Earnings Transcript for AASZF - Q1 Fiscal Year 2024

Johan Andreassen: Hi, everyone, and welcome to our Q1 operational update and the 2023 annual report presentation. I am Johan Andreassen and with me to present today is, as always, Karl Oyehaug.

Karl Oyehaug: Yes, good afternoon. We will open up for a Q&A after the presentation where you can type your question into the Q&A tab that you'll see on the right-hand side of the team's window. We will only answer questions from attendees that have identified themselves with name. So please state your name in the question box as well. Johan?

Johan Andreassen: Thank you, Karl. First, I would like to give a quick comment on the process of finding my successor as of CEO. As I mentioned, last fall, this was going to take some time since we wanted to do a thorough search to find the right person. After a very good process, we are now close to making a decision which means that you can likely expect an announcement on that topic by the end of this quarter. And with that said, I will now give you an update on the latest developments since our last update that was on February 29. Stable performance on the back of infrastructure improvements. As we have discussed in detail over the last year, 2023 was heavily impacted by infrastructure upgrades, followed by temporary challenges last summer that limited our ability to produce fish the way we are supposed to. After we were done with these upgrades and got our temperatures under control in October last year, the stability in the farm has been completely different from what we have seen in the past. As we have also discussed in detail over the last year, we have seen a high degree of maturation and poor performance on the fish groups that were in the growout systems during the high temperature period last summer. These fish groups have given us poor feed conversions and low-price achievement. We are all very happy that we are almost done harvesting these fish and that we will tap into the new batches before the end of this quarter. On the new batches, we are continuing to see strong biological development with low feed conversion, low mortality, low maturation, and good growth rates. Farming conditions are stable, supporting an outlook of continuous increase in biomass gain and harvest volumes over the coming months. Warming temperatures are continuing to remain stable and at set point of around 14 Celsius in the growth systems and 12 Celsius in the freshwater systems. We are operating with a high level of caution on water quality parameters, and we see that our water remains stable despite higher feeding rates. The new chillers continue to operate with a high degree of reliability and they can keep temperatures where we want them to be even with the warmer weather that we have seen in Miami lately. The new heat exchanger for energy recovery in our wastewater is being brought on line and further cooling capacity buffer on standby in addition to the four new chillers that we're receiving is going to give us a good buffer going into the summer. The mix of batches are quickly improving. Parts of the pre-Q3 2023 batches went into early maturation due to the temporary challenges that I mentioned earlier. And in general, the harvest sizes have been much lower than desired due to the same challenges. The farming conditions have significantly improved since Q3 and significantly reducing the share of maturing fish in the current standing biomass. In the graph on the right-hand side, you will see that as of today, we are very close to having harvested out all the pre-Q3 batches. In fact, we have harvested out these underperforming batches of fish faster than we anticipated back in February, this to give room for the high-performing fish that comes after. All the pre-Q3 measures will be harvested by mid-2024 and the remaining biomass has not had the exposure to the high temperatures. The combination of improved quality of harvested fish and increased volume of harvest is expected to result in a significant improvement of the financial performance in the months to come. We harvested approximately 1,150-ton HOG on the pre-Q3 batches in the first quarter of this year with a significant volume of small and mature fish. Still at the same time, we were able to supply good quality fish to our key customers. We expect to harvest at least 1,000-ton HOG in the second quarter of this year, at the same time, as we will increase our standing biomass further setting the stage for a much better second half of the year. Stable temperatures and growth conditions have improved performance. as you can see from the biomass gain graph on the left-hand side, we are continuing to see it higher and higher biomass gained in the post-Q3 batches, while we had a negative contribution from the older batches in high maturation. Again, we look forward to getting out of these fish. On the right-hand side, you can see that the newer post-Q3 batches has had growth rates around 30% monthly in the last six months, which is in line with our targeted growth for the sized fish that is represented in this bucket at any given time. That said, the growth rates we have seen in the post-Q3 batches are far above what we have seen in Miami since the farm was built. It is a very good example that the fish will grow well, if we as operators are able to give them the conditions that it needs to grow. Supporting feeding rates and conversion ratios. The graph on the left-hand side is showing us the accumulated feed conversion rates on the remaining standing biomass of the older fish at around 1.5 biological and 1.9 economical. It reflects that these fish have a high degree of maturation and has historically had elevated mortality. The post-Q3 batches, on the other hand, is showing a very good, accumulated feed conversion, reflecting the underlying favorable biological conditions and good operations that these fish has been subjected. Even though the fish it still needs to grow out to full harvest size, the feed conversion that you see here is good benchmark with industry averages. It is also worth mentioning that the economical and biological feed conversion is almost the same, reflecting the very low mortality rates we have seen for these fish. Oon the right side, we can see the monthly feeding in the last five months that shows a slowly of course trends and with better feed conversion rates, the biomass gain is increasing more than the feeding rates. We expect this trend to continue in the months to come. In conclusion, the development of feed conversion ratios and ton of feed absorbed, indicate good fish health and good farming conditions. System temperatures has stabilized after chiller improvements. As we have spoken a lot about before the new rental chillers that were brought online after the summer of '23, immediately resolved our prior nightmare with elevated temperatures. The temperatures were brought down and stabilized at the target levels of 14 in the salt water systems and 12 in the freshwater systems which is -- these are the levels that the company believes are optimal for high growth and operational stability. The available chiller capacity is around 9,000 cooling ton representing a significantly cooling overcapacity as peak days of the summer are estimated to require an online cooling capacity of approximately 7,000 ton. In addition, the new discharge heat exchanger will be installed before the peak summer and will add another 2,000-cooling ton worth of capacity, leaving us with an expected overcapacity/buffer of approximately 55%. And with that, I'm going to give the word back to you, Karl.

Karl Oyehaug: Thanks, Johan. So I will take you through some of the highlights of our annual ESG report. Before I present the headline financials for 2023, and I encourage everyone to read the full integrated annual report as the report, of course, contains a lot more details than we'll be able to address here in this presentation. First, looking at the updated materiality matrix. We've made some changes since last year's version that reflect our current corporate priorities. In the 2023 materiality matrix, water and effluents and climate reduction have sweet spots because we believe we now have a relatively greater impact on water and effluents. Meanwhile, technology and innovation has been removed from the materiality metrics to reflect our current focus on delivering a proven phase one operation rather than focusing on innovation. On the next slide, we've summarized some selected milestones achieved over the last year. We recently signed an agreement with our power company, FPL, to start sourcing 30% of our electricity consumption from solar energy starting in the second half of 2024. This is something we're very excited about and something we've been working for several years to get in place. To us, this marks a large step towards eliminating the carbon footprint of farmed salmon here in the US. Further, we have adopted the GHG Protocol framework to report on Scope 1 and 2 emissions in adherence with the TCFD recommendations. For next year, we're targeting Scope 3 reporting specifically when it comes to Skretting's fish feed production as well as all inbound and outbound transportation. In 2023, we supported several community initiatives, organized visits to the farm by schools, university students, researchers, neighbors, authorities and more. We received the American Heart Association's Heart Check Certification and the Parent Tested Parent Approved Seal of Approval. Further, an 80% of our finished product were packed in compostable and recyclable shipping boxes, 100% of our byproducts from the fileting operation were sold as pet food ingredients. We maintained our FIFO under 1 making Atlantic Sapphire a net marine protein producer. So to conclude, we are very excited to finally be able to start sourcing renewable energy for what is our dominantly largest source of carbon footprint, our electricity consumption. Moving over to the financials for 2023 and starting off with the P&L statement. The consolidated group reported revenues of $14 million for the year. We harvested 1,545 tonnes head on gutted in 2023, which was down from 2,253 ton in 2022. With the restrictions on production in 2023, a significant part of our cost of goods sold were expensed and charged to underutilized plant capacity. The figure was $25.6 million in 2023, up from $21.8 million the preceding year. To recap, the allocation of indirect production costs to unutilized plant capacity is done with feeding as a percentage of theoretical full feeding capacity as the allocation key. Last year, we estimated that we encountered approximately $8 million in extraordinary costs tied to infrastructure upgrades, primarily due to higher outsourced labor costs and maintenance costs than we expected under normal operating conditions. We also reported a reduction in other operating expenses year over year, driven by the reclass of chiller rental costs of $5.2 million to cost of materials and various other cost cutting initiatives. Off note, the group is also taking a $35 million impairment of the US property plant and equipment, which represents around 10% of the balance sheet value. This is a purely non-cash effect it has nothing to do with our belief in our ability to execute the combined Phase 1 and 2, but rather as a consequence of us performing a detailed scenario-based DCF analysis where we have taken into account a more conservative long-term production ramp-up plan linked to our decision to pause Phase 2 construction, as everyone is aware of, and other external factors such as higher interest rates to arrive at a net present value of the assets. Needless to say, if any of the assumptions change in the future, the balance sheet value may change again. For example, a lower cost of capital could mean a reversal of the $35 million impairment that we're taking now. The adjusted EBITDA loss for 2023 ended up at $63.3 million, which is a $10.2 million improvement compared to 2022. This was driven by lower harvested volume and realized COGS as well as general cost cutting across the cost base. Looking at the balance sheet, the group ended 2023 with total assets of $342 million. On an accrual basis, we invested $21.4 million in 2023, which is down from $52.4 the year before, and of course, tied to the slowdown of Phase 2 construction efforts as we look to get Phase 1 into a proven state. All costs considered we have invested around $110 million in Phase 2 as of year-end 2023. Group equity ended 2023 at $283.1 million, down from $296.4 at year-end '22, driven by the $35 million non-cash impairment that we talked about on the last slides. The net interest-bearing debt, including the of restricted deposits, was $4 million at year-end 2023. The group had $42.1 million in drawn term debt, $20 million of RCF undrawn, and $100 million in undrawn term debt earmarked for Phase 2 construction. Subsequently, a private placement of $35 million was successfully completed on February 29 and this year that added further to our available liquidity. This slide shows that the US business now represents largely all of the company's activities. As it relates to the remaining assets in Denmark, we're currently considering the future for our Danish business and are currently evaluating the possibility of selling the remaining Danish assets, giving our clear strategic priority to focus on the US market out of South Florida. On the cash flow side, you'll also see that the cash flow from investing activities of $33.5 million is that higher in absolute numbers than the previously mentioned CapEx figure of $21.4 million on an accrual basis. The difference is explained by the that we have transferred into an interest-bearing restricted cash account instead of the old minimum cash covenant for the same amount that we had as part of an agreement with our lender. Over to offtake, our Bluehouse branded fish continues to be sold in approximately 2000 retail locations across North America. In Q1, the premium price was back up to $11.1 per kilo, while we achieved an average price for all the harvested fish of $4.4. The average price achievement in Q1 was negatively affected by the high share of small and downgraded fish in the pre-Q3 batches. Under stable conditions, 80% to 90% of total harvest is expected to be sold at the Bluehouse premium price, which will raise the average price achievement considerably. Long term, we're targeting around $12 per kilo in average price achievement. For the sales and marketing team, the focus at the moment is on new value added and convenience product lines that can supplement the offtake we have for our premium Trim D fillets, which of course, represents the majority of our harvest volume. On the next slide, the key takeaways, since I think last time we presented remain the same, we believe that Atlantic Sapphire has a unique asset base in what we think is the optimal place for land-based salmon farming out there. Although our recent focus has been on proving Phase 1 operations work is going on in the background on finalizing the Phase 2 design so that we are ready to move ahead with the completion of that project whenever we are ready for it. With Phase 2 volumes online, the company will generate significant economies of scale that will boost the profitability and cash flow potential of the business compared to the current Phase 1 operation. And approaching the end, to conclude here, I would like to just give you a refresher on the unique business case that Atlantic Sapphire represents. First, Atlantic Sapphire is capturing a US mega trend. The US is by far the largest salmon market in the world. However, US production is scarce with consumers generally reliant on salmon imports, an issue we are addressing. Secondly, we have the world's largest land-based facility already operational and are approaching a proven state. As described earlier in the presentation, we've seen strong operational performance after the infrastructure improvements last year. Third, we have Phase 2 under development and have invested around $110 million in the project so far. Once complete, total production capacity will be around 25,000 tons head on gutted, offering significant economies of scale. To finance it, we have an undrawn term loan of $100 million credit approved by DNB. Fourth, we have a proven ability to extract US premium pricing for our superior grade fish while benefiting from significant cost savings by removing the need for air freight as well as a reduction in our carbon footprint. Our fish is being sold across 2,000 stores in the US today. Finally, the company is backed by highly renowned financial and industry experts. With over $685 million of equity invested since inception, Atlantic Sapphire has a strong supporters both in equity and debt markets. For example, leading salmon farmer, Nulux, is showing continued operational and financial support in their active role as the largest shareholder of the company. So with that, I'd like to thank you for your attention and open up for the Q&A.

A - Karl Oyehaug: [Operator Instructions]. And I think the first question, which comes from is high -- was the gross -- biomass growth in Q1 1,150 plus 1,200 equals 2,350 tons in Q1. And I can quickly address that question. The actual biomass growth, gross would be the 1,200 tons of biomass gain, plus whatever we had in mortality. And I think as Johan already talked about in his presentation, in Q1, we had very low mortality figures. So in other words, you can expect that also the gross biomass gain would be relatively close to that 1,200-ton figure. Then the next question here is coming from

Johan Andreassen: Sure, Karl. I'll do that. So basically, as I talked about earlier, we are still harvesting out the older batches that has a higher degree of maturation and smaller size, and we expect to conclude that sometime next month. So for the first part of the quarter, you should expect a similar price to what you saw in Q1. And then as we tap into the newer batches in May and June, we expect to see a dramatic shift upwards in price towards, which is our lowest premium prices of this guidance. So yeah, so it's going to be a mixed quarter, low prices in the beginning and much higher prices towards the end.

Karl Oyehaug: Very good. Thank you for that, Johan. Our next question comes from Lars Parison, again

Johan Andreassen: I think you went into great detail here, Karl, and I don't have anything to add.

Karl Oyehaug: Very well. Our next question here comes from Knut-Ivar Bakken in SpareBank 1 Markets

Johan Andreassen: Yes, Karl, I'll do that. So the expected steady-state biomass is a little bit like a moving target because it highly depends on the growth rates that we see, because the cap of the farm is in reality, not how much fish you can have standing there, but it's how much you can feel, right? So with the current -- with the latest developments you see on feeding rates where the fish is growing much faster than it has done in the past, you will hit the feeding limits expectedly earlier with a lower standing biomass than what we have had in our plans in the past. So we expect steady state biomass to be lower than what we earlier had spoken about, like the 4,000, 4,200 range. It's going to be in the 3,000s, but it's not an exact science to put it that way. But as it relates to the second part of the question, we do have approximately 3,000 tons standing biomass at this time. And out of that, as we spoke about earlier in the previous slides, we are on the tail end of the post-Q3 batches. As I said, we're going to harvest them out in a month from now. So that is approximately maybe 10% of the biomass in the farm currently is of that older, less quality fish. I don't know, Karl, if you want to add something to it.

Karl Oyehaug: I think you addressed that very well. Thanks, Johan. Moving on to our next question from John Evans at IntraFish. It's actually three questions. The first one is

Johan Andreassen: Yeah. As I mentioned at the beginning of the presentation, we are coming to the tail end of the process. It has been a long process because the Board and the company really wants to make sure that we appoint the right candidate for the benefit of the company going forward. But we are close. We have been able to identify great candidates, and we expect to come with news on that regard before the end of this quarter. So stay tuned on that. And there are two other questions, I guess, you call--

Karl Oyehaug: Sure. I'd be happy to. So the second question on how much we expect to produce this year. We have, of course, already published our Q1 figure of 1,150 tons sold. And today, our guidance for Q2 of around 1,000 tons sold. So that means that we're expecting around 2,150 tons of harvest in the first six months of the year. And then as you've probably noted, we haven't been explicit on our guidance for the second half of the year just yet. But what we are saying is that we do expect to have a farm that is pretty much fully stocked when we pass the summer, which puts us in a position to continue increasing our harvest volumes significantly from the first half level. So without saying exactly what we think that is going to be, we do expect it to be significantly higher. And then bridging over to the third question on when we expect to reach 9,000 tons of production. Also here, we're not saying an exact time when we think that is going to happen. But obviously, our expectation is that when we have a fully stocked farm, if we continue to see the same stability in the operational environment that we've had the last half year that we will also continue to see good improvements on the biological performance that will take us there. So we are optimistic based on what we've seen in performance in the last six months. But also, as Johan talked about in depth, we still have a path ahead of us to get to full feeding, full biomass gain volumes and those 9,000 or 9,500 tons of annual production. But we're very pleased with the progress towards that goal so far. And I'll just give you the chance to chime in if there's anything else he wants to add on that topic.

Johan Andreassen: Sure, Karl. No, maybe I can add that we do see that our systems can handle the feed volume that they're designed for. So if you assume that volume times -- the 12 ordinary systems that we have, we should get to that 9,500 targets. That being said, it also depends on us having being able to operate all the systems continuously at the same time, which is a big focus to have as much as high as a possible percentage of the installed capacity available to us at any given time. In addition to that, we are doing some smaller but important upgrades and modifications to the facility that is going to further help us to be able to support a higher production volume. So this is happening in the background, slowly but steadily in combination with improving our operating procedures and the education level in the farm amongst employees. So I think as Karl said, we cannot give you exact dates, but there's no indications that we won't be able to reach that volume with some time. We just need to give us a little bit of time.

Karl Oyehaug: Great. Thanks for adding those thoughts, Johan. Our second last question is from an anonymous ask a question speaker. And again, we ask that you state your name for questions, but I'll be kind enough to address it anyway. So how much CapEx remains on Phase 2? And here, the short answer is that we will go out and get new quoting for the remaining scope of Phase 2. And that will also then result in a final CapEx budget number. So until that process is completed, and we have new valid quotes for the rest of the project, we will not know exactly how much CapEx remains. But as we've talked about in the past, our estimate has been $275 million to $300 million in total. But again, we want to get the final number confirmed with actual bids based on the 100% design. Then our final question for this afternoon is from Lars Parison, again. He is asking us, approximately how long time is it expected to take from resuming construction of Phase 2 until operationalization of Phase 2. I think, Lars, similar to the previous question on exactly how much many dollars are left exactly how much time is left to complete will also be something we find out in that process. So just to explain a little bit how it works, we will go out to all the vendors, and they'll also supply us with remaining or time frames for delivering the final pieces of equipment or services that we need to finalize the Phase 2 project. So also there, there is some uncertainty until we've done that process and gotten not only committed quotes, but also delivery dates for all the different parts of the project, but you can at least expect based on what we've communicated in the past that we're talking 18 to 24 months. But we would like to stress that that is just a good feeling at this point. It's something that we will get more formally confirmed once we go out for final quotes and bids for the remaining scope of the project. And very good. So with that, I think we have gone through all of the questions that we received today. So unless there's anything more that has popped up while I was speaking, I can't see anything. Then I would just like to say thank you to everyone for tuning in and listening to the presentation. And of course, if there are any questions that come up later, please feel free to reach out directly to Johan and myself. We'd be more than happy to address those. And then Johan, I'll give you the honor of coming with the concluding remarks.

Johan Andreassen: Thank you, Karl. No, I think what I can say is that it's quite boring to be on the call now. And in this situation, boring is good because we -- we're able to make plans. We're able to stick to the plants. We see that we don't run around solving challenges rather than what we are doing now is to basically focus on the details and to do organizational improvements and yeah, deliver the business. And I think also when I'm walking around in the farm, seeing the mood amongst the people that has been part of this the last few years, is completely changing. And we all agree that we are very close to deliver this. So I think it's a very exciting time ahead for Sapphire. It has taken a lot of time, but we are very close to cracking the nut here. So with that, I think I'll thank everyone for listening in today and wish you a good rest of the day, and stay tuned.