Atlantic Sapphire ASA (ASA) Earnings Call Transcript & Summary

Hello, everyone, and welcome to the update call in conjunction with the January 2022 operational update for Atlantic Sapphire. My name is Johan Andreassen. I'm meeting you today to present CFO, Karl Oyehaug.

As usual, we will go through the highlights of the update and thereafter open up for Q&A at the end of the presentation. [Operator Instructions] Johan?

Yes. Let's start with the biological performance. The December biomass gain -- sorry, the January biomass gain was approximately 300 tonnes, down from around 400 tonnes in December. As you can see, we have now split up a graph here. [Audio Gap] Sorry, we are seeing the same trend as we have talked about in all the other monthly updates. The initial batches are underperforming. However, the new batches continue to perform great and in line with expectations. For every month that goes by, these batches will make up a larger part of the biomass gaining, thereby increasing the overall biomass gain as we move towards steady-state production this summer. In January, the initial batches performed worse than expected, with a net biomass gain of 0. This is due to the higher day-to-day mortality and high FCR on maturities. It is easing, but using [indiscernible]. In a normal situation, this fish would have been harvested out already, but we are holding back on some of it to bridge the gap until the new batches are ready [indiscernible]. In the month of January, we were at approximately 300 tonnes [indiscernible], which is a ramp-up from the 400 tonnes that we harvested in the 3 months of Q4 last year. In both Q1 and Q2, we are planning to harvest approximately 1,000 tonnes stock. We are also expecting to be close to Phase 1 steady-state harvest from Q3 2022. The farm continues to operate very stable in January. The same stability has, therefore, also been seen in water quality parameters, such as temperature. I'm happy to see that our teams are able to operate 12 independent RAS systems in a controlled way without having any setbacks. The farm is a completely different place now than it was a year ago, and we are now able to control the operations and are operating in a way that keeps our fish safe. Let's switch to the next. As this graph illustrates, the batches continues -- the new batches continues to outperform the old batches. In this update, we have also added a new batch before to this graph. The B1 fish has now passed an average of 1.2 kilo, which is on track for harvest in the middle of this year. The largest tank of this batch now has an average rate of 1.8 kilos, up from 1.3 kilos a month ago. As you see also the other new batches are performing great and are in line with expectations. In January, the new batches represented actually all the biomass gain of the farm versus 65% the month before. We have seen no maturation of new batches, and we see a very low mortality and expect very few downgrades of high-product quality once we start harvesting them. The picture below shows a delay from the B1 fish. And as you can see, the color is looking great despite that this is a relatively small fish. So the color is on track here. The total standing biomass in the farm was flat month-over-month as far as volumes in the month matches the biomass gain of the new batches of approximately 300 tonnes. Although the majority is still lower, the lower performing batches, but the new batches are expected to overtake the initial batches as it relates to standing biomass this month. We also want to make the point that we have more than enough numbers of fish in the new batches in the farm to get to our planned harvest volumes. The biomass of the initial batches will -- later this year be 3.5x higher than they currently are. By the end of January, we had approximately 60% of the planned Phase 1 steady-state biomass stock in the facility. The average index will increase gradually with grown biomass and replacement of initial batches with new batches, and we are on track to meet our [indiscernible] average JEA index of 0.47 mid this year. The JEA index in this chart is only for [indiscernible] systems, while the total biomass gain presented also includes the small stage, including [indiscernible].

Perfect. And moving over to price achievement and touchprint on Slide 7. As we also mentioned in the last month report, we were expecting more smaller fish and more mature fish harvested through Q1 2022, which is why I see a relatively flat average price achievement month-over-month, up 7.3 kilos in January 22. The cheap premium price was also [indiscernible] down due to promotional marketing activities that were planned last year. That are accounted for in lower price assumed instead of being booked as a marketing expense in the P&L. These marketing efforts are tied to in-store promotions and discounts that aim to get even more new consumers to try our products. On the right-hand side, you'll see our live overview of all locations where the product is available. And as you also see, it's a stable number of stores, which is linked to a similar harvest volume as the months before. Moving over to the next slide, showing Phase 2 CapEx. We had good progress on the signing of big packages in December, January. And now $158 million of the total budget of $225 million is committed. As of December 31, end of 2021, a $34 million had been invested. As you can see, a relatively small CapEx figure is budgeted for Q1 2022, but a ramp-up is planned when we get towards the summer. All in all, we are pretty pleased with the progress on the construction site and continue to expect to have the first phase introduced into Phase 2 early in 2023. The next slide shows scenario drone photo of the Phase 2 construction site and on the photo taken last month, you can see that a lot of the Phase 2 foundation work and piping is now completed. The first basis and drains of the tanks are now in place, and you can see sampling for the tank walls coming up. Also in the bottom left, you'll note this that a 5,000 cubic meter concrete settlement tank has been erected. This will be used as part of our wastewater treatment. To remind everyone, Phase 2 will bring a total annual harvest capacity in the U.S. to 25,000 tonnes once fully operational and fully stopped in the end of 2023. Moving over to our last slide, other updates. Like we shared a month ago, we continue to expect stable price achievement on the premium fish also going forward. But we also highlight that there is a higher percentage of downgrades and smaller fish are expected to be harvested out through Q1 2022. So we expect similar price achievement as in January, also in the next couple of months as we harvest out the last of the initial batches. We're also happy to see that the first promotions of the year have been completed with demand measured in volume sold, exceeding the expectations of our retailers. That's also a great new stat, some more color. We're seeing consistent organic growth in stores, which is very positive for upcoming volume ramp-up. In other updates, we continue to see higher processing costs also in a month. This is expected to be the case until the modifications we're doing to our in-house [indiscernible] are completed around May and this coincides well with the ramp-up and the reaching of steady state this summer here in Phase 1. Finally, last Thursday, we had a pleasure to announce that from Q4 last year, we started replacing 1/4 of the fish oil in our feed with non-marine algae oil, making Atlantic Sapphire [indiscernible] marine protein producer. We plan to continue to increase the inclusion of novel ingredients over the next couple of years and see this as an important step reaching our 2025 target of producing healthy, delicious salmon with no impact on the marine environment whatsoever. The graph on the right-hand side shows the ratios and how the feed is getting down well below 1:1 ratio on how much [indiscernible] ingredients are needed to produce 1 kilo of [indiscernible]. With that, we'd like to conclude this first part of the presentation, and we will open up for questions.

So the first question that we have is from Alex [indiscernible]. What caused increased day-to-day mortality for the initial batches? Johan?

Yes. So this is -- it's not new that we have had increased mortality on the initial batches and the main reason for that is the high degree of maturation. This -- when the fish matures, it becomes weaker. And normally, you see that [indiscernible] as well. So basically, every time we handle the fish or we -- it has some stressful activities going on, you see increased mortality. It's not dramatic about this. But as we also shared earlier here, this fish -- normally have been harvested out because it's not performing the way it should, but we are electing to keep it so we can bridge the gap on harvest volumes before the new batches are ready.

Great. The next question comes from anonymous. [Operator Instructions] The question is, if you please can comment on the PFOS situation in December that has been reported in Danish regional media? Does this, in any way, affect the insurance payout? Then I can start answering that question. The last part, the answer is definitely no. This will not have any effect on the insurance payout for background information PFOS, which is, let's call it, a toxic substance is something that you will always have when you have plastic in our case, PE pipes, which is a very important part of our land-based facility and every other land [indiscernible]. When you have virus with these types of materials, that will always be a solution. However, all of the wastewater that contained these substances were cleaned and cleared. So this is also something that has been handled according to best practice. And therefore, we don't expect any consequence of this going forward. The next question comes from Carl-Emil Johannessen from Pareto Securities. This question is, approximately what was the average density or the best-performing OG system in January?

Yes. So that was OG1 and the density varies between 30 to 60 kilos per cubic million. I would say the average is probably around 45 to 50 for the moment.

Great. Next question comes from [indiscernible]. Looking at the biomass overview, Batch 3 has lost roughly 10% of the fish in September, while the other batches have been far more stable in the terms of number of fish. What has led this batch be particularly tricky when it comes to the number of fish mortality?

Yes. This is -- even if the numbers on the chart is 10% less, it doesn't mean that it's mortality. When we are transferring fish, we are always counting them. And on the freshwater side, we have seen some inaccuracies in the counters. So this is not because this batch has very high mortality. As a matter of fact, we see extremely low mortality in all these batches. And -- yes. So this is a little bit when we put out this much detail, it's important for everyone to understand that there are a few percent inaccuracy in the counters. Our counters in the saltwater stage is way more reliable. So that's the comment there. It's not like this batch had higher mortality.

Perfect. Our next question comes from Axel. And this question is that 60% of the planned Phase 1 steady-state standing biomass was stocked at the end of January. How much of this is new batches versus what we had last month, which was approximately 34%. And if you take a look at the overview of the table that shows all the fishing system, you'll see that just below 50% of the standing biomass at the end of January, was from -- was new batches. And also, Johan's comment that now in February, you'll see the new batches overtaking the initial batches in terms of stand environments. Next question is from Alex Aukner from DNB Markets. He's asking, where on Slide 9, we can see the new chiller plant. And if we bring Slide 9 back up again, the area of tota,l, the base of the new chiller plant will be just close to where you see the large 5,000 cubic meter effluent settlement tax. So that's the area where you can expect to see that. Perfect. Let me see if we have more questions here. Yes, another one came in from Alex Jones from Bank of America. Committed CapEx has increased to over $40 million from last month. So that 70% of the Phase 2 budget is now committed. Does this signal growing confidence in reaching a financing solution before the summer, or do remain open to delaying some of this committed spend to future quarters if necessary. I can start answering that, Johan, and then you can fill in. So I think it's absolutely fair to say that we have very high confidence that through the finance Stage 2 is going to happen, which is also why we continue to construct the Phase 2 according to the original schedule. And the reason why we have relatively high chunk of CapEx dollars being committed in January is more the natural flow of the project and timing to reach our original timeline of completion by the end of the year and having the persistence ready for fish in the start of next year. So nothing has really changed there. We will say that we are equally confident as we have been, and the plan remains the same. I can also add that if you see the overview on CapEx, you'll see that a substantial uptick in spend is expected in the second half of the year. So that's also said something about when we've always had the plan to get the final part of the Phase 2 funding in place. Johan, I don't know if you have anything to add?

No, I think that's fine. Obviously, we are living in a world where we have very big supply chain challenges. So it is really important to commit the capital and to keep people rolling here to avoid delays in the construction when we get to the second half of the year.

Very good. Right now, we have no new questions coming in. So we'll give it a few seconds before we can see through closing remarks, just to see if there are any last-minute questions there. All right. Then I'll start by thanking everyone for joining the monthly update and looking forward to present to you again in 1 month from now. Johan?

Stay tuned. See you soon.