Salmon Evolution ASA (SALME) Earnings Call Transcript & Summary

Okay. Good morning, everyone, and welcome to this presentation of Salmon Evolution's results for the first quarter. My name is Trond Hakon Schaug-Pettersen. I'm the CEO of the company. And with me here today, I also have our CFO, Trond Vadset Veibust. There's a lot of things going on in Salmon Evolution at the moment. And as you can see from the picture here, construction of Phase 2 is progressing very well with now only 10 months until we take the first tanks into operation. We are also very satisfied with our continued operational development and really see that our performance is improving day by day and month by month. And hence, we believe that we are on a very good track at the moment. So we will start the presentation by going through the highlights before moving over to the operation and our growth initiatives, and then our CFO will take you through the financials. And finally, we will end the presentation with a Q&A session. And for those of you who are attending virtually, you can submit questions via the webcast. So as to the highlights, we continue to see stable operations across our farm and are currently experiencing what I would characterize as exceptional low mortality. We are also very satisfied with continuing the positive trend from the previous quarters and setting a new production record in Q1 of more than 1,600 tonnes, which is up 7% from the fourth quarter. During Q1, we have prioritized building the biomass, and we ended Q1 with an all-time high biomass of more than 2,900 tonnes, which is up 45% from Q4. And this level is in line with our targeted run rate level and hence also a very important prerequisite for taking out the full growth potential at the farm. We saw revenues of NOK 50 million after harvesting just under 600 tonnes, including some post-smolt deliveries. This resulted in a farming EBITDA of NOK 5.6 million and a negative group EBITDA of NOK 4.1 million. Clearly, the salmon market has been much weaker than expected this year, driven by a massive supply increase, which we believe is temporary. So in the meantime, for us, it's all about continuing the positive operational development, which in turn also will bring production costs further down. Phase 2 is progressing according to plan, on time, on budget. Construction is taking place at a high pace, and it's actually now only around 10 months until our first Phase 2 smolt release. This is something we really look forward to as Phase 2 will be a, what we call a true game changer for Salmon Evolution and really create what we believe is an unparalleled platform in this industry. So moving over to the operations. As mentioned, we saw both a production record in Q1 as well as an all-time high biomass. We have now seen production increasing steadily over many quarters, and this continued in Q1 with production up 7% from Q4. Finally, we also reached our targeted run rate levels of between 2,900 to 3,000 tonnes of standing biomass after growing the biomass from 45% from the fourth quarter, and we now have a fully stocked farm, both in terms of number of individuals and also in terms of volume. And going forward, it's all about maintaining this biomass level so that we can continue to increase production. On the smolt side, we have also stocked group in Q1, and we have already stocked group in Q2 in April. Both of them have performed well. Also, the stocking weights have been above target, which we also expect for the next group plant stocked in June. And obviously, this is very important, both for production volumes and harvest weights. And as to the biology, I dare to say that the situation at the moment is the best we have had since we stocked our first batch 3 years ago. And what's really satisfying about this is that we also have never had so much fish in the facility as we had today. Mortality has been steadily decreasing now over the last months, and we are now at the lowest levels we have ever seen. We have a target of 3% to 5% per annum. We are already operating well within this range. In fact, in March, we ended at an annualized mortality of 2.4%. And if you go to April, the figure was actually 1.7%. Same goes for superior grade share, which consistently hover around 95%, which is in line with our target. And in sum, I think this shows that the biological status is strong and thus also setting a very good backdrop for continued positive development in operational performance over the coming quarters. As communicated, we harvested 581 tonnes gutted during the quarter, including 1 post-smolt batch. In Q1, we prioritized growing the biomass, which explains the relatively low volume. In addition, we had approximately 300 tonnes scheduled for harvest late March that we moved into early April for logistical reasons. Harvest weights were negatively impacted by the smolt quality issues in the first half of last year, where we needed to restock the facility within a relatively short time frame and thus also creating a gap in our production plan. This required partial harvesting of certain groups in Q1 at suboptimal weights. We are, however, entering the second quarter with a significantly better biomass composition, and we'll see improving harvest weights from Q2. Price realization in Q1 is obviously also impacted by the low salmon prices seen this year, which has been much lower than I think both we and everybody else expected. And in that context, it was a good quarter to build biomass all else equal. As to harvest guidance, we are now expecting between 5,800 tonnes to 6,200 tonnes gutted this year, slightly down from our estimate in February. And what's important here is that we are able to maintain full biomass going forward so that we can maximize production. And that's what it's all about to get the cost to where we want it. And as I mentioned, the biological situation is very good at the moment. And I think this is the result of a very systematic approach over the last 3 years. We really see that things are improving every day. And I would say that especially the last 6 to 9 months, we have taken huge steps. We have been able to maintain strong operational stability over time, while at the same time, increasing production. Also on the smolt side, which was an issue a year ago, we have seen a substantial improvement, both in terms of regularity, stocking weights and quality. Now, we have the biomass needed to take out the full potential of the farm, and that's what we are working on. Also in the second quarter, our biomass composition should be fully normalized, which will be very positive for harvest weights for the remainder of the year. And finally, with Phase 2 up and running, we will also have the critical scale needed. So a little bit about our growth projects. This is how it will look in a few years once the site is fully developed, 36,000 tonnes at one location. I think it's worthwhile reflecting on that for a few seconds. The efficiency of scale that we will get out of Indre Harøy, I think it will be quite astonishing and also enabling this cost leadership position that we are striving for. Phase 2 is well underway. First smolt Q1 next year. And also with Phase 2 completed next year, we are halfway in our build-out. And what we are building in Phase 2 is an improved copy of Phase 1, incorporating all the key learnings over the last 3 years. So we're very confident that Phase 2 will be even better than Phase 1 in the same way as Phase 3 eventually will be even better than Phase 2. And that's one of the beauties in this industry, there's always room for improvement. And after Phase 2, the ambition is to transition directly into Phase 3. We have all licenses in place, and we have already made significant infrastructure investments. So Phase 3 is a highly attractive project for us with strong expected return metrics. But first, it's all about completing Phase 2 on time and on budget. Phase 2 is, as I said, a real game changer for our company, both in terms of establishing ourselves as a significant salmon farmer, but also by reaching critical mass and scaling our existing operational platform. With Phase 2, we more than double production, and we can leverage the investments in systems, in people and facilities that we've already taken as part of Phase 1. And additionally, by building on existing infrastructure, we ensure a faster rollout and also lower risk. And as to Phase 2 construction, this is, as I said, moving forward at a high pace and progressing according to plan, on time and on budget. We currently have about 50 workers on site. And as you can see from the picture here, the first tanks are already assembled. Now with most of the underground work completed, we are soon intensifying the process installation part of the project in parallel with assembly of the remaining tanks and completion of the building structures. The building for the intake station, you see here is now -- this is also an outdated picture, but it's now almost completed, and we will very soon be installing the intake pipes, which will be a major milestone. And right now, we have 6 tanks assembled. The salmon, they started on yesterday. So things are moving forward at a high pace. And actually, already in December, we are starting testing and commissioning of the first 2 tanks. As to the new post-smolt tanks that we are planning in Phase 2, the planning and engineering activities are soon finalized with the aim of starting construction over the summer and completion to be aligned with the completion of the grow-out modules. And for us, now, obviously, our 2 main priorities are continued operational excellence and executing our Phase 2 construction project according to plan. We already have an 18,000 tonnes operation well in sight. And with this, we will have a fantastic platform for further growth. And as to growth, Phase 3 at Indre Harøy is our first priority given all the infrastructure investments we have already made, which makes this project highly attractive, both from an operational and financial perspective. We are also exploring additional opportunities in Norway as we already today see that our close link to the existing salmon value chain in Norway give us a substantial competitive advantage. When it comes to North America, we have a very good overview of potential opportunities suitable for our concept. But in the current geopolitical environment, we take on a more of a wait-and-see approach. When it comes to Korea, the work with authorities with respect to financial support is continuing, and we expect to have clarification around this during this year. And in the meantime, we have taken the cash burn down to a minimum. Also worth mentioning is the proposed new regulation for Norwegian aquaculture published by the government in April. Although it will probably take considerable time for this to come into effect and to be finally approved. I think it's fair to say that this paper sets very clear direction about the future of aquaculture in Norway. The authorities are not satisfied with the current biological conditions and want to see both reduced sea lice levels and reduced mortality. And as per the proposal, this will, without doubt, imply substantial investments for the conventional industry, and it will also put a cap on growth, at least in the short to medium term, which again will be supportive for the market balance. And at the same time, this will only further improve the relative attractiveness and also relevance of what we are doing. So I think in sum, this will be positive for us if implemented. When it comes to the new regulatory framework for land-based farming, this is still pending. But as previously communicated, Salmon Evolution is already fully compliant with the proposals set out. But we think it will be good to have this finalized as it will reduce regulatory risk going forward. And then I will leave the word to Trond, which will take us through the financials.

Thank you. Good to see you all again. As Trond Hakon elaborated, we prioritized biomass buildup during Q1, and this led to a temporary low harvest volume in the first quarter. Harvest volumes were also somewhat impacted by availability of harvest capacity with some volumes scheduled for Q1 being moved into the second quarter. Additionally, as Trond Hakon has also mentioned, high supply growth paired with geopolitical uncertainty around tariffs has put a damper on the salmon prices during the quarter. And this is in stark contrast to Q1 last year when salmon prices averaged above NOK 100 per kilo. Farming costs were impacted by harvest of fish that was mostly produced in the second half of 2024 when we had lower production and thus less biomass to allocate costs on. And I will get back to costs in a short minute. There was also some impact from weights and post-smolt sales. However, the cost effect of post-smolt in Q1 were less evident than in Q4 as we took out costs a little bit too aggressively on this group during the last quarter of last year when we harvested out -- or where we sold half of the group. In the Farming segment, we ended the quarter with revenues of NOK 49.7 million and an EBITDA of NOK 5.7 million. And as I just said, much of the profitability in the quarter was linked to post-smolt sold at regular market terms. And then to clarify an important point around our farming EBITDA cost development. No surprise. What defines the farming cost is production. And specifically, production in the 2 last quarters leading up to harvest. And this is an effect of how a normal biomass cost allocation model works. And we have illustrated this using this chart. The gray dot is the reported farming EBITDA cost for the first quarter. As said, we had some cost implications from volume, weight and post-smolt, but primarily, the fish we harvested in Q1 or fish we produced during the second half. And again, as I said, when our production volumes and standing biomass were lower and lower production and less biomass means less fish to allocate costs on. And all else equal, that means a higher cost per kilo. However, the orange dot illustrates the current underlying production cost. And for -- to make the numbers comparable, I have added the estimated harvest cost and G&A element so that you can compare these 2 data points. Currently, we are producing significantly more biomass than we did in the second half of 2024. And the positive impact on cost is clearly visible. And thus, we are producing biomass at a lower cost than the reported farming cost. Put very simply, increased production scales our cost base. In an operation like ours, with all tanks in operation, around 50% of costs are essentially fixed. Whether we produce 1,600 tonnes or 1,900 tonnes, our personnel costs, electricity bills and maintenance costs are virtually the same in absolute terms. So a high portion of incremental revenues coming from increased production and harvest down the line goes straight to the bottom line. But it takes a few quarters for this effect to materialize, and we call this the lag effect. So improving our costs from where we are today is just a matter of time. Hitting our long-term cost targets comes down to steadily increasing biomass production towards full utilization. And there are some natural variations between batches. And therefore, we highlight that we expect the second quarter farming costs to be similar to Q1. But starting in Q3 and onwards, we will begin to see the positive effects of increased production at Indre Harøy in our reported farming cost. Then to look at the consolidated group accounts. The group is the consolidation of the Farming and Other segment as presented in our quarterly report. As previously noted, the Farming segment had an operational EBITDA of NOK 5.7 million. In the Other segment, which encompass typical headquarter functions as well as staff working on growth projects, the costs we usually refer to as the expansion costs had a negative EBITDA of NOK 9.8 million, which is a run rate in line with previous quarters. And as highlighted by Trond Hakon, the costs related to project outside Norway has been reduced to a minimum. In total for Salmon Evolution, revenues ended at NOK 49.7 million, that equals the revenues in the Farming segment and the operational EBITDA ended at minus NOK 4.1 million in Q1. And then a quick look at the balance sheet and cash flow. The increase in assets are primarily related to Indre Haroy Phase 2 expansion, no surprise, where we invested approximately NOK 250 million during the quarter. This is also evident when you look at the cash flow from investing. The operational cash flow was slightly negative in the quarter. We entered 2025 with high trade receivables after intensive harvesting in December last year, contributing positively to cash flow. But on the other hand, we also increased the standing biomass by almost 50% during Q1, neutralizing that effect. But all in all, to have close to breakeven cash flow from operations in a quarter where we have a relatively low harvest volume is considered positive, and it kind of highlights the operational platform we have established in Salmon Evolution. Overall, cash flow was slightly negative in Q1, and we ended the quarter with NOK 408 million in available liquidity. Also a little bit more on Phase 2. As Trond Hakon mentioned, time is -- the project is on time and on budget. During the quarter, most of the procurement with the main contractors have been completed within budget. And now it is all about executing the different key deliverables within the time frame. We are closely monitoring time lines to mitigate any risk of delays to make sure that the project remains on track. As mentioned, we invested approximately NOK 250 million in the project during the quarter and have accumulated investments of a little more than NOK 650 million at the end of Q1. We expect to start drawing on the dedicated construction financing during Q2. And finally, before I hand over the word to Trond Hakon, it's also been a while since we updated our long-term cost targets. What you see in this illustration is our expected long-term cost targets based on the full run rate for the different phases. These estimates are based on current input costs, currency assumptions and feed prices. The changes we have made to our long-term cost targets are in all material respect related to inflation. And as highlighted many times before, in Phase 1, we have laid the foundation and established much of the operational platform needed for the subsequent phases at Indre Haroy. And therefore, between Phase 1 and 2, we expect scaling effects of approximately 5% to 6% with additional economies of scale coming with Phase 3. Trond Hakon, the floor is yours.

Thank you, Trond. So -- to sum up, we believe that things are looking very good at the moment. What we are doing is working and also we have been able to maintain stable operations over time, which is extremely important in this business. Also, the operational KPIs that we are experiencing are very encouraging, and we are now fully devoted on maximizing the utilization of the facility and thus also improving unit economics. Another important factor is that we have already completed the heavy lifting. We have a fully operational platform. We have built a best-in-class organization and we have also taken a lot of infrastructure investments that will be highly beneficial as we are continuing to scale our business. And finally, we strongly believe that Salmon Evolution is at an inflection point with Phase 2 now soon up and running. This will, as I said many times, be a game changer for the company where we are going to reap the benefits of all the investments we have taken over the last years through what we see as a strong cash flow generating platform. And that, in turn, puts us in a unique position for further growth and long-term value creation.

I think we can start here in the audience, and then we move over to the questions submitted via the webcast.

And if you -- we are a little bit short staffed here today. So if you can just raise your hand and then the microphone will magically appear from the back.

Alex Aukner from DNB Carnegie. Just a question on the harvest weights. So you said in your notes, it will improve from Q2 onwards. So does that mean it's going to be the same low harvest weights also in Q2?

I think what we are seeing is Q2 will be better than Q1. We are now -- we entered Q2 with a significantly better biomass composition, but it was not fully normalized by -- during Q2, we are like fully on track on the -- because we have a 12-month cycle on the production. And we had this smolt quality issues last year that was in May. So things are like fully back on track in this quarter. So like from Q3, you should see quite good weight, but it will be like a step-up from Q1 and Q2 and then fully normalized in Q3 and onwards.

Okay. And on the blasting work, you said blasting during April. Is that now concluded? Has there been any negative effects on the production?

What -- no, it has gone -- we have taken some precautions because that is -- we have done the blasting work for the new intake pipes. So obviously, very important to not impact the pipes already laying there. So what we did then, we had a couple of days where we just didn't feed the fish just to calm it down in case of something were to go wrong, but everything went perfectly fine. So we haven't seen any impact on the fish.

Christian Nordby, Arctic Securities. In the cost estimates you show, what type of feed costs are you calculating compared to the feed cost you're purchasing today?

We're using the current observed feed price because we consider the kind of the current price is also our long-term target.

And the current price, how is that compared to the fish that you're harvesting today? Is it significantly down or?

Yes, it's down. Whether it's significant or not is a different question, but it's definitely down since the peak we saw last year. And as we have also said previously, we expect to start realizing the impact of lower feed prices during Q2 and the second half of 2025 because, of course, it takes a little time to work this through the biomass. Anyone else? All right. We have some questions which have been submitted via the webcast. All right. Can you estimate harvest volume and weights for Q2? I think that has already been covered by the question from Alex. What is the status on the Korea project? Could you quickly elaborate on that. Trond Hakon, I think it was mostly covered.

Yes. No, as we highlighted in the presentation, we are currently now working with the Korean authorities for financial support to improve the project economics. I think we see that there is a strong desire to get that project up and running and hence a willingness to support. But it's processes that needs to sort of it takes time, but we are -- we have very constructive dialogue and especially obviously, our partner that sort of is lead on that. But I think at the same time, it's important to emphasize that Salmon Evolution's main contribution into this project is not sort of the capital, it's the -- or the financial capital is the human capital. So we are working on it, and it takes a little bit time to get clarifications, but we expect that during this year, we should sort of know how to proceed.

Yes. Are you considering scaling further in Norway before expanding abroad?

Yes. I think also, as I said, obviously, now we have the project with Phase 2, then we have an 18,000 tonnes operation. We already have at Indre Haroy, we have Phase 3. We have all the licenses. We have done a lot of infrastructure investments. So for us, that's like a no-brainer to get that done. And we are also looking at other opportunities in Norway. We see that we have a big benefit just by being located where we are, access to people, infrastructure, the whole value chain, and that gives us a huge advantage, both operationally, but also on the cost side. So that is something that we are working on. But obviously, we have just within the Indre Haroy, we have quite a good growth pipeline already. But we are actually now in -- by the end of next year, we are sort of halfway in the development of that project. It has taken some years to get to where we are today. And obviously, we are able to -- Phase 3, we can get done much quicker. So -- but the main focus now is to get finished with Phase 2 and then hopefully transition directly into Phase 3.

Yes. And then finally, a question on North America. Can you specify a bit more on the North America progress? What length of wait-and-see period do you foresee?

I think it is hard to sort of give a specific estimate. What we have done is that we have had a quite thorough site search. So we believe that we have a very good understanding and overview of potential opportunities in the market and suitable locations for a hybrid flow-through systems. And I think it's basically 2 things on more the overall picture. It's obviously the sort of geopolitical situation with tariffs and how that will finally look. And then it's sort of on the regulatory side, depending on sort of where in the North American market you are. There are some uncertainties there, which I also think we need to know more about how this will play out before committing any significant investments. But we have a good understanding of the market. We have -- we know locations. We have developed a lot of relationships, both with natives and also with relevant authorities.

That concludes things for today. Thank you for attending. See you again in August.