Salmon Evolution ASA (SALME) Earnings Call Transcript & Summary

Okay. Good morning, everyone. Thank you for joining Salmon Evolution's presentation for the second quarter. We are currently at a true inflection point where we are now transitioning from a period dominated by construction and investment towards now scale up and ultimately, cash flow generation with Phase 2 at Indre Harøy now in operation. And this is something we look forward to for a long time. And as I've said many times before, this will be a game changer for the company. In land-based salmon farming, you need scale. And by the end of this year, scale is exactly what we will have. Also, while the salmon market has been challenging for some time and impacting our financial results, we are now seeing a more positive market outlook emerging, which is also very encouraging. Coupled with a substantial increase in production over the coming year, this is arguably the most interesting period in Salmon Evolution's history. So my name is Trond Håkon Schaug-Pettersen. I'm the CEO of the company. Together with our CFO, Trond Vadset Veibust, I will take you through this presentation. So as normal, we will start this presentation by going through the highlights, then I will take you through the operations and our ongoing growth initiatives before our CFO will take us through the financials. And finally, we will end the presentation with a Q&A session. For those of you who are attending virtually, you can submit questions via the webcast. And as mentioned, the company is at an inflection point where we, over the coming year, will fundamentally transform the scale of our business. Key to this is Phase 2, which is now in operation. The ramp-up is progressing according to plan. The fish is performing well, and we have completed the third Phase 2 smolt release now in July. The building project is also nearing completion, with the remaining eight tanks to be gradually handed over and taken into operation throughout this year and enabling a significant increase in production going into 2027. In Phase 1, we are seeing continued progress from the new feed and updated operating protocols that we implemented earlier this year, particularly around water quality, translating into better growth. And although we expect the full effect still to be ahead of us, the recent development gives us increased confidence in the underlying production potential. Clearly, the weak salmon prices impacted our financial results in the second quarter, where we saw revenues of NOK 67 million, a farming EBITDA of minus NOK 3 million and a group EBITDA of minus NOK 11 million. However, on the positive side, harvest volumes are up 50% year-to-date and also year-to-date farming EBITDA is up from minus NOK 8 million last year to plus NOK 15 million this year and also despite a challenging salmon market. So I think to sum up, our production will increase significantly over the coming quarters, which in turn will reduce unit cost. Combined with a market looking increasingly attractive into next year, we believe that we are in a quite good position. So moving over to the operations. In the second quarter, we harvested 945 tonnes gutted, with harvest taking place in May and early June. The superior grade share and tight weight distribution was in line with previous quarters, and harvest weight was up from 3.2 kilo gutted in Q1 to 3.5 kilo gutted in the second quarter. All-in price realization ended at NOK 70 per kilo, reflecting a fairly backloaded harvest profile and also weak salmon prices in the quarter. We have updated our guidance for 2026 and expect to harvest approximately 6,000 tonnes this year compared to the previous guidance of 7,000 tonnes. The adjustment reflects lower-than-anticipated biomass production during the first part of the year. So while this impacts 2026 volumes, we continue to see positive operational development and remain confident in our production outlook and targets. Operationally, the quarter marked another step forward. We continue to see stable operations across the farm, minimal mortality. Net biomass growth increased to 1,706 tonnes. This is up from 1,357 tonnes in Q1. We had good appetite across the farm in April. Production in May and early June was somewhat impacted by a sub-optimal fish logistic operation and longer-than-normal adaptation period for a new smolt group stocked in Phase 1. But towards the second half of June and going into July, we saw good development across all groups. And we are seeing that the changes implemented earlier this year are beginning to deliver and that better water quality is providing a stronger biological foundation to take out the full potential of the system. And at the same time, Phase 2 continues to ramp up according to plan, although the contribution to biomass growth was limited during the quarter. But this will increase significantly over the coming months. So I think the key takeaway is that the biological trends are moving in the right direction. We are building the foundation for higher harvest volumes, larger harvest weights and also improved unit economics. And this slide is to highlight why we are increasingly confident in the operations and performance. Historically, we have delivered strong performance up to, say, 2.5 to 3 kilo. The challenge has been to maintain that growth momentum through the later part of the production cycle. The improvements implemented earlier this year, geared around feed and operating protocols, have had a positive effect on water quality, and we see that this also translates into a positive effect on growth. And as you can see from the right-hand chart, the last two groups that we have harvested have had a significant better feeding in the last part of the production cycle compared to the previous two groups prior to implementing those changes. So while it's still early, the data is encouraging and supports our view that the biological potential of the system is improving. And going forward, I think it's all about building on that positive momentum. And when it comes to Phase 2, the first months of operation have gone according to plan. We completed the third smolt release in July. All groups have adapted well with minimal mortality, good appetite and growth in line with expectations. Importantly, also, the technical upgrades that we have in Phase 2 are performing as intended with further improvements in water quality, which has been a key focus in Phase 2, and that means improvements in particles, gas levels, tank hydraulics and overall more capacities throughout the system. And over the coming months, the contribution to biomass growth from Phase 2 will materially increase, and we are planning for two full-size smolt releases in the fourth quarter, meaning that for 2026 as a whole, we plan to stock around 2.8 million smolt, which is up 65% compared to last year. So I would say in short, Phase 2 is delivering operationally. The ramp-up is on track, and we are now building the foundation for substantial production growth over the coming quarters. And delivering on the production ramp-up, that is the primary focus for us now, and we remain confident in achieving our mid-2027 run rate production target of 14,600 tonnes. And that means continued improvement in Phase 1 so that we, as a first step, get to 85% capacity utilization and also getting Phase 2 to full run rate production. This will fundamentally transform the company. It will give us critical mass, also a fully competitive production cost and stable weekly harvest, which will, again, enable further initiatives on the commercial side. So moving over to our growth initiatives. We believe that we are entering a very attractive phase for the company, where years of execution are now translating into clear and scalable growth. Our strategy is very clear and disciplined. It's now all about execution on the current operation, delivering Phase 2 and also ensuring that we have a compelling pipeline. And Phase 3 at Indre Harøy is the natural next step that will double the capacity towards 36,000 tonnes. This is on one side, a platform and also with an organization that is already proven. And also, this is growth that leverage the existing infrastructure and experience that we have, reducing risk and boosting returns. And important, as to Phase 2, we firmly believe that, that will set a new benchmark for land-based salmon farming. And as previously mentioned, things are looking very good. We have taken out 4 years of operating experience from Phase 1 and incorporated those learnings into Phase 2. And the improvements are especially centered around water quality, robustness and reliability. We are introducing around 20% more fresh seawater. We are upgrading the degassing systems, better water hydraulics particle filtration on the water that we reuse. And these are targeted and experience-driven upgrades designed to support strong growth through the full production cycle. And at the same time, we've also simplified the systems. We have further strengthened the biosecurity to ensure predictable operations at higher volumes. So I think the takeaway is clear. Phase 2 is now -- it's not just more volume, it's also better biology. It's lower risk. And together with Phase 1, we believe that we have a very solid operational platform. And this is just to illustrate the strength and scale and long-term potential of Indre Harøy. Phase 1, as you know, we've been operating now for several years. We now have Phase 2 in operation that will eventually take production capacity to 18,000 tonnes, gutted. Additionally, Phase 3 is, in our view, a highly attractive project. It's building on the same proven site infrastructure and organization. And beyond that, we also have a potential Phase 4 that represents meaningful long-term optionality. So I think to sum up, this is a very capable and unique platform. It offers significant volume growth in the near term. We have a very tangible medium-term expansion opportunities and also a long-term growth optionality. And as to Phase 2, disciplined project execution and cost control have enabled Phase 2 milestone to be delivered in line with plan. We have now taken over 4 out of 12 grower tanks, with the remaining 8 tanks to be taken over during the course of this year. The project is nearing completion. That gives us good visibility on remaining CapEx and milestones. The civil construction scope is largely completed. The project focus is now centered around process installation and final commissioning activities for the remaining tanks. As to the pre-grower tanks we are planning as part of Phase 2, we estimate total investments of around NOK 400 million, including contingencies. But before making any final investment decision, we will run a structured process with contractors with the aim of further reducing risk in cost estimates. So with that, I'll leave the word over to you, Trond.

Thank you, Trond Håkon. Okay. So let me take you through the financials for the second quarter and the first half of 2026. After harvesting approximately 1,000 tonnes at an all-in realized price of NOK 70 per kilo, farming EBITDA ended at negative NOK 3 million in Q2, representing a substantial year-on-year improvement driven by lower farming costs. Farming costs landed at NOK 71 per kilo in Q2, down from Q1, and a 13% year-on-year improvement. With increasing volumes in Phase 1 and scaling effects from Phase 2, driving fixed cost dilution, we expect gradually reducing farming costs in the second half of 2026. And I will go through the farming costs a little bit further in a minute. The other segment reported an EBITDA of -- in line with Q1 and an improvement of approximately 35% year-on-year. As previously highlighted, we have implemented several measures to reduce cash burn and costs in this segment, resulting in meaningful cost reductions, including a reduction of five FTEs. Looking ahead, with the volumes set to more than double, this cost base will scale significantly and the relative cost burden of these activities will continue to decline. At group level, EBITDA was negative with NOK 11 million, representing a solid improvement compared to 2025. Looking at the first half of 2026, harvest volumes was up 50% compared to 2025, farming costs down approximately 10% and farming EBITDA ended at about NOK 15 million or NOK 5.4 per kilo, an improvement of over NOK 10 per kilo compared to the same period last year, even in spite of a relatively challenging salmon market. When it comes to farming costs, we are beginning to see the benefits of scale as Phase 2 ramps up, although these effects are not yet reflected in the financial results. As we have consistently communicated, our cost structure contains a higher proportion of fixed costs than a traditional farming operation. And as a result, attractive unit economics are primarily driven by utilization and the ability to scale production across a largely established cost base. Over the past several years, we have built the organizational -- the operational platform required to support Phases 1 and 2 at Indre Harøy, effectively front-loading much of the infrastructure and organizational cost base needed for future growth. With substantial production growth underway, we see a material fixed cost dilution ahead. In other words, our underlying unit economics will improve significantly in the coming 6 to 12 months. To dwell further on cost, a topic that has become increasingly important over the last few quarters, feed costs and the benefits of a low economic feed conversion in a tightening feed market. As you are all aware, feed accounts for approximately 50% of farming costs, making feed conversion the single most important driver of long-term competitiveness in the industry. Our controlled land-based production system enable a level of feeding precision, monitoring and data collection that is difficult to replicate elsewhere and act as a natural hedge against feed cost inflation. Over the last few quarters, we have improved our economic feed conversion ratio by 5% to 6% and remain firmly on track for our 12-month target of 1.1. In fact, the latest group we harvested crossed this threshold. Going forward, we expect to continue benefiting from the investments made in feeding technology, personnel training and artificial intelligence to maintain our already sharp economic feed factor going forward. In a market characterized by rising feed costs, every percentage point improvement creates meaningful value and represents a structural competitive advantage over time. And then, finally, let's take a brief look at the balance sheet and cash flow. Most of our assets are related to the grow-out facility at Indre Harøy, biomass and other inventory and cash. The net interest-bearing debt decreased slightly compared to Q1, reflecting the cash injection from the private placement in April. With the Phase 2 expansion project being close to completion, as highlighted, investments in the project are decreasing, and we have good visibility on remaining CapEx as -- and milestone as mentioned. Cash flow from operations reflects harvest timing and the ongoing Phase 2 ramp-up. Investments in the quarter are in all material respects tied to Phase 2 and cash flow from financing relates to the mentioned private placement as well as drawdowns on the construction financing. Thank you. Trond Håkon, summary.

Thank you, Trond. So let me end where we started. The company is at a true inflection point. For years, our focus has been on building the platform, proving the technology and developing the operational capabilities needed to succeed at scale. Today, that foundation is in place. We have a proven operation. We have a capable team and the platform -- and platform that is now entering its next phase with Phase 2 now online and ramping up according to plan. So I would say that the heavy lifting is largely behind us. What lies ahead is about unlocking the value of what we have built through higher production, stronger economics and ultimately also significant cash flow generation. At the same time, we are seeing an encouraging biological development across the farm, which, in turn, increase our confidence in the production potential of our system. We also believe that the market backdrop is becoming increasingly supportive. After a prolonged period of pressure, the outlook for salmon prices is finally improving, I have to say, and we are uniquely positioned to benefit from that as our production growth now accelerates. So I think the combination of improving operational performance, substantial volume growth ahead and a strengthening market outlook gives us confidence that the most exciting period in the company's history lies ahead of us. So I think with that, I'd like to thank you all for your attention, and we're now happy to open up for questions.

We can start with the audience first and then move on to the webcast.

Herman Dahl, Nordea. Two questions from my side. Firstly, on the pre-grower tanks, could postponement of that investment also mean that it will take longer time to ramp up to 18,000 tonnes? And a second one on feed. Could you just comment briefly on the composition of your feed basket compared to sort of an average industry feed basket?

I think -- as to start with pre-grower tanks, so the 18,000 tonnes, there's a component of -- that relates to the pre-grower tanks. So obviously, that's sort of part of the 18,000 tonnes. So that, I think, goes without saying that we have -- on the pre-grower tanks, the design is basically completed, and it's about just getting started. So we haven't made a final investment decision yet, but obviously, that's something we are working on. But also, we are now in a phase where, yes, the grower tanks are finished by the end of this year. That will also free up capacity. As to the feed composition, I would say we have what I would say is a high-performance feed. I think there are unique features in terms of technical specifications, but also we have sort of prioritized high energy content and so forth. So we have a very close cooperation with our feed supplier and, obviously, are monitoring the situation closely as to the increasing feed prices.

Does that mean a higher inclusion of marine ingredients compared to an average basket?

We have prioritized the high marine inclusion.

Kristoffer Haugland, Arctic Securities. With the improvements you're seeing on the feeding protocols and water quality, do you expect to see average harvest weight of 4 kilos this year? Or is that a milestone for '27?