously, the most important item is the Phase 1 CapEx at the Indre Harøy, which ended at NOK 190 million, somewhat higher than expected. We'll come back to that. Outside of that, we also capitalized around NOK 10 million in internal G&A and construction loan interest. And we also had some spending on Phase 2 and other than that, also some on Kraft Laks and our project in North Korea.
The quarter also -- the North America, sorry, North Korea. So we are in South Korea and North America. So -- and then finally, in the quarter, we also had some fairly large changes in investment payables and this is a reflection of the project nearing completion. On the financing side equity issue proceeds from that in April of the NOK 300 million equity issue, and we also had drawdowns on our debt facilities in -- of around NOK 90 million.
So looking more in detail on Phase 1 at Indre Harøy. Total investments since project initiation now stands at NOK 1.35 billion. As Håkon mentioned, we are seeing somewhat lower productivity and expect that the final completion date is pushed to Q1 next year, and this also has an impact on cost, which we now expect to end up at NOK 1.5 billion compared to the previous estimate of NOK 1.4 billion.
And also, as touched upon in earlier presentation, we have been very fortunate in a way that we managed to lock in most contracts before the raw material prices started to increase. And thus, we have been relatively shielded from this throughout our project. But we are seeing, as Håkon mentioned, that the system integration processes and the commissioning phase, it is complex. It requires more resources. It takes more time. And that has an impact on cost and also some supply shortages on personnel. And also some longer lead time on some equipment adds to the mix and give some challenges. But -- all in all, we are quite happy with being able to complete the project almost in line with the original time line, and more importantly, the production plan remains unchanged. And we are on track for harvesting in Q4.
So as we all know, raw material prices are -- have been extremely volatile over the last years, and as to all new construction project that creates challenges. We have, however, seen lately that many raw material prices have come down, for example, iron ore, which is down about 50% since peak. But the volatility and the uncertainty in the raw material market causes problems and makes it challenging for our suppliers to price new projects. And also adding to the uncertainty is that there are significant lead times were done changes in raw material prices passed through the full value chain to the end customer.
So moving over to Phase 2. We are -- have started with initial design and engineering activities. Our main focus is on implementing the learning effects from Phase 1 and also identify cost savings. We are seeing raw material pressure, inflation pressure on the raw material intensive part of the project. And also, I think with the uncertainty, there is a problem getting qualified price quotes on that.
On the more personnel-intensive part of the project, we -- the quotes are more or less in line with expectations. So as we move forward now, we are very cautious about not locking in raw material prices, I'd call it peak levels. And with sort of the time line being moved to Q1, we have some additional time to both monitor the market development and also to chase further cost savings, and we will come back with the final estimate on CapEx in due course.
And finally, we also want to emphasize that we have not taken on any financial commitments for Phase 2 yet. And the amount we are spending until the final investment decision is taken is moderate. So just -- as a follow-up to the CapEx discussion, we think it's worthwhile having a look at a big picture when it comes to land-based farming. Yes, CapEx for new project is impacted by inflation, but land-based still compares very favorable to commercial farming on a CapEx per kilo due to the sharp increase in license value. So you have seen over the last years.
And our perspective and thinking around land-based is that the key issues to actually have a concept, are you able to reach the design capacity on the throughput of the facility. And that is also why we have chosen a hybrid flow through system, where we use a lot of fresh seawater to create very good water quality and also being able to control the temperature, so we can have ideal growth conditions all year round.
And based on what we have seen so far as the biological performance, we think that over time, as we learn more and more, there's definitely room to further increase the production, but we will also drive down the unit cost. As to the OpEx, we remain confident that we will have a production cost on par with the conventional farming when we reach steady state.
And with the high feed cost that you are seeing at the moment, this is something that favors land-based. You have better control on the feeding and also with potentially lower mortality your effective feed cost is also reduced. I think on the other side, energy is obviously an issue with land based. And we think that geographic allocation is something that become more and more important when sort of evaluating land-based projects. We are fortunate to be located in an area where we have favorable energy prices. We have also locked in most of our consumption for both this year and next year at very favorable prices in today's market.
So finally, Salmon Evolution continues to enjoy a strong financial position. We are fully funded for our committed projects. At the end of the quarter, we had done available liquidity of around NOK 760 million, including committed undrawn credit facilities. This gives us a very good flexibility as the financing of early Phase 2 CapEx and while at the same time, meaning a strong financial platform towards the completion of the project.
We are also working on Phase 2 bank debt financing. We see a very good interest and we expect both higher loan-to-value and also a lower cost on that. We are also very focused on sort of leveraging the proof concept from Phase 1 in our debt financing for Phase 2. And accordingly, this is something that we will be working on over the coming months alongside the upcoming operational milestones of which the harvesting of first generation is very important.
So thank you. Håkon, will have some final remarks.
Yes. Thank you, Trond Håkon. I will just summarize this presentation, and then we go into Q&A. So as we said and have signaled clearly, we have a production target of 100,000 tonnes by -- in the next decade. We seek to develop our Indre Harøy facilities in 3 phases. That's been the plan for the whole time. We have progress on the Korea project. And then at the sort of the last part of the decade, we hope to -- or seek to come into production mode in North America as well.
So the highlights of the quarter is obviously and summarizing, it's the strong biological performance. We have seen growth in both batches. As I said to one of the -- on one of the conversations earlier to see it in 1 batch. It's something that can always happen. But as you see it in consecutive batches, you get really confident in the ability the facility has to provide good growth.
We have tested, seen very good samples of potential products coming out of the facility. And yes, the second batch is performing also really well. The production plan is unchanged. We will come into steady-state release mode in November, and then we will sort of come into steady-state production mode of the full facility in around the first half of next year. Yes, we are fully funded for committed projects and are working to develop our company, both in Phase 2 in Indre Harøy as well as the international overseas projects.
So thank you for your time. And if there are any questions, we will answer them the best we can. And also, we have the opportunity to answer questions that are coming in through the web stream.
Please say your name, maybe and then the question.
Sindre Sørbye, Arctic Asset Management. You say that you are 20% ahead of plan on both first batches. And I think also in the presentation, you had a figure showing that CapEx per tonne would, of course, fall if you increase throughput. I mean should we -- maybe a little optimistically, but -- should we assume that this kind of nameplate capacity of 7,900 tonnes maybe it will be closer to 9,000 tonnes?
It's a very good question. I think from our perspective, we have a sort of a design capacity, which we're very confident on. We see our performance being above our plans. From the company's perspective, we would need several generations going all the way to slaughter, the way we see them before we do any sort of structural changes to the design capacity. But I can say that the way we see it, it's an opportunity that might happen as we get more proof of growth. But obviously, we need to see into full slaughter, full harvest weights before we do that.
Herman Dahl, Nordea. On batch 1, maybe you can say something about the mortality level so far, maybe something about the feed conversion ratios. And also, what's your biggest concerns ahead going into Q3 and Q4?
Yes. I think we -- the feed conversion ratio is -- when you do -- when you measure feed conversion ratio, you really don't have the true answer before you do the harvest because the estimate of the biomass is always sort of an estimate. So I think we will wait to release the actual numbers until the harvest. But the FCR looks really, really impressive. As to mortality rates, I think we can also say that they are low. They are on the -- there is a few percentages, so far. What was the last.
It was -- what's your biggest concerns for the next 3 to 6 months on batch 1 on production?
Obviously, when you do land-based farming, it's always important to see the salmon performing all the way up to harvest weight. And as we see the fish is growing, of course, the density is growing. So our ability to continually feed all the fish in the tanks is important, and we have to really prove on that. And then we will start moving the fish and taking the fish logistics system into use during the fall, which is maybe the 1 system part, which have not yet been used or been tested.
Carl-Emil Johannessen, Pareto. You are getting close to, first, let's say, real harvest. Do you have made any plans on where and how to sell the fish and what do you kind of expect in terms of prices compared to conventional salmon from our ocean salmon?
Yes. We're still working on that. The way -- if you look into our production plan, you will see that we have harvests now in Q4. And then the next batch will be -- there will be some months between that harvest and then the next harvest. So we plan to use that harvest really well to work with potential customers to get samples, and we'll also do some sort of launching event around that first harvest. And then we will use the experience gained from that harvest to really sort of I would say, launch more of the downstream strategy concept between the first and the second harvest.
Martin Kaland, ABG. For the North American expansion, do you have any initial thoughts on ownership structure partnerships and financing, even though it's somewhat early day spreads?
Yes. But we have said it all the way. We have -- I could say, we have a minority stake in our joint venture in Korea. That is the exemption. We will have a majority stake in all other projects we are involved in. We see interest from potential North American partners to join the project. So we will -- we estimate to have an ownership between -- and I would say, in the upper 50s to the 70s maybe.
And looking at partners both sort of from a downstream approach, but also on more of an industrial and also actually financial approach. So we are very confident in the sort of the attractiveness of the project, but also that our partner actually provides a lot of value added, both in sort of scaling our human capital, releasing some of the equity demand from our side, but also actually providing strength in, it could be regulatory processes and then local knowledge.
And for the sites sort of secured now so far? Is that both on the West Coast and the East Coast?
The sites we have secured are on the West Coast.
John Binde, Fearnley. What is the water temperature in your facility? And is it anticipated to be on a constant level throughout the year?
Yes. We are -- in our production plan and it's very important that it's constant because then you get sort of the clock-wise effect of the land-based production. And so it's 14 degrees up until 1 kilo, and then 12 degrees from 1 kilo to harvest weight. And then I think 1 of the already empirical evidence we see is that the effect of reducing the degree a little bit. Saving energy and really not hurting the growth. It's -- that's a potential, but we have to see more evidence before we do any changes to that.
[Indiscernible] You said you've done extensive testing on the quality of the fish. Can you say something what you found when you compare the quality of your fish to whilst salmon conventional fish farming, salmon -- ros technology salmon?
Yes, we have not sort of compared it to any rosfish, but I think when you do testing, you're looking at color, obviously, because when you have -- on the land-based production, you have a shorter production time. And then you have to be more diligent on the color and more -- because color is -- time is an asset when you work with color. So looking at that in different sort of levels, how is the color developing? How is the texture of the fish and the fat structure, and also the taste of course, and the general appearance, looking at the quality, how much is superior, how much is production.
And overall, I think we have seen that, as I said, it's been really positive feedback. I think what you see here today is a smaller fish is around 2, 2.5 kilos. Actually more suited maybe for grilling or baking in the oven, then for sashimi but a very good place to start for a small fish and as it grows into 4, 5, 5.5 kilos, it will be a very good product for raw consumption, I think that's what we see. And we've done some testing and some comparing to other conventional products. And I think we can say we are satisfied with the results. I think that's about it.
Also, I have some questions that -- we have gotten online. When is the first half as Q4, we've touched on that. How big is the smolt in batch 2. We also -- that's 235 grams which -- how do you transport the fish to Vikenco. We do it through a wellboat, we have a wellboat, so a very conventional way of transporting. Also a question about water temperature. I think you touched upon that earlier. Finally, also a question on has Salmon Evolution considered its dependency on energy considering the energy markets of this year. Good Salmon Evolution produce some of the energy itself in the future.
I think you answered the question Trond Håkon, our relationship to the prices and the structure. And I think we are a salmon farmer. That's the value chain we are involved in, and I think energy production is for someone else.
[ Stein Nora ], Investor. So I have a question about the smolt. So do you plan to be self-sufficient on the smolt, and are you satisfied with the quality of the smolt that you have used so far? And then a follow-up of the feed that you've used. Is there any healthy feed? Or is it just regular scratching or any other, yes.
I can do the smolt and you do the healthy. Yes, we are planning to be self-sufficient with smolt. So the capacity we now have is somewhat higher than what we need for this phase. And as we are moving into Phase 2 expansion, we plan to double smolt capacity at Kraft Laks. We are satisfied with the quality. One of the more important aspects is that our smolt facility has a very strong access to water on different water sources, which provides opportunity both for growth, but also to actually give the production you want throughout the whole year as the sort of the freshwater capacity can vary through the year in many smolt locations.
Yes. And I think as to the feed, we have a strategic partnership with Cargill on the feed side. So -- and as to the feed we are using now. We have sort of gone very safe in the beginning. So we use a feed that is very high on marine content, which obviously also has a positive impact for the fish. But I think over time, this is something we see a lot of potential on the feed side, both from an ESG perspective, but also from like an opportunity to tuning growth and sort of the models we have on that. So feed is an area which we have very high on our priority list going forward. And we think that the partnership with Cargill is sort of going to enable us to do some very interesting things on that side.
So can I take it just a follow-up, that when you decide to go high on marine content, it is to preserve the Omega-3 ratio in the salmon?
Yes. And also, obviously, since we have that, this is the first batch, and we want to sort of go very safe sort of in the beginning and just give the fish a very good sort of basis for some growth.
Any more on the sub?
Well, I think Yes, we have 1 question about what is -- what would be the harvesting weight on batch 1 I think that, we'll see. We will see. But it's looking good.
Yes. On the production plan, we could say, the average harvest weight is slightly below 5 kilos had on get it. Okay. And I think we thank you all for the interest in our company, and we welcome you back to the Q3 presentation in November. Have a good day.
Thank you.