Salmon Evolution ASA

OSE:SALME

Earnings Call Transcript 2024-Q3

[Trond Schaug-Pettersen, executive]

Hello, everyone. Welcome to this presentation of Salmon Evolution's results for the third quarter. My name is Trond Schaug-Pettersen. I'm the CEO of the company. Together with me here today, I also have our CFO, Trond Vadset Veibust. So, a real pleasure showing this -- to start with this video and showing our commitment to a circular economy and how that we ensure that nothing goes to waste. This is something we are very proud about and I think really sustainability at its core. As we know are closing in on 2024, I think we can look back at a transformatory year for Salmon Evolution, where we have demonstrated both strong profitability as well as now finally being well underway with our Phase 2 construction, which will take the company to the next level.

So, I will start this presentation by going through the highlights for the quarter. Then we'll move over to the operations before our CFO will take you through the financials for the quarter. And finally, we will also do a Q&A at the end. And for those of you who are attending virtually, you can submit questions via the webcast. As to the highlights for the quarter, we have again demonstrated that we have a strong operational platform. We are continuing to see stable operation across our firm. And very importantly, also many of our biological KPIs are extremely good. Looking at the third quarter, we had a group EBITDA of minus NOK 7.3 million, whilst in the Farming segment, we had a positive EBITDA of NOK 2.2 million or NOK 3.3 per kilo, which is something we are quite satisfied with given relatively low volumes and a seasonally low salmon price.

The harvest volume guidance for 2024 remains unchanged at around 5,000 tons as we have pushed some volumes from the third quarter to the fourth quarter to maximize price realization and harvest weights. As per end of the third quarter, we had a biomass at close to all-time high levels of about 2,600 tons. And equally important, we have also completed the restocking of the facility with new smolt groups, and this sets the stage for good growth going into 2025. We are also very satisfied with ramping up construction of Phase 2, which is progressing according to plan and also at a high speed. Phase 2 will be transformatory for Salmon Evolution as it is a key building block in unlocking the potential in our operation.

And finally, we also have a strong financial position. We are fully funded for Phase 2, which will take production to 18,000 tons gutted and really give us a platform in which we can create substantial organic growth in the years ahead. So, moving over to the operations. It's now almost 2.5 years since we stocked our first smolt, and we are now actually on the 17th batch. When you are doing innovation at this level, obviously, there will always be challenges that you need to tackle. But overall, I would say that things have gone very well. The biological results that we are achieving on key KPIs are extremely good and also in many areas, even outperforming what's already a very ambitious targets. We are consistently producing a salmon of very high quality with a superior grade share year-to-date above 96%. Also, in terms of mortality, we are operating within our targets. And for our last batch, we had an accumulated mortality of 3%.

And actually, for the next batch due for harvest, we're even lower than that. And the same goes for feed conversion ratio, where we for our last batch had an FCR of 1.00. And please also note that this is not for a small-scale test production. This is on an industrial scale, and that's a big difference. So, when we talk about attractive production cost and also strong price realization, this is both how we are achieving it and how we will do so going forward. So as communicated, we harvested 680 tons during the quarter after pushing some of the volumes into Q4 to maximize the price realization. We continue to see a very high superior grade share, which was at a record high 98% in the third quarter, which, together with the low mortality, I think really is proof of good fish health and good fish welfare across the farm.

Our all-in price realization ended at NOK 72 per kilo, which we are very satisfied with, given an average harvest weight of 3.3 kilo gutted, which, by the way, was up 10% compared to the second quarter, but still impacted by low stocking weights last year. Going into the fourth quarter, we see a further uptick in harvest weights and expect this to end at around 4 kilo gutted. As we know, we’re harvesting fish that had more normal stocking weights last year. For Q4, we expect around 1,800 tons gutted in harvest volume, and that will take the full year total to around 5,000 tons, which is in line with previous guiding. When it comes to production during the third quarter, this was up 9% to almost 1,400 tons and leading to a standing biomass of about 2,600 tons end of quarter, which is close to record levels.

Over the last quarters, biomass production has been impacted by the smolt quality issues we encountered earlier this year. But during the third quarter, we have fully restocked the facility, and we currently have an all-time high number of individuals at the farm, and this is obviously then setting the stage for strong growth going into 2025. And also, as you can see from the chart here, the productivity at the farm is increasing, which is something we are very satisfied with. And I also want to highlight that overall performance is very stable. The new smolt groups have been performing well, and we also see that for the smolt group where we had some challenges some months ago, the situation is now fully normalized. So, as I said, 2024, we will end at around 5,000 tons gutted in harvest volumes. For 2025, we expect a significant increase in production, up around 40%, which will take us to around 7,000 tons gutted in production.

We are also factoring in some biomass buildup during the first half of next year, which is why 2025 harvest volumes are expected at 6 to 6500 tons gutted. This is a core priority for us as having the right biomass level is key for us to be able to take out the full growth potential of the farm. Our biomass composition is still impacted by some spillover effects from the smolt quality issues earlier this year, and this will lead to lower harvest weights and volume in Q1, where we expect to harvest around 1,100 tons gutted. But we are now laying the foundation for optimized production. And during Q2, we expect to have quite an ideal biomass composition, enabling us to take out the full potential. It's also very important to highlight that we are now actually at a stage where our focus is fully devoted on optimizing and fine-tuning our operation.

We know that the systems are working. We have very good stability, and we are also consistently producing a fantastic product. Furthermore, as highlighted initially, we have very strong results on a number of key biological KPIs. So now it's all about taking out the full potential. And here, we have a wide range of initiatives ongoing, in fact, over 50 specific activities that we are in the process of implementing. And all of these activities are what's going to enable us to both reach our targets and also over time, exceed them. And when we do that with the setup we have, including the scaling effects we are seeing from Phase II, we are very confident that a very few will be able to match that. Having a high-quality smolt with the right size at the right time, that's very important in an operation like this. And hence, we have focused a lot on our smolt operation over the last year. And I think we are now really starting to see the effects of this.

Year-to-date, our biomass growth at the smolt facility is up almost 40% compared to last year. And this is largely due to the facility upgrades that we have done coming into effect, combined with also an optimization of the production plan at the smolt facility. And the effect of this, you can see here where we now see very solid stocking weights for the entire 2025. This, in turn, will give us the necessary capacity and flexibility to reach our production targets at Indre Harøy. And obviously, we are extremely pleased with now having Phase 2 in sight as this is an instrumental part in taking Salmon Evolution to the next level. Phase 1 is a large operation in itself, but it's too small. And with Phase 2, we are able to reach critical mass and really scale our operational platform. And also, Phase 2 is key to unlock the potential at Indre Harøy as this will give us a lot of advantages in our daily operation.

The new production plan that we will have when Phase 2 is online is also more conservative, lower average density, meaning more upside potential. We also reduced the production cycle, meaning less risk. We're able to run more batches through the facility every year, which means that each batch share of total annual harvest volumes goes from 17% in Phase 1 down to 6%, including Phase 2 and even down to 3% when you include Phase 3. Also, with the post-smolt tanks that we are planning for, we will always have a smolt on standby. Meaning significant improved operational flexibility. So, some words on our growth initiatives. Obviously, fully built out Indre Harøy will be a massive operation. And as you can imagine from this picture, the level of efficiency that we will be able to achieve here is quite astonishing.

We have all relevant permits in place to complete Phase 3. But actually, the site also has a potential beyond this. And in fact, last week, the local municipality approved a new zoning plan for the remainder of the island, which again opens up for quite a substantial increase in scale beyond Phase 3. So obviously, that is very interesting for us and something that we will be working on going forward. When it comes to Phase 2 construction, this was kicked off in August, and there is currently a lot of construction activity on site and things are progressing at a high pace, as you can see from this picture. We remain on track for first smolt release by Q1 2026, which actually in a couple of months is only 1 year away. So, it's not long. So, over the coming months, you will see a continued ramp-up at the construction site, and we also expect to do the first tank installation already in Q1 next year.

To the left here, you can see the lower floor of our new intake station serving Phase 2. And you might recognize that it is smaller than the one we have for Phase 1, but that's actually not the case. The water intake capacity here is almost 30% higher than for Phase 1 as we are also including water to the new post-smolt tanks that we will be building. But we are able to do so with less space, so that's one of the results from the cost optimization process that we have been through. When it comes to the new post-smolt tanks, we are now in the planning and engineering phase and expect completion of these to be aligned with the completion of the grow-out modules. When it comes to our international project, the work is progressing there, but I don't have anything new to report at this stage.

As previously mentioned, project in North America, there, we have identified a very interesting site that we classify as a high potential location. Obviously, I would like to share more details, but we need to get some clarifications before we can go out with the details. In Korea, we are working together with Dongwon on financial support for the project. And it's also important for us to highlight that our main contribution in this project is our human capital and that we remain very focused on capital discipline and making sure that we have strong financial returns on all our projects. And I also want to add that we see additional opportunities in Norway in the same way as for conventional farming. We strongly believe that Norway will be the cost leader also for land-based, and that's simply because of all the infrastructure we have and a very efficient value chain.

Talking about Norway, we think it's positive that we now seem to get a clarification around the future regulatory framework for land-based salmon farming. The Norwegian government has put forward a new proposal in which they have asked for feedback during November, which means that these new regulations will likely come into effect sometime during the first half of next year. The main takeaway from this proposal is that they are introducing mandatory filtering and disinfection of intake water. From our side, we generally believe that the proposal is reasonable. And we also know that, with our hybrid system already is fully compliant to the new regulations. So, from our perspective, I think this is a good thing. It reduces regulatory risk going forward and further strengthens Norway's position as the driving force for the development of land-based salmon farming.

So Trond?

[Trond Veibust, executive]

Thank you, Trond HÃ¥kon. Third quarter, as mentioned by Trond HÃ¥kon, we were planning to harvest more during the quarter, but ultimately decided to push harvest into Q4 to maximize the price realization. Our full year guiding, as mentioned, remains unchanged. Harvest for the quarter ended at 680 tons, resulting in revenues of approximately NOK 51 million, a farming EBITDA of NOK 2.2 million and an EBITDA per kilo of approximately NOK 3.3. With this harvest volume, the scaling on the fixed part of the cost base was lower, resulting in a slightly higher farming cost than compared to previous quarters. However, I would like to highlight that this is a temporary effect driven by the low harvest. Going forward, we expect the farming cost to reduce in line with the increase in biomass production. Additionally, our feed composition is high in marine ingredients, including fish oil.

And during 2025, we also expect a positive effect on the farming cost from the decrease in fish oil prices seen in the marketplace that will ultimately translate into a lower feed price. During the quarter, we also topped up our 2025 hedging position on energy in line with our hedging strategy, fixing in about 80% of the volume for next year. But also given the attractive rates we observed in the energy market, which were slightly lower than our existing hedge positions, we also used the opportunity to top up our positions for 2026 and 2027. The other segment encompass typical headquarter functions as well as staff working on our growth initiatives. For the sake of simplicity, let's just call this the expansion cost.

The cost base in this segment is primarily driven by salaries, which represents approximately 75% of the costs for this segment in the third quarter. Apart from salaries, other costs or a high share of other costs are dependent on activity to a certain degree. And this is, for instance, illustrated by the second quarter, where we raised equity, we refinanced our bank facilities, and we completed the Phase 2 pre-project. And if you compare the costs in the second quarter to this quarter, you will quickly notice that costs in Q2 were higher. That illustrates and proves the point. A portion of the costs are reinvoiced to the Farming segment and to growth projects. In the third quarter, the expansion cost ended at NOK 9.6 million after allocation of NOK 5.4 million to the Farming segment as G&A as well as reinvoicing to the mentioned growth projects.

Looking at Salmon Evolution as a whole, the third quarter highlights that it is all about volume. with the results reflecting a temporary low harvest volume during the quarter as well as the normal seasonality in prices. Revenues for the group ended slightly above NOK 51 million, EBITDA at a loss of NOK 7.3 million, and after the fair value adjustment, an operating loss of NOK 14.2 million. Looking quickly at the balance sheet and cash flow. The increase in assets are primarily related to Phase 2 as well as a biomass buildup of approximately 550 tons during the quarter. Looking at equity and liabilities, the main change is in trade payables, which is also linked to Phase 2. Looking at the cash flow, we generated NOK 6.6 million in operational cash flow with virtually all of the reported investments linked to the Phase 2 project.

At the end of the quarter, we have a strong financial position with available liquidity of NOK 866 million. As Trond HÃ¥kon mentioned earlier, the Phase 2 project is progressing very well and on time and on budget. Activity at the building site was ramping up during the quarter, and we invested approximately NOK 130 million in Phase 2 during Q3. So far, we have invested close to NOK 250 million in the project. Going into the next quarters, the activity will continue to increase as will investments. As an example, we expect investments in Q4 to be double those in Q3. Activity at the building site will likely peak around the third quarter next year. And as previously highlighted, the project is fully funded. We have NOK 1.45 billion earmarked in construction financing, and we have NOK 866 million in available liquidity at the end of Q3. On top of this, we are generating a positive operational cash flow.

To illustrate the strength of the Salmon Evolution platform we are setting up at Indre Harøy, we have prepared this illustration, showcasing cash flow, returns and investment capacity in different salmon price scenarios. Admittingly, Phase 2 might seem a little bit into the future, but actually, it's only 2 years until we harvest the first salmon out of Phase 2. As the illustration highlights, we are creating a strong cash-generating foundation and have the potential to create an organic growth machine. In a normal scenario with reasonable assumptions on salmon price and cost, the cash generated from this platform could equal one, 9,000 tons Indre Harøy facility every 18 months. And as will showcase, we also have a quite attractive return scenario and incremental return on equity on our growth.

The margin, cash-generating abilities and returns will only continue to improve with falling marginal costs driven by scale and optimizations as well as expected positive effects on CapEx driven by standardization, modularization and know-how in future expansion projects. In our industry, this puts us in quite a unique position where we control our own destiny and further scaling more becomes a question of speed rather than funding. And of course, as we grow, the investment capacity will also continue to increase. And looking a little bit at the bigger picture, I guess this is ultimately why paired with the excellent biological results, why we are so focused on growth. Our relative competitiveness compared to the conventional industry has improved significantly over the last few years. And 2024 marks something of an inflection point.

When Salmon Evolution was founded, we had an idea that if we could create an optimal growth environment on land, capturing the benefits of land-based and sea-based farming, putting biology first and limiting operational and biological risk, then over time, we could create a competitive edge. In reality, this has happened much faster than our initial hopes and dreams. Admittingly, we still have a little way to go, but look at where we are after a few years in operation. Who can outperform Salmon Evolution on superior grade share, low mortality, feed conversion? And with time, how do you think this will translate into cost base, earnings, cash flow?

For Salmon Evolution, parity on CapEx and OpEx with the conventional industry is no longer an illusion. It is actually here. And then this boils down to growth. Salmon is the world's most popular fish, and there is a strong underlying demand growth. Salmon Evolution can grow at an attractive investment level with highly competitive returns. And we are not hampered by the conventional growth restraints. On the contrary, we have a significant growth potential with CapEx and OpEx on par.

Trond HÃ¥kon?

[Trond Schaug-Pettersen, executive]

Thank you very much, Trond. So, to sum up, we are creating a foundation for substantial profitable growth in the years ahead. We have proven that it is possible to produce full growth salmon on land at scale and with both strong biological and financial results. And we see that with the setup we have, we have a competitive production cost, as Trond highlighted too, and this will only improve as we move forward and increase production. So now that's the main priority, take out the full potential at the farm, and that's what is our focus every day.

We're also very pleased now with being well underway with Phase 2, which will give us critical mass and really position Salmon Evolution as a substantial player even from a conventional farming perspective. So, this, combined with having a strong financial position. We're fully funded for Phase 2 really puts us in a great position to capitalize on a strong expected market, both in 2025, but also in the years ahead. So, I think that concludes this presentation, and we will then open up for questions. We will start here in the audience with us, and then we will take questions submitted via the webcast later.

[Christian Nordby, analyst]

Christian Nordby, Arctic Securities. You're guiding on 4 kilo harvest weights in Q4. Are you tracking on 4 kilo so far in Q4 as well? Or are you hoping that it will be higher at the end of Q4?

[Trond Schaug-Pettersen, executive]

I would say that's approximately where we have been on the fish that we have harvested to date.

[Christian Nordby, analyst]

And is your harvest profile in Q4 quite even in the months? Or is it back-end or front-end loaded?

[Trond Schaug-Pettersen, executive]

I would say we have quite some volume left for Q4. So, we are trying salmon -- I guess it's fair to say that they haven't started to spike yet. So, we are trying to hold back as much as we can. So, we're not harvesting this week, but towards the end of the month, there we will start again.

[Trond Veibust, executive]

Put it simply, we are not harvesting more at an early stage than we need to. We are trying to hold back as much as we can because, of course, we expect the prices will ultimately start to climb in the fourth quarter.

[Christian Nordby, analyst]

In terms of this new zoning regulation for your site in Norway, how much volumes do you think you can get there out beyond the 36,000 tons? And when will you apply for more licenses then?

[Trond Schaug-Pettersen, executive]

I think this is obviously, Phase 3 will come first. And then there's -- we don't have the permits for more than sort of including Phase 3. But it's potentially substantial. So it's quite a meaningful potential increase. But I think we will have to come back to the total potential, but it's a meaningful volume at least.

[Christian Nordby, analyst]

And in North America, we see that for you guys, it's been quite favorable in BC with conventional industry being forced to go into land-based or closed pens by '29. But on the other hand, Donald Trump wants to have tariffs on imported products. How do you think about these weighs against producing in Canada versus in the U.S.?

[Trond Schaug-Pettersen, executive]

I'm sure if you should comment too much on the political side, but I would guess that the U.S. don't produce a lot of salmon today. So, it's mostly import. So, it's the same for everybody, at least in the foreseeable future. And then we'll have to see what eventually happens.

[Mindaugas Cekanavicius, analyst]

Mindaugas, Norne Securities. I have a couple of questions regarding the one that was just asked. How flexible are you with postponing the harvesting? I mean, is there a chance that the fish would outgrow would get too fat, too overweight? Or you are just very flexible, you can postpone any harvest by 3 or 4 months, if you want to?

[Trond Schaug-Pettersen, executive]

We cannot do that. So, the reason why we have some flex -- the reason why we have been able to push volumes from the third quarter to the fourth quarter is that we have had available capacity at the farm. And obviously, we don't want to have available capacity. And this is industrial production with production lines and you want to move fish from one department to another. And you always have -- you have some flexibility. But when you are fully stocked, then there's not that much flexibility. You can always take out fish earlier, but it's harder to extend it too much because you always have new fish coming in from behind.

[Mindaugas Cekanavicius, analyst]

So, we should expect equal numbers whenever you reach the full capacity throughout all 4 quarters.

[Trond Schaug-Pettersen, executive]

That's what we're striving for the same production every day. And that's how you take out the maximum potential.

[Mindaugas Cekanavicius, analyst]

And some of your competitors have very different issues. Well, I'm not counting Atlantic Sapphire as your competitor. It's not a decent company in my view. But Proximar and Nordic Aqua Partners have issues with geosmin and turbidity issues. Have you encountered something similar to those? Or if not, what's the main reason? Is it the technological differences between you guys?

[Trond Schaug-Pettersen, executive]

No, we serve our salmon as in raw condition outside. So please let me know if you noticed anything. I don't. So, we got a consistent, very good feedback on taste. So that's not an issue at all with our system. And I think the main reason for that is that we use so much water at all times. And then that is not then an issue basically. So, I'm very glad to report that.

[Trond Veibust, executive]

Anyone else? Speak now or you have to -- the next opportunity is Q4. Okay. We have gotten some questions via the webcast. We can go through those. Starting with, as you are growing the fish larger, do you have any plan to go all female? Or other measures to avoid maturity?

[Trond Schaug-Pettersen, executive]

We don't have that at the moment. We have had very little problems with maturation. So far, it's minimal. So that's not been an issue for us to date. And yes, as you see now in the fourth quarter, we have quite decent harvest weights. So that's not been top of mind to date.

[Trond Veibust, executive]

Currently, 2025 contracts are being closed at NOK 97 per kilo as a company that actually sell almost only superior quality. Have you entered into such hedges? No, we have not entered into price hedging on the salmon price. But of course, as a salmon farmer with consistent volumes through the year, this is an interesting opportunity that we will definitely -- that's definitely on the agenda, but in the future. All right. Time line for North America and Korea, do you expect any news within Q1?

[Trond Schaug-Pettersen, executive]

I think as I mentioned, we are working on both. And obviously, we'll come back as soon as we have something concrete to report.

[Trond Veibust, executive]

Also, North America, who will deliver the process facility for your North America expansion?

[Trond Schaug-Pettersen, executive]

I think what we can say there is that, that's part of the phase we are now in terms of planning and setting up the project. So that has not taken any decisions on that as of now.

[Trond Veibust, executive]

And then last and final question, how much smolt did you stock in Q3? I think it means.

[Trond Schaug-Pettersen, executive]

We stocked 4 groups. So, we have had, as I mentioned, we have an all-time high number of individuals at the farm. So, we stock fish in July, August and also in October. So, 3 groups actually in Q3 and then 1 in October, and then we are stocking group again in December, which is also that amount of stocking volume is a little bit higher than normal, but I think that has been well covered in the presentation. That concluded the questions from the audience and the webcast. Thank you, everybody. Thank you. If there are any leftover sushi outside, please just bring it with you and enjoy it for lunch and see you again in 2025. Thank you.