Salmon Evolution ASA (SALME) Earnings Call Transcript & Summary

Okay. Good morning, everyone, and thank you all for joining this presentation of Salmon Evolution's results for the fourth quarter. Salmon Evolution is currently at a pivotal inflection point where we are now transitioning from a period dominated by construction and investments towards now commissioning, scale-up and cash flow generation with Phase 2 at Indre Haroy quickly approaching first production. This is something we have looked forward to for a long time. And today, I want to thank all our dedicated and hard-working employees and partners for making this happen. And as you can see from the picture here, the scale of what we are doing is quite remarkable. This is next-generation salmon farming at an industrial scale, and we truly believe that what we have built here is something that's going to have a profound impact on the salmon farming industry in the years and decades to come. So my name is Trond Hakon Schaug-Pettersen. I'm the CEO of the company, together with our CFO, Trond Vadset Veibust, I will take you through this presentation. Just a short recap of where we are. Salmon Evolution is the global frontrunner in land-based salmon farming, and we are already operating and delivering at scale. We have a proven platform. After several years of production, we've demonstrated stable biology, high quality and also repeatable performance. That matters because we're not just scaling an ID, we are scaling something that already works. We are also in the right place. Our location at Indre Haroy gives us structural advantages across competence, suppliers, logistics and costs, and these are advantages that will further strengthen as now volume increase. And now we are entering the value creation phase with Phase 2 coming online. Capacity moves towards 18,000 tonnes. And that is fundamentally shifting the earnings profile of the company. This is where fixed costs are absorbed, margins expand and cash generation also accelerate. So to put simply, the platform is built, the risk is reduced, and scale is also now coming. So as normal, we will start this presentation by going through the highlights, then I will go through the operations and our ongoing growth initiatives before our CFO will take us through the financials. And finally, we'll end the presentation with some comments on outlook and a Q&A session. For those of you who are attending virtually, you can submit questions via the webcast. As mentioned, as a company, we are moving towards a clear inflection point, where we go from build out towards execution and value creation. Phase 2 is progressing according to plan with the first smolt release planned for week 17. For 2026, we are preparing for a step-change in scale. We will stock around 2.8 million smolt, which is up 65% year-on-year and also underpinning a materially higher production trajectory and setting the foundation for increasing volumes and earnings. Importantly, we also enter this growth phase from a position of operational strength. The farm goes into 2026 with a solid biological foundation, giving us confidence that we -- in our ability to scale efficiently and also to consistently improve performance as now volumes ramp up. Financially, Q4 also sends an important signal. Farming operations were effectively breakeven on EBITDA, even with some Phase 2 ramp-up costs and also despite quite low prices during the quarter. And I think that clearly demonstrates the operating leverage in our business model. Finally, we're also disciplined on capital. The updated partnership model in Korea ensures that capital and management focus are firmly concentrated on Indre Haroy, where we see the highest, most near-term returns. So takeaway is simple from our perspective. The platform is working. Scale is now underway, and the salmon market is about to recover, and we are positioned to translate the growth into earnings as we move through 2026. So moving over to the operations. Q4 harvest volumes reflect a deliberate strategic choice. We harvested around 1,200 tonnes gutted and prioritized biomass build up to enter 2026 with a fully stocked farm. As a result, we ended 2025 with a standing biomass above target and expect now to harvest around 1,800 tonnes gutted in Q1, also giving us a very solid start to the year. Price realization in Q4 was NOK 74 per kilo reflecting softer market conditions early in the quarter and also the fact that we didn't harvest in December. During Q4, we also sold a batch of smolt to a conventional farmer as we have maintained some overcapacity on smolt over the last year. So to sum up with a fully stocked farm and basically full exposure to the spot market, we are well positioned as the salmon market is expected to tighten going forward. Looking at net biomass growth in Q4, this ended at about 1,600 tonnes, was impacted by a high level of logistics activity as we optimize the farm for the year ahead. But I think importantly, the underlying growth trends remained consistent with previous quarters. The standing biomass ended at around 3,100 tonnes and we have now maintained a fully stocked farm over 4 consecutive quarters. And this is key for continuing to improve performance and also get the operating cost down. At the same time, we continue to execute on various operational improvements that are expected to gradually lift the growth performance. Here, we have several initiatives ongoing, which we very much look forward to see the results from over the coming quarters. So I think to sum up, we have a strong biological foundation and now it's all about taking out the full potential. And I think as to the full potential, this is a good illustration of how we will do that. What we clearly see is that growth performance is good. I would say, very good up to 2.5 to around 3 kilo, even at high densities, while the growth curve flattens out in the final stage. Producing large fish, it's not a problem from our perspective. For example, in the fourth quarter, we harvested a batch of around 200 tonnes at an average weight of 5 kilo gutted, but where the fish stayed a little longer in the tanks. So the issue goes to maintaining the desired productivity throughout the full cycle so that you're able to reach the target weight within the time that the production plan allows for. And key to this is water quality. Through 4 years of operations, we have identified specific bottlenecks around particles, gases and flow. But the important point is that these are known and addressable issues that we are already acting on. This includes, for example, a new and improved feed composition, which is expected to improve water quality that we have already incorporated. It also includes improvements in the way we treat and manage the sort of water recirculation. And finally, it's also increasing -- includes increasingly using data and AI to replicate what works tank by tank and also cycle by cycle. But importantly, all these learnings are already embedded in Phase 2, and we see also a clear potential for similar Phase 1 upgrades in a very cost-efficient manner. So to sum up, we see tangible upside in growth, harvest weights and cost efficiency driven by execution, experience and also data as we now move into the scale-up phase. And Phase 2 is about quality as much as scale. We've taken 4 years of operations of experience from Phase 1 and incorporate those learnings into Phase 2, especially around water quality, robustness and reliability. We are now introducing more seawater, actually up to 20% more. We are upgrading the degassing systems and the water hydraulics and we're also adding particle filtration on the water that we are reusing. And these are targeted experience-driven upgrades designed to support strong growth throughout the full production cycle. And at the same time, we have also simplified the systems. We have strengthened biosecurity to ensure predictable production at higher volumes. And importantly, also, this is capital efficient improvements. Phase 2 is designed to deliver higher quality capacity from day 1. And it also gives us a very clear road map for potentially cost-efficient upgrades in Phase 1. So I think the key takeaway is clear. Phase 2 is not just about volume. It's also better biology, lower risk and better margins as we now scale the operation. As a company, we have a very clear and credible road map for substantial production growth at Indre Haroy. Over the next 18 months, we target to reach 85% capacity utilization of Phase 1 while we, at the same time, are ramping up Phase 2 operations which will give us a run rate production of 14,000 to 15,000 tonnes gutted. Then we are going to implement the pre-grower tanks as well as solving the remaining bottlenecks in Phase 1, which will give us a run rate production of 18,000 tonnes gutted by year-end 2027. And this is not growth far into the future. We are commencing operations in Phase 2 just over Easter. And for 2026 alone, as I mentioned, we will stock around 2.8 million smolt, which is a massive increase from last year. So in some disciplined and stepwise growth on a proven platform. So a little bit about our growth initiatives. I think we are entering now a very attractive phase for Salmon Evolution, where years of execution and experience are translating into a clear and scalable growth. Our strategy is focused and disciplined. It's all about execution on the current operations, deliver Phase 2 and also build a compelling pipeline. And Phase 3 at Indre Haroy is a natural next step, doubling capacity to 36,000 tonnes on a site platform and organization that already works. And this is growth that leverages the existing infrastructure and experience that we have, also reducing risk and enhancing returns. And I think this is a good illustration of sort of the strength and scale and long-term potential of our platform at Indre Haroy. Phase 1, as we've been through has been operating successfully for several years, but Phase 2 is now very soon about to enter first production, then bringing the capacity to 18,000 tonnes. And obviously, Phase 3 here, a highly attractive project, building on the same proven site infrastructure and also the organization. Beyond that, we have a potential Phase 4, which represent also a meaningful long-term optionality. While this is still conceptual, it provides additional upside that can be unlocked over time in line with market conditions permitting and so on. So I think to sum up, Indre Haroy is a unique platform that offers significant volume growth in the near term, very tangible, medium-term expansion opportunities and also long-term growth optionality, all anchored in a proven platform. And when it comes to Phase 2, this is progressing according to plan. We are now well underway with testing and commissioning, marking a clear transition from construction towards operations. The major civil works are largely complete and our focus now is firmly on process installation and operational readiness. Importantly, we have reached this stage without any lost time injuries, which reflects strong execution, discipline and also a continued focus on safety across the project. We remain on schedule for the first smolt release in week 17, and all activities on the site are aligned around this milestone. In parallel, we have also completed planning and engineering for the pre-grow-out tanks where we target to make an investment decision during the first half of this year. So sum up. Phase 2 is on track. Project risk is now coming down, and we are moving from build-out to execution. And I think this is a key step in shifting the company towards scale and earnings. And these pictures captures a major milestone at Indre Haroy in Phase 2. We have now successfully filled water in the first 2 production tanks, which is a critical step in the commissioning process. This confirms that the core systems, the water intake, water management and treatment and are performing as designed. And these tanks are now soon ready for the first smolt release. After which, we will gradually take the remaining Phase 2 tanks into operation throughout 2026. And reaching this stage is a significant and strong validation of the work done by our organization and our partners over several years, turning a large scale, complex build-out into a functioning production platform. I also would like to briefly address the updated partnership model in Korea that we announced earlier this quarter. This is an important strategic clarification. The key message is that this update reinforces Indre Haroy as our foremost priority in the near to medium term. Our capital and management tension and execution focus are firmly concentrated on Indre Haroy and maximizing the output and delivering Phase 2 according to plan and also preparing for the next steps at Indre Haroy. The revised structure also reflects a disciplined approach to capital allocation. Salmon Evolution will provide technical advisory services on market terms with also the potential for quite substantial royalty payments linked to certain operational milestones. But also importantly, we will remain a minority shareholder but with no further investment commitments while we also retain a 5-year purchase option to increase ownership should we desire to do so. And I think this is a good example of how we're able to leverage the significant competence and experience that we have built up over many years without diverting capital or focus away from the core operation in Norway. So Trond, will you take us through the financials?

Thank you. All right. Starting with the Farming segment, which comprise most of our activity. In the fourth quarter, we harvested about 1,200 tonnes in addition to the sale of smolt group due to temporary overcapacity. As Trond Hakon has elaborated earlier, retaining overcapacity on smolt through 2025 was part of our deliberate strategy. As you are all aware, salmon prices through 2025 have been weak. And we are fully exposed to this as we sell our salmon exclusively in the spot market. The impact of lower salmon prices are clearly reflected in our financial results, both for the quarter and the year. In Q4, as Trond Hakon mentioned, our harvest took place in October and November, meaning that we lost out on most of the price recovery towards the end of the year. Overall, we ended at an all-in price realization of NOK 74 per kilo in the quarter and about NOK 70 for the year. Looking at costs. Our farming EBITDA cost ended at NOK 73 per kilo in Q4 and NOK 77 for the year. Q4 reflects the capacity utilization in the second half of 2025. Considering that initiation of Phase 2 operations is commencing soon, we have some ramp-up costs related to this. Net of these ramp-up costs, farming operations were breakeven in the fourth quarter. For 2025, we ended with a negative EBITDA of NOK 39 million, reflecting the mentioned weak salmon prices through the year. For the other segment, which comprise headquarter and expansion costs fully aligned with our growth strategy, we had a negative EBITDA of NOK 7 million in the quarter and NOK 39 million for the year. Through 2025, we have taken steps to minimize cash burn on expansion projects as well as retaining our relentless cost focus through the year. Importantly, this part of our cost base scales significantly once Phase 2 is fully operational with harvest volumes set to more than double. And to underline and illustrate this, it is worth mentioning that we are initiating operations at Indre Haroy Phase 2 without increasing the administrative headcount. The increase in personnel is exclusively linked to farming operations. At group level, EBITDA was negative with NOK 8 million in Q4 and about NOK 80 million for the year. The difference between farming operation and the group results is the mentioned headquarter and expansion-related costs. Overall, we are not satisfied with the financial results in 2025. However, as we move into 2026 with higher harvest volumes, higher salmon prices and continued operational improvements, we expect a significant step-up in financial performance. All the fundamentals are moving in the right direction and we are well positioned to translate operational progress into earnings and cash flow going forward. This illustration shows the bridge from gross costs to the farming EBITDA cost of NOK 73 for the quarter and NOK 77 for the year. As mentioned, the farming EBITDA cost in Q4 reflects the capacity utilization in Phase 1 during the second half of 2025. Included in the gross costs are some ramp-up costs in relation to initiation of operations in Phase 2, as mentioned, although the effect in the quarter and for 2025 is relatively limited. And consequently, through 2026, there will be some effects on the farming EBITDA cost related to this. The smolt group sold during the quarter also impacts gross costs. Smolt have both a much higher revenue and cost per kilo than the regular head-on gutted salmon for obvious reasons. As the volumes increase and Phase 2 comes on stream, we expect a meaningful reduction in unit costs driven by scale. In short, Q4 costs are representative of where we are today, not where we are heading. To look more at the big picture on costs and how the -- and the impact of increased volumes, we have prepared this illustration. In our fully operational farm, we have a predictable cost structure with about NOK 200 million in fixed operating costs in Phase 1. Admittingly, we have a relatively broad definition of fixed costs. For instance, we define electricity as a one-off them. The reason being that electricity use primarily is defined by whether all tanks are in operation, not how much biomass we produce in them. The same goes for personnel, technical operational costs and so on. Our run rate of about 6,000 tonnes HOG yields a farming EBITDA cost per kilo of approximately NOK 70 to NOK 75, reaching targeted cost levels in Phase 1 and 2, NOK 56 and NOK 53 per kilo, respectively, is all about scale and maintaining a stellar biology. The majority of the cost improvements is related to scaling of the fixed cost base. Additionally, the feed factor has been higher than normal during 2025, and improvements in this towards targeted levels is also an important part of the equation. Therefore, decreasing farming costs and meeting our cost targets is all about continuing to increase biomass growth, reaching targeted feed conversion ratios and maintaining current performance on mortality and superior grade share. With Phase 2 operational, we will have further scaling effects on the cost base. Even though volumes are doubling, you don't need one additional CFO. The point being that the required operational platform has already been established in Phase 1 and there are multiple cost efficiency gains with Phase 2 operational. Then over to another topic that has received a lot of attention lately. EBIT cost, depreciations and the distinction between recurring and nonrecurring CapEx in land-based salmon farming. I can only speak for Salmon Evolution and not other land-based farms. But to me, it seems that there are a lot of opinions on this and little facts. With more than 4 years of full-scale operations at Indre Haroy, we have deeper insights into this than most. Let me, therefore, make a few important clarifications. Indre Haroy is built to last and represents a high-quality asset base, supported by stringent maintenance protocols. Anyone who has visited a facility can attest to the quality and the robustness of the operation. Approximately 25% of accounting depreciation corresponding to NOK 2 out of NOK 8 per kilo relates to engineering, internal project management, rigging and operation of the building site during the construction phase. This is not capital expenditure that we will require -- that will require reinvestments in the future. In addition, roughly 20% of depreciation relates to concrete and steel structures with an expected useful life well beyond our average depreciation period. On top of this comes intake pipes and other in-ground infrastructure components with a useful life measured in decades. Hence, our significant portion of CapEx is nonrecurring and carries no future replacement costs. A useful way to think about this is that CapEx for Salmon Evolution effectively replaces license costs in conventional salmon farming. However, licenses are not depreciated whilst our CapEx is, even though a large portion of it does not need to be replaced. The bottom line is that with a high-quality asset base, we are well positioned to maintain a highly competitive EBIT cost over time. Then let me briefly take you through the balance sheet and cash flow. Phase 2 is progressing according to plan. As Trond Hakon mentioned, building activity has peaked. And from here, we expect capital spending to gradually decrease as we move into a period where the primary focus of the project is process installations whilst civil works is nearing completion. We are comfortable when it comes to the project economics. We have approximately 9 months left in the project and are on track to reach our targeted milestones. Currently, we have high focus in the project on effective project execution to minimize delays, change orders and to ensure good coordination between all disciplines at the building site. And thus, reducing the risk of cost overruns. When it comes to the previously announced refinancing, we are currently having constructive discussions, and these processes are proceeding as expected. We will update the market in -- on the results of this in due course. Cash flow from operations was positive in the quarter, supported by our reduction in working capital. For 2025, the cash flow at large reflects our underlying financial results and the fact that we increased the standing biomass by over 50% during the year. Overall, we remain firmly on track and the investment, the heavy investment phase is peaking as we move into the scale-up phase. And bottom line, this is what Indre Haroy is about, positioning Salmon Evolution for significant cash flow generation in the years to come. The key point is that the heavy lifting is done. We have a high-quality asset base in place, and our platform is highly scalable. Strategically, this puts us in a unique position compared to our peers. With Phase 2 fully operational, we are in control of our own destiny with the ability to fund growth from our own operations rather than having to depend on exclusively on external capital. Based on our expected cash flows, we can self-fund growth in the years ahead whilst maintaining a disciplined approach to capital allocation and prioritizing returns overall scale. Bottom line, the business is de-risked, the platform is built and Phase 2 unlocks strong expected financial results with attractive returns. All right. Trond Hakon for the summary remarks.

Thank you, Trond. So to sum up, we believe that we are well positioned going into 2026. We have a proven operational platform. The heavy lifting is largely done. And with Phase 2 coming online, we are also entering a new phase for the company, moving from CapEx towards scale, earnings and cash flow. So I think the fundamentals are very clear. We have a good biology. We have a scalable platform. We're disciplined on capital. And also, we have a clear visibility on growth. Phase 2 is also a game-changer for the company. It significantly increases capacity, strengthening margins and position us to capitalize on an expected stronger salmon market. So our focus is unchanged. It's all about execution and converting continued operational progress into long-term value creation. So I think with that, we would -- I would like to thank you all for your attention, and we're now happy to open up for questions. I think we can start in the audience, if any, and then we take questions submitted online.

Just raise your hand if you want the microphone. All right. Quiet audience today, but that's okay. We have a whole list of questions received online. I think I will just start from the top. Okay. What is the reasoning behind the updated partnership model in Korea? And what ambitions that Salmon Evolution have to scale outside Norway? Trond Hakon?

Yes. No, I think as mentioned, our primary focus now is Indre Haroy and both taking out the full potential of Phase 1 and also delivering Phase 2 according to plan. We clearly have ambitions beyond Indre Haroy, but I think we need to have a very sort of focused approach and that's why we have been very clear that we are focusing our both our capital and our resources in getting Indre Haroy fully up and running. And obviously, also from a growth perspective, Phase 3 is extremely attractive. You have to remember that we have made all the infrastructure investments. We have electricity. We have the permits. Everything is in place. So also from a return perspective, I think there are a few, if any, projects anywhere in the world that can compete on the economics of a potential Phase 3. But it's not ending with Phase 3. We have ambitions well beyond that, and but it's something about sort of timing. And then I think this was a very good solution for us, where we are able to sort of stay involved in a very good way. We get -- we are able to leverage the competence and experience that we've also built up and we also have a good economic upside. So we're very happy about the sort of this revised structure.

Yes. Just to add, I think it also reflects our very disciplined approach when it comes to capital allocation. And importantly, we also retain our 5-year option, purchase option in the project going forward. All right. Okay. What do you expect of Phase 2? And how long do you think the ramp-up period will be?

Yes. Now as we went through in the presentation, we have -- we very much look forward to putting Phase 2 into operations. It's so we have now 4 years of experience from Phase 1, gathered a lot of learnings. All of that is incorporated into Phase 2. It will be a fantastic facility. I dare to say next, it will sort of set a new standard for land-based salmon farming and obviously, now, we're starting. We will have a quicker ramp-up in Phase 2 than we had in Phase 1. So we will stock 5 groups this year and by sort of the -- now we are taking over the first 2 tanks in later this quarter, and then we will sort of gradually take over all the remaining tanks sort of for the remainder of this year. So -- by the end of the year, we are sort of all tanks are fully operational and then into first half of next year, we should be at sort of the steady state where we are producing at full capacity.

And of course, also the big difference from Phase 1 is that we have a very experienced staff and we have all the operational protocols in place to facilitate a much faster ramp up. All right. Yes. Okay. How do you view the salmon market going forward Trond Hakon?

Yes. I think everybody has been a little bit surprised sort of going into this year. I think the expectation was that salmon prices would start higher. Now we've had good seawater temperatures and we've seen higher volumes sort of early in the year. But I think 2026 will not be as 2025. Now it seems like the sort of growth in supply is coming down. And hopefully, very soon, we will see a tightening of the market. But at the same time, you have now -- we have a period behind us with very high supply growth. The good thing about a lot of supply growth is that you then build demand. So when the supply growth comes down, then prices tend to recover quite sharply. So I think we are hopefully on the verge of sort of a new sort of price level. And from our perspective, obviously, we are now with more and more volumes. We are very well positioned to sort of benefit from that.

Thank you. All right. Okay. What are your views on dividend? And do you have a dividend policy in place? Yes. We have if you -- our dividend policy is available at our web page, so you can check there. Okay. Looking at the superior grade share, it has been fluctuating a little bit, peaking at around 97% in 2024. And now in Q4 2025, it was 92%. Do you have any comments on this?

I think it will always fluctuate. We don't see any sort of specific reasoning for why it's a little bit higher or lower. I think overall, looking back over the last, yes, 4 years, it's been sort of plus/minus 95%. And sort of that is where what we are targeting also going forward.

Yes. Our lifetime superior grade share is 94.7% to be very exact. All right. Can you comment on Q4 results for harvest volume and farming EBITDA costs versus your guidance for 2025? When it comes to the harvest volumes, I think we have covered that in full during the presentation. When it comes to the farming EBITDA cost that was in line with what we have previously disclosed during our quarterly presentations. All right. Okay. Trond Hakon, looking at the big picture, what opportunities do you see for a Salmon Evolution over the next 5 to 10 years?

We see a lot of opportunities. And I think it obviously starts with Indre Haroy. By the end of this year, we're sort of -- we have built out sort of the growth tanks on Phase 2. But Phase 2 is only -- then we are only halfway. And then we obviously have Phase 3. I think that's sort of a very obvious expansion because we have -- as I mentioned, we have everything in place. It's sort of very easy to just add on, and we can do that in a very cost-efficient way as well, but -- and there's also upside beyond that. And we are looking at other alternatives also in Norway. And I think with the platform that we have, basically being the only player in this space with sort of at this scale and also now getting into a stage where we have a substantial cash flow and sort of an ability to sort of do things then we are in a very good position to also look at other things, which we are sort of consistently valuating. But the core focus is here. And then obviously, there is there are opportunities outside of Norway. We have this project in Korea. We have also done a lot of work in North America. So we have a very good understanding of the market and the opportunities. So I would say that it starts -- this is only the beginning, and we have ambitions well beyond what you are looking at here. And I think the industry goes into a very, very exciting time. Obviously, last year, we had a weaker salmon prices. But when the market recovers and also when we continue with this improving operationally and suddenly, you get into a phase where you -- where the sort of the business model and also the sort of financial earnings in the company are fully demonstrated then I think there will be a lot of opportunities.

Okay. Then a few closing questions. Can you comment on the scope of the farming cost reductions per kilo we expect in first quarter of '26 and through 2025? I think on the farming EBITDA cost, we have covered that in quite detail during the presentation. It's all linked to continued operational improvements and increased biomass growth. And then do you have a few closing remarks, Trond Hakon on kind of the production at the start of the year at Indre Haroy?

Yes. No. But I think we are, as I mentioned, we're going into 2026 on a very good foundation. We have a fully stocked farm. We have good volumes in the already now in the first quarter, knock on wood. We hope that prices soon recover, but we expect them to do so. And then I think this will be a very, very exciting year. We're also, obviously, now with Phase 2, very much looking forward to take that into operation and also at the same time, we have a lot of very interesting initiatives in terms of taking out the full potential in Phase 1 that we very much look forward to seeing the results from over the coming quarters. So I think we are very optimistic now going into 2026.

All right. That concludes it for today. Thank you for attending and see you again, yes, in May, I believe it is. Thank you.

Thank you.