Salmon Evolution ASA
OSE:SALME
Earnings Call Analysis
Q4-2023 Analysis
Salmon Evolution ASA
Salmon Evolution has had a dynamic quarter marked by significant achievements indicating the company's upward trajectory. They reported excellent biological performance, achieving a key milestone with the first 1,000+ tonne harvest, marking a moment of both operational and financial viability. This successful harvest led to an all-time high biomass production, further evidencing the company's prowess in managing its farming operations. These operations are supported by strong financial health, with the company reporting about NOK 650 million in available liquidity.
Internationally, the company is making calculated moves, particularly in North America, where efforts are concentrated on securing a site that mirrors Norway's favorable salmon farming conditions. These efforts are poised to establish the company as a formidable player in North America's emerging market. However, in Korea, the project economics present challenges stemming from specific site conditions and infrastructural gaps. Salmon Evolution remains vigilant on maintaining sound capital discipline and high return metrics. Clarifications on project support are anticipated in the second quarter.
Driven by market strength and its leading superior share rating, Salmon Evolution's product quality is resonating with consumers. The feedback highlights the exceptional taste and quality of the salmon, and with the demand regularly surpassing supply, the company's commercial standing is robust. With such validation from the market, Salmon Evolution is on track to increase sales volume and potentially leverage its unique selling points to command premium pricing.
Cost management remains a pivotal concern for Salmon Evolution. Despite cost pressures, including factors like long shorelines affecting their Korean operations, they are ensuring all projects align with their financial criteria. Domestically, Phase 2 construction is a focal point where efficiency and improvements from Phase 1 are expected to expedite progress. While the exact timeline for harvesting from Phase 2 is contingent on construction commencement, the past experiences afford a promising blueprint for future developments.
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Good morning, everyone, and welcome to this presentation of Salmon Evolution's results for the fourth quarter. My name is Trond Hakon Schaug-Pettersen, I'm the CEO of the company. And with me today, I also have our CFO, Trond Vadset Veibust.
As reported in our operational update in early January, we have had a good biological performance throughout the fourth quarter, which is also the first quarter where we exceeded 1,000 tonnes in harvest volumes. And this is obviously a very important milestone for us.
So as always, we will start by going through the highlights for the quarter before moving over to the operations, both in Norway and internationally. Then our CFO, will go through the financials, and we will end the presentation with some comments on outlook before we open up for questions. [Operator Instructions]
So as to the highlights, the main event for the fourth quarter is that we harvested out 1,100 tonnes of gutted weight with good results, which again enabled us to reach breakeven on EBITDA level for the farming segment for the first time. And I think for us, this is real proof that we are on track and really demonstrating not only the operational viability of our project, but also the financial viability.
We also saw record high biomass production in the fourth quarter and ended the year with an all-time high biomass of more than 2,200 tonnes. We are also very pleased to report a strong start to 2024, and we have already harvested out 457 tonnes of gutted weight with, I would say, very strong results both in terms of harvest weights, quality and price realization. As you all know, the salmon market is very strong at the moment, and we really see that we are very well positioned to benefit from this over the coming months and quarters as we continue to ramp up both production and harvest volumes.
Finally, we continue to enjoy a strong financial position with an available liquidity of almost NOK 650 million. And on top of this comes also the bank financing earmarked for Phase 2.
So over to the operations. 2023 was the first year where we were fully operational. And I will say that we have made good progress on many fronts. We have throughout the year, been gradually increasing production, and we had a total biomass production of almost 4,000 tonnes last year. We also harvested about 1,900 tonnes of gutted weight and this generated almost NOK 160 million in sales revenue. But what I am and also as a company, what we are the most proud of is that when we say we put biology first, this is not just something we say. You can actually also now see it in our performance. And I think the best parameter for fish health and fish welfare is probably the mortality rate, where we as a company, have set a very ambitious target of 3% to 5% on an annualized basis. And as you can see from the chart here, we are already operating within this range. And it's also important to stress that this is not for a small-scale test production with low densities. This is rather on a large scale with industrial densities.
To compare the average mortality in the conventional industry was 16% in 2022. That's over 10 percentage points higher. The figures for 2023 were just released, and they show a further uptake largely driven by the jellyfish problems we've seen in Norway over the last month. But obviously, being able to operate with this kind of mortality levels gives us a huge advantage in terms of production cost. But I think for us, the ambition is to get even lower. And I think over time, that's also possible. Also recently, we've seen more and more focus on the superior share on harvested fish. And we believe this is a very relevant topic because this is something about the fish health and fish welfare of the fish that survives until harvest. And on this parameter, we have consistently had very strong results, and this is also something that gives us a huge advantage in terms of price realization, especially now during the winter season when prices are at its highest.
So as communicated, we harvested 1,100 tonnes in the fourth quarter, which is a significant ramp up compared to previous quarters. The vast majority of the volume comprise batch 3 and 4, which are now fully harvested out. I think it's also worth pointing out that these 2 batches were the ones that were the most impacted by the AGD issue we had in the second quarter last year. So when looking at both harvest weights and superior share, that should also be taken into consideration.
As to price realization, we had an average all-in price of NOK 76 per kilo. That reflects that the majority of the volume in the fourth quarter was taken out in November when salmon prices were at its lowest. But please also note that this includes -- this is for all fish, including downgrades.
So looking into Q1, we've had a very strong start to the year already. We harvested out 2 out of the 4 groups. We plan to take out this quarter, and this has given us a harvest volume of 457 tonnes of gutted weight. We are very satisfied to see that harvest weights are improving. And year-to-date, we have an average harvest weight of 3.9 kilos gutted with also a very tight weight concentration and with the majority of the fish being over 4-kilo gutted. And we're also very pleased to see that the superior share so far this year has been exceptionally strong at more than 95%, and given the strong market we are seeing currently and also the huge gap between superior and downgraded fish. I think it's fair to say that we are on track for a very promising quarter. So with the last 2 groups left for harvesting in Q1, we remain confident in our guidance of 800 tonnes to 1,000 tonnes of gutted weight in first quarter harvest volumes.
Yes. As we reported in our operational update, we saw record high biomass production of 1,440 tonnes in the fourth quarter. And we also ended the quarter with an all-time high biomass of more than 2,200 tonnes. On the production side, it's important to note that we had a very high harvesting activity in November, taking out fairly large volumes of fish and does this temper rarely reduces the biomass production. But we had a very good development towards the end of the quarter. We have also stocked 2 additional batches of smolt and with the stocking of batch 10 being completed in early January.
We have a fully stocked farm, and also setting the stage for further growth in biomass in the first quarter. So I think we really see that and believe that things are going in the right direction. We have now been operating the farm for almost 2 years and feel that we have a very good control on the operational side. I think a very good example of this is they have a storm a couple of weeks ago that hit the West coast. That caused minor dips in our power supply. But then the redundancy systems kicked in as they are supposed to do causing no harm to neither fish, people or the facility.
So we are also continuing on the preparations for Phase 2. This will double the production capacity to 16,000 tonnes of gutted weight. All the preparatory ground works are now completed. And together with our contractors, we are working very closely on the design and engineering, and obviously, an important part of this job is to identify and implement areas of improvement and efficiency gains. Phase 2 will be an improved copy of Phase 1 with no fundamental changes, but we are obviously incorporating the lessons learned from Phase 2. And although Phase 2 will be benefiting from the significant infrastructure investments we have taken in Phase 1, we are seeing inflationary pressure on CapEx and hence, we are working very closely with our contractors on cost optimization and reducing uncertainty to a minimum. And we expect this process to be completed in Q2 upon which we are in a position to push ahead with construction.
I also want to restate that in terms of Indre Haroy, we have all relevant licenses already in place for the full build-out of the project meaning that fully developed, we will produce 32,000 tonnes of gutted weight on this small island.
I will then say a few words about what we're doing on our international projects. So as communicated earlier, we have been spending a lot of time and resources on our North American venture, which we see as a strong growth driver for Salmon Evolution in the years ahead. We have really scrutinized the entire region for potential sites, and we are now in advanced negotiations for a site, which we classify as a high potential location that ticks all the relevant boxes. We want both with respect to water quality, size and topography. And I think as we alluded to last time, what we really like about North America is that in many ways, this is very similar to what we do in Norway, where we have an existing salmon farming infrastructure, and where we can more exclusively focus on the grow part of the business and just tap into the remaining parts of the value chain.
And thus, in our search for sites, we have been very much focused on finding locations with access to existing salmon farming infrastructure. And also culturally, North America is very similar to Norway and also the fact that you, in many places already have smolt facilities, you have processing plants, well boats, access to people and suppliers with experience from the industry, that makes this a very interesting project for us. So this project is definitely moving forward, and we look forward to share more detail here, hopefully, in not so long.
When it comes to Korea, our focus has been and currently is on cost optimization. I think as of today, we see that the overall project economics are somewhat challenging, and this is primarily driven by site specific circumstances relating to the growth side and also the lack of certain other salmon farming, infrastructure and regulatory framework, which together are having an impact on both the project cost and also the operating cost. And together with Dongwon, we are therefore working and engaging with relevant authorities in Korea to shore up financial support for the project to improve the economics, and we also expect to have clarification around this during the second quarter. And for us as a company, it's very important to maintain sound capital discipline, and making sure that every project we are engaged in meets our return requirements, and that's why we have such a high focus on cost.
When it comes to design, that is more or less completed. Also, we have seen very good progress on the permitting side and I'm really experienced that this is a high priority project in Korea both on a local, regional and national level.
So with that, I leave the word to Trond to go over the financials.
Thank you. Good to see you all again. First, I thought we would start a little bit with the all-in price realization. As Trond Hakon mentioned, currently in Norway, the market is -- there is too much [ poor ] fish and too little superior. And that, of course, has an impact on the price realization.
According to the Norwegian Food Safety Authority, there has never been recorded higher levels of production fish than at the start of 2024. In week 5, the share of downgraded fish amounted to 30% -- 37% of all the fish that was harvested. And this is even before the sea temperatures are normally at the lowest, which is a key driver for downgrades in the industry. The high level of downgrades of course, has a significant impact on the all-in price realization. And here, we have made an illustration how that could look in the first quarter. We have used -- Salmon -- that we have in Salmon Evolution, we have an industry-leading superior share. So far in this quarter, as Trond Håkon mentioned, 95%. And then we have looked up the numbers for 2 listed salmon farmers, the 2 salmon farmers that actually report on superior share. We don't have updated numbers for the first quarter in 2024 yet. So we have used the numbers for the first quarter in 2023. And then we have used some prices for illustration. You probably noticed that they are quite close to where the market price is today. With our industry-leading superior share of 95%, we look at an all-in price realization of 4% to 8% above the listed farmers in this example. And of course, on top of this built-in premium, driven by superior fish welfare, comps premiums from other built-in unique product characteristics like certifications and so on. So having a superior fish welfare also have a significant economic advantage. Then the financial results. Farming Norway is -- consists of the farming activities at Indre Harøy, the smolt facility at Dale as well as sales. Without ambitions to leverage our technological advantage internationally, this is basically how Salmon Evolution would look. In the fourth quarter, we are pleased to report breakeven farming operations for the first time. These results came after harvesting about 1,100 tonnes of gutted salmon with an average all-in price realization of approximately NOK 76 per kilo. On top of this, we had some other income as well. In total, we generated sales revenues of NOK 83.6 million and total income of NOK 85.9 million. As mentioned by Trond Håkon, the price realization reflects that the harvest mostly took place in November. But when comparing our price realization on superior fish to the relevant NASDAQ equivalent, we had the price realization above the index. We also primarily harvested batch 3 and 4 in the fourth quarter. These batches were affected by the AGD event in the second quarter. This had a somewhat an effect on the average harvest weight and thus also the EBITDA cost per kilo. We do continue to see decreasing farming costs on back of higher biomass production and are on track for refarming cost at par with the conventional industry. And as highlighted by Trond Håkon, going forward, we expect to significantly increase the harvest volumes, which will have a positive impact on both the price realization as well as the farming costs. The Other segment is related to projects and technology as well as general corporate functions. This is basically the cost of scaling the business internationally. And we have also taken a quite conservative approach as to capitalizing costs for this segment. The revenues came in at about NOK 7.5 million. And the EBITDA contribution was relatively stable when looking at the previous quarter. However, we do expect going forward as more projects mature, that the negative contribution from the Other segment will decrease. When looking at the entire Salmon Evolution group, we had revenues of NOK 88.9 million, mostly related to the harvest that took place in Q4. With breakeven farming operations, the EBITDA significantly improved from the last quarter and ended up negative NOK 16.1 million. This includes NOK 9.4 million in capacity adjustments expensed directly in the profit and loss. We had a fair value adjustment of negative NOK 2.6 million and ended at a net total profit and loss for the quarter of NOK 51 million. Looking at our balance sheet and cash flow. We have a strong financial position. At the end of the quarter, we had available liquidity of NOK 645 million. This includes committed and undrawn credit facilities. The cash flow from operations has improved significantly since the last quarter and reflects that harvest activities has picked up. Of course, going forward, looking ahead, looking into the second quarter and beyond, we expect significant increase in harvest volumes, which should also have a positive effect on the operational cash flow. Investments in the quarter was mostly related to the design and engineering work for Indre Harøy Phase 2, as well as completion of the upgrades at our smolt facility at Dale. Until building commence for Indre Harøy Phase 2, we expect investments to be relatively moderate. Over to you Trond Håkon.
Thank you, Trond. So to sum up, we believe that we are in a very good position. We are now fully operational at an industrial scale, and we are continuing to increase both production and harvest volumes. We are also very encouraged by the strong biological results, where we see a consistent low mortality and also an exceptionally high superior share, both of which are strong indicators of good fish health and fish welfare in our farm. The salmon market is also very strong, as you all know, with harvest -- and with harvest volumes now ramping up, we should be very well positioned to benefit from this, both during the first quarter and also over the coming quarters. And I think also you really see that the relative attractiveness of our business case has only improved over the last couple of years, and we remain fully confident that we will be competitive with conventional farming in terms of production costs. So with a strong financial position we have, also now together with our cash flow generating Phase 1, we have a unique platform to scale this business, both in Norway and abroad and continue to lead and shape the development of this industry. So I think with that, we will open up for questions.
We will start here in the audience, and then we will move over to questions submitted via the webcast.
Herman Dahl, Nordea. Could you say something on when you expect the state production and also something on 2024 volume expectations? That's the first one. And the second one also, how has the batches that you've introduced to your tanks after the AGD issues in Q2 developed compared to your original budgets on growth, especially.
Yes. I think as to -- now we have 2,200 tonnes of standing biomass at the end of the year. When we are sort of fully operational, this will be somewhere between 2,800 tonnes, 2,900 tonnes. So I think now what we see for the first quarter is that we will produce more than we take out. So you will see an increase in biomass during this quarter. And I think the way it looks now, we expect to be -- yes, fairly in line when we are going into Q2. And I think that once you get to a normalized level on the biomass, that is also when you are getting into a normalized level on the harvesting. So for Q1, we have guided 800 tonnes to 1,000 tonnes of harvest and then you will see a step-up from Q2 and onwards. If that was -- yes. And then you had a question on the batches. I think overall, we see that the performance has been good. It's more or less according to plan. There are some, as always, differences between the batches. I think if you look, for example, at batch 3 and 4 were harvested out in the fourth quarter. Those were the batches that were the most impacted by the AGD issue. Batch 5, which we are now harvesting in the first quarter. We've had -- we're taking -- we are taking it out at 4-kilo -- almost 4-kilo gutted on average. That was a fish that was stocked late February last year, so about 10 to 11 months. So I think it's fairly a good performance. And this was also -- we lost some days on the AGD issue on those as well, but good performance. And I think -- we are learning more and more every day. And I think the assumptions we have in our production plan are very much supported by the performance we are seeing. So we remain very confident in the overall plan, and that is -- that we will have a production out of Phase 1 of 8,000 tonnes of gutted weight on a sort of normalized basis.
[indiscernible]. Just on the operational costs. You say that you're still are on track in terms of reaching -- being on par with the conventional industry. In terms of when we should expect that you say that normalized harvest should be around Q2, Q3. Will that be the same sort of time we should expect costs to be on par with the industry? Or is it affects that we should take into account that might push costs being normalized a bit further out in time?
As of course, we have not given any specific guidance on the costs kind of in the coming quarters just to clarify that. But what we see now is at the year-end, we have more or less fully stocked Indre Harøy. So now we have the right amount of fish, and we are close to having the right amount of biomass to spread the costs on. Of course, that will have a significant impact on the cost level going forward. And from quarter-to-quarter now, we see a steadily decrease. And that's also why we communicate that we see that costs are decreasing on back of a higher biomass production. And of course, when we approach steady-state production volumes, it's also reasonable to expect that the cost level starts aligning with where we have communicated that we believe it will be in the future. So from quarter-to-quarter now, we produce more and more biomass. We also expect the cost level to decrease on back of that.
And the second question is on the Korean adventure, if you like. You say that site-specific issues have made it somewhat more challenging. Is this sort of new information? Or has this always been the case and it just now seems to...
No. I think as we have alluded to over the last couple of quarters, particularly with respect to the intake solution, we have been working on different solution on that. It's a very long shore line. That's a big cost driver on that. And that causes quite a complex technical setup to facilitate both the intake and discharge of water. And that is driving the cost. And I think also, what we see is that -- and I think that is a reflection that when you are operating in a new emerging market, there are a lot of infrastructure you need to put together. It is also having an impact on cost. But we are, like we said, we are seeing that this is a high priority project in Korea. And -- but for us, it's very important to make sure that -- yes, we need to make sure that every project we engage in that we have sound return metrics on those, and that is why we are so much focused on costs. So we will continue to work on this now together with Dongwon over the coming months, and we expect to have a clarification on that in the second quarter. But the big driver is that you need to -- it's a long shore line or it's very shallow waters. You need to go very far out to access the deepwater, and that is sort of the main cost driver.
Anyone else? All right. Then we also have some questions submitted via the webcast. First one, what is the status of Phase 2? That -- it was submitted quite early. So I guess, Trond Håkon, we covered it quite well. Any additional comments from you.
No, I think it was -- if it was submitted earlier. I think we are covered on that.
Second question, you have a very impressive superior share. What is the feedback from customers on the quality of your salmon?
Yes. I think it's -- yes, customers are requesting more. So from our side, we would -- yes.
Sold out.
We were sold out. We are sold out, so from week to week. So we've had a very good feedback. I think what people say is that this is -- the taste is excellent. Very nice color and also with this high superior share that, yes, it's quite a unique product and a unique position to be in, to have this type of fish with this quality this time of year. So we are extremely pleased with what's going on, on the commercial side of the business.
Right. Then a question on the cost. What's the outlook for costs going forward? I guess we also covered that during the Q&A, so that should be covered. Then regarding South Korea, is it an option for Salmon Evolution to find another site in the country for the grow-out facility that can facilitate for improved project economics?
I think it's always an option. We have -- but -- and we have been -- the site we have now is sort of a result of a search to find possible sites. And it's not -- I don't think there are many sites but there might be opportunities. But at least now we have -- our main focus is on the site that we have and also then engaging with the relevant authorities and which have been demonstrating strong support for this project. So that is our main priority.
Good. Then a question, when do you expect to start commercial harvest from Phase 2? Of course, that ultimately depends on when we start building. But I guess it's fair to say that looking at the building time for Phase 1, we expect to build and move a little bit quicker this time. So a reasonable expectation would be to look at what we achieved for Phase 1 and then to -- we would expect to do it a little bit quicker this time around. But ultimately, when we will harvest from Phase 2 depends on when we start building.
Yes. And what we can say is that in Phase 1, we started building in May 2020, and we harvested the first fish in November 2022. So that's a good proxy.
Are you seeing any signs of land-based premium on top of the Fish Pool index levels? I think, ultimately, when it comes to price premiums, we showed a little bit earlier in the presentation. But to have a -- to start talking about price premiums on unique product characteristics, we also need to have a steady harvest volumes. So looking ahead, there could definitely be a potential, but still, it's a little bit too early to conclude on that.
I think what our focus is to have an efficient operation. So obviously, we see a lot of demand and a lot of customers are liking the story that we represent. But to develop a market and to develop programs, you need to be able to supply on a -- almost like a weekly basis. And we don't want to take on that kind of commitment because that will basically then dictate how we run our production. And we want to take out the fish when it's ready for harvest, and we would want to do it at scale, drive down the cost. But now as we continue to gear our production here, we have fairly good stability in Phase 1. But when we get into Phase 2, we have weekly harvest. 52 weeks a year. And obviously, then it's much easier to commit into those kind of programs where you deliver maybe several times a week. So that is definitely on the agenda. But I think right now, it's cost optimization and then this will be a little bit further out. But we are seeing that we have customers already today that are paying up a premium because this is a land-based salmon. But it will take some time to develop the market.
Okay. With increased costs in Korea, is it the right time to venture to North America? We have a firm belief in North America. We are also looking at sites close to the existing value chain in the industry, that should definitely have a positive impact on the price level.
I think it's also very important to say that in North America, it's not like we plan on starting to build tomorrow. It takes a long time developing this kind of project. So -- but this is all about sort of building a pipeline for long-term growth and value creation in Salmon Evolution. And we will spend time on both -- on developing the project, securing permits, et cetera, also the design and engineering. And then after some time when the timing is right, then they can sort of execute on the project, but it will be a fairly modest capital expenditure in this phase that we are entering.
And then the final question in the Q&A. Have enough measures been taken to avoid the AGD issue appearing again? I guess we have also covered this quite good in this and previous presentations. But the short answer is yes. We have taken very strong measures to make sure that AGD will not be an issue at Indre Harøy again.
Yes. And I think also when looking at our -- yes, mortality figures and superior share figures over the last -- yes, since that happened, I think that is clearly also a demonstration that this is well taken care of.
All right.
Okay.
That was it. Thank you.
Thank you all.