Atlantic Sapphire ASA (ASA) Earnings Call Transcript & Summary

Happy Thursday, everyone, and welcome to Atlantic Sapphire Monthly Update for May. I am Johan Andreassen and with me to present today is Karl Øyehaug.

Good morning and good afternoon. For those of you who are new to the format of our monthly updates, we will open up for Q&A at the end of the presentation. You type your question in the Q&A plan, but note that we will only answer questions from attendees that have identified themselves with name. Johan?

The April biomass gain came in with an uptick to 430 tons versus 400 tons in April. We harvested approximately 140 tons, and as we only harvested sufficient volumes to fulfill our program business commitments. The filleting line commissioning remains on track and is still expected to be done by June. And hopefully, we will start running the first fish over the new line in the beginning of July. The fact that we are pushing volume to be harvested until the new filleting line is operational, makes financial sense as we will capture better yields to fillets as well as lowering our processing costs. We are expecting to reach a Phase 1 steady-state biomass gain and harvest volumes sometime during Q3. Fish mortality rates were very low in the month of May. Even though the farm is in general, continuing to operate stable in May, our production was impacted through the first weeks of the month due to a malfunctioning of our well pump on our upper Floridan well. This led to salinity fluctuations in the farm and reduced feeding until the issue was resolved and stabilized. The reason why appetite drops with salinity fluctuations is that the fish spends energy adopting to the -- its osmoregulation system to the new environment. The opportunity loss related to this is estimated to be around 40 -- 75 tons of gain in May. Both our Florida [indiscernible] wells has had pump issues the last 2 months. And even though this is not dangerous for the fish, it does impact our water stability. We have improved our protocols and looking into other pump setups to reduce downtime during maintenance going forward. The new batches continue to outperform the initial batches with the biggest batch being above 2.2 kilos on average after 18 months with a lot of fish being over 3 kilos. We did a small test harvest of approximately 8,000 fish of B I in late May. And as expected, we didn't see any elevated maturation in that harvest. If you look at our actual growth so far this year, we are tracking approximately 10% under our internal growth model, but we have clear action items identified that gives us comfort that we will reach the targeted growth rates over time. The devil is in the details to get there, and the focus is to execute on what we plan to do without delays that reduce growth as well as always keeping everything stable. We now have only approximately 80 tons left of the old fish. So out of the 2,700 tons of total biomass, [ $1 ] represents approximately 3% of the biomass. By end of May, we had approximately 65% of our planned phase 1 biomass stock in the facility. In May, we have an average JEA index of 0.25 across the whole farm. The reason why it's a little bit lower than the month before is because we took more tanks in US in May that had been empty before. This is natural as we continue to build biomass. A bit lower densities on average, the JEA index is reduced somewhat as you have more cubic meters of tank volume to divide the biomass gain on. We are happy that we will soon have a full stock farm, where all tanks are in use. And as we have said before, our steady-state projection for JEA index is 0.47.

Moving over to price achievement for May. In line with earlier guidance, we have had a relatively high share of downgrades year-to-date linked to the harvest of the initial batches. In May, we had an increase in the all-in price achievement month-over-month to $8.1 per kilo. The price achievement for our superior 3-kilo plus fish was $12.4 per kilo. We expect an uptick in price achievement will be consistent harvest of new batches over the next months. If you look at our store overview, it shows around 2,000 retail locations across the U.S. and a stable number month per month. This will increase once we ramp up harvest in Q3 this year. As of end of April, we have spent a total of $68 million on Phase 2 construction. As we discussed in the last monthly update, the global challenges related to longer lead times and cost inflation for construction globally have worsened, which has delayed the process of getting an updated budget and time line in place. Like we talked about last month, our engineering team is working hard on value engineering to limit the effect on CapEx and time line to the greatest extent possible and to get an updated budget in place, that we are comfortable with. With the most recent developments, some more time is needed to get to a revised construction budget and schedule nailed down. Our focus right now is to ensure we have full control of the cost and quality of the project, which explains why it's the right thing to spend some more time now to ensure we maximize the return on the Phase II project as a whole. Our photo of the month is a bird's-eye view from the construction site once again. This photo is taken in mid-May and shows further progress on the erection of the Phase II tanks while you can also see our Phase I facility on the left-hand side. In other updates, we are proud to announce that we've released our first consumer impact report on our brand webpage, bluehousesalmon.com. This was released in connection with World Oceans Day yesterday. The report is meant to be a consumer-friendly condensed version of the full ESG report that we released back in April. The focus, as always, is on educating consumers on the advantages of Blue house technology to keep our oceans blue and our planet green and can hopefully be a nice resource to all of our stakeholders. Finally, we have a comment that after the DKK 180 million Denmark insurance settlement was reached in May. We have since received the insurance proceeds on our accounts and can consider that case closed. So with that final comment, we will open up for questions.

[Operator Instructions] Our first question comes from Axel Jacobsen at Arctic Securities. And his question is, "how many tons of the new batches were harvested in May? Any explanations for why the new batches are tracking 10% below the internal growth model." I could start with the first part, and then I'll hand it over to Johan. So we harvested approximately 20 tons from the new batches in that initial harvest. And Johan, you want to talk a little bit more about the performance of new batches as it relates to the 10%?

Yes, sure. It's a mix of a lot of things. And as I said, the devil is in the details to reach the full utilization of the animal. So basically when we have delays, for example, in fish transfers, if we have downtime in our feeding system, there's a lot of smaller things that happens during operations that somewhat has implication on our ability to feed all the fish in the facility of the model at a given time. So this is just -- it's nothing dramatic in this. This is just becoming even better at executing on day-to-day operations. So I mean we know where the shoe is tight. So we have a clear path to improve month by month here.

Our next question comes from Bjorn Wicklund. "Can you elaborate a bit more on price achievement for the test harvest? And what kind of price premium you expect to Norwegian or Chilean salmon for the new batches going forward." So I can start here, and then you can fill in Johan. We did that harvest actually at the end of the month. So it has not been -- we don't have that price achievement as part of the May update. But what we have shared in the past and what we can definitely reiterate is that with the new batches, we expect much less downgrades versus what we had before. So the premium price, which is what we sell all the 3-kilo superior fish for is a price that we expect we increase gradually throughout the year. This is, of course, helped by the fact that we have very strong multi-markets, but most importantly that we have good quality fish, which makes it easier for us to comfortably go to our customers and take up the price. And we really wanted to get to a product that we're really proud of before we do that move. So we do expect price achievement to continue to increase basically for all the next months going forward. And then I guess when it comes to the premium versus commodity salmon, and we continue to expect that we will have a very stable price achievement that isn't so closely linked to whatever movements you see from the underlying commodity prices. So the same stability that we've seen historically is also what we expect to pay in the future. I don't know if you want to add anything.

Yes. No, I can add that yes, the program business that we have in place was negotiated last year. So obviously, we haven't kind of done any new deals since the spot price skyrocketed in Europe and in the U.S. So I think it's fair to assume we have had $11 average price achievement in our business plan for 5 years. And 5 years ago, the quality price was maybe half of what it is today. So I think it's fair to assume that over time, we will lift our prices on the superior fish as well. So yes, I think there's an opportunity there for a $2, $3 uptick over time, not in the next quarter, but over a little bit more time, but it all depends also on the -- how the commodity market is moving.

Perfect. Our next question comes from Christian Nordby at Kepler Cheuvreux. "Will the insurance settlement primarily be used to repay the DNB $25 million 3-month loan? Or do you expect to get an extension on this loan." So as you correctly point out, Christian, there is a June 30 maturation date for that $25 million loan. So something is going to happen on that end. But we don't have news to report on exactly how that will look as of now. So we'll get back to everyone on that most likely later in this month. Our next question comes from Alex Jones at Bank of America. First one is, "Can you give more details on the clear action items to improve growth rates?" The second one, "Why have you removed the chart showing quarterly phasing of committed CapEx?" Johan, would you like to go first on the...

Yes. I think this is -- we can talk about this for a long time. So I propose instead of spending a lot of time on this call is that we can offer you, Alex, a more in-depth conversation on this offline. But as I said, it is small details in how we operate the army, keeping everything stable, making sure all the fish lights are on, the bidding systems are working. It's just some of many small things that need -- we need to become a little bit better at. So I think -- I don't think we can go more into details on this call.

Perfect. And your second question, Alex, on why we're not showing projections on the CapEx is simply because we are in the middle of nailing down an updated CapEx percent. We don't want to show numbers before we have them all with enough certainty so rather than showing something that is going to change and it's going to look a little bit different than what we project, we'd rather just finalize that work and then get back to you all with new updated projections, so that is why we kept it to the historical spending in this monthly update. Perfect. And I think so far, we don't have any more questions, but I will give it a minute or so if there are any more questions here towards the end.

Seems like that was it.

Seems like that was it. So then I'll just thank everyone for once again joining our monthly update call and look forward to present the next monthly update in 4 weeks or so. Johan?

Very good. No, thank you, everyone, for attending the call today and enjoy the nice summer evening.