Atlantic Sapphire ASA (ASA) Earnings Call Transcript & Summary

Happy Wednesday, everyone, and welcome to another update call from Atlantic Sapphire. This time, we are going to talk about how it went in the month of March. Live in now from the Miami Bluehouse is myself, Johan Andreassen, and as usual, with me here to present today is our CFO, Karl Øyehaug.

Good morning and good afternoon. We will go through the highlights of the update material. And as always, thereafter open up for a Q&A. [Operator Instructions] Thanks. Johan?

Yes. Let's go to the biological performance. The March net biomass gain came in at 310 tonnes on the new batches versus 330 tonnes in February. The reason for the lower number in March is that we had increased mortality in one tank, where we lost approximately 60 tonnes of biomass due to what we think is instability under water hydraulics in the trickling filters that again stirred up some dirty water that have impacted the fish in a negative way. It is worth mentioning that this was the first time we got to test our new [indiscernible] in real life, and we were successfully able to avoid and using the flow to the tank and, thereby, salvaging the rest of the fish in that system. Also worth mentioning is that this is the only notable fish loss since last March in the Miami Bluehouse. And this comes with a low volume and no noteworthy impact on harvest volumes and biomass gain projections for this year as we do have more than enough number of fish in the farm. It shows that due to design modifications and better SOPs, we can now avoid the larger incidents that we have seen in the past. In fish farming, one can never rule out losing fish for several reasons. The important part is to reduce the frequency and the size of each one of them. If it were not for this mortality, the biomass gain would have been ended up on around 400 tonnes for March. The math behind that statement is to add back the lost biomass of 60 tonnes to get to the gross biomass gain and then to add in what would have been the expected feeding on that fish. It is important to note that this reduced biomass gain in March is not due to poor biological performance, but for this isolated event. And that the fish in the new batches are, in general, developing according to our plan. We are currently feeding approximately 15 to 18 tonnes a day on the new batches, which means that the April biomass gain is expected to come in well above 400 tonnes. We harvested around 850 tonnes head-on-gutted in Q1, all of that being the initial batches. We are guiding on 1,000 tonnes HOG in Q2 as we will start harvesting on the new batches towards the end of this quarter. The initial batches are currently stocked in only 4 out of our 36 grow-out tanks in the facility, and we continue to harvest on these now in April and into May when we finally will be out of this fish and turn the page to the new fish. We are still expecting to be close to Phase 1 steady-state biomass gain and harvest volumes from Q3 of this year. In general, the farm continued to operate in a stable way for the month of March. On a side note, we are taking advantage of the opportunity now before we are getting into full production to do deep cleaning and what we call pit stops on systems that have been running since day 1 for the farm to be as clean and in as good shape as possible in preparations for a fully stocked farm in Q3. As the graph illustrates, the new batches, as expected, continues to outperform the initial batches, with the biggest batch being around 1.8 kilo average after 16 months from start feeding. And we start to see an increasing number of fish above 3 kilos in that batch. As you see, all the other new batches are also developing nicely in terms of growth. We have not seen any maturation and the meat colors from our color samples are at levels that we expect it to be for this fish size. We continue to expect very high superior quality percentage once we start harvesting on this fish later this quarter. And for this update, we have also elected to show you some other production KPIs on the largest of the new batches, specifically B1, B2 and B3, which is the cumulative economical FCR and mortality rates in the grow-out phase. So for B1, maybe have a cumulative mortality of 2% and an economic feed conversion of 1.15. For B2, we have 14% mortality and FCR of 1.28 million. And for B3, we have a mortality of 1% and an FCR of 1.0. And just to -- so it's clear, our grow-out phase is what you should compare to the net-pen phase for commercial salmon farming. And as you can see, we have very low mortality rates in general and even for B2 where we had a tank specific mortality this month, the cumulative mortality rate is way lower than what you usually see in the conventional industry. Switching to the next slide. We now have only 500 tonnes left of the old fish out of the total of 2,300 tonnes of total biomass. And as I said earlier, we have enough numbers of fish from the new batches on the farm today to get to the planned standing biomass and the harvest numbers from this summer. For the next monthly update, we expect to introduce a new batch, B6, into this view. Switching slides. By the end of March, we had approximately 60% of the planned Phase I steady-state biomass stocked in the facility. However, as pointed out on the last slide, still close to 30% of that is still from the initial batches. Without the mortality affecting B2 in March, the JEA index would have been approximately 0.26 versus 0.19 actual. And if you consider that we had a farm stocked at 40% as it relates to the new batches at month end, you can do the math on how we are tracking now as it relates to growth. In a steady-state, we expect to have JEA index of 0.47. Even though we are not using a big part of the farm capacity at this time, as we are in lower biomass and we are doing the pit stops, I mentioned earlier, in certain systems, we also do have a certain tanks of the new batches with our max stocking density, up towards 80 kilos per cubic meter, supporting our ability of operating the farm with a higher average biomass than what we currently have in the facility.

Okay. Over to the price achievement. On the price shipment side, we're seeing the same trend as in the last couple of months. In line with the guidance given earlier, we had a relatively high share of downgrades in Q1, linked to the harvest of the initial batches, which resulted in a flat average price achievement month-over-month of $7.6 per kilo. The price achievement for our superior 3-kilo-plus fish was steady around $12 per kilo in March. We're planning to harvest out the majority of the 500 tonnes of the initial batches we have left over the next weeks, which means you'll continue to see a similar price achievement also in April before the average price achievement jumps up with the harvest of the new batches later this quarter. On our store overview, you'll notice a stable number of stores compared to last month, which is linked to a similar harvest volume as we had [ there ]. Over to the Phase 2 CapEx status. We had a total of $161 million of the total budget committed at the end of February. In terms of timing of the Phase II spend, there're only minor movements in this overview compared to last month's projection. We expect to have a first guaranteed maximum price amount from our CMR contractor, Wharton-Smith, ready in early May. The guaranteed maximum price is based on the fixed design and scope where the CMR contractor guarantees a maximum price with Atlantic Sapphire, we'll pay for the project unless we choose to initiate any change orders. Although we still see the $225 million as a good budget figure, we do see some signs of inflationary pressure on the parts of the Phase II budgets that have not yet been locked in. These are linked to increasing construction raw material and equipment prices. We're also expecting updated completion dates to the new overall systems, together with the GMP, next month. The delivery time of equipment has increased everywhere and will likely also impact our Phase II project to some extent. As an example, the delivery time of high-voltage transformers has increased from 20 to 50 weeks. Our construction team is working on finding clever ways to reduce the impact of longer lead times, but we currently do see timeline as a more significant project risk than the CapEx budget. The photo for this month shows an aerial view of the Phase II construction site. And as you'll see here, we are implementing good progress on erecting the tanks. Lastly, in our other updates section this time, we've focused a little bit on insurance and finance. As we communicated last week through our stock exchange announcement, the official police investigation after the Denmark fire, last September, has now been concluded and published. As we were expecting, the investigation is inconclusive as to the exact cause of the fire. We mentioned before that there was no formal requirement for the police investigation to be concluded before the insurance case could be settled. But of course, it's positive for everyone to remove the uncertainty related to this. The insurance case after Denmark fire is moving forward according to plan, which means we continue to expect to have a conclusion in place this quarter. We're also pleased that we were able to announce last week that DNB has granted us an additional $25 million 3-month credit facility. The short-term facility secures us additional liquidity on top of what we already have, while the details of the overall long-term financing are being finalized. Finally, we'd also like to remind everyone that on April 21, we'll publish our 2021 annual and ESG report, and we'll be sending out an invite for a virtual presentation of the highlights of the report in a similar format as were -- we have here for our monthly updates. So with that, I would like to open up for questions. And we already -- giving everyone a few seconds here.

Perfect. So we already have received the first questions here. And the first one of the day comes from Peter Evensen. His question is, what is the status regarding the filleting facility?

Yes, I can give some updates on that. So we are doing all the preparations in the Bluehouse to get ready to receive the machinery that is being shipped out of Denmark and Iceland. The supplier has opted us on a new arrival date for the machinery, which is the first week of June. We are going to be ready here to plug and play and install that equipment relatively quickly, call it a week or so. And then we will slowly, but surely, start commissioning and training our people and gradually switch all the filleting that we are doing to our in-house facility. That said, we do expect this to take a few weeks to get up to full speed. That's just the nature of commissioning new equipment and training new people. But it is more or less on track.

Perfect. Next question here is from Andreas. In Q4 '20, you achieved a JEA index of 0.46 with suboptimal growing conditions in the farm. Could we, therefore, expect even better growth than budgeted, and thus higher volumes, when you reach steady state in Q3 as the growing conditions for the fish now is improved? I'll also leave that one to you, Johan.

Yes. I don't want to promise anything in excess of what we have in our model, which is the 0.46. The -- that said, it's not to be said that it's not possible to do a higher yield, but it comes at higher risk. So for now, our ambition is to get there and stabilize there. And then as we become better at what we're doing, and we get more confident, we might be able to see higher yield down the road. But for this year and the beginning of next year, I wouldn't expect higher than 0.46.

Next question here is from Carl-Emil Johannessen, Pareto Securities. Why was the JEA index for the best performing system down in March versus February?

Yes. This is a little bit random because it depends on how we're stocking the fish in the system. So for example, 1 system has 3 tanks. And if you have 2 tanks that are stocked with relatively high density and high feeding, but the third tank is empty or recently stocked, that drags down the average for the system. So it's nothing dramatic in this. This might change completely and bump back up again next month.

Thanks for that question. Next question, Peter Evensen, can you provide some information on the collaboration with Skretting regarding the feed plant?

Yes. So that is basically nothing new there. Skretting is in the permitting process to build from one of the feed plant here in Miami-Dade. We expect that to take between 6 to 12 months. And then, thereafter, the construction time of that feed plant is approximately 1.5 years. So I think the best estimate is that we can get feed from that plant, 2.5 to 3 years from now.

Next question comes in from Alexander Aukner in DNB Markets. Since you guided for 1,000 tonnes of harvest in Q2 and 500 tonnes from old batches, I assume that 500 tonnes will come from batch 1. Given the current average size of 1,770 grams, at what weights do you expect to start harvesting the Batch 1 fish? And then the second question, can you give some more color on what happened in the trickling filter to cause the instability?

Yes. So to the first point here, yes, you're absolutely right. The last 500 tonnes will be from the new batches and specifically B1. The target harvest weight that we have here to reach our commodity market is to harvest the fish no smaller than 2.8 kilo head-on-gutted. So that will be the target for -- when we initiate the harvest in Batch 1. The nature of it, as I mentioned also earlier, even though the batch itself is 1.8 kilos, we already have quite a lot of fish that is now passing the 3 kilo mark around weight. And we will then start with the size A, as we call it, the biggest graded fish, and new harvest grades out of those fish, that way we are able to start harvest on fish way earlier than when the average rate of the batch per se is to the target harvest rates. When it -- as it relates to instability in the trickling filter, we don't want to go into more details on that in this call. We are still finalizing all the investigations both from water quality parameters and also our internal logs and sensors. So we can come back to that at a later point, Aukner.

Perfect. And then we have another question here from Carl-Emil from Pareto. When do you expect the final answer to the insurance settlement in Denmark? And any progress on the case in the U.S. related to the chiller plant. So to give a quick comment on that, we are still expecting both the conclusion and an actual settlement, cash settlement, for that insurance case in Denmark this quarter. And as we communicated before, we don't think it's going to stretch towards the end of the quarter either. So we don't have an exact timeline to guide on, but things are going according to plan. And on the timing of the U.S. chiller plant, we think this is something that based on how things are moving right now it's going to happen after the Denmark insurance claim. But also there, we don't have an exact date that we can give at this point. Next question comes from Alex Jones in Bank of America. He has 3 questions, it looks like. First is, what grow out mortality rates and eFCR figures are in your long-term budget? And this probably relates to the data points that you shared, Johan, in one of the earlier slides.

Yes. No, so we are expecting approximately 5% mortality related as a percentage of the biomass gain in the grow-out phase. Yes. So that's that. And the eFCR in the budget is -- I believe it's 1.15 for the long-term budget.

Then Alex also had 2 other questions. The first one was on whether our financing partners were aware of the minor March mortality incident when we gave $25 million extra credit or not? To answer that one, first of all, I think it's important to repeat that this is a relatively small incident. It's visible because we have full disclosure on every single unit of fish we have in the farm, but it's not something that will impact our harvest volume or biomass gain projections meaningfully. But then on a general level, we have a very close relationship, in this case, with DNB, who lend the $25 million to us, where they're basically tracking our performance live. So definitely, they have full visibility and even more visibility into everything that happens operationally than the rest of the market.

And then the mortality was only 60 tonnes out of 1,800 tonnes of the new batches. So it's -- yes, just to reiterate, it's minor.

The last question from Alex Jones is on Phase II timeline. You mentioned a delay of as much as 30 weeks for one component. Can you frame for us the potential length of the delay to Phase II in the worst case? So it's a good question, Alex. And as we were hinting towards, we are still waiting to get even more detailed timelines for when the various sections of Phase II will be completed. So right now, we don't have a good date to give. But one -- although there are single components, like the example with a 30-week delay that we mentioned, it's also important to stress that there was some contingency in the original timeline. And further, the team's focus right now is to ensure that you are able, through clever ways of constructing, to minimize the impact of some of these delays. For example, by changing sequencing of when various parts of the construction process is completed. So we definitely don't think that all of these delays will have a direct impact and that, that will only add-on for each single item that might be delayed. There are definitely opportunities to minimize the effects, but we will get back to you in our next monthly update with more details on what it's going to look like given the latest and greatest. Then let's see if we have any more questions that have come in. Just give it a few minutes to see if some more questions come in. We have one question coming in from John Evans at IntraFish. Will you be using the insurance money from the Danish plant to plough into Miami instead of building a new one? I can give a quick answer to that first question, which is that we have not yet decided on the future plans for Denmark. So that is also something that we will get back to later, once a decision has been made. The next question is that you plan to harvest 1,000 metric tons in the first and second quarters. Can you catch up the 150 metric tons you didn't harvest in March. Johan, would you like to give a quick complement?

No, we don't expect to catch that up.

Then was the lost 60 tonnes around laden weight due to increased mortality in one batch-2 tank, the main reason -- yes, I think that's the question. And the answer is yes. It was in one Batch-2 tank. The main reason you missed the 1,000 tonne targets or...

He is asking if the harvest lost of the 60 tons was the reason why we missed the target. And no, that's not related. It's primarily due to lower-than-expected HOG rates on the initial batches as a consequence of high degree of maturation. That's the answer.

Good. Thanks for clarifying that. You plan to harvest 1,000 metric tons in the first and second quarters. And that sounds very similar. Do didn't harvest in March -- the Whole Oceans -- you plan to harvest 1,000 metric tons in first and second quarters. Can you catch up 150 tonnes you didn't harvest in March. Hope, that one we answered. And then Whole Oceans told us they will begin construction of their land-based site in 2023 in Bucksport, Maine, any advice from what you have learned so far for Whole Oceans?

I don't think we have any other advice than don't underestimate the task. It's very complicated and takes a lot of time.

Nothing more to add to that. But let's give it 1 more minute to see if any last questions come in here before we give a couple of concluding remarks. No more questions. Then I will start with thanking everyone for joining the call and hoping to see most of you back for our presentation of 2021 annual report later this month. Johan?

Yes, I would like to thank everyone on the call today for joining and listening in to what we have to say. And I also want to share a few thoughts on -- as you all know, we are in a very turbulent world, shocked with war, and we have a lot of human tragedies going on in Ukraine. And I think we need to realize that we are lucky that we are shielded from that in many ways. And when it comes to our business, of course, we follow our -- follow the raw material markets and the risk for inflation closely. But all things being equal, we are probably in a better position than most other players in aquaculture and in food production in general because our business model is based on sustainability, meaning that our salmon is produced and distributed in the same markets. We don't need to pay too much attention to energy prices and long transport lines. We're shielded from air transport and the enormous costs that will entail, and we are simply in line with what the future needs are, both from an environmental perspective and when it comes to a country's need for food security. And with that, have a good rest of the day, and see you in a month.