Atlantic Sapphire ASA (ASA) Earnings Call Transcript & Summary

Hello, everyone, happy Monday, and welcome to the update call in conjunction with the February 22 operational update for Atlantic Sapphire. My name is Johan Andreassen, and with me today, as always, I have CFO, Karl Øyehaug.

Hello, everyone. As usual, we'll go through the highlights of the update material and thereafter open up for Q&A, where you can ask the question. So while we're presenting and in the Q&A session, feel free to post your questions in the live event Q&A tab. Johan?

The February biomass gain came in at approximately 330 tons on the new batches, which is up from around 300 tons in January. We are continuing to see the same trend as we have talked about in all the other monthly updates. The initial batches are underperforming. However, the new batches continues to perform in line with our expectations. For every month that goes by these batches will make up a larger part of the biomass and feeding, thereby increasing the overall biomass gain in the farm as we move towards steady-state production this summer. Other than the obvious fact that February is a shorter month, we also did quite a few fish transfers on the new batches in a month, and the stage is set for a good bump up in the biomass gain in March. In February, a combination of elevated mortality and harvest deviations on the initial batches contributed a negative 130 tons. The fish is eating, but as we have spoken about before, most of the energy goes to grow eggs and the returns are lower harvest yields. In a normal situation, this fish would have been harvested out already, but we are holding back some of it to bridge the gap in harvest until the new batches are ready for harvest later in the quarter -- in the second quarter. In the month of February, we did harvest approximately 300 tons, which is the same as in January and on track with our harvest plan. The harvest guidance for both Q1 and Q2 '22 remains unchanged, and we're planning to harvest approximately 1,000 tons HOG in each of those quarters. We are expecting to be close to Phase 1 steady-state harvest volumes from Q3 of this year. The farm continued to operate very stable in February with no major equipment failures. We have now been operating the farm for 3 full quarters with the necessary stability. And I'm very happy to see that our staff and our systems are able to manage to deliver the day-to-day cooperations we need for successful fish farming. And detail-oriented view we actually pointed out to us that in order to avoid confusion, we should follow industry standards of showing growth, from stock feeding and not from -- when the eggs are introduced into the hatchery. That's why you'll see that the axis' title has changed slightly from the previous versions, while the data remains the same. As the graph illustrates, the new batches continues to outperform the batches that we introduced before at the middle of 2020. The B I fish has now passed an average of 1.5 kilo which is on track for harvest in the middle of this year. The largest tank of this batch has an average rate well above 2 kilos, 15 months after stock feeding. The lead tank or Batch III is now 750 grams, 11 months after stock feeding filling, and that is very impressive growth. For this month, we have also added another batch, B V in this view. As you see also the other new batches are performing great and in line with expectations. We have seen no maturation on the new batches, and we continue to see very low mortality, good meat color, and we expect very few downgrades and high product quality once we start harvesting. The new batches overtook the initial batches in terms of standing biomass in the month of February, and we are really looking forward to getting out the rest of the old fish very soon. We have more than enough number of fish in the farm in the new batches to get to our planned harvest volumes. The biomass of the new batches will eventually be approximately 3x bigger than it currently is at steady state as so will the biomass gain be. By the end of February, we had approximately 60% of the planned Phase 1 steady-state biomass stocked in the facility. However, as pointed out, still a big percentage of that is the initial batches. The average JEA index will increase gradually with growing biomass and replacement of initial batches with new batches, and we are on track to meet our budgeted average JEA index of 0.47 by midyear.

Perfect. Thank you, Johan. Moving over to our monthly update on price achievement and our footprint. You can see that as we mentioned in the last monthly report, we were expecting more smaller fish and more mature fish harvested through Q1, which is why you see a relatively moderate average price achievement of $7.6 per kilo in February. Despite the higher share of downgrades in February compared to January, the average achieved price was up [ a north ] in the month, thanks to a strong commodity market. We expect to continue to see a very supportive commodity market also in the weeks and months ahead. But we continue to highlight that higher percentage of downgrades and smaller-sized fish is expected to be harvested out in March and April 2020. Looking at the store, however, you'll see a stable number of stores, which yet again, is linked to a very similar harvest model month-over-month. On the cost side, there is a lot of focus right now on price inflation on commodities that impact our feed costs. Although feed is our single largest cost item, we want to point out that the salmon is a very efficient feed converter with all else equal makes Salmon more competitive compared to other proteins, such as beef, which has a significant higher feed price increase due to beef having a very high feed conversion ratio. So although we are also seeing some of the same cost pressure on some items such as feed, we do think that long term, we still are going to benefit compared to other sources of protein. Moving over to the Phase II CapEx overview. We're all in all, very pleased with the progress on the construction side and continue to expect to introduce the first fish into Phase II tanks early in 2023. We're seeing continued good progress on the signing of feed packages with now a total of $159 million of the total budget of $225 million committed. One small change this month compared to the last overview we had is that we moved approximately $9 million of CapEx from 2022 and into Q1 2023. We also have a relatively small CapEx figure budgeted for the rest of Q1. But as we get towards the summer towards the end of Q2, we do expect a ramp-up in spending. And looking at the projected CapEx spending, it's also natural to give a quick comment on financing. We're currently working with our banks to complete Phase 2 financing in time for when we need liquidity later in the year. This is something that we, of course, will let everyone know about as soon as we have something we can share on that topic. Similarly, when it comes to the insurance case after the Denmark fire last September, this process is also moving along according to plan, which means we expect to have a conclusion in place quite soon. This is also something that we'll notify the market about immediately upon receiving news. The photo that we have included in this monthly update shows the Phase II tanks being erected. The concrete tanks will have a similar footprint as the ongoing tanks that we have in Phase 1, but they will be taller, therefore, increasing the total tank volume in Phase 2 compared to the ongoing in Phase 1 by approximately 30%. So just to remind everyone, Phase 2 will bring total capacity up from the current 10,000 tons to approximately 25,000 tons when it gets -- when we start taking that facility use in next year. And when we see the full harvest volume potential of Phase 2 from 2024 and onwards. Johan?

Yes. I'm really happy to announce that Jon-Birger Løvik today has been appointed COO of Atlantic Sapphire. And this is happening after that he has worked here in Miami since April of last year in a temporary position as the Director of Aqua Technology. Since Mr. Løvik, joined the team here in the U.S. last year, he has proven to be a highly respected hands-on manager in the operational team that drives accountability and culture and has a deep understanding of both salmon biology and the technical aspects of running our RAS facility at this scale. So I'm therefore pleased that Mr. Løvik now has permanently accepted the position. He until now has held on a de facto basis, contributing day-to-day with his closer 2 decades of fish farming experience and competence. So that takes us over to the Q&A.

[Operator Instructions] We'll start then with the first question today that comes from Nick [indiscernible]. He is asking if this slide show will be available after the conference call. And we can already say that, yes, it will both be available on the web page, and we've also posted it on -- through news web on the Oslo Stock Exchange, so already out there. The next question is from anonymous is asking what is the average rate cost per kilo to deliver fish to the market? And I can give a quick answer there. It obviously depends on where we are trucking the fish. As far as right now, most of the product we're actually selling is going to Publix farm, which is our largest single customer. So there, for example, we have very low freight costs due to the close proximity. If you want to track further, let's say, up to the East Coast or even to California, then of course, that adds some trucking. But in terms of dollars per kilo you're maybe talking in the area of $0.30, for example, to get to the East Coast, just to give everyone an idea. The next question comes from Carl-Emil Kjølås Johannessen at Pareto. He's asking if you have any comments on the frozen storage build up during Q3 last year. Yes. We're basically working on selling that fish. And what you will see is that throughout the next months, we're definitely trying to take advantage of what are very strong demand in the salmon market right now. So you can expect that to slowly but steadily decrease and get monetized. The next question comes from John Evans at IntraFish. And he actually has a series number of questions here. So the first one is, does the lows in the share price we have seen recently indicate a lack of investor confidence? And is this sustainable? Johan, do you want to do that?

No. Yes, I can. I mean we generally don't like to comment on the stock price. I think the markets, in general, has been quite turbulent in the last 6 months. I think we are not the only the stock that is down as investors have been moving from growth stocks to more value stocks. So that I don't feel like commenting more on the stock price itself. We do have a very strong and supportive investors that have been with the company through highs and lows and are long term into the business plan here. So I don't have any other comments on the stock price.

I agree with you. So the other question is on Denmark. And if we've planned -- if we will rebuild the Denmark facility. And here, the question is the same that we have so far not made a decision on that point. But as soon as that decision is made, we'll also notify the market. The next question is on our increased percentage of conventional nonland-based salmon and the plan for growing that. So that area. So I think this might be based on a small misunderstanding. We don't have any programs of conventional nonland-based salmon. So I think I'm not completely sure what you're referring to with that question, John. Is there a fallout of the Atlantic Sapphire in terms of the Ukraine innovation, for example, higher energy fuel costs and/or feed costs. On this point, I can start and then maybe Johan want to something to fill in. We already commented on the fact that there is a lot of talk right now about the potential for raw materials going into feed becoming more expensive. In addition to this, obviously, we are and we'll continue to be in construction mode for all the foreseeable future. So of course, any impact on raw material prices on the construction side as well is something that will impact us. But other than that, I don't think we have any specific direct impacts of the turmoil that we're seeing right now. So similar impacts as what the rest of the industry would also expect is the status for us. I don't know Johan, if you have anything to add.

I actually argue that if the energy costs and ingredient costs goes up, we would be the least impacted amongst the salmon farms being in market. So if it costs more to fly fish or to truck fish, we have the shortest and leanest value chain. It's a disaster what's going on over in Europe, and we feel dearly with the Ukrainians. Here in the U.S., we are lucky to be quite far away. And we don't see any huge disruption as long as things doesn't go worse than it is today.

Very good. The last question from John Evans at IntraFish was regarding our new COO, Jon-Birger Løvik. And what competencies he brings into Atlantic Sapphire. So Johan, you already commented a little bit on that. But I don't know if you have anything.

Yes. No, I mean, Jon-Birger, he has been doing a lot of different things in his career. And everything from salmon farming to building out hatcheries and small facilities in Norway. He was with Atlantic Sapphire in Denmark a few years ago as well. He is very strong in technical and deep understanding of large-scale facilities with the complex activity that we have here. And he has brought since he came here in April when we did all the restructuring in the company, he has brought tremendous value in the company. So this is -- he is now appointed COO after having been here for almost a year, having a tremendous impact on maturing the organization there.

Perfect. Thank you. Our next question comes from [indiscernible] and he's also asking about the frozen program, which I believe [indiscernible] question also was concerning. So that one we have addressed. Moving on, Nils Thommesen from Fearnley Securities is asking if you have any updates on when we expect the new chiller plant to be in operation. Yes. There we're still on track, so we expect to have that online in the middle of this year. That's a status quo there. The next question is from anonymous. If you can give an update on the new frozen program we started last fall. Again, another question along the same lines as [indiscernible] initial one. Further, Alex Jones from Bank of America is asking if -- he's pointing out that the slides now say you're ready for fish in early 2023 versus year-end 2022 previously. And if there is anything material to call out here or if this is facing a very minor delay. So as you can also see, you'll see a marginal sliding also in the projected spending where $9 million was transferred from end of 2022 towards 2023. And that's also why as you correctly point out there's a marginal change in the wording. We have always said that we expect the structure to be completed around year-end, and that's also when we'll start introducing the fish. So early 2023 is what we're expecting based on our latest and greatest information. All right. We have the next question from Christian Nordby at Kepler Cheuvreux. He is asking what the status is on our current processing capacity. Johan, do you want to comment on that?

Yes. The harvesting capacity, I mean, you have to divide it into 2 pieces. One thing is the harvesting where you basically stun and bleed and gut the fish and pack them as [ head on good ]. That capacity is way larger than what we need. We have more than enough for Phase 2. That processing line, that's the hardest. The line is extremely efficient and it's working very well. It's on the filling side that we're still not where we need to be. However, we have state-of-the-art machinery ordered that is expected to arrive here around May. Once the machines arrived, all the other hook-up points and water and drains will be modified within the facility so that we can quickly install these machines and start leveraging the efficiencies that we expect from that. So hopefully, by June, we should be up and running with our internal state-of-the-art filling line. That filling line is also big enough for Phase II volumes.

Very good. The next question is from Carl-Emil at Pareto. He's asking if we're seeing any signs of maturation on the batch 1 fish. Johan?

No. We have not seen a single fish with elevated eggs in the belly. So that looks very well. And I can also share that the color level in the flesh for the fish size is very, very high, much higher than what we have seen in the past, which is also a very important welfare indicator on fish. So that is on track.

Perfect. So see -- is there one more? Yes. We have one more question here from anonymous. Why is batch IV is significantly smaller than batch I and II? Shouldn't the newest batches have at least the same amount of fish? And a follow-up, how many fish are included in batch V? The presentation does not state the number. Johan, you want to comment a little bit on why there are some minor deviations in weights between the different batches.

I think he's probably referring to a number of fish, not weight, right?

Oh, inside -- yes, number of fish, right.

Yes. I think we commented on that last time. That had some fungus issues early on in the hatchery. So we have lost a few -- higher percentage than normal of eggs in the hatchery stage. So this is -- yes, it's nothing more dramatic than that. So -- and on the -- yes, the B V number. I don't know if...

But it's approximately the same size as the average batch we have in the -- among the new ones.

Yes. And this is also when we stock as we always stock more eggs than we need because in the early stages, you typically have losses of -- yes, between 5% to 10%, up to 30%. So we always make sure that we stock enough eggs to factor that in and do proper culling. So we only farm the high-performing animals.

Perfect. Next question, another one from anonymous. Can we -- why is the average price lower than the fish pool index? And if you go to the slide that we show every month on price achievement, you'll see there are 3 different figures that we report on. Fish pool is the commodity price in Europe. And for those of you who are familiar, the fish pool price is actually not all salmon sold, but rather a fish that is larger than 3 kilos and grade is superior. Because every fish farm will, of course, at any point in time, always have fish that are the smaller or larger and some that get downgraded for various risks. So when we show our premium price achievement, -- that is for fish that has the exact same spec as the fish pool price. So apples-and-apples is basically our premium price compared to the fish pool price. What we're also showing in addition to this is our average price achievement all in also including fish that for numerous reasons, were downward. And just to repeat, the last month, we've had more downwards not what we expect long term due to the fact that we've had a higher share of mature fish from the initial batches. So when you see that number, the all-in figure, that is, for this month lower than the fiscal pool price, then that also includes a mixed bucket of product that has been sold and is all-in basically. So that's what the difference is. See if we have any more questions coming in here. Let's go down. Yes, we have one more question from Christian Nordby at Kepler Cheuvreux. His question is if what are running mortality rate is at the moment? Johan, would you like to comment on that.

I don't know specifically what you mean there, Christian. But typically, the mortality that matters is the mortality that happens in seawater where the body mass is high. As we mentioned earlier, on the mature fish, we have elevated mortality much more than what we have been seen in the past and what we expect to see. If you look at the new batches, which is really what matters here, we have very low mortality. I think you can assume anything from 2% to 5% mortality from 100 grams to harvest. I think that's a ballpark range that you can put in your book.

Okay. Very well. As far as I can see Christian's question was the last one that we received. So unless there are any more that come in now last minute, I will -- I can start with saying thank you to everyone who attended once again and say that we're, of course, looking forward to presenting again in 1 month from now. Johan, any concluding remarks from your side?

No. Thank you, hang in there, and we talk again in a month. Have a good day.