Salmon Evolution ASA (SALME) Earnings Call Transcript & Summary

Okay. Good morning, everyone, and welcome to this presentation of Salmon Evolution's results for the second quarter. My name is Trond Håkon Schaug-Pettersen. I'm the CEO of the company. With me here today also our CFO, Trond Vadset Veibust. And as you can see from the picture here, we've had a busy first half of the year in Salmon Evolution with our Phase 2 construction project now really starting to take shape, and we are very excited in putting this facility into operation in just about 7 months from now. So we will start this presentation by going through the highlights for the quarter, then I will take you through the operations and our ongoing growth initiatives before our CFO will go through the financials. And then we will end the presentation with some comments on outlook before we open up for a Q&A. For those of you who are attending virtually, you can submit questions via the webcast. As to the highlights for the quarter, we are pleased to report that Phase 2 is progressing according to plan, on time and on budget and with the first smolt being targeted for release late Q1 next year. We are also very satisfied in continuing to see stable operations across the farm with very low mortality rates and also a consistent high superior grade share. When it comes to production, the positive trend from the previous quarters continued when taking into account that we had a precautionary pause in feeding in the second quarter relating to Phase 2 construction activities. We also ended the quarter with an all-time high biomass and also a fully normalized biomass composition, which is very important in terms of taking out the full production potential at farm. Harvest volumes ended at 1,232 tonnes gutted. Clearly, the salmon price has been very weak, both during the quarter and year-to-date, and this has impacted the financial results where we in the second quarter saw a farming EBITDA of minus NOK 13 million and a group EBITDA of minus NOK 25.6 million. The figures are also impacted by a temporary high farming cost in the second quarter due to certain nonrecurring factors related to harvest of underperforming groups that were affected by last year's smolt quality issues. We will come more back to this later in the presentation. And finally, and especially given the soft salmon market, we are very pleased to have increased our financial flexibility with the new bank facilities totaling NOK 300 million. So moving over to the operations. As I mentioned, we continue to see stable operations across the farm with very low mortality rates. And I believe this is a strong testament to both the facility and the concept as well as our operational staff. Reported biomass production was more or less flat compared to Q1 and ended at 1,600 tonnes, but underlying production was higher since we, during the quarter, had a precautionary feed pausing feeding in connection with blasting activities for the Phase 2 water intake pipes and it's reduced the biomass growth by approximately 100 tonnes. So when you adjust for that, we are at 1,700 tonnes plus, which actually is a nice uptick from the first quarter. In Q2, we also harvested out the groups that were affected by last year's smolt quality issues, which also represented a significant share of the biomass in the quarter. So with these groups now out, we expect that to have a positive contribution to growth going forward. We also stocked 2 smolt groups in Q2, both of them above target weight. Over the last year, we have put a lot of effort into our smolt operation, and I think we are now really starting to see the positive effects from this with the right quality smolt delivered at the right time and also with the right size. And similar to the first quarter, we had a fully stocked farm now with more than 3,000 tonnes of standing biomass, which is a prerequisite for continued production growth. One of the core focus areas this year has been to improve the biomass composition, and we are now very pleased to see that as per end of Q2, this composition finally was fully normalized following the smolt quality issues we had in the first half of 2024. The mix we have end of Q2 is close to deal, both in terms of volume, individuals and also weight distribution. And as you can see from the chart here, end of Q2, 57% of the biomass was above 3 kilo versus 0% going into the year. And this obviously explains the fairly low harvest rates seen year-to-date. And going forward, this normalization will clearly have a positive impact on both harvest weights and also production costs. So hopefully, it will take a very long time until we have to harvest small fish like we've done in the first half again. So it's all about maintaining this type of composition going forward, and that's something we are now very well positioned to do. As communicated, we harvested 1,232 tonnes gutted during the quarter, and we continue to see a consistent high superior grade share of around 95%. Harvest weights ended at 2.9 kilo in Q2, up from 2.3 kilo in Q1 as we completed the normalization of the biomass composition. Thus now with a fully stocked farm and a normalized composition, both harvest weights and volumes will increase from the third quarter. When it comes to the salmon price, we had an all-in price realization of NOK 72 per kilo. The salmon price fluctuated a lot during the quarter, and our harvest was not spread out evenly, but we consistently see that we outperform the reference price. And I think it's also worth mentioning that we are seeing more and more interest in the market for the store that we represent. Although, obviously, lack of harvest regularity is a key issue for many customers. So with now Phase 2 soon up or running, that's something we very much look forward to as that will open up many new commercial opportunities as well. As to harvest guidance, we are now expecting around 5,000 tonnes gutted in harvest volume this year. When it comes to the underlying production, there are no major changes from the last update. But what we've done is that we have optimized the production plan and are prioritizing going into 2026 with as much biomass as possible, especially given the prevailing salmon market conditions and also expectations of a stronger salmon price next year. So about 500 tonnes, which was originally untendered for 2025 is pushed into 2026. Also, we were planning to upsize 2 smolt stockings this fall and partially use this for post-smolt sales. As we have not been able to secure offtake commitments, yes, this volume has been excluded for precautionary purposes. But we are continuing to explore opportunities for post-smolt sales towards the end of the year. And finally, if you include the 50% increase in biomass, we are expecting year-on-year, the underlying production that we are expecting this year is around 7,000 tonnes live weight, which is approximately 5,800 tonnes gutted, which is 20% higher than the 2024. As mentioned, we expect both harvest weights and volumes to increase from Q3. And since the ambition is to only harvest growth. The underlying biomass production is a good proxy for expected harvest volumes going forward. I would say, we have taken huge steps over the last year and also really demonstrated that we can maintain stable operations over time with consistent and good biological KPIs. As I've said many times before, with an operation like this, it's all about continuously improving in everything that we do to take out the full potential and that is the focus of the organization at the moment. As you can see from these charts, things are definitely moving in the right direction, both in terms of harvest volumes, but most importantly, in terms of underlying biomass production. So from a production perspective, we expect 2025 to be significantly better than 2024. And in the same way as we expect 2026 to be better than 2025. Moving over to our growth initiatives. Just a quick reminder of how Indre Harøy will look once the site is fully developed. It's 36,000 tonnes in 1 location. Obviously, the scale, efficiency and that we were able to get out of. This is quite unique, and I'm confident that once fully developed, we have a production cost here, that's very hard to match. Phase 2 is now well underway with the first smolt release planning Q1 next year. And with Phase 2 completed, we are actually halfway in our build out. And we are very much looking forward to put Phase 2 into operation as what we are building in Phase 2 is an improved copy of Phase 1, building on all the experience of learning from over 3-plus years of operating Phase 1. So we're very confident that Phase 2 will be even better than Phase 1 in the same way as eventually Phase 3 will be better in Phase 2. And that's how it is in this business. It's a constant pursuit of perfection. Indre Harøy is also a unique location. We have all the licenses in place for the full development of the island and we've already made significant infrastructure investments that will benefit Phase 3 when we eventually move forward with that. Well, first, Phase 2. It's all about completing that according to plan, on time and on budget. Phase 2 will be a real game changer for the company, both in terms of establishing ourself as a significant player, but also reaching critical mass and scaling the platform that we have. With Phase 2, we more than doubled production and we also dramatically increased our harvest regularity, which is very good from a commercial perspective. And it also leverage us -- enables us to leverage the substantial investments already taken in systems, people and facilities. So clearly a game changer for the company. And as to Phase 2 construction, this is moving forward at a high pace and progressing according to plan, on time and on budget. As you can see from the picture here, 10 out of 12 tanks are already assembled with the last 2 tanks being assembled now in August. Also, the building shells for 4 out 6 technical rooms are assembled with the last 2 soon due for assembly. Now a lot of focus is devoted to process installation work, and this will be further intensified over the coming months. And also on the intake station, the building itself is now completed. We have also installed 2 intake pipes, 1 going down to 95 meters and 1 going down to 25 meters. And this was a major milestone in the second quarter, very important milestone. In the intake station, our work is centered around process installation work, which is well underway. And as I said, we are on time and testing and commissioning of Phase 2 will commence in just a few months, and we are now devoting a lot of resources into the preparations for significantly scaling up our operation over the coming year. We already have a very good staff operating and managing Phase 1, and we're also adding additional operational resources, so that -- so we're very confident that we're able to scale up Phase 2 in an efficient manner. And as to the Phase 2 pre grow-out tanks, planning and engineering activities are in the phase and subject to a final investment decision during the second half of this year. We target completion aligned with the Phase 2 grow-out facility. In the near term, obviously, our 2 main priorities at the moment are continued operational excellence and taking out the full potential of Phase 1 as well as executing Phase 2 according to plan. With Phase 2, we already have an 18,000 tonnes operation. And with this, we have the critical scale needed for strong returns. And this also gives us fantastic platform for further growth. And in terms of further growth, clearly, Phase 3 at Indre Harøy is the obvious choice in the medium term. We have all the infrastructure in place. And I think you'll have a very hard time finding a more attractive project than Indre Harøy. Longer term, we naturally have ambitions beyond Indre Harøy. And being the global front runner, we believe that there's bill a lot of opportunities. But as I said, now it's all about taking out the full potential of Phase 1 and executing Phase 2 according to plan. And that is -- those are the most important enablers in terms of taking Salmon Evolution to that next level. I would also like to say a few words on the new regulation for land-based that was announced by the Norwegian government this summer, and that has now come into effect. Clearly, we find it positive that we have now gotten clarification around the future regulatory framework for land-based salmon farming. The main takeaway is that filtering and disinfection of intake water becomes mandatory. From our side, we generally believe that regulation is reasonable. And we also note that we with our hybrid floater system already is fully compliant, both for Phase 1 and Phase 2. So from our perspective, this is a good thing as it reduced regulatory risk going forward. And potentially also strengthens Norway's position as the driving force for the development of the land-based salmon farming industry. Okay, Trond?

Thank you. All right, the financials. To state the obvious, although we are pleased to report continued improvement in key metrics and stable operations at Indre Harøy. Financially, the second quarter is not something we are satisfied with. Firstly, we are fully exposed to the spot market. Last year, this strongly worked to our advantage. In fact, we likely had the best price realization amongst the listed farmers in the first half of 2024. This year, however, the salmon price has been significantly weaker reflecting high supply growth. As a result, even with harvest volumes broadly in line with Q2 last year, revenues are down significantly. And this represents the primary negative impact on EBITDA year-on-year. Second, farming costs in Q2 were elevated, driven by nonrecurring factors. This was primarily due to harvesting underperforming groups linked to last year's smolt quality issues. These groups delivered lower weight, reducing smolt yield and incurred higher feed costs due to less growth and higher FCR than anticipated. I guess you know what is positive with all of this is they were harvested in full during the quarter. So they are behind us. Taken together, the combination of weaker salmon prices and temporary cost effects in Q2 had a notable effect on our reported results. However, we expect a strong price recovery in 2026. And on cost, the drivers behind this are nonrecurring in nature. The smolt quality issues from last year, impacting performance in the first half of 2025 have been resolved, and underlying costs are lower than what is reflected in the reported figures. With stable operations at Indre Harøy, minimal mortality and a scalable cost structure, we have significant operating leverage as volumes grow. So we did not hit the mark in the first half of 2025. But looking back 1 year to the first half of 2024, highlights what is possible even at an early stage at Indre Harøy. And I think overall, the heading summarizes it well, better times ahead. And at Indre Harøy, it is all about cost competitiveness. It's all about good biology, capacity utilization and scale. After several years of operating that facility, we have deep insights into the underlying cost structure. In a fully operational farm, roughly half of the total costs are essentially fixed. Smolt stockings follows our production plan with limited variations. It is all about small yield. Personnel levels are stable and technical operations, maintenance of the running expenses and G&A are largely independent of production volumes. In other words, with all 12 tanks in use, incremental output adds minimal additional cost, creating significant operating leverage as volumes grow. The more we produce, the lower cost per kilo we have. Pretty obvious. So for Salmon Evolution, driving down farming costs is all about making continuous improvements that steadily increase production and harvest volumes. And when Phase 2 is online and volumes double, we also unlock significant economies of scale by leveraging the operation we already have. The same factors impacting the farming segment, weak salmon prices and temporary higher farming costs also flowed through to overall group results. Outside farming, the group includes the Other segment, which are essentially headquarter and expansion costs. Operating expenses in this segment were slightly higher than preceding periods. I would like to emphasize that cash burn on growth projects, both domestic and international remains very limited as our core focus is on maximizing the performance of existing operations and delivering Phase 2 on time and budget. Again, results in the second quarter and the first half of 2025 are not something we are satisfied with. But as the salmon price recovers and volumes growth, so will profitability. Then a quick look at the balance sheet and cash flow. As Trond Håkon highlighted, the Phase 2 expansion is on plan and budget. Investments through Q2 were funded with own cash and first drawdown on the construction facilities was completed early July as planned. In the quarter, we also strengthened our financial flexibility with new loan facilities totaling NOK 250 million, of which NOK 150 million is earmarked for the planned pre-rollout department at Indre Harøy. None of these were drawn at the end of the quarter. Cash flow from operations in the quarter were impacted by the combination of weaker market prices and temporary higher-than-normal farming costs, as mentioned earlier. Cash flow related to investments primarily relates to the Phase 2 expansion. And cash flow from financing is related to working capital financing and interest expenses. As mentioned, Phase 2 is on track. And as on Trond Håkon said, testing and commissioning of Phase 2 will commence in just a few months. During the quarter, we invested approximately NOK 280 million in the project, bringing accumulated investments up to a little bit more than NOK 900 million. As mentioned, the first draw down on the construction facilities was completed in July. Building activity and capital expenditure are expected to peak during the second half of 2025. And to state the obvious. This project is a game changer for Salmon Evolution, and it is only 7 months until we stocked the first smolt and start doubling production at Indre Harøy. As I also mentioned earlier, we took proactive steps to further strengthen our financial flexibility during the quarter. In light of the softer-than-expected salmon market the last 12 months, by entering into a new loan facility up to NOK 250 million with DNB and Nordea. Of this, as mentioned, NOK 150 million is earmarked for the planned pre-rollout department at Indre Harøy. The facility is on customary market terms with a 12-month tenure and option to extend for an additional 6 months subject to lender consent. Additionally, we also increased the overdraft facility from NOK 150 million to NOK 200 million providing additional flexibility. Trond Håkon?

Yes. Thank you, Trond. So clearly, the salmon market has been much weaker than expected this year and this is due to an unprecedented increase in volumes. But looking into 2026, the outlook is much better. And as we turn the page on 2025, we expect supply growth to come significantly down, which again would result in stronger prices. Here, we have borrowed some material from DNB Carnegie. And as you can see, they are expecting minus 7% supply growth from Norway next year and minus 1% globally. So -- and I think also the positive thing with salmon market is that volume builds markets, so when supply eventually come down again, which it will, prices could also easily surprise on the upside. And we are, therefore, positioning ourselves for a market recovery next year. And with Phase 2 down also up and running, we are in a very good position to capitalize on this. So to sum up, we have a proven platform, and we know that what we are doing is working, and we've been able to maintain stable operations over time. now it's all about maximizing utilization of Phase 1, which will further improve unit economics. Also, the heavy lifting is done as we are now soon already halfway in our project at Indre Harøy with an 18,000 tonnes operation well inside where we also get the scale needed to really see attractive economics and cash flow on back of unexpected market recovery next year. And this, again, puts us in a very good position to continue to lead the development of salmon farm -- land-based salmon farming industry. Thank you. I think we will then open up for questions. Maybe start here in the audience and then move over to questions submitted via the webcast.

Herman Dahl, Nordea. Can you say something about what kind of harvest weight we should expect in Q3 and also in H2 this year?

I think what we can say is that you had the 2.9 kilo gutted in Q2, and we expect those to increase in Q3. I don't want to give like an exact figure, but we -- given that we have now sort of pushed through with the normalization of our biomass composition and we have a substantially different composition than we had both going into 2025 and also end of Q1, you should see a material increase from Q3 and onwards.

Christian Nordby, Arctic Securities. Can you give a range for how much cost per kilo will drop in Q3 versus Q2 now in your Farming segment?

We have not issued any specific guiding on costs. What I can say is what I have already said. We are not satisfied with the second quarter and the first half of 2025. Smolt yield was too low. And the feed conversion of the groups we harvested were too high impacting costs. I think towards the end of 2024 and the start of 2025 is kind of a good reference point going forward. But again, we have not issued any specific guiding on costs. Apart from saying the obvious that costs will go down. The second quarter is not representative for the operation. We -- the cost structure of the operation we have at Indre Harøy.

And based on 1 of your slides where you show the biomass composition, it looks like you have quite a lot of volumes ready for harvest in July. Is that -- will you be quite like 1,000 tonnes, roughly speaking, harvested in July at fairly low prices?

It was not 1,000 tonnes in full, but we had a decent volume in July, but it's lower than 1,000 tonnes.

Alex Aukner, DNB Carnegie. So could you explain the volume split in the second half of the year? How much in Q3 and Q4 and also the volumes pushed into 2026. Is that -- will those 500 tonnes come in Q1?

Yes. I think we are, I would say, in general, what we are targeting is to harvest only the growth. So assuming that you have sort of fairly stable growth or hopefully slightly increasing quarter-by-quarter. That should be a good reflection of the harvest volumes. And then obviously, there are timing effects if it's sort of in this quarter and that quarter. But -- so I think we'll leave it at that as the split between Q3 and Q4. As to the volumes pushed into 2026, that will then come in Q1. So we have -- the way it looks now, we have quite a lot of volumes in the beginning of the year, next year. So that's where volumes are originally intended for late 2025.

And in terms of the nonrecurring costs in Q2. That was specifically because of higher feed costs due to bad economic feed conversion ratio. Was that the explanation for the nonrecurring?

Two main effects, smolt yield and the 1 you mentioned, higher feed costs.

And in terms of construction for Phase 2, any more blasting, anything that would disrupt Phase 1 production?

Everything completed. The Phase 2 -- and it's worth emphasizing that this was sort of nothing with respect to the biology or anything impacting the fishes was precautionary post that we had because when you are sort of laying the intake pipes, there's a lot of rocks that needs to be sort of taken out and to sort of mitigate and stress for the fish. We stopped feeding for quite a few days just to be on the safe side. And that was what was impacting the growth. But that is all completed. So there are no more blasting activities or anything like that going forward.