Good morning, and welcome to this presentation of Salmon Evolution's Q3 2021 results.
My name is Håkon André Berg, and I am the CEO of the company, and I will be giving this presentation together with our CFO, Trond Håkon Schaug-Pettersen. As we have not yet fully returned to normal procedures around traveling and physical meetings, we have decided to also do this presentation virtually.
We really hope that we will be able to invite you to a more traditional presentation when we present our Q4 results. Questions can be asked throughout the presentation via the chat, and after the presentation is ended, questions will be repeated for the entire audience, and we will try to answer the best we can.
We will start this presentation by looking at some highlights for the quarter before we go through the main headlines of our approach to land-based farming and our choice of technology. We take a look at the operations in Norway and our new project in Korea before we go through the financials. We will end this presentation with some comments on outlook. Salmon Evolution was founded back in 2017 by a group of industry veterans.
Their ambition was to build a state-of-the-art land-based salmon farming facility where you basically extend the ocean potential by transferring the preconditions offered by the sea to farm fish on land. This is made possible through our Hybrid Flow-Through technology, where we create optimal living conditions for the salmon, while at the same time maintain a low operational risk and with a production cost that is competitive with conventional farming.
Our first facility is under construction at Indre Harøy, north of Molde on the west coast of Norway, and we will have a total production capacity of 31,500 tons gutted weight fully developed. The build-out is divided into three phases, with phase one comprising a production capacity of 7,900 tons. The construction has been ongoing for 18 months, and we plan to release the first fish into the facility in March 2022.
Given that our technology is scalable beyond Norway, we also have strong international ambitions, and in March this year, we formalized a joint venture with the Korean seafood giant Dongwon Industries for the development and construction of a 16,000-ton production facility in South Korea with first grow-out production targeted in 2024.
As we look at the highlights from the Q3, the main headline is still that our ongoing building project has developed according to plan. With continued good progress within detailed engineering, planning, and building, we have seen a significant de-risking of the project since we started to build in May 2020.
During the quarter, we have continued with the assembly of the fish tanks and also started on the installation of technical equipment and pipes, as well as the systems for heating and fish logistics. We also finalized the acquisition of Kraft Laks, a family-owned smolt producer located in Dalsfjorden in Møre og Romsdal.
This acquisition was the result of a thorough process where we evaluated a number of alternatives for smolt supply, and we firmly believe that we, through this acquisition, reduce risk and increase our operational flexibility at Indre Harøy, while at the same time doing so in a cost and CapEx-effective manner. As some months have gone since our takeover, we are glad to report that the company has performed well and our smolt is now more than 200 grams and will be ready for release at Indre Harøy in March.
Another major highlight in this quarter was the listing of our company's shares at the main list at Oslo Stock Exchange. We see this as a strong validation of our business plan and concept and are confident that this will be beneficial for our shareholders and help facilitating further growth.
During the quarter, we also did the first drawdown under our NOK 625 million debt package and will continue to draw on this facility as we move our building project forward. After the end of the quarter, we announced a strategic partnership agreement with Cargill related to supply of feed, a dedicated R&D program, and a $5 million private placement in Salmon Evolution. Kraft Laks has been a family-owned company since the mid-1990s and has for many years been recognized as a supplier of high-quality smolt.
After a thorough process where we evaluated several potential smolt suppliers, we were confident that Kraft Laks is a perfect match for Salmon Evolution.
The reason for this is both the technological aspect, as Kraft Laks facility is based on the same concept as our HFS system, but also the excellent water sources the company has available, as well as the quality of the management and organization. Kraft Laks has over many years consistently shown a strong financial performance, and the purchase price for 100% of the shares is based on an enterprise value of NOK 70 million, which is 7 times average EBITDA for the last three years. As we have looked at the alternatives, we do see that this acquisition, together with future expansion opportunities, secures a significant lower CapEx compared to a greenfield build-out. At the same time, we know that potential freshwater sources of the same quality is not available, and thus we are very pleased with this acquisition.
As part of the transaction, the sellers reinvested NOK 16.6 million in Salmon Evolution at a price that was equal to the volume-weighted average price for the last 20 days. Further, the transaction held a NOK 35 million cash payment, while the rest of the purchase price was structured as a deferred payment. As mentioned earlier, we are very excited about our partnership with Cargill, as we have been able to define some critical aspects as the basis for our cooperation in the coming years.
First of all, Cargill has defined Salmon Evolution as their global flagship customer within land-based salmon farming, which is an indication of their belief in our company and our technology.
Secondly, they have committed to allocate significant amount of R&D resources to ensure that we get the best and most sustainable feed possible for our HFS system, which is the most important input factor in our production.
Access to high-quality feed is especially important for a land-based facility, as our business model is somewhat different from the traditional sea-based industry. Due to our opportunity to work with optimal temperatures and water quality, we can tap into growth potential that is not possible in the sea.
As the diagram to the right indicates, our production plan is based on a cycle of eleven and a half months from 130 grams to harvest weight. As we work with important factors such as feed, ova, and water quality, there can be opportunities to increase growth beyond what we have as the basis in our biological and financial models.
This is why we value a close partnership with our feed supplier so high. The investment done by Cargill shows their dedication to this partnership, and as we continue to de-develop our relationship, we are sure that we will benefit highly from their global presence in the years that are ahead. Before we give an operational update from the last quarter, we would like to spend some time to bring some perspective on our approach to land-based farming.
We identify Salmon Evolution as a conservative company that operates in a disruptive industry, which may seem like a contrast in itself. For us, this is actually rooted in our DNA and even our name, as we will always stay true to the fundamentals in salmon farming. It's all about the salmon.
We see what we do as a natural evolution of the salmon industry, and as all salmon farmers are aware, successful operations is all about providing excellent conditions for the fish to grow. This is the baseline behind the establishment of Salmon Evolution, and we are convinced that excellent living conditions for the salmon directly affects our profitability, and this is the very reason for our choice of technology.
Our position in this area means that in our search for growth opportunities, we are not willing to compromise on fish welfare and water quality, as we know that this is the most fundamental part of a successful land-based operation. We also try to have a humble approach to the new challenges that come with land-based farming.
Even though our company is founded and developed by some of the most experienced people from the Norwegian industry, we still admit that the land-based operation is complex, and we need to develop our best practice together with strong partners and other industry players. This is why we are proud to launch our first facility in the heart of the Norwegian aquaculture cluster, and also why we see it as natural to continue to improve this facility as new phases will stand on the shoulders of the previous projects.
We do also see the mathematics of cost and prices that exist in overseas markets, but also the complexity of the operations and lack of local experienced personnel. Thus, we are confident that the strong Norwegian-based operation is the best way to ensure successful development in overseas markets.
As a young company, we are also aware of the timeline and risk connected when doing heavy infrastructure investments overseas. In this stage of the company's development, we are convinced that the best way to expand internationally is together with a strong local player like Dongwon in South Korea. As these projects require local knowledge about regulatory framework and trustworthiness when relating to local stakeholders, our experience has been that the timeline can be shortened and the execution risk lowered when we team up with someone who understands the local dynamics better than us.
We will therefore continue to develop relationships with potential partners and look at this from both a financial and industrial perspective. The diagram to the left is an attempt to illustrate some of the basic experiences from decades of land-based farming in the smolt, post-smolt, and broodstock segments.
That an increase in the level of recirculation beyond 65%-70%, meaning that more than two-thirds of the water that flows into the tanks at any given time is recirculated water, brings an exponential increase in operational and biological risk and complexity.
This is mainly driven by the need for a biofilter and other water treatment elements, and our chosen Hybrid Flow-Through system is designed with this experience in mind. Because of this, we have decided to build facilities where we reuse some water for the sake of cost reduction, but where we also continuously supply a high-quality seawater as our primary water treatment element. This dilutes all unwanted elements in water and thus provides excellent growth conditions for the salmon.
In our Hybrid Flow-Through system, our only water treatment beside providing new seawater will be to add oxygen and aerate for CO₂, which again is something we have done in the smolt industry since the eighties. As we stay away from risky and complex elements of water treatment, we can operate with significant lower risk of unwanted events to occur.
We also have designed our system to have each tank as a completely individual biozone. We also reduce the effects of a potential event to a minimum, as we never mix water from one tank with another. By being dependent on significant amounts of seawater, we do accept that our HFS system have some limitations when it comes to geography and potential locations.
At the same time, we do see that our opportunity to use water from different depths makes this solution possible in areas that previously have not been suitable for salmon farming. By looking at ocean temperatures, but also other parameters, we see a significant potential for our solution internationally, and our first international project in Korea is a great testament to this technology. Yes, we do have to be located along the coastline, and yes, there are still some areas in the world where we cannot build a facility with this solution.
At the same time, there are many locations where this system will work very well. Our focus, again, is to find optimal entry to the most attractive ones at the same time as we execute on our ongoing projects. For Salmon Evolution, operation can at this point be divided into three main areas.
Most importantly, we are managing a complex building project at Indre Harøy together with our main contractor, Artec Aqua. Together with that, we are now in the early stages of our project in South Korea.
Finally, we are preparing for operational startup at Indre Harøy, which requires thorough planning and dedication. As mentioned earlier, so far, we have developed our project according to plan, and we are satisfied with our ongoing operations at building site. We have assembled most of the fish tanks, and at this point, there are only two tanks out of the 12 that are not fully raised. In the Q3, we started with the installation of the technical equipment such as oxygenation systems, heating systems, pumps, and valves. In the intake station and the first technical rooms, we now see strong progress from week to week.
We now have around 175-200 workers on site, and we expect to be at these levels for some more months before activity will be reduced in the first and Q2s and onwards as we take over the facility partially during 2022.
We are now preparing to welcome our first smolt into the facility in March next year. We then expect to harvest our first salmon from Indre Harøy around year-end 2022. The facility is built as two production lines of six tanks each, and thus our phase one build-out consists of 12 fish tanks. These 12 tanks are supported by six technical rooms, where one technical room provides water supply and treatment for two tanks.
As mentioned earlier, the water from one tank is never in contact with water from another tank, as we have been diligent to ensure the highest biosecurity in our facility. In addition to the technical rooms, we also have other buildings, such as the feed center, the intake station, and the room for common technical installations. We have seen a strong progress during 2021, and this picture from April is a testament to that.
The amount of piping and technical installation that is done both under and inside this building is extensive, so the visible progress is just an indication of all the man-hours that have been invested in this project since May 2020. This picture is taken in tank number 11, which is one of the two tanks where we will welcome the first smolt in March.
The coating work was started during the Q3, and we are now installing the gangways at a height of around 9.5 meters. We installed the two inlet pipes in October, and the operation went successfully. This is the shortest pipe that is around 125 meters long and will supply water to the facility from 25 meters depth. This is one of two inlet pipes, and the other one will provide water from 95 meters. Both of the pipes can supply the facility with enough water, and thus we have 100% redundancy on the water intake. Here you can see the second floor of the intake station, and the pumps are located on the floor below.
The blue filter to the right is the Bernoulli filter that filters out any particles and prepares the water for the strong UV treatment that will take care of all pathogens and bacterias to ensure that the intake water doesn't bring any unwanted diseases or parasites into the tanks. The intake station has six pumps that combined will provide the facility with 240 cubic meters of new seawater per minute.
Our smolt is living a good life at Kraft Laks and is now more than 200 grams on average. The excellent water at this location ensures a high-quality smolt, and we are confident that the fish will perform very good when it is moved into our facility in a few months from now. Now, Trond Håkon Schaug-Pettersen will give you an update on the joint venture we have together with Dongwon in South Korea.
Thank you, Håkon. As we have said many times, we are very happy about South Korea being the first market in our international expansion. We see several attractive attributes to the South Korean market. First of all, you have over 50 million people living in a fairly small geographical area, making inland logistics very efficient. Secondly, South Korea is a high-growth market with double-digit growth for many years, and we think this growth will continue going forward.
South Korea is also a high-paying market, which has consistently outperformed the overall market for many years. In fact, over the last 7 years, the average Korea premium has been around 10 NOK per kilo, measured on an Oslo price basis. South Korea is also mainly a fresh market, with basically everything being flown in from Norway via air freight, so you have high freight costs going into the market.
By producing locally in Korea, we will avoid the high air freight cost. Pre-COVID, that was typically around 15 NOK per kilo, but in today's market, you are closer to 20 NOK per kilo. In sum, this means that we will have a price advantage of over 25 NOK per kilo relative to the normal Oslo market price. This makes us very confident that we'll have a strong relative price achievement and a solid potential for value creation.
Together with Dongwon, we have established a joint venture called K Smart Farming , where we will build and operate a land-based salmon farm on the northeast coast of South Korea. The facility will be developed in two phases with a production capacity of 8,400 tons gutted weight from each phase.
Salmon Evolution has a 49% ownership in the company with Dongwon as the local company holding 51%. As we have looked into the foundation for doing salmon farming in Korea, we see that it is an area which highly benefits our low risk concept.
Temperatures are not optimal on the surface, but at different depths, we have access to unlimited amounts of water, which gives us the opportunity to create a business that can supply both the Korean and Asian market with high-quality salmon in relevant weight classes and with a true salmon taste. We also see that we should be able to set up an even more energy efficient production in Korea than we have in Norway, as temperatures are more stable throughout the year.
From Salmon Evolution's viewpoint, this is a very attractive project where we are able to scale our competence within salmon farming and also capitalize on the experience and knowledge gained from our ongoing project in Norway. Over the last months, we have had good progress on the project. The initial feasibility study was delivered in October.
Last week, we also had a large delegation from Korea visiting us here in Norway. In cooperation with Dongwon, we are now in the process of fine-tuning the facility layouts and production plans, and we remain on track for planned construction start during the course of 2022. I will now go over the financials for the quarter. Initially, I want to spend a few minutes on a topic that has received a lot of attention over the recent months.
As we all are aware of, the price of most commodities have spiked during 2021, including the price of electricity, which is a key component for land-based salmon farming. The Norwegian electricity market is divided into 5 separate markets with different prices, and Salmon Evolution is in the fortunate position to be strategically located in what is called Production Area three, which together with Production Area 4 in Norway, have almost been unaffected by the recent high electricity prices.
Historically, the electricity prices have been fairly similar across all regions in Norway, but this year, we have seen that the regions in Southern Norway, to a much larger extent, mirrors the electricity market in rest of North Europe. Norway has a widespread coastline, and there is limited grid capacity in transporting surplus energy all the way from the north to the south.
In addition, the southern part of Norway is also exchanging electricity with Europe, which in our view contributes to increasing price differences between the northern and southern regions in Norway. As such, we feel very comfortable being located where we are. Also, our Hybrid Flow-Through system is energy efficient with an estimated consumption of around 6.5 kWh per kg HOG.
This means that based on current electricity forward prices, energy represents around 10% of our production cost in phase one. From phase three, we will have even lower energy costs as our energy consumption level then qualifies for reduced grid costs. In Norway, you also have a fairly substantial electricity tax. Energy-dependent industries normally get an exemption from this tax.
Given that land-based salmon farming in this scale we are contemplating still is a fairly new industry, it does not qualify at the moment. However, with the industry developing, we expect this topic to become more and more relevant, and Salmon Evolution's position is that there is no reason why land-based salmon farming should not get an exception from this tax similar to other industries in Norway.
Looking at our P&L for the Q3, this is a clear demonstration that Salmon Evolution has gone from being a project company into being a full-fledged salmon farmer. Our numbers for the Q3 this time includes Kraft Laks, which is consolidated into our accounts from August. This has had a positive impact on both our revenues and earnings, which I will come back more to later.
Outside the inclusion of Kraft Laks into the accounts, it's worth mentioning that we had about NOK 4 million in one-off costs relating to the Oslo Stock Exchange uplisting, finalization of our debt financing, and also advisory costs relating to the Kraft Laks acquisition, leaving an operating loss for the quarter at -NOK 4.7 million. We also had a net disagio of -NOK 1.6 million relating to FX hedges for underlying Euro exposure in our building contract at Indre Harøy, leading to a total loss for the Q3 of -NOK 5.6 million. During the quarter, we have focused a lot on integrating Kraft Laks into our group.
We have also seen strong benefits from having an existing farming operation, as we now quickly approach production start at Indre Harøy. We have been able to send people for training to Kraft Laks, benefiting both the onboarding processes as well as securing manpower for Kraft Laks. We have also focused a lot on recruitment of operating personnel during the quarter, and we are very pleased to see that Salmon Evolution is regarded as an attractive employer, enabling us to recruit tier one people across all functions. In total, we are now about 30 people in our group, and the headcount will increase further over the coming months, ensuring a well-functioning operating organization well ahead of March 2022.
As touched upon earlier, Kraft Laks has for many years delivered a strong financial performance, and the company is on track to also deliver a good result for 2021. During the quarter, we sold 700,000 smolt under the company's existing customer contract, which ends in the spring of 2022. This resulted in revenues of NOK 12 million and an EBITDA of about NOK 8 million, which is included in our accounts for the Q3.
The next smolt delivery for Kraft Laks is in Q1 2022, where the company will deliver smolt both to Indre Harøy and to our external customer. As Håkon mentioned, things are proceeding according to plan at Indre Harøy.
CapEx was at all-time high in the Q3, with total capital expenditures of NOK 239 million, of which NOK 230 million was relating to the Artec Aqua contract. As of September 30, the accumulated CapEx from project initiation back in 2019 amounted to NOK 745 million. The high activity levels seen in Q3 will continue in Q4, with expected CapEx of around NOK 200 million. Going into 2022, CapEx will gradually come down as we come closer and closer towards completion of the project. During the course of 2021, we have had strong progress at the site, and we now have close to 100% of the subcontracts already confirmed.
This means that the visibility for the final project cost has increased significantly over the last year. We are also very pleased to see that we, despite the general cost increases seen in the market, and especially when it comes to raw materials, we remain on track on our original budget, and we also have a healthy buffer capacity still remaining.
During the Q3, we made our first 50 million NOK drawdown under our new construction facility, which was then used to refinance the bank loan from Q4 2020. In the Q4, we plan to start further drawdowns on the construction loan, and the majority of CapEx going forward will be funded by this loan. We are now in the process also of raising bank debt in relation to our acquisition of Kraft Laks.
Feedback from banks are very positive, and we expect to conclude this during the Q4. This will further strengthen our financial flexibility and also give us a solid platform as we steadily approach production start at Indre Harøy in just a few months. I now leave the word back to Håkon for some final remarks.
Thank you, Trond Håkon. Before we summarize with some word on outlook, we want to summarize our goals for development of harvest volumes. The facility at Indre Harøy is divided into three phases, where phase one construction is ongoing. We see a double value in this project as it both functions as our main contribution to harvest volumes in the years to come, but also in how we will seek to develop this as our best practice facility, where we will have the opportunity to continuously develop our concept and technological platform as well as our operations.
By doing this, we will be able to contribute with supreme experience in future projects, which should enable us to execute both the building phase and operations at a very high standard.
We expect our facility in Korea to start construction late in 2022, and from there we have a great foundation for future scaling our Korea and Asia operations. We thus see that with a very tangible pipeline, we will have a production capacity at around 24,000 tons in 2024, which will continue to grow in the years following that.
As we have been building and developing our project at Indre Harøy, we have a clear understanding that the project has been through an important phase of de-risking, and our estimates have shown reliable. We are developing according to plan and are satisfied with the ongoing construction at the building site. K Smart Farming is progressing as expected, and we are in the early phase of design and engineering.
The potential in this joint venture is very high, and we are confident that the owners' combined strength will be sufficient to create a success story in South Korea and East Asia. Salmon Evolution is now an integrated salmon farmer as we completed a successful acquisition and integration of smolt producer Kraft Laks in the Q3. We have a solid financial position and is thus well-positioned to execute on the pipeline we have ahead. This was all for today. We thank you for the interest in this presentation and in our company, and we will now be answering your questions.
Yes. We have received a couple of questions, so thank you for that. We will just go through these and answer them. The Q&A session is open, so if you have more questions, please fill them in and we will try to answer as best as we can. Okay. I have a first question here from Asbjørn Wang, which I think you can take, Håkon. Does each tank have an inlet pipe direct from the sea, or is it through a pump house?
Yeah. As we shared earlier, we have one intake station that supplies this phase one with all the water that it needs. It pumps in water from the sea and then distributes the water into the different tanks.
Yeah. Thank you. We also have a question here from Carl Emil at Pareto. Will Kraft Laks continue to sell smolt externally the coming quarters? If yes, for how long? As I touched upon briefly earlier in the presentation, the existing contract runs through the spring of 2022, and we will finish that contract. From then on, Kraft Laks will exclusively serve Salmon Evolution. We also have a question here from Alexander Aukner at DNB. What are the steps needed to get energy tax exemption? How this is structured is that whether you qualify or not is based on the industry codes that your company has.
As of now, a land-based salmon farming operation is categorized as aquaculture. You need to get it registered in a different industry code. That's something we are working on and will continue to work on going forward. Historically, there have been many examples of companies being able to change the code. For sure this is something we will prioritize going forward.
The energy consumption sort of initially in 2022 is not that much, but for sure, as we build out the facility, this is a very important cost factor, which we will really focus to get an exemption from this cost. We also have a question from Nils Thommesen at Fearnley Securities. I think maybe you, Håkon, can take the first section of the question. Could the recent increase in commodity prices impact your CapEx budget for phase one on Indre Harøy and phase one for K Smart?
Yeah. As Trond Håkon Schaug-Pettersen said earlier, we have signed up, yeah, I would say close to 100% of all the contracts in at Indre Harøy phase one. We feel confident that our estimates are reliable. There might be some smaller contracts that has a sort of a price inflation adjustment, but it's very limited, so we don't expect that to make any sort of impact on the overall cost for our phase one. Of course, when it comes to phase one for K Smart Farming, we will spend 2022 sort of engineering out the project and also contacting the vendors and contracting them.
As we do expect, of course, the situation to get back to normal during maybe 2022, 2023, we have an expectancy that this will not give a major impact. There is, of course, something we need to take into account when we plan this project. At the same time, we do plan that this project will be building on the experiences we have both on the engineering side and construction side for Indre Harøy. We do expect also some sort of copy effects from both engineering and some of the more technical equipment vendors that should bring potential for cost reduction on that side.
Yeah. Thank you. Also a follow-up from Nils Thommesen at Fearnley.
Can you quantify the revenues expected for external smolt deliveries in the first half of 2022? I can briefly answer that. It obviously depends on the size of the smolt that is delivered. Sort of a general comment, Kraft Laks has historically had upwards to NOK 30 million in revenues for the full year and has historically been doing two deliveries per year of fairly similar size. So I think that gives an okay estimate. And then we have a question from Carl-Emil Kjølås Johannessen at Pareto. I think you can take that, Håkon.
When do you expect to have more firm estimates on CapEx for phase two? What is your gut feeling on phase two CapEx compared to phase one?
We expect to work on the engineering for phase two going forward. Our focus is to sort of implement the best practice experience and learning from phase one into the engineering part. As our plan is to start construction in the second half of 2022, we do see that we will get firm estimates both on sort of the some of the modeling and changes that we will do from phase one, and then sort of the bilateral dialogue with all the contractors. Next, I would say around next summer or before or after late Q2, early Q3, we should have very firm estimates.
The sort of our gut feeling is, as I mentioned earlier, that we do see some increase in commodity prices. That of course is there, and it's hard to avoid them. Then we have to look at how the market will develop going forward. We also see in Indre Harøy definitely potential for cost and efficiency gains through our phase two, which will be very similar to our phase one, with some exceptions as we do see some possibilities to build smarter and more efficiency. Yeah. I think that's the comments I can give at this point.
Yeah. Thank you. We have one question from Terje Lien. I know it is still early in the process. Will there be a dividend in the future? I think on a general note, I would say that we obviously have quite ambitious growth plans with the now completion of phase one at Indre Harøy. Obviously, what's in the business plan is to fully develop that facility. We have the project in South Korea also. At least for the foreseeable future, we don't plan on doing any dividends. Obviously once you enter a more steady state on a operational level, that is obviously something that that will be more relevant.
I think that was all the questions we have gotten. We can hold for a few seconds if there are any more questions. That seems to be all the questions for today. We want to thank you all for attending this presentation. We look forward to see you again in February 2022. Thank you.