Salmon Evolution ASA

OSE:SALME

Earnings Call Transcript

[Trond Schaug-Pettersen, executive]

Okay. 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 here today, I also have Trond Vadset Veibust, our CFO.

I think 2024 was a transformatory year for Salmon Evolution, where we demonstrated both continued solid operational progress and also strong financial metrics. And going into 2025, we believe that we are in a very good spot at the moment, both operationally, but also in terms of our Phase 2 expansion, which will, I think, really be a game changer for the company.

So I will start this presentation by going through the highlights in the quarter. 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 a Q&A session. For those of you who are attending virtually, you can submit questions via the webcast.

As to the highlights for the quarter, we are continuing to see stable operations across the farm. And very importantly, many of our biological KPIs are extremely good. We are also very satisfied with a record high harvest volume of over 1,700 tonnes gutted, which generated almost NOK 150 million in revenues and a group EBITDA of NOK 9 million.

For the Farming segment, we saw an EBITDA of NOK 15 million, equivalent to NOK 9 per kilo. And I think that's something we are quite satisfied with given that salmon prices in the fourth quarter were somewhat weaker than expected.

As per year-end, we had a standing biomass of about 2,000 tonnes and a key priority for us now going into 2025 is to build our biomass to the desired level so that we can take out the full potential of the farm. I would say that things are progressing very well operationally. We have a fully stocked farm and are thus very well positioned to demonstrate continued operational progress over the coming quarters.

Phase 2 is also progressing according to plan, on time and on budget. Construction is taking place at a high pace and it's actually now only just a little over a year until our first Phase 2 smolt release.

Finally, we also have a strong financial position. We are fully financed for Phase 2, which will take production to 18,000 tonnes and really give us a unique platform, enabling substantial organic growth in the years ahead.

So moving over to the operations. As I said, as a company, we took significant steps last year and I think really solidified our position as the leader within this space. We harvested almost 5,000 tonnes, which I think is actually around 30% of all land-based salmon harvested globally.

Furthermore, we also demonstrated strong farming margins, in particular, in the first half of the year on back of strong price realization and good cost control, both driven by good biological performance and high product quality. So we are now very much looking forward to 2025, where we expect a significant uptick in production, which should again enable us to scale our cost base and support attractive margins.

As communicated, we harvested 1,729 tonnes gutted in Q4. This includes 105 tonnes of post-smolt delivery. During the second half of last year, we also focused a lot on utilizing available production capacity to backlog volumes into the fourth quarter, which we now can say paid off as the market firmed up going into Christmas. The all-in price realization for harvested fish in Q4 ended at NOK 82 per kilo. This is up NOK 10 per kilo from Q3.

We also continue to see an excellent product quality with the superior grade share ending at 95% in Q4. And I think it's also very satisfying to see that the average harvest rate ending at 3.8 kilo gutted, which is up another 15% from the third quarter.

As to harvest guidance for 2025, this remains unchanged at 6,000 to 6,500 tonnes. This also includes some batches of post-smolt deliveries.

For Q1, our base scenario is 1,100 tonnes in harvest. We might potentially push some volume schedule late in the quarter into Q2 as we have a temporary drop in harvest weight this quarter. That is due to the biomass composition we had following the spillover effect from the smolt quality issues we had in the first half of last year.

As I said in the beginning of the presentation, we have taken significant steps in 2024 operationally. And I think we're really seeing that we are improving every day and batch by batch. This is a core part of our DNA and also one of the unique features of a land-based operation like this, where we are able to control the parameters and replicating what's working and avoiding what's not working.

And I think a very good example of this is our batch 9, which we harvested out in Q4. Here, we saw an average weight of 4 kilo gutted and with an exceptionally tight weight spread, actually 63% above 4-kilo gutted and only 6% below 3-kilo gutted. And from our perspective, this is close to an optimal distribution, but very balanced both price, cost and biology.

Also, fish welfare KPIs were extremely good. We had an accumulated mortality of 2.6%, which is the best we have ever had and also a superior grade share of 96%. And obviously, when we talk about production cost and attractive economics, this is what it's all about.

When it comes to production in the quarter, this was up 11% to 1,518 tonnes. This led to a standing biomass of around 2,000 tonnes as we harvested out a bit more than we produced.

As communicated in Q2 last year, we had a setback due to smolt quality issues. But after restocking the farm throughout the second half of last year, we have seen a good development in production over the last quarter. And in fact, in Q4, we had close to all-time high growth.

We now have a fully stocked farm after stocking 2 groups in the fourth quarter and actually also one group last week. And this puts us in a very good position to continue to see a positive development over the coming quarters. And going forward for us, our core priority is to get the standing biomass to the targeted levels and also to keep it there so that we can take out the full potential.

Also, we have, for some time, been talking about utilizing the potential or utilizing the excess capacity at Indre Haroy to also produce post-smolt and we are very pleased to finally be able to -- have been able to successfully test this out. In December, we delivered 105 tonnes of post-smolt at around 700 grams and we also did another batch in January at around 1 kilo.

And both of these groups have performed very well after transfer to sea, minimal mortality and also strong growth. And I think this also really demonstrates the unique operational flexibility that we have at our farm in Indre Haroy.

For 2025, we have already secured overcapacity on smolt through external sourcing and the plan is to utilize this for this purpose later this year.

And we are also very pleased to announce that from next week, our salmon will be available all across Norway. There are some packages outside. So please feel free to bring them with you after the presentation.

This is actually the first time land-based salmon is launched as a separate category in Norwegian retail and we are doing this in partnership with the Norwegian premium brand, Lofoten. Our salmon will be available at Meny and also selected SPAR stores all over Norway.

And a key enabler for this launch is to offer consumers more choice on the shelf and also potentially to appeal to a broader target group. So we really look forward to follow this launch and continuing to broaden our market reach as we, in parallel, also are increasing our production and harvest regularity, which again will open up for additional commercial opportunities.

So moving over to our growth initiatives. As I said, it's now only just a little over a year until we will release our first smolt in Phase 2. And Phase 2 will really be a game changer for Salmon Evolution, both in terms of establishing ourselves as a significant player, but most importantly, we are able to reach critical mass in our operation and really scale our platform and creating this organic growth engine with a substantial operating cash flow, which is essential in terms of further growth.

So you've probably seen this picture before, but obviously, fully built out Indre Haroy is a massive operation. And obviously, the level of efficiency we will be able to achieve here is quite astonishing. We have all the permits in place for the full build-out of the project, 36,000 tonnes, but there is also an upside potential here at this site and that is something we are also working on.

As to our Phase 2 construction project, this is moving forward at, I would say, a high pace and progressing according to plan, on time, on budget. We currently have about 100 workers on site.

And as you can see from the picture here, the first tanks are already in the process of being assembled. A lot of the work to date has been done underground. But with this now mostly being completed over the coming months and quarter, we expect to see a very visible progress at the site.

To the left here, you can see the new intake station for Phase 2. And although this is smaller in size than the one we had for Phase 1, it actually has 30% higher capacity. So that only demonstrates what's possible in terms of cost optimization.

The intake manifold in the -- on the first floor that was installed in the fourth quarter and we are now in the process of constructing the second floor of the intake station.

As to the post-smolt tanks that we are building in Phase 2, the planning and engineering activities here are advancing with the aim of construction start mid-2025 and completion of these to be aligned with the completion of the other grow-out modules.

When it comes to our international projects, we have nothing new to report at this stage. As to North America, we are obviously following the geopolitical situation closely. And clearly, the introduction of potential tariffs may have an impact on economics. So this is something we will have to more clarity on before committing significant resources.

In Korea, the main focus now, which is led by Dongwon, is centered around obtaining financial support from the authorities. As previously highlighted here, in this project, we have a special JV structure where our main contribution is human capital.

I also want to add that we are seeing additional opportunities in Norway, also outside of Indre Haroy. And I think for us, it's very clear that in the same way as for conventional farming, we strongly believe that Norway will be the cost leader also for land-based and this is simply because of all the infrastructure we have and also the highly effective value chain.

So then I leave the word to Trond, who will take you through the financials.

[Trond Veibust, executive]

Thank you. Pleasure to see you all again. Just to reiterate what Trond Hakon just said. These are -- this is one of the rare occasions when our student learning actually offers you something free, a free lunch and it's available outside. So please grab a slice of Lofoten smolt salmon when you exit.

Q4. We ended the year well. We set a new harvest record in the fourth quarter and delivered our volume in line with our own prognosis, including our first delivery of post-smolt. And with a good timing of harvest and supported by strong harvest KPIs, we had a solid price achievement in the quarter as well.

Revenues in the fourth quarter amounted to about NOK 149 million, the second highest on record and an EBITDA of NOK 15 million, equaling an EBITDA per kilo of approximately NOK 9 and about NOK 23 for 2024 as a whole.

Our farming cost in the quarter was temporarily impacted by post-smolt sales. Allocation of costs between segments and harvest of biomass with peak production coinciding with a period when we had a relatively low standing biomass at Indre Haroy and thus less fish to distribute the cost base on.

The harvest set -- the biomass set to be harvested in Q1 will, to a lesser extent, be affected by this. So our farming cost is expected to go somewhat down going into the first quarter of 2025.

Looking at the other segment, this is typically headquarter functions as well as the staff working on our expansion projects. For sake of simplicity, let's call it the expansion cost.

A portion of the costs are reinvoiced to the Farming segment as well as the growth projects, for instance, the Indre Haroy Phase 2 expansion project. The cost base is primarily driven by salaries, which represented about 2/3 of the costs in this quarter in Q4.

The cost impact of the expansion projects in North America and Korea was marginal in the fourth quarter. The result in this segment was positively impacted by allocation of costs between segments, resulting in the lowest expansion costs we've had to date and it kind of serves as a good illustration of how little impact this part of our cost base will have once volumes pick up further with the initiation of Phase 2 operations. Going forward, we expect the impact from this segment to be in line with 2024 as a whole.

Looking at the consolidated group accounts, the fourth quarter was a solid ending to a good year with revenues close to NOK 150 million in Q4 and a little over NOK 470 million for the year. The EBITDA in the fourth quarter ended at about NOK 9 million and a little over NOK 70 million for 2024.

If adjusted for depreciations on nonrecurring CapEx, the underlying EBIT was also positive in 2024.

Taking a quick look at the balance sheet and cash flow. The increase in assets in the fourth quarter was primarily related to Phase 2. The operational cash flow was positive by NOK 1 million and NOK 43 million for the year as a whole. And at the end of the quarter, we had a strong financial position with available liquidity of NOK 684 million, excluding the committed construction financing.

Looking at the Phase 2 expansion project, as Trond Hakon highlighted, the project is on time and on budget. Activity at the building site was high through the quarter with approximately NOK 160 million invested in Q4.

Going into the next quarters, activity is expected to continue to increase as will the investments. And this is illustrated by the chart on the right -- your right-hand side, which shows a gradual increase in investments up to Q3 this year, which will coincide with kind of the peak point at the building site.

And as previously highlighted, the project is fully funded. We have NOK 684 million in available liquidity and we have earmarked construction financing of NOK 1.45 billion available. On top of this, we are also generating a positive operational cash flow.

Thank you. Trond Hakon?

[Trond Schaug-Pettersen, executive]

Thank you, Trond. So to sum up, we believe we are in a very good spot at the moment. We have proven that it's possible to produce full growth salmon on land and also with very good results, both operationally and financially. We continue to see stable operations and also steadily improving performance.

And already, we have a quite competitive underlying production cost, but this will only improve as we further increase our production.

So that's where the focus is now over the coming quarters, take out the full potential of the farm. We are also very pleased to be well underway with Phase 2, which will give us this critical mass and really position ourselves as a substantial player. And we are -- yes, so I think this, combined with having a strong financial platform, really puts us in a great place to capitalize on an expected strong market in the years ahead.

So I think that was the presentation. We will now open up for questions. We will start here in the audience and then we will take questions via the webcast after that.

[Unknown Analyst]

[Foreign Language]

[Trond Schaug-Pettersen, executive]

[Foreign Language]

[Herman Dahl, analyst]

Herman Dahl, Nordea. Could you say something on the margins on the post-smolt you sold externally in the quarter? Maybe also saying something on what kind of weights we should expect in Q1? Are we thinking back to Q2, Q3, '24 levels? And will it normalize into Q2 '25?

[Trond Veibust, executive]

Okay. I can start with the margins on the post-smolt. The margin picture on post-smolt for Salmon Evolution is in line with the margins we have on the normal harvest fish. So it's quite similar. Harvest weight, Trond Hakon?

[Trond Schaug-Pettersen, executive]

Yes. No, I think as to the harvest weight and just to explain Q1 because we had -- as you might remember, in the first half of last year, we had some smolt quality issues. So we took out a batch and that was partly to be harvested in Q1.

So we have sort of a gap. And that means that we -- the weights -- and then we have sort of restocked the facility with new smolt groups, but obviously, then they have somewhat lower weight.

So that is sort of the fish that we need to take out. It will be a little bit lower. So I think it's fair to say, like, I don't want to be exact, but it is low -- you will see a drop in Q1 if it's sort of at Q2 or Q3 levels. I don't think we can go into specific on that now. It will depend on sort of when we do the harvest and so forth.

But as we go into Q2, things are normalizing because then you are sort of on this -- you're back on the normal track. So you should see quite an uptick in Q2 and back to sort of a more normalized level throughout the year.

[Unknown Analyst]

You talked about that you are planning to have extra capacity for 1,100 tonnes in Phase 1. Are they in place and running?

[Trond Schaug-Pettersen, executive]

So in connection with phase, because in Phase 1, that's like 12 large tanks. In connection with our Phase 2 build-out, we are building some smaller tanks, call it like post-smolt tanks and by doing -- so those are not there yet, but they will be built in connection with Phase 2.

And what that gives us is that then we can increase the stocking weight and do -- instead of like we do today, we have 6 batches a year, then we can increase that to 8 batches per year. And so we get a better churn out of the facility. And that's sort of what's explaining that we go from 7,900 tonnes, which is the production capacity today to this 9,000 tonnes per phase in Phase 2 and 18,000 tonnes in total.

[Unknown Analyst]

So that depends also on Phase 2 completion.

[Trond Schaug-Pettersen, executive]

Yes.

[Unknown Analyst]

As I see it…

[Trond Schaug-Pettersen, executive]

Yes, it does. And then another thing we can do in Phase 1 and as we are -- have been doing with this utilizing excess capacity to -- especially like in the early start where we have low densities, you can also stock a little bit more fish and sell sort of leftover as post-smolt. And that is something we will be doing this year to sort of get a little bit extra out of it.

So I think that we have a lot of flexibility. Obviously, when doing those kind of things, you need to have control over the supply side and securing the smolt. That we have done this year.

So now we have overcapacity. And that's sort of first and foremost, just to be sure that you have enough smolt for sort of the main production. And given that nothing happens, then you can sort of utilize that for external sale.

[Unknown Analyst]

And I have a second question as well. You have talked about the importance of scaling up, which is now the critical phase for you in order to really have that capacity running. What do you see are the primary risk operationally for having hiccups for, say, the next 1 year?

[Trond Schaug-Pettersen, executive]

Yes. I think, obviously, there will always be risks. But I think now we have been producing for almost 3 years now. We -- like in the beginning, it was like a lot of new things and a lot of things to learn.

But we see that the facility is -- it has a very good redundancy. We have backup systems and backup systems on the backup system. So we are -- we've had -- experienced different kind of things, power outage and other things as well.

But what we see is that we are -- when things happen, we are able to contain it because you have competent people, which is essential in this business and both on the biological side, but also you need very competent technical people. And then you need to have a good quality on sort of the construction on the facility in itself and obviously, this redundancy systems.

But there's no guarantees, but I think we are feeling very comfortable that this is sort of built to last and also built to handle challenges.

[Christian Nordby, analyst]

Christian Nordby, Arctic Securities. Your biomass at the end of the quarter is just over 2,000 tonnes and Q1 last year was 2,700 tonnes. What should we expect for Q1 this year? What are your prognosis based on harvest levels for Q1?

[Trond Schaug-Pettersen, executive]

It should get -- it will go up quite a bit. So we are at, call it, steady state, we should be sort of close to sort of in the high 2,000 tonnes, close to 3,000 tonnes. And that is the focus now, get the biomass to the right levels and that is sort of a prerequisite for getting the volume out of the farm.

So in Q1, we are building biomass. We'll have to see sort of on timing of harvest and so forth. But obviously, over the -- this quarter and at least when going into Q2, biomass is going to see a substantial increase.

And just to add to that, obviously, in terms of cost and production cost, having enough volume to allocate the cost on is, yes, naturally very important.

[Aleksander Helgo, analyst]

Yes. Aleksander Helgo from Arctic Securities. You mentioned earlier in the presentation some optionalities in regarding to the sites for expansion.

Of course, Phase 3 is the next step. And it was interesting what you mentioned around the intake, water intake that it was so much more efficient. Is that mainly due to the technology? Or -- and can you mention a little bit more regarding the optionalities at the site?

[Trond Schaug-Pettersen, executive]

Yes. Just to add to -- to take the last question first. It's just doing things smarter. And I think -- and that's one of the -- what's really interesting because yesterday, we are building, let's say, NOK 240 to NOK 250 per kilo.

I'm 100% confident that over time -- and that is if you compare to conventional farming, it's sort of on parity or maybe even a little bit better. But it's still a high cost.

So I'm very confident that over time, this can be reduced and you could get -- we'll see how much, but there is a potential to sort of get further down on cost just by doing things a little bit different and doing things smarter. So that is something we have a very high focus on.

And I think it's an essential part of sort of the long-term story here and that's why we also are investing heavily in the organization to have people that can sort of work on this and really creating this platform for what we're going to do in the future.

And as to your first question on the site, we have all the licenses for Phase 1, 2 and 3. And that is for sort of the land we own, but the local municipality have had a zoning plan ongoing for the remainder of the island. So that was approved last -- in the fourth quarter and that opens up an opportunity for sort of potentially expanding the site.

Obviously, then we need to apply for more licenses. So these are things we are looking at, but it can be quite a meaningful sort of increase on sort of the size of the site.

[Trond Veibust, executive]

Okay. A few questions submit via the webcast. Start with the first one. I think we have already answered this one.

Everything seems to be going well. Do you see any current -- do you have any current challenges? Or do you see potential challenges in the future?

I think that was answered pretty well by Trond Hakon a few minutes ago. So I think we can hop to the next one.

The next question is, whether we had any escapes in 2024?

We did not have any escapes salmon in 2024.

Then the last and final question to you, Trond Hakon. On smoked salmon, do you achieve a price premium on the branded Lofoten smoked salmon?

[Trond Schaug-Pettersen, executive]

I don't want to comment on that now. But obviously, it's important for us to get our product out there. This is a very interesting opportunities.

Volumes are still -- this is a 100-gram pack. So volumes are naturally fairly small and sort of out of the -- sort of total volumes that we have, this is sort of not a significant impact sort of economically, but still a very interesting opportunity. And I think it really demonstrates that there is a market out there for an alternative product.

This is about sort of offering consumers more choice and also an opportunity to broaden the target audience. So we very much look forward to this and continue to develop new opportunities as we progress.

[Trond Veibust, executive]

All right. That was it. See you next time in May. Thank you.

[Trond Schaug-Pettersen, executive]

Thank you.