Good afternoon, everyone, and welcome to this company update following our announcement to the market last night regarding the financing of our improved phase II project. My name is Trond Håkon Schaug-Pettersen. I'm the CEO of the company, and I will be doing this presentation together with our CFO, Trond Vadset Veibust. For Salmon Evolution, this is really a transformative milestone, as we now are creating a fantastic platform, fully funded for 18,000 tons gutted, and with a significant cash flow generating capacity that can support strong organic growth in the years to come. We will go through the main highlights with respect to our phase II project and the financing structure. Then we will open up for questions towards the end of the presentations.
You can submit questions via the webcast. Next slide. As I said, what we are doing now is creating the foundation for a substantial profitable growth in the years to come. We have now been operating the farm for over two years and really demonstrated the viability of farming salmon on land at scale and with strong biological results. Furthermore, during the first quarter, we finally also demonstrate that strong financial results. Therefore, we are now very much ready for phase II, which will be what we call an improved copy of phase I, increasing total production capacity from the phase I and II combined to 18,000 tons gutted, by optimizing the production plan and adding additional tank capacity at the site.
We have also a very solid relationship with our banks and are very pleased with the new debt financing package we announced yesterday, which, together with the completed equity issue, ensure that we are fully funded for phase II. Another major point is that with phase II, our operation reaches critical mass and is thus expected to generate a substantial operating cash flow, which is putting us in a position with significant organic growth capacity, both at Indre Harøy, but also elsewhere. Next. We have, over the last year, gradually been increasing production and also showed consistent strong operational performance over time.
We are already largely operating within our target at mortality rates of 3%-5% per annum, and the quality of our fish is also very good, with a superior grade share consistently at around 95%-96%, which is well above the average for the industry. Then, obviously, those two in combination gives us a very tangible competitive advantage. Furthermore, we are also continuously improving every day. A good example of this is our development in feed conversion ratio, which was 1.14 on batch one and 1.03 on batch six, which was harvested out in April. So low mortality, combined with strong FCRs, are key drivers for achieving production cost on parity with the conventional industry, which is our target.
Q1 was obviously also a major milestone for us, where we had strong financial results, even at modest harvest volumes. For Q2, harvest volumes will increase significantly, and we expect to harvest approximately 1,600 tons gutted, of which more than 1,000 tons gutted were taken out in April and May, when salmon prices were very strong. So for us, Q2 has definitely been an exciting quarter. Next. So over the last two years, we have gained a lot of operational experience, which is very important as we now move into our phase II expansion. And as a part of phase II, we have, for a time, been looking at an optimization of our production plan to increase the output from the farm.
The way we do this is that we add some additional tank capacity, which enable us to increase our stocking weights, and thus also having a higher throughput in the farm, increasing the combined production capacity phase I and II from 15,800 tons gutted to 18,000 tons gutted, which again also will have a positive scaling effect on our production cost. Also, given all the infrastructure already in place at the site, we can do this in a very cost-efficient manner, as we simply just connect to what's already there. And then, our plan is to do the same for phase III, which means that the total production capacity for Indre Harøy fully developed goes from 32,000 tons gutted to 36,000 tons.
And then we're talking about a quite substantial farming operation. Next. So as you can see from this picture, the grow -out part of phase II is more or less identical to phase I and will also be so for phase III. What's new is that we, in connection with phase II, plan to add one additional module consisting of four smaller tanks, which will serve phase I and II. this module will be located next to the water intake station, and as such, we just tap into the infrastructure already in place, which is a very cost-efficient way of securing growth. And then when we go into phase III, a couple of years down the road, we will add one additional module of four smaller tanks, serving the entire phase III operation. Next.
So, here we have tried to illustrate the changes in our production plan and the reason why we are doing it. Today, we have a production plan where we stock the fish at 130 g, with a target at harvest weight of 5.7 kg live weight. This takes approximately 11 months and enable us to do 6 batches per year. The one drawback with this production plan is that we have a low lower density during the start of our production cycle. And therefore, by adding new and smaller pre-grower tanks, we can increase the stocking weights in the growth department from current 130 g to 400 g, which will significantly increase the throughput in the farm.
At the same time, we also reduce the target at harvest weight to 5.2 kg live weight, which still is a very nice weight profile. By doing this, we reduce the production cycle to 8-9 months, which again enable us to run eight batches per year and increasing total production capacity by 1,100 tons per phase or 2,200 tons in total. Also, outside the increased production capacity, there are several other benefits to this new setup. First of all, this is a more conservative production plan with lower average harvest weights and also peak densities, which means more upside potential. By having more batches, we also increase our regularity when it comes to harvest, which is important from a commercial perspective.
As I pointed out earlier, this is also very capital efficient growth given the infrastructure already in place. And by having more batches, we also reduce the operational risk, while at the same time getting more operational flexibility. And finally, this also gives us a better utilization of our small facility, as we, with this setup, can increase the number of units produced by lowering the weight somewhat. So with that, I will leave the word over to our CFO, who will go through a little bit on the financial side.
Thank you, Trond Håkon. To fund the improved phase II expansion project, we will utilize a combination of debt, equity, cash at hand, and free cash flow. The project has an estimated investment level of NOK 2.2 billion, as well as NOK 200 million in project contingencies. Additionally, we have added a significant buffer on top. Compared to the original phase II project, we have added additional tank capacity, lifting planned output from 15,800 tons phase I and II combined, to a planned 18,000 tons HOG phase I and II. we already had a very competitive bank package in place for phase II, with a little over NOK 1 billion in available bank facilities for the project.
To fund the improved project, we have again received strong support from our bank syndicate and add NOK 675 million in new bank facilities as part of the total financing package. Additionally, we did a highly successful private placement yesterday, raising approximately NOK 365 million. With these sources combined, we have fully funded Indre Harøy phase II with headroom, which will take Salmon Evolution from 7,900 tons gutted to a planned 18,000 tons gutted, establishing critical mass for the company and creating a strong platform for further growth. To illustrate the strength of the platform, we have prepared this example, estimating cash flow and theoretical investment capacity in different salmon price scenarios when phase II is fully operational.
Although phase I is a potent platform in itself, when looking at the combined phase I and phase II at Indre Harøy, Salmon Evolution established a strong cash-generating platform as foundation for substantial organic growth in the years to come. As the illustration highlights, we have a potential to fully fund our expansion plans based on our own cash flow. This puts us in a unique position where we basically control our own destiny, and further scaling becomes more a question of how quickly we want to do it, instead of how we are going to fund it.
Based on this illustration, at the salmon price of around 90 NOK per kilo, we estimate an annual investment capacity of 6,000 tons HOG, with phase II in full run rate, equaling approximately a full isolated 9,000 tons phase at Indre Harøy every 18 months. And of course, as we continue to grow, we further increase the potency of this platform. Over to you, Trond Håkon, for the summary.
Yeah. Now, so, so to sum up, we are very pleased with, with having completed this, financing round. We, as Trond mentioned, we are fully funded for phase II now. We have a unique, operational, platform. We have a very, competent, organization, and, and also with phase II, up and running, we will also have a strong, cash flow generation, capacity that can support, organic growth in the years to come. So with that, we conclude this, presentation. We will now, move over to the Q&A, and we'll start, going through the questions, submitted via the webcast. And, and Trond will take us through the Q&A.
Yes. Okay. A question: "What is your hurdle equity, internal rate of return on potential new projects, for instance, in North America?" When it comes to equity IRR, that is not something we have guided specifically on, but of course, we want competitive returns on all projects, but this is also something that we will have to come back to in the future. Question to you, Trond Håkon: "When can we expect news about Korea and North America?
Yeah, as we said, in the presentation published yesterday, when it comes to Korea, we are working on shoring up government financial support for the project. So, that is sort of proceeding. We are, at the same time, very focused on capital discipline, and obviously Indre Harøy now getting that fully up to speed is the core priority. But, with this setup, we then have a very strong platform to pursue other growth as well. When it comes to North America, we, as we have said before, we have been in a site search process.
We are narrowing in, and we also want to make sure that we have, yeah, we have certain clarifications before we go out publicly with any specific sites. But it is a little bit down the road when it comes to actually starting construction. Now, it will take a little bit time to develop, both in terms of permitting and preparing for construction. So the priority number one now is to get into phase II, as we see this as a real game changer for the company, giving us, as we alluded to, critical scale and creating a very strong platform going forward.
Okay, next question: "May the additional tanks provide opportunities to sell postsmolt externally?" As Trond Håkon highlighted during the presentation, our plan is to utilize the added tank capacity to produce postsmolt for own use, to increase the output of the Indre Harøy facility. But of course, you know, there are numerous opportunities that could be unlocked in the future, so we will not be too categorical on this point, but just highlighting that our plan is to use this for our own use. Do you have anything to add to that, Trond Håkon?
No, I think you summed it up well. I think the best way to sort of get the max value out of it is to increase the stocking rates in the sort of grow -out department. But obviously, this having this capacity gives us a lot of flexibility on many fronts. So it's definitely possible to do that, but the sort of main purpose of this is to boost the total production of full full size harvestable salmon.
Thank you. Next question: Shall we think about CapEx per kilo for phase III as quite similar to phase II, as it looks today, assuming no inflation, or will there be some scale effects? We have not guided on CapEx for phase III, and that is something we will have to get back to in the future. But of course, now we are planning to do the second build. This is our second round doing a project like this. And of course, over time, we expect to have learning effects that should positively impact the CapEx per kilo.
I think also just to add to that, so in phase I, we that was sort of one phase under the old scheme, 8,000 tons. And then we're doing a copy of that in phase II. But the plan in phase III is to run a bigger construction project. And then also, our hypothesis is that then we have learned so much that we can do a larger project and also reduce the construction time. So definitely there should be room to sort of further optimize the CapEx per kilo and sort of reap the benefits of some scaling effects.
Okay, next question: May increased production flexibility as a consequence of additional tanks provide room for lowering costs? Of course, with added output, we also that increases the operational leverage. And if in the Q1 presentation, we gave some estimates on the expected cost base, looking ahead at both phase I phase I and II, combined. We have slightly updated those estimates in this new company update. So we expect some scaling effects by increasing the output at Indre Harøy. Next question, in regards to your estimates on coming on par with costs like the traditional fish farmers, how is it going? What are the approximate cost per kilo farmed right now?
As we highlighted in the first quarter presentation, we had a farming EBITDA cost of NOK 67 per kg. If you look at all the traditional fish farmers in Norway that report their numbers on the stock exchange, I think you will find that even with a relatively modest harvest volume, we have a relatively competitive cost base. Okay, next question. This is for you, Trond Håkon. You took out some poor performing smolt in May. Will this mean a gap in harvest volume down the road, or can the shortfall be recouped?
Yeah, and as we also alluded to, we have secured external smolt capacity, so now we have overcapacity on smolt. So the plan is to stock more smolt. We are obviously trying to minimize the impact, but I think in any case, it will sort of not be anything else than a timing effect of the harvest volume as to sort of when the harvest will take place. So we're very satisfied with having secured additional smolt capacity, which is very important to be sure that you have enough of that.
Okay, and the last and final question: How much does Salmon Evolution pay currently on their debt, and how much interest rate do the company pay on its loans? For that question, I would just refer to the first quarter 2024 report. All right.
Yeah, and I-
Trond Håkon, please.
Yeah, and I think it's fair to say that we have very competitive financing cost, and a very competitive margin. It's something we are very, very satisfied with.
Thank you. That concludes the questions. That's also concludes this webcast. Thank you for attending, and see you again soon.