Salmon Evolution ASA
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Earnings Call Analysis
Summary
Q3-2023
Salmon Evolution reported a robust third quarter with doubling biomass to 2,100 tonnes and a net production increase from a quarterly run rate of about 1,000 tonnes to 1,600-1,700 tonnes. Superior fish quality remains high at 94%, compared to the industry's 85%, contributing positively to pricing power. The company enjoys a strong financial position with over NOK 700 million in liquidity and expects harvest volumes between 1,000-1,200 tonnes in Q4. Costs are trending down towards competitive rates with conventional farming. Optimizations focus on feed, genetics, AI, and operational efficiencies. The CFO forecasted a strong price outlook for salmon, with cash costs between NOK 53-58 per kilo at steady state in Phase 1, and operations are progressing with the ASC certification obtained in under a year. Expansion plans include doubling capacity to 16,000 tonnes of gutted weight under Phase 2, aiming to complete initial project design in Q1 of the following year. Additionally, ventures in North America and Korea are under development, leveraging experience from Norway to ensure sound capital discipline and attractive returns.
Good morning, everyone, and welcome to this presentation of Salmon Evolution's results for the third quarter. My name is Trond HĂĄkon Schaug-Pettersen, the CEO of Salmon Evolution. And with me here today, I also have our CFO, Trond Veibust. As reported in our operational update in early October, we have had strong biological performance throughout the quarter, and that's obviously something we are very satisfied with. I will start this presentation by going through the highlights for the quarter before moving on to the operations, both in Norway and internationally.
Our CFO will then take you through our financials for the quarter. And finally, we will end the presentation with some comments on outlook. So as to the highlights, the biological performance in the third quarter has been strong, and we ended the quarter with an all-time high biomass of 2,100 tonnes. That's basically a doubling during the quarter. And this means that production in 3Q has never been -- it has -- we have never had higher production, and we ended Q3 with a total production of 1,300 tonnes in net biomass growth. We have also seen a steady increase in production throughout the quarter. And as of end of September, we had a quarterly run-rate biomass growth of 1,600 to 1,700 tonnes. That's equivalent to approximately 70% to 75% of our state production volumes. During the third quarter, we harvested 185 tonnes with very good results. We continue to see a very high superior share for our salmon, which enabled us to achieve good price realization. For the fourth quarter, we expect a significant increase in harvest volumes. And as of today, we expect to harvest somewhere between 1,000 and 1,200 tonnes of get that weight in Q4, which I think will really be the first quarter where we can say that salmon evolution is more in a normal operational modes.
We have also continued to stock our facility with new fish groups. And in October, we stocked about 9, which brings the number of individuals in our farm to 1.5 million which is in line with where we want to be. And as expected, with higher production volumes, production cost is also coming down. And we are on track on achieving production costs, fully competitive with conventional farming. Our CFO will go more through this in detail later in the presentation. And finally, we continue to enjoy a strong financial position with over NOK 700 million in available liquidity. On top of that comes the bank financing earmarked for Phase 2.
So moving over to the operations in Norway. In salmon evolution, we say that we put biology first. And we do so because we care about our salmon, but also, and this is very important, good biology is a prerequisite for good economics. When you are dealing with biology, obviously, things can happen and expected things. But as we've tried to illustrate on this slide, things are looking quite good at the moment. As a company, we target a mortality rate of 3% to 5% on an annualized basis, and we are extremely satisfied to see that for both September and October, we were within this range. It's also very important to stress that this is not for a small scale, low density, low intensity past production. This is actually on a large scale with industrial densities.
And I also think that in terms of fish welfare, mortality rates are probably the best indicator of fish welfare. And thus, with the rates we are seeing, I think that's a really strong demonstration of the good fish valve we have in our facility. To compare the average mortality in 2022 in the sea was 16%. That's over 10 percentage points higher than what we're seeing here now. So obviously, that gives -- with those kind of figures, we have a huge advantage in terms of production cost. Secondly, another important indicator as to fish baler is the quality of the fish and the superior share.
We have consistently had a very high superior share. Year-to-date, we are at 94%. The for the commercial industry, the corresponding figure is 85%. So obviously, in terms of price realization, this gives us a very good advantage to get good prices for our salmon and not only for a fraction of the volume but actually for the entire volume. Finally, also as reported earlier a few weeks ago, we have now been ASC certified in less than a year since our first harvest. And I have to say that I'm very proud of our team who managed to get this done in such a short period of time. And I think it's a really strong demonstration of our commitment to both responsible farming and environmental sustainability team. We have already sold our first ASC certified salmon. And I think we really see that this certification both increases our market access and is also helping us in realizing good prices for our fish.
Going into the third quarter, we had a quarterly run rate of about 1,000 tonnes in net biomass production. And as I said, we ended at 1,600 to 1,700 tonnes end of quarter, which means that we have consistently increased production throughout the period. Now we are also harvesting out the largest fish, but at the same time, we are also stocking new groups. And actually, now in October, for the first time, we reached 1.5 million individuals in the farm, and that's where we want to be when we are fully stocked. Both Batch 9, which was stocked in October and also batch 10, which we will stock in December have strong stocking weights.
So we expect these groups to contribute nicely to growth over the coming months. I finally take us to steady-state production volumes, which for us means an annualized production of equivalent to 8,000 tons of gutted weight. So we really feel that things are going in the right direction step by step and really look forward to continue growing the biomass and trim production. During the third quarter, we harvested out the largest group in batch 3, and our plan for the fourth quarter is to fully harvested out both batch 3 and 4 and as well as approximately 50% of the individuals in Batch 5. As you can see from the table here, we have a quite nicely distributed rate profile across our firm, which means that going forward, we will have very good regularity in terms of harvest volumes, which, of course, is also good in terms of our commercial activities and building awareness in the market for our salmon.
When it comes to the biological performance. We are very satisfied to see the full recovery of both batch 3 and 4 following the [ HD ] challenges we faced in the second quarter and that these groups now will be harvested out at a normal harvest weight. Batch 5 has performed very well, and we have also seen good performance on the batches stocked from May and onwards.
So for us now, it's all about further streamlining the production and improving a little bit every day, but I have to say that with the way things are looking, we are now closer than ever to really demonstrate the unique both capabilities and potential of our facility at Indre Haroy. So as I mentioned, we harvested 185 tonnes after moving some of the planned volumes for Q3 into Q4. And in Q4, we expect to take harvest to a new level. Already in Q4, we have harvested around 500 tonnes of gutted weight, and we expect to end somewhere between 1,000 and 1,200 tonnes. Going into Q1 next year, we should see similar volumes before we expect a further uptick in the second quarter next year. Also, as touched upon earlier, we are consistently seeing a very high share of superior grade fish, which we are very happy about. Also, the weight concentration continues to be very tight, which is one of the benefits we have by grading the fish during the production cycle. We are also working very actively on Phase 2, which will double the production capacity at Indre Haroy to 16,000 tons of gutted weight.
All the preparatory groundwork is complete that, and we continue to focus on the sign-and engineering together with our contractors. And an important part of this job is to identify and implement areas of improvement and efficiency gains. Although Phase 2 will be what we call an improved copy of Phase 1 with no fundamental changes. We're also working very actively on verifying the project cost together with our contractors to make sure that we have good visibility on that when we are pushing ahead.
We think that overall, the timing for starting building Phase 2 is very good as we are seeing clear signs of a cooldown in the construction market. And this is, in particular, evident for the civil part of the construction. Well, we see that for the process part, that's a little bit more late cycle. But also when it comes to Phase 2, we have a lot of the infrastructure already in place. So we expect a very efficient construction project. Furthermore, we are also seeing a lot of scaling in terms of operations when we are also including Phase 2, which will clearly have a positive impact on the production cost. In terms of time line, we expect to complete the initial project design in Q1 next year, which should put us in a position to push ahead with construction.
I also want to restate that for Indra are, we have all relevant licenses in place for the full build-out of the project, meaning that fully developed, we will produce 32,000 tonnes of gutted weight on this small island, measuring only 100 Norwegian acres. So moving on to what we are doing in our international projects. I will start with North America, where we are currently expanding a lot of time and resources on this venture, simply because we see that this is a opportunity for salmon evolution to really have good growth in the years to ahead.
I have to also say that we have, over the past year, basically really scrutinized the entire region for potential sites. We are currently in the process of narrowing in on a few qualifying sites. And for us, it has been very important to find the right site where we're able to tick the boxes we need. Indre for us is the gold standard. It's probably the best site on the planet. But nevertheless, we are still seeing sites with very good potential, both in terms of quality but also in terms of capacity to handle large volumes. And for North America, what we really like, besides sort of the market access to the single largest salmon market is that in many ways, it's very similar to what we are doing in Norway, where we have an existing salmon farming infrastructure and where we can more exclusively focus on the grow out part of the business and just tap into the remaining parts of the value chain. And thus, in our search for sites, we are very much focused on finding areas with an existing salmon farming operation. Culturally, North America is very similar to Norway.
And the fact that we also, in several places, already have small facilities, processing facilities, you have feed production, you have well boats, you have access to experienced people and suppliers. That makes this a very interesting opportunity for us. So this project is definitely moving forward, and I hope to be able to share more detail here in not so long. In Korea, we have continued our focus on design and engineering. The small facility is more or less completed. And for the growth facility, we are actually having 60% design review this week. So things are moving forward.
We are also working actively on the optimization of the project cost as shared in our second quarter report, we are seeing some, I would say, site-specific circumstances that is impacting the cost, in particular, the intake and discharge water solution for the growth facility in which we are evaluating different alternatives to reduce the cost. And also with overseas projects in new markets, there will always be an element of farming infrastructure required that we take for granted, for example, in Norway, where we have an existing industry, and this will also have an impact on cost. We're also working together with our JV partner on the JV financing of the project. And obviously, for salmon evolution, it's always important to maintain sound capital discipline and making sure that we have an attractive return profile in any projects that we are involved in.
On the permitting side, things are also moving forward although it has taken some time, but I think that this extra time has been very valuable for us as a company as it does enable us to obtain more experience from Norway, which is something we will benefit from long term when it comes to new projects. So with that, I will leave the word over to our CFO, who will go through the financials for the quarter.
Thank you, Trond HĂĄkon.
I thought I would start today with a little refresher on why we are doing this. You basically have 4 ways to farm salmon. The conventional way closed pens in the sea, closed offshore and on land. With regards to closed patents, nearshore and offshore, the regulatory framework is not clear. And there is little visibility on investments and operating costs. Subject to this being clarified sometime in the future, this could definitely represent a growth opportunity for the industry. When looking at conventional farming prior to the resource rent tax, it had an investment level of approximately NOK 200 to NOK 210 per kilo.
Naturally, post introduction of the resource rent, the license cost has fallen in correlation with expected lost cash flow. With regards to costs, they have surpassed NOK 60 per kilo for the industry in Norway as a whole. Yes. The conventional industry has other challenges as we all know, including limited growth prospects. Looking at salmon evolution compared to the conventional industry when adjusted for the resource rent effect on the license cost, we have an expected investment and cost level at par with the conventional industry.
We also have substantial opportunities to further optimize operational costs, having a controlled operation in a closed facility. In summary, our approach solves many of the challenges the conventional industry face with investments and costs at par. Looking at costs, we are definitely trending the right way. Without incorporating long-term optimization, which can put us in a cost leadership position, we are looking at an estimated cash cost of between NOK 53 and NOK 58 per kilo head on gutted in Phase 1, steady state based on current input factors. Of course, long-term actuals are a little bit of a moving target and are highly dependent on the feed price and currency. We expect further cost improvements through optimization of production, primarily focused on feed, genetics and AI as well as capturing the built-in upside in the production plan, for instance, by increasing the number of smolt releases per year and or utilizing spare tank capacity at the beginning of the production cycle for post-smolt. The price outlook for salmon remains very strong with a 95% plus average expected for next year and a 90-plus average in 2025.
And of course, given that we have a steady production output year round, we will benefit having -- we will be benefited having production in the times of the year when the price level is high. As mentioned by Trond HĂĄkon, superior fish welfare and uniform and a uniform harvest profile has a positive price implication for salmon evolution. First, when achieving a higher superior share, we estimate a price premium of between NOK 2.5 and NOK 3 per kilo versus the conventional industry.
As to HĂĄkon showed earlier, the conventional industry in Norway has a superior share of approximately 85%, whilst salmon evolution year-to-date has achieved 94%. Second, we harvest the same amount of fish year-round, and thus will thus capture more of the upside when the price level is high in the market. In total, this adds up to a built-in premium for salmon evolution versus the conventional industry of approximately NOK 3.5 to NOK 4 per kilo. Additionally, comes the price premium related to certifications as well as other unique product characteristics. Then looking at the financials for the third quarter. End of September, we harvested the first fish group in Batch 3, resulting in revenues of approximately NOK 13.3 million. Additionally, we have some income related to sale of services to our joint venture, Kmart Farming. The operational EBITDA ended at negative NOK 24.6 million. This includes capacity adjustments directly expensed in the profit and loss of NOK 13.7 million.
Depreciations ended at approximately NOK 15 million. And I would like to highlight that the third quarter is also the first quarter with full depreciations following the completion of Indre Harøy Phase 1. Fair value adjustment amounted to NOK 14.8 million, and this reflects that one new batch has been stocked as well as high forward prices on salmon. Finally, we had negative net financials of NOK 10.6 million and the net loss of the quarter ended at NOK 36 million.
Salmon Evolution has a strong financial position with available liquidity of NOK 705 million at the end of the quarter. This includes committed undrawn credit facilities. The negative cash flow from operations reflects the substantial biomass buildup in the third quarter and limited harvest. In Q4, we expect to harvest between 1,000 and 1,200 tonnes head on gutted, and this should significantly improve the cash flow from operations. Investment activities are mainly related to the design and engineering phase for Indre Harøy. Two, as well as during the quarter, we had an intensive period with regards to the upgrade of the smolt facility at Dale. And last but not least, segments. In Salmon Evolution, we have 2 reporting segments: Farming Norway and Other. Farming Norway is the farming activities at Indre Harøy as well as the small production at dollar and sales. Without ambitions to leverage our technological advantage and scaling internationally, this is basically how salmon Evolution would look.
In Q3, revenues in the Farming segment amounted to NOK 13.3 million related to a partial harvest of batch 3. And operational EBITDA ended at negative NOK 8.1 million. Capacity adjustments directly impacting the EBITDA and EBIT amounted to NOK 13.7 million. In the other segment, all the resources related to projects and technology are employed as well as other general corporate functions.
The other segment is basically the cost of scaling and internationalizing salmon evolution. We have taken a conservative approach to capitalizing costs in this segment. Revenue primarily come from sale of services to other group companies as well as the K Smart joint Venture. Over to you, to HĂĄkon for the summary and outlook..
Thank you, Trond. So to sum up, we really feel that salmon evolution now is in a unique position. We are fully operational also on an industrial scale, and we are seeing strong biological performance across our farm with study increasing production and steady state now within reach. The salmon market is also very strong. And with harvest volumes now ramping up, we should be very well positioned to benefit from that over the coming quarters. We also see that the relative attractiveness of our business case has only improved over the last years, and we remain confident that we will be fully competitive with the commercial farming industry in terms of production costs.
So with the current strong financial position that we have, together with a, hopefully, very soon, cash flow generating Phase 1 we have a unique platform to scale this business, both in Norway and abroad, and continue to lead and shape the development of this very exciting industry. So that was it for today. We look forward to see you again next time in February in connection with our fourth quarter results. Thank you, and have a nice day.