Salmon Evolution ASA

OSE:SALME

Earnings Call Transcript 2023-Q2

[Trond Schaug-Pettersen, executive]

Okay. Good morning, everyone, and welcome to this presentation of Salmon Evolution's results for the second quarter. My name is Trond HÃ¥kon Schaug-Pettersen, the CEO of the company. And with me here today, I also have our CFO, Trond Vadset Veibust. It's now almost 3 months since our first quarter presentation in May, where we communicated that situation was under control, and we had recommenced feeding across the farm following the challenges we had in the quarter. And as published in our operational update in early July, we had very good operations going into the summer. And today, I'm very pleased to share that this has continued throughout the summer. It's been uneventful summer at Indre Haroy with, I would say, a very strong biological performance across all fish groups. So that's something we are very satisfied with. I will start this presentation by going through the -- can you change the slides? Yes. I will start this presentation by going through the highlights for the quarter. Then we will move over to the operations, both in Norway and internationally before our CFO takes you through the financials. And finally, I will end the presentation with some comments on outlook and a summary before we open up for questions. And for those of you who are attending virtually, you can submit the questions via the webcast.So as I said, it's been an eventful summer. We have seen a strong biological performance with good appetite and normal mortality levels across all fish groups. The third quarter is already well underway for all-time high biomass production, and we have a standing biomass of well over 1,600 tons as per 15th of August, with the largest group also very soon exceeding 4 kilos. And as communicated earlier, we harvested out our second batch during the quarter. And I think given the challenges we had, we are quite happy about the result from this, we showed both very good prices, good quality and also a tight weight concentration, which is something we are very focused on. We are also continuing to ramp up production. We stock 2 additional batches during the quarter. So we are now on our seventh generation and more to come during the second half. And furthermore, we're also starting to get now meaningful data as to our production cost development, which shows that we are on track. Our CFO will go more into detail on this, but I think that both our results for the second quarter as well as the batch-specific cost show that this, for sure, is moving in the right direction. During the quarter, we also completed Phase 1, which was a major milestone, and we entered into contracts with Indre Haroy for Phase 2, and the preparation here is well underway. And finally, we continue to enjoy a strong financial position following our equity issue in April and the completed refinancing of our bank facilities. So moving over to the operations in Norway for natural reasons, obviously, the net biomass production in the second quarter was low, but following a strong development throughout June. We ended the quarter with a quarterly run rate of around 1,000 tonnes in biomass production. And halfway into the third quarter, we are already at 580 tonnes or 58%, which means that we are very comfortable that we will have all-time high biomass production during the third quarter. We have also installed a mobile freshwater production plant at the site, which we have taken into operation. And I think the operating procedure that we have implemented here is quite unique as we know, have freshwater as an integrated part of the fish logistic and fish grading process that we do regardless every 3.5 months. And this is a very gentle procedure from a fish valve perspective and effectively gives us a free freshwater treatment without any extra starving days. And it's also important to stress that this is a precautionary step that we are taking. And together with the other procedures that we have implemented. This should put us in a very good position to handle AGD if it is a problem later. And I think also very important, the fact that we now have these capacities on-site, rather on short notice at all times. We are in a position to act swiftly if an urgent situation should come up. So I think for us now, we don't expect it to be a major problem going forward. It's more of a risk that we need to be aware of and tackle if needed.So looking at our biomass situation. As you can see, we are now on the southern generation. We have an all-time high biomass. And as you can see from the table here, we have had strong growth over the summer. And both Batch 3 and 4 has gained around 1 kilo over the last 45 days. So strong growth. Both of these batches are split in 2 groups and the largest group here we expect that to exceed 4 kilo by the end of this week. We also have seen good momentum on our fifth batch, which is now around 1.7 kilo and with the largest group here around 2 kilos. And I think what is also show is the value of having the ability to grade the fish during the production process, you will always within a batch have varying growth and by grading the fish, we can tighten the weight spread and also making sure that we maximize the output. And at the end of the day, we're confident that, that will have a significant impact on both production costs as well as our ability to achieve good prices. Batch 6 and 7 have also had a very strong growth over the summer, I would say, above expectation. And for those 2 batches, the stocking weights were slightly lower than what we ideally wanted. This is due to somewhat lower temperatures during the winter at a small facility. So we are installing some more heating capacity at that site, so that we can produce as evenly sized small as possible. But given the growth we are seeing; this should have a very marginal impact on the total. So I think if we scroll back a few months, the harvesting profile we are now looking at is better than we could have dared to hope for. Back then, it was a real possibility that we had to harvest some fish early. But with the way things have developed now, we expect to have normal harvest operations for basically all fish groups. So we plan on starting now with harvest in September, but we will take out the largest groups in both our Third and Fourth Batch and with the fish being now almost 4 kilo and also with some more weeks remaining until harvest, we expect a decent harvest weights. The majority of our harvest volume will come in the fourth quarter, where we will harvest out the rest of Batch 3 and 4 as well as parts of Batch 5, and the last part of Batch 5 will be taken out in the first quarter. And I think what we're also seeing now is that we expect the increasing harvest weights throughout the second half, and we've obviously do whatever we can to try to maximize output. And part of what's determining the actual time of harvest is tank availability, we are stocking new groups. We have transferring fish. And actually, our 8 batches is coming already next week. So right now, we are utilizing 9 out of 12 tanks. But very soon, all tanks at the site will be fully in operation and hence, we should see a continued good development as to growth and feeding over the coming months. As communicated, the harvest of Batch 2 yielded around 600 tonnes of gutted weight. We harvested out the back in full in May over 9 days. That was a precautionary step and also in light of a very strong market at that time. And I think this was a real stress test for our harvesting logistics, which also show that we can handle quite a sizable volume over a very short period of time and also a really useful experience for both our operating staff and sales organization. So I think what we are very satisfied to see is that similar to Batch 1, we saw a very tight wage concentration for Batch 2 and also the quality was very good with a superior share of 93%, which helped us have an average price for all the volume of NOK 96 per kilo, which I think is quite good given the wage profile of the fish. So as to the building project, Phase 1 was completed in mid-April when we took over the last 2 tanks. We have been preparing for Phase 2 for quite some time, both on the planning and design, but also on initial groundworks and escalation works. We signed contracts for Phase 2 with a as the supplier of the process part of the facility and hunt as the civil contractor. And I think what we are trying to do here is combine industry-leading experts within their respective fields. And we have really high hopes for this model and expect this to yield benefits, both in terms of cost, timeline and also efficiency during the construction process. So right now, we expect a CapEx of around NOK 1.6 billion to NOK 1.7 billion. This reflects savings on infrastructure investments already taken in in Phase 1, productivity and efficiency gains in Phase 2 and also the expected inflation effect. So we are working very closely now with the contractors on the cost estimate. We're also working actively on the design and engineering and preparations. And the ambition here is to be in a position to make a final investment decision by the end of the year. So before we go over to the financials, I will say a few words on what we are doing in our overseas projects. In Korea, we continue to have focus on design and engineering. And small facility now is more or less completed. And during the quarter, we also saw good progress on the growth facility. And this obviously gives us a better understanding of the total scope of the project. We are working very actively with respect to cost optimization of the project. We are seeing some, we call it, site-specific circumstances that is impacting the cost, in particular the intake and discharge water evaluating different alternatives to reduce cost. And obviously, in overseas projects, there is always also an element of farming infrastructure that you take for granted in Norway, which also have an impact on the cost. But I think on the positive side, comparing apples-to-apples with Indre Haroy in Norway, the costs are comparable. And also, salmon prices in Korea have remained very strong, and I think stronger than most have expected. And this is obviously something that has a positive impact on earnings and margins. And we are now also glad to report that we have had a good progress on the permitting side. This has taken a long time, but we are now starting to see the results of the work undertaken here. For the small facility, we have received the initial construction permit and the zoning permit is already in place. So here we expect the permitting process to be completed fairly shortly. When it comes to the growth facility, we have received the zoning permit during the quarter. This was something that took a long time and quite a big hurdle. We are now working on the construction permit and also what is called a sea permit, and we hope to have come a long way by the end of the year on those 2. When it comes to North America, we are continuing with our site selection process and initial due diligence, and we are also actively engaging various stakeholders, both private and public. We are, I would say, very focused on finding the best possible site. Obviously, Indre Haroy for us is the gold standard, and it's something that is hard to find elsewhere. But for us, it's important to find a site that ticks the box as we want, and this is something we don't compromise on. And therefore, we are taking the time needed to make sure that we find a site that is meeting our criteria. But we are progressing here. And I hope to have something more per share on this project in connection with our third-quarter results. I think also what's interesting with North America is that there in many places are an existing farming operation. And this means that you have farming infrastructure already in place. You have people and so on. And this is obviously something that we see a lot of value in. So I think with that, I will leave the word over to Trond to go over the financials for the quarter.

[Trond Vadset Veibust, executive]

Thank you, Trond HÃ¥kon. Nice to see you all again. Financials. As expected and communicated earlier, production costs are decreasing as we see as the biomass production gears up and the volumes at Indre Haroy increase. Looking at Batch 5 at a live weight of around 1.1 kilo at the end of the quarter. The farming EBITDA cost is about NOK 71 per kilo. We expect scaling effects towards harvest of about NOK 16 primarily as an effect of decreasing smolt costs. That gives an expected farming cost at harvest of NOK 55 per kilo, excluding G&A. This scaling effect is expected to continue to improve when steady-state production volumes are reached towards the end of the year, with an additional positive effect from Phase 2 and 3, primarily linked to personnel and other OpEx. In May, we harvested our Batch 2 in a historically strong salmon market, generating revenues of NOK 56.3 million. Additionally, we had some income related to sale of services and expected insurance settlement following the mortality incident. The operational EBITDA ended up negative NOK 20.8 billion. This includes NOK 17.9 million in incident-based mortality costs and extraordinary costs following the mortality incident in the quarter. This was partly offset by an expected insurance settlement of roughly NOK 3 million. Additionally, it includes capacity adjustment that has been expensed directly in the profit and loss. Depreciation for the quarter ended at NOK 11.3 million. As Indre Haroy is now complete and hand it over to us, the depreciation has commenced from May this quarter. That means it's about 2 months of depreciation included in that number. The fair value adjustment of the biomass ended at NOK 7.4 million. It reflects that we have stocked 2 new batches, but also that the forward price of salmon is very high. Finally, we had negative net financials of NOK 1.2 million. Again, as Indre Haroy is now complete interest cost that has been previously have been capitalized is now expensed in the profit and loss. And the net loss for the quarter ended at NOK 26 million. As shown in the quarterly report in the NOK 2 segments, the Farming Norway segment reported an operational EBITDA of roughly negative NOK 6 million. As explained earlier, this figure includes a relatively high amount of nonrecurring costs linked to the mortality incident. And thus, it does not really reflect the underlying performance in the segment. Firstly, we had NOK 12.9 million in incident-based mortality costs, which is where the disease part of the biomass has been written down and expensed. We had NOK 5 million in extraordinary costs related to handling of the incident. And as stated, this was partly offset by the expected insurance settlement of NOK 3.9 million. Adjusted for these nonrecurring costs, the operational EBITDA in the segment ended at roughly NOK 9 million, and that's excluding capacity adjustments. And as highlighted by Trond HÃ¥kon, Salmon Evolution is in a strong financial position. We have available liquidity of NOK 853 million, including committed undrawn credit facilities. Following the completion of Phase 1, there is naturally a significant reduction in investments. And although we have initiated Phase 2, the first 6 to 9 months is relatively capital-light. We are doing some upgrades at our smart facility in Dongwon. But yes, this is relatively minor compared to the investment level we have had in previous quarters. And last but not least, we had a successful private placement in April, raising gross proceeds of NOK 525 million. Thank you, Trond HÃ¥kon.

[Trond Schaug-Pettersen, executive]

Thank you, Trond. So as we have communicated, we have a production target of 100,000 tonnes over the next decade. And this plan remains unchanged. And we also really feel that we have a very tangible pipeline of project and also now with Phase 1 fully operational, we have a unique platform to build on. And we are now focusing a lot of attention on Phase 2 and very much look forward to get started with construction here. I think for Norway, we are also seeing some interesting opportunities especially in terms of projects that might have received licenses but struggle with financing also. But going forward, we also obviously look forward to continue developing our project internationally. But as we've always said, the backbone of our strategy is to do this on the back of having a successful operation in Norway, which we think is absolutely critical to succeed overseas.So to sum up, biomass production is, as we have stated here, back on track. We have had now very strong biological performance over the summer. And hence, we are very comfortable that we will see all-time high biomass production during the third quarter. We have also all-time high standing biomass, which is up 55% over the last 45 days, so strong growth. And also, with new batches coming on stream over the next months, we should see a good trend in both daily growth and feeding levels going forward. And I think also we very much look forward to start harvesting again and also to be able to have more regularity as to harvest volumes. We've had very good feedback from our customers. They are only complaint has been that we don't have enough fish. So we're looking forward to start addressing that. And finally, I'm also very happy to see that our production costs are trending the right way on back of increasing production volumes. And obviously, long term, this is very important. And at least based on what we are seeing, we remain very confident that we will have a production cost that is fully competitive with conventional farming when we get the study state. So we believe that we have a strong and unique platform, both operationally and financially to continue to lead and shape the development of this, I would say, very exciting industry. So I think with that, we will open up for questions. We will start here in the audience, and then we'll take the questions, submit via the webcast later.

[Unknown Analyst]

[Foreign Language] Could you elaborate in terms of your efforts on sales and marketing and maximizing the revenues per kilo on the fish? Can you say something about your strategies going forward? You're obviously small volumes now, but this will come up significantly in the coming quarters. Could you say a bit more on that topic?

[Trond Schaug-Pettersen, executive]

Yes. I think if you look at our sales prices, and we obviously benchmark or every time we sell fish, with benchmark against the NASDAQ index and so forth. And what we have seen, we have delivered good results, benchmarking against that. Obviously, the challenge has been – if you are to do real things on the commercial side, you need to have regularity on volumes. And obviously, the beauty with this market here is that it is a very attractive commodity market. So we can just tap into that when you have fish. But I think long term, we see a lot of opportunities here, but it's all about timing as well. So now we harvested in November and December last year, then we had a pause and we harvested 9 days in May. But now from September and into the fourth quarter, we'll start to have more regularity. And so we have an ongoing process on – we obviously see – with land-based, we have a unique opportunity to do something extra. But I think you need to time it alongside the development in production, but this is for sure something we are working on. We, as you probably saw, like here in Norway, it was more like a gimmick that we sold to many supermarkets in Oslo and also some other parts, but this is for sure something that we'd like to do more of. But as of now, the bulk of the volumes have gone into the commodity market, but we have been able to get good prices and sell it as a unique product and get people to pay for it. But for sure, as volumes come up now, this is a very big focus area for us.

[Unknown Analyst]

And in terms of cost on Batch 3 and 4, is it fair to say that it's more tilted towards the performance of Batch 2? Or is it somewhere in between or at your targets for Batch 5?

[Trond Vadset Veibust, executive]

The cost of Batch 3 and 4 has, of course, been somewhat impacted by the mortality incident and the fact that these batches haven't been standing slightly longer at Indre Harøy than, for instance, Batch 5. So your assumption is pretty accurate.

[Trond Schaug-Pettersen, executive]

Yes. But I think also now we have good growth, and it's all about get the kilos on it quickly. And so we should have an okay development now over the next months.

[Unknown Analyst]

And finally, on the smolt, it's being stocked in the second half of the year. Will that also be impacted by the colder waters at Dongwon and be stocked at lower weight? Or will that come up to your targets around 120, 130?

[Trond Schaug-Pettersen, executive]

Yes. I think what you will see is that Dongwon we are stocking next week is slightly lower, but then the 2 next ones, it will be increasing weights throughout the fall. But it's a fairly small impact because like you saw on both Batch 6 and 7, it's double several times in just 1.5 months. So we are able to catch up fairly quickly. But obviously, in an ideal world, you would like to have exactly the same way every time, and that's what we're working on to achieve. And part of that is to have somewhat more heating capacity, and that's especially during the winter. So to be in a good position for the next winter, that's what we're making sure of now.

[Unknown Analyst]

Can you give some color on the mortality rates in different batches since the operational update in July?

[Trond Schaug-Pettersen, executive]

Yes. I think what we can say is that it's normalized. It's been normal mortality levels, both Batch 3, 4 and 5, I would say. As to Batch 6 and 7, it's been exceptionally low. So with almost nothing. So overall, it's yes, mortality levels as seen from the tables. And I think we have a target of 3% to 5% on a full cycle, we are absolutely confident that, that is within reach as long as you're able to maintain good biosecurity and avoid the sea. So that's what we are striving to get to.

[Trond Vadset Veibust, executive]

Anyone else? Then I think we can move on to the question. We have received online. It reads like this. Can you elaborate on the difference between water intake in South Korea versus Indre Haroy?

[Trond Schaug-Pettersen, executive]

Yes. So at Indre Haroy, it's fairly deep right outside the facility. So we have immediate access to deepwater. In South Korea, it's more shallow. So you need to go longer out to access the deepwater. And that's the main difference. And that also has some implications as to how you lay down the pipes and the math behind that. And that's what we are assessing how to do in the most cost-effective way.

[Trond Vadset Veibust, executive]

Okay. That concludes the question submitted via the webcast. And there seems to be no more questions here. So I guess that concludes this session. Thank you for your attendance, and see you again in November.