Salmon Evolution ASA

OSE:SALME

Earnings Call Transcript 2022-Q3

[Trond Schaug-Pettersen, executive]

Good morning everyone and welcome to this presentation of Salmon Evolution's results for the third quarter. My name is Trond Schaug-Pettersen; I'm the interim CEO of the company, in addition to my role as CFO. And with me today, I have our Chief Commercial Officer, Odd Frode Roaldsnes. And we will be doing this presentation.When we were here in August, we were able to give you a taste of our salmon. That was also the plan today, but apparently it's Christmas party season in Oslo. So a little bit limited capacity at the kitchen here, but we have brought some fillets that you can check out.And also we have some smoked salmon from our first harvest that you can bring with you after our presentation. And that's from -- actually from a local smokehouse here in Oslo, [ Frederick's smokehouse ] at Fiskehall. So hope you will enjoy that. And then the plan is next time when we meet in February, in our fourth quarter presentation, we will try to give you some taste on-site, that's for our salmon.So as to the agenda for today, we will start by going through the highlights for the quarter. We will then, for those who are not too familiar with Salmon Evolution, say a few words about our company and approach to land-based salmon farming before we move into the operations both in Norway and in our overseas projects.We will then go over the financials for the quarter and we will round off the presentation with some comments on outlook. And at the end, we will do a Q&A. And for those who are attending this presentation virtually, it's possible to submit questions directly in the webcast.So as to the highlights. Obviously I think that the main takeaway since our presentation in August is that we, in our perspective, now have demonstrated proof of concept as to our approach to land-based salmon farming. We have been operating now for more than 7 months. We have successfully completed 3 smolt releases. We continue to see low mortality, and we also see that strong biological performance that we have reported earlier has continued, and this has allowed us to finally start the harvesting of batch 1.And I think the first harvest, obviously, a major milestone for the company and really where we have proved that it's possible to produce salmon on land on an industrial scale in a short period of time, and not only to a certain weight level, but also all the way up to harvest way.And I think also for us, it's extra rewarding to see that the quality has been very good. As you know, we've done a lot of testing, but now the product is out there. We have gotten feedbacks from our customer and are very satisfied with the results so far.We also continue our projects in the overseas market, both in Korea and North America. In Korea, we will soon approach the construction phase. And we strongly believe that with the setup we have already in place in Norway, we have a unique opportunity to scale our human capital in even more attractive markets overseas.And also, we are continuing the preparations for Phase 2 at Indre Haroy. The main focus is on identifying, learning effects from Phase I and also, obviously, try to get the cost as low as possible.And the company continues to enjoy a strong financial position with good liquidity. And so post quarter event, obviously, outside the first harvest and the stocking of our third batch. Another important event was the stepping down of Hakon Berg as CEO for personal reasons and myself taking over as Interim CEO.So a few words about Salmon Evolution. As you know, we're a land-based salmon farmer based in the heart of the aquaculture cluster in More og Romsdal in Norway. And our ambition is to take a lead position in the development of land-based salmon farming globally.The company was founded by a group of people deeply embedded in the farming industry. And today we have about 60 people in our group covering all the important areas such as farming technology, project management, and sales.And I think what's important for us to say is that the basis for Salmon Evolution has always been that we want to take the best -- we want to build a concept where we take the best the ocean has to offer while at the same time building on the decades of experience from the land-based smolt industry.And we do this through what we call a hybrid flow-through system where we constantly provide the salmon with a fresh flow of seawater to give optimal living conditions. And at the same time, we reuse some of the water because simply this makes sense from both an operational and financial point of view.And what's important for us is that we want to have an environment for the salmon where it not only can survive, but also thrive. And we think that this will give better biology, it will give better appetite, better growth, better quality, and at the end of the day it will also give better economics.So our flagship operation at Indre Haroy, it's a large facility. We're now building Phase I. We started to build in May 2020. In March this year, we released the first batch of smolt, and we have just completed the first harvest. And the facility will be completed in just a couple of months.And we really see that our approach to land-based farming has a potential for global scaling in attractive overseas markets. And we are, with our technology approach, we are dependent upon finding relevant locations with access to seawater and also water of a certain temperature. This means that we cannot be everywhere. But at the same time, there are many places in the world where we can be.And that's why we, last year, entered into a project with Dongwon -- a joint venture with Dongwon Industries in Korea, and we will build a similar type of facility. And also this year we announced that we are planning to move into the North American market.So as I said, the first harvest is obviously a major milestone for us. Last week we completed the harvest of around 1/3 of batch 1. And as reported, operation went very well. Actually just completing a harvest is quite a logistical -- is quite a logistical operation.First you need to get the fish out of the tanks, then onto the wellboat and then from the wellboat into the slaughterhouse. But this went very well. Whole operation was carried out in a controlled manner, and we had minimum registered mortality during the process. So we expect to fully harvest batch 1 during the fourth quarter. We expect an average harvest rate of around 4 kilo on a head-on, gutted basis.And I think also what we have seen now with this harvest is that the quality of the product is very good. We see that -- and because now we have gotten feedback, Odd Frode will share more on that later, but we got feedback from a lot of customers that have been trying out the product, and they are confirming that the quality of the fish is very good. You have a very good fillet quality, the meat texture is very firm and nice. And also you can see from products outside here, the color is very nice and red and also consistent. And I think also, very importantly, obviously, the taste of the product is very good.Another thing which we are very happy about is the fact that -- and there's obviously some uncertainty as to the superior share when you're -- because you don't know that before you harvest. But for the product that we -- the fish that we have harvested so far, we had 94% superior share. And I think even for a conventional farmer, that's something you would be very happy about. So high quality of the product.We also saw that the weight spread for the fish was very tight. So we had quite consistent size, which is a clear indication that we've been able to evenly spread the feed out in the tank. And this was actually a smolt that was -- when we put the fish into Indre Haroy that it was quite a large spread as to weight. So we managed to narrow that range.Another also important feedback from our customers is that we have a very strong fillet yield. And that is obviously, at least for myself coming from the salmon processing industry, that's something you as a customer prefer because that gives you more value for money. And obviously for us, as a supplier, it's a very good way to get a good price for our product.I think we will -- as to the data for batch 1, we will obviously not have all the data before the batch is fully harvested. But in our Q4 update early in January, we should be able to give sort of the full details about the results from batch 1, but I think what we can already say now is that we are very satisfied with the results we've seen so far, and really think that this is a very good start, given the fact that this is our first batch.So since our last update, we have continued to grow our biomass and we now have around 780 tonnes in our facilities right across Indre Haroy and our smolt facility at Dale. At Indre Haroy, we have now 3 batches, including the last batch that were stocked late October. We continue to see low mortality across the farm, which together with a strong biological performance, it's a very clear indication of both good water quality and good fish welfare in our farm.And I think we -- now we have been operating for more than 7 months. And I know I speak for everybody in our organization when I say that we are more convinced than ever that our approach to land-based salmon farming with a hybrid flow-through system is the best way to do it.And I also think, looking at this performance there, it's worthwhile remembering that taking a facility like this into operation is not plug and play. It's a lot of tuning of the systems and the operators need to be acquainted with the facility and how it works. So when we are able to get these kind of results already for batch 1, I think that says a lot about the long-term potential of this facility.This is a chart we've presented earlier. It shows the compounded daily growth rate for both batch 1 and batch 2. As you know, the fish grows faster when it's smaller. And then when it gets bigger, the growth rate is falling.Batch 1, now at 4.7 kilo has had a daily growth of 1.2% since initial stocking. We are continuing to -- although the growth rate is falling, we are continuing to see stable feeding volumes.And as for batch 2, the performance has been, as you know, even stronger. Very happy about the results there. It's grown in just 4 months from 125 grams to 1.2 kilos. So that's 1.8% per day. I think some of the outperformance is probably linked to the fact that it was stocked at a lower weight than batch 1. But still we see the performance of batch 2 is very strong. And also in terms of mortality, batch 2 is doing extremely well.So as to our production plan, there are basically no changes since last time. As I mentioned on the harvest, we completed the first harvest. Batch 1 will be fully harvested in the fourth quarter. We will then have a pause in the first quarter before we start harvesting of batch 2 in the second quarter.I think with the volumes we have for batch 2 and the outlook for the second quarter, we should be in a good position to get some good results out of that.So on the stocking of smolt side, we -- as I said, we completed the third smolt release. We'll do a new batch in December. That will be at what we call steady state smolt release volumes, so around 280,000 smolts. And from then on, we will stock 280,000 smolt every second month. And this should get us in a position to reach steady state, both production and harvesting volumes from Q3 next year.And then I think Odd Frode, he will say a few words about our first harvest and the feedback from customers.

[Odd Roaldsnes, executive]

Yes. So what we see from the first harvest, then we see the true value of the successful cooperation we have with Vikenco as a state-of-the-art processing plant located nearby our facility. The relationship we have with Vikenco is an opportunity for us to fully focus on the farming operations as well as the sales of our salmon.When it comes to slaughter and processing activities, it's all about scale, if we're able to achieve a competitive unit cost. And through the partnership, we have the possibility to have industrial scale cost level from day 1 rather than to invest in a subscale processing operations from the beginning.Through Vikenco, we also have the opportunity to offer our customer a full range of value-added products, either being fillets or portions, in any kind of different packaging, which gives us a lot of credibility when we are discussing and interacting with customers worldwide.Next, please. For the first harvest, we have distributed samples and trial shipments for more than 20 different accounts worldwide. Clients and partners have been waiting patiently for our first harvest, and we are very proud to finally share our products with the markets.We have received very positive feedback in terms of product qualities and attributes such as taste, texture, color, freshness of our land-based salmon.We have distributed in various categories of clients all the way from high-end retailers in U.S., European distributors, processors and smokers and large Japanese food service distributors, all of them confirming the versatility of the product and unique product characteristics such as mild salmon taste, a high fillet yields, a firm texture, and an observed color of 29 to 30 on the SalmoFan color chart.We will continue to introduce our products and build strong partnerships down the value chain with both major industry players and smaller niche customers through our enthusiastic and competent sales organization.

[Trond Schaug-Pettersen, executive]

Yes. Thank you. Obviously this is supposed to [indiscernible] what's important at the end of the day that you get out the product that both we are happy with and also our customers. So obviously extremely satisfied with that.So this is moving over to the project. This is Indre Haroy in August. And as you can see, all the tanks are completed, the buildings, the structure, facilities, it's finished. So now it's all about installation inside, piping system integration, commissioning and testing.We currently have fish in these 4 tanks. Very shortly we will split the fish we have in that tank into these 2 tanks here. And then we will take the remaining 6 tanks into operations over the coming months.I think also what we are happy about with this project is that we've been able to do both construction and operation basically hand-in-hand. It's not ideal, but we managed to put good procedures in place and also physical barriers so that we have been able to do that without any problems. So we are now so far soon approaching the finish line here. We'll complete that in just a few months.So then a few words about our projects in overseas markets. We continued to work actively on our project in Korea that we have together with Dongwon Industries. And as you know, this project comprises both a smolt facility in the inland and also a full grow-out facility on the coast line.And especially during the third quarter, we worked a lot on the design and engineering of the smolt facility, which is now getting soon completed on the design phase. The plan is there to start building early next year.We've also done quite a lot on the grow-out facility. And as you can see, this is very much similar to what we have at Indre Haroy. There are some differences as to the configuration, but the main principles are the same. You have 12 tanks for each phase. But for example, as to -- like in Norway we have an external slaughtering operation, in Korea we'll have to do that on-site because you don't have the same infrastructure as you have in Norway.But the plan is -- as to the grow-out is to start building by mid next year. This is also tied to the permitting processes that is ongoing. We are, as communicated earlier, working actively on this. We are experiencing very strong support, both on a local, regional, and national level, and expect to have some important clarification on some key permits over the coming months. And that will really put us in a position to speed up the progress.And as we said, we target to be the leading land-based salmon farming company globally. And as such, it's very important for us to build a good pipeline of high-quality projects. And obviously the North American market is very attractive, but land-based salmon farming is a new industry. And this means that you don't have the same regulatory framework in North America as you have in Norway. And therefore lead times are much longer.So if we want to be in a position to start building in, say, 2 to 3 years, we start -- need to start working on this now. And that's why we have dedicated -- put together a dedicated team to work on this opportunity. And I will say we've taken on quite a methodical approach. What we've basically done is that we are scanning every parcel in certain areas of the coast. And then we are matching each parcel with certain given criteria, such as water quality, water depth, water temperature, access to infrastructure and so forth.And as mentioned last time, we have secured options for some sites. We will continue to work on the site selection process over the -- and due diligence of these sites over the coming quarters. And I think sort of long term for Salmon Evolution, projects like this is where we really can create a lot of value by basically applying the principles we have in Norway from a well-proven and well functional facility into the overseas markets.So a few words on financials. As I said last time, our P&L is not very interesting, but it's soon starting to be. So at least from the fourth quarter, we'll finally have some real revenue, which we very much look forward to. We are still in a ramp-up phase and we'll continue to be so over the next quarter. And accordingly there is a limited number of kilos to allocate the costs too. But I think what we already can say is that unit costs are trending the right way for every month, and we remain very confident that once we reach a steady state, we will have a production cost on par with conventional farming.As to the results for the third quarter, EBITDA ended at minus NOK 21 million. Please note that this figure also includes NOK 4.5 million in charges taken directly over the P&L and not allocated to the biomass due to unutilized production capacity. It also includes around NOK 5 million that is directly linked to our projects in Korea and North America. And I think starting from the fourth quarter, we will introduce segment reporting so that much -- in a much clear way, you can see the contribution from our farming operations in Norway in the P&L.Yes. Further down the P&L, we had a fair value adjustment on the biomass of NOK 6.2 million, leaving an operating loss of NOK 16 million.So moving over to CapEx for Phase 1 at Indre Haroy. To date we have invested just short of NOK 1.5 billion. CapEx in the second quarter ended at NOK 121 million. This is somewhat higher than expected. Also over the last month, we have together with our contractor, Artec Aqua done quite a thorough review of the remaining project cost. And based on that, we have also revised the full Phase 1 CapEx to NOK 1.56 billion to NOK 1.59 billion. And this means that we, as per the end of the third quarter, have somewhere between NOK 85 million and NOK 115 million left in remaining CapEx.I think as we said last time, we see that this system integration processes and this is of completion and getting all the systems to work together, it's complex, and it has required more resources. And also we are now in a phase where a lot of the contracts that we have with sub-suppliers are subject to final settlement, and we see that we have had a higher than expected level of variation orders.But I think to a very large extent, these variation orders can be looked as prototype costs. This is something that is unique for Phase 1 and something that we will benefit from when moving into Phase 2 and 3 in Norway and obviously in our project overseas.As to Phase 2, we are continuing the preparations. Focus is on implementing learning effects from Phase 1 and also identifying cost savings. As you can see from the picture here, we have actually now completed blasting and excavation works for the next intake station, actually both for Phase 2, but also for Phase 3. And this was made possible because we already had the equipment and relevant personnel on site. So we were able to do that in a very cost-effective manner.And it also gave us very valuable experience as to doing heavy construction work and operating the facility at the same time. And we can confirm that it went very well with no sort of problem for either the operations or the fish. So our plan is to continue with Phase 2, following the completion of Phase 1. However, we'd want to emphasize that we haven't taken any investment decision on that. We also haven't taken on any financial commitments and the spending on Phase 2. Until we make that final investment decision, we'll be very moderate.So as to our funding situation, we continue to have a very strong balance sheet, available liquidity of NOK 645 million end of quarter, leaving us in a very good position to both handle early Phase 2 CapEx, but also having a robust financial platform towards the tail end of Phase 1.We are -- as we have said, we are continuing to work on debt financing for Phase 2, that's going, I would say, very well. We see very strong interest from banks and remain confident that we will be able to get higher leverage and also even more competitive cost. But I think we are not rushing it because what's important for us is to fully leverage the proof of concept from Phase 1. And obviously the first harvest now and the full harvesting of batch 1 is very important in that respect.So this is our roadmap and our plan. We -- it's an ambitious plan, and we target to, over the next decade, get up to a production of 100,000 tonnes. In Norway and at Indre Haroy, we will continue to develop this project in 3 phases as planned. And then in Korea, we are now soon entering the construction phase on that. And then obviously the ambition and the target there is to, by the end of the decade, be up and running with a quite a substantial operation in the North American market.And we, as a company, clearly see a huge potential for land-based salmon farming to fill the supply gap in the market. But I think working on this every day, you see that the lead times in this industry is very long. So at least in the short to medium term, we are not very concerned about a wave of supply from land-based.So to sum up, we are extremely excited about having completed the first harvest, which is, as we say, a proof of concept as to our approach to land-based salmon farming. We've been able to achieve excellent biological results from smolt to harvest rate. We have done that over a short period of time, and as I said, on an industrial scale and with the end result being a very high-end quality product.So going forward, it's all about continuing the strong biological performance, while at the same time ramping up our production. And as I said, we are very much convinced that the hybrid flow-through system is the best approach for land-based salmon farming. And we see a huge potential in scaling this, both in Korea and also in North America.So as I said, we have a strong balance sheet. And yes, we are very happy about where we are at the moment and look forward to the next harvest, which is just in a -- yes, very shortly, and then we will get some very good data and experiences now throughout the fourth quarter. So I think that was the end of the presentation.We'll now give the opportunity to ask questions, and then we'll try to answer as best as we can. And I think we'll start with questions from the audience, and then we will move on to questions submitted via the webcast.

[Carl-Emil Johannessen, analyst]

Carl-Emil, Pareto. Two questions. One on the growth in Phase I. It's been very strong. Can you say something about how it is compared to your budgets, aka, the 7,900 tonnes you expect for Phase 1, what is kind of expectations with this growth rate on volumes?And then on CapEx for Phase 2, you previously said NOK 1.3 billion to NOK 1.4 billion. Is that still kind of best guess or any changes to that estimate?

[Trond Schaug-Pettersen, executive]

Yes. I think as to the growth, we are in our production plan. We are -- if you look at where we are now on batch 1, that is basically more or less in line with the production plan.Batch 2 is sort of ahead. And obviously what you have to remember on batch 1 is that we have had a lot of tuning of the systems and modifications and stuff, and we have policies in feeding and that kind of thing. So -- but still we are sort of on the same trajectory as in the production plan.So I think we are very confident in the production plan. We see that that is very realistic and we clearly see an upside potential over time. But I think you will have to get more data to sort of do any revisions on that. But clearly we feel that what we have done now with Phase 1 and the first batch is extremely satisfying.I think as to CapEx, obviously, that estimate was made in, I think, in February. We have seen an increase in CapEx this year. We are sort of working on it. We haven't concluded on the full CapEx estimate for Phase 2. You see what we -- where we are at Phase 1. I think there are obviously -- Phase 1 includes some, call it, global CapEx that will benefit other phases such as the land and some of the infrastructure. So that's one part of the equation.And then as I said, we are now seeing that CapEx is -- or the construction market is cooling down. And there is a lot of construction projects being either postponed or canceled. And I think going forward, you will see -- this will have a favorable impact on cost. But we haven't concluded as to the exact level of CapEx, and that is something we will have to come back to.

[Unknown Analyst]

Can you just say a few words on capital costs in Korea versus Norway? Is it on par with that? Or is it less expensive to build there? What's the outlook?

[Trond Schaug-Pettersen, executive]

Yes. I think the -- sort of the -- we are working on it to map out the cost. There are some differences. But I think sort of more or less, it should be sort of about the same. There are -- some will be higher and some will be smaller, but I think sort of -- as sort of a general rule, it should be sort of around the same level.We also have a few questions here via the webcast. Can you say something about the death rate from batch 1?I think what we can say, and obviously, you can read from the biomass overview. It's not the exact figures, but it's approximate, but we have a budget of 3% to 5% mortality or 95% to 97% survival. And I think for batch 1, we are sort of within that range. For batch 2, it looks, yes, even better. So that is -- we see a very low mortality on batch 2.Yes. And then we have a question here from Knut Ivar Bakken at SpareBank 1 Markets. CapEx for Phase 2 in Norway, I think we addressed that with Carl-Emil.And then he also has a question with -- about the total CapEx of Phase 1 in Korea. That is -- the work on that is ongoing. So that is something we will have to come back to.And then he also has a question about sort of the start of production in Korea. And as I said, the ambition there is to start with a smolt facility early next year and then by mid next year, to start on the grow-out facility. And based on the plans we have there and to be in a position by the end of 2024, to take the grow-out facility into operation.We also have a question here on -- also from Knut Ivar Bakken. Production cost level when we are up at 100% utilization of Phase I.I think what we have said is that we will have a production cost on par with conventional farming. That has increased, obviously, over the last year with increasing feed prices and so forth. But sort of what we can see today is sort of around the NOK 50 million mark or slightly above. I think that's sort of more or less where the market is now.I think we have addressed all the questions on the webcast. Let me hold on for a few seconds before we end the presentation. So I think that was all for today.Thank you all for attending this presentation. We very much look forward to see you again in February in connection with our fourth quarter results. Outside here, we have some, as I said, smoked salmon that you are more than welcome to bring with you and taste the product for yourself. So thanks a lot.