Earnings Transcript for AASZF - Q2 Fiscal Year 2023

Johan Andreassen: Hello, everyone, and welcome to Atlantic Sapphire's presentation of the 2023 half year report and operational updates. I am Johan Andreassen. And with me to present today, as always, is our CFO, Karl Øyehaug.

I will start with some highlights from the first half of the year. The focus has been on heavy infrastructure upgrades and operational improvements. We had approximately 2,100 tons of gross biomass gain and harvest volume of 870 tons HOG. We saw a decrease in revenue driven by lower volume, partly offset by higher sales prices. We had a consistent price achievement of approximately $12 per kilo HOG on our premium fish. There was an increase in overall cost per kilo of biomass produced compared to the first half of last year. :

We did an internal reorganization of the company to streamline the organization and strengthen the operational resources. Our Phase 2 construction is currently focused on design and optimizing quality and costs of the project while limiting actual CapEx for the project to a minimum. And we successfully completed an extension of our debt facilities with DNB to April '25, and we did a $55 million private placement. :

Here is a time line of 2023 so far and an outlook for the rest of the year. From January through April, the focus was on the heavy infrastructure upgrades and operational improvements, requiring production to be put on hold as we had biofilter and flow restrictions. This resulted in lower harvest rates. The upgrades done are setting the stage for a good and safe production environment going forward. The net production in this period was negatively impacted by higher-than-normal mortality rates. :

Following that, we had a good period in May and June, where we saw good conditions and productivity. During that time, we had stable conditions and the low mortality and we saw what our farm is capable of. We saw feeding capacities and growth rates in line with our expectations. :

Then unfortunately, we started to experience temperature issues in the farm, which resulted in slower growth and restricted feeding once again. I will get into more details about the temperature issue on the next slide. This will result in lower harvest rates and potentially higher the percentage of downgrades in the second half of this year. This setback will also result in reduced harvest volume and revenue for the second half and a delay to achieve what we call steady-state biomass and production. :

Looking forward, and as we put these challenges behind us, we do expect to achieve the targeted temperatures in the farm by the end of September, which will create a stable production environment and gradually improving the biological performance. :

To give some guidance for the rest of the year, we foresee our Q3 harvest volume of approximately 400 tons HOG and a ramp-up in harvest in Q4. That can range from 750 to 1,500 tons, depending on how fast we achieve stability and how the fish responds to the improved conditions. We currently have about 2,700 tons of standing biomass in the farm and more than enough numbers of fish to get to steady-state production. :

Now over to a deeper dive into the temperature issue that we had mentioned previously, the cause, the consequences and the path forward. We have had higher-than-expected downtime for maintenance and repairs of the rental chillers. Since we underestimated the need for more redundancy in cooling capacity, we have seen temperatures increased in the farm. :

In the graph on the right-hand side, you can see our daily average deployed cooling into the facility the last 4 months and how temperatures in the farm are going up when our amount of cooling goes down, and that it stays stable when we have a high percentage of uptime on our external chiller bank. As you can see, we have never been able to utilize 100% of the designed capacity due to downtime. :

High water temperatures is bad. It might lead -- it may lead to higher maturation, reduced growth, increased feed conversion ratio, a higher risk of anaerobic conditions, higher oxygen consumption, higher caustic consumption, higher turbidity and higher ammonia toxicity. Long story short, it makes it very difficult to operate the farm. :

The solution to this is, is that we will install 5 additional chillers in September, adding 45% more cooling capacity. This is resulting in more redundancy and a large overcapacity. In addition, this will give us an opportunity to reduce the average electricity price by deploying more cooling during off-peak hours and less during peak hours. :

In addition, our recently installed heat exchanger or precooler, as we call it, will allow us to cool the well water coming out of the ground and into the farm from 26 Celsius to 12 Celsius, allowing a distribution of large volume of cold water across the farm once the new chiller capacity is online. :

Recent fish sampling does not indicate that we have a spike in maturation levels, but the status of the biomass, including maturation will be monitored closely going forward. :

So over to price achievement. We have seen good development of branded sales and programs for superior quality product, and we keep seeing great engagement to our brand promise and attributes. We are now focusing on new value-added convenience and ready-to-eat product lines such as smoked salmon. :

Our current footprint is stable at about 2,000 retail locations. As expected, our price achievement in Q2 was affected by a high share of downgrades, but we do expect the percentage of superior fish to increase from Q4. Long term, under stable conditions, we expect 80% to 90% of our harvest to be sold at the Bluehouse premium price, raising the average price achievement considerably. We are targeting approximately $12 in average price achievement once we are in steady-state production. :

And with that, over to you, Karl. :

Karl Oyehaug: Thank you, Johan. So starting with the Phase 2 CapEx status. As of June 30, we have invested approximately $104 million as of mid-2023, with cash conservation still being in focus. Looking into the second half of the year, we expect to spend approximately $7 million in CapEx. This is roughly half of what we spent in the first half of this year.

The focus continues to be on value engineering and optimizing the cost and quality of the remaining Phase 2 project. Until we have a new updated budget in place, we continue to expect total CapEx for the project to be in the $275 million to $300 million range, but note that this estimate hasn't been updated for a while. In conclusion, Phase 2 construction spending will be kept at a minimum until Phase 1 breakeven is accomplished. :

Moving over to the financials for the first 6 months of the year and starting with a summary of the key figures. As announced in our trading update earlier this month, we had revenues of $8 million in the first half and an EBITDA of negative $36.4 million. If we exclude the effect of fair value adjustments on the results, the EBITDA adjusted was negative $33.5 million in the first half compared to negative $33 million in the same period last year. After accounting for $14.6 million of CapEx, we ended the first half of the year with total assets of $366 million. :

On the next slide, we dive deeper into the P&L statement. In total, we harvested 870 tons head-on-gutted in H1 2023, down from 1,217 tons in the same period last year. Revenue per kilo was slightly higher than the same period last year. :

Diving into cost of goods sold. These were up by $4.3 million year-over-year despite the lower harvest volume. This is explained by a mortality costs of $7.2 million compared to $1.3 million in H1 2022. Further, we incurred $13.4 million of indirect production costs expensed through cost of materials for underutilized capacity in the first 6 months, which is $5 million more than the same period last year. The underutilized capacity charge is linked to how much we fed compared to the theoretical feeding capacity of the farm. The higher the feeding is, the more production costs are allocated to the biological assets on the balance sheet. :

In the first half, we incurred around $5 million in extraordinary costs tied to infrastructure upgrades, distributed between higher outsourced labor costs and maintenance costs. With this work pretty much completed, this is expected to return to normal now in the second half 2023, resulting in a significant reduction in monthly cash burn going forward. :

Looking at the SG&A. This line item is also down considerably year-over-year. This is explained by a $2.2 million temporary chill rental costs now being classified as cost of production and upon harvest, cost of goods sold. Last year, these charges had been booked as overhead costs under SG&A. :

Looking into the rest of the year, we see that cost inflation has eased across most key production inputs, although they still remain at elevated levels. For example, our current feed price is quite stable compared to earlier periods at $2.3 per kilo, including the $0.30 in transportation costs. :

As Johan discussed, we are hooking up 5 additional chillers in September. These will add around $100,000 each -- sorry, in total, in additional monthly rental costs that will be booked under cost of production. :

In conclusion, we expect lower fixed costs in the second half of 2023 as the infrastructure upgrades are finalized and these charges are returning to normal maintenance cost levels. :

Our final slide for today is the overview of the balance sheets. The group ended the first 6 months of the year with $23.6 million of cash on the balance sheet. :

We have not drawn on the revolving credit facility, isolating our drawn debt to the $44.6 million of term debt. This means that the net interest-bearing debt as of midyear was $21 million, which is half of the net debt level at the same point in time last year. :

In addition to the undrawn RCF facility, we also have $100 million in undrawn term debt earmarked for Phase 2 construction available. To recap, the availability of this debt is subject to incurrence test, most importantly, reaching EBITDA breakeven with our Phase 1 operation. :

For further comments on our financial projections and financing considerations, I refer to the stock exchange announcement that we just published together with the first half report, where this topic is covered in greater detail. We'll leave the summary of the financials there. As Johan highlighted, we'll face challenges in 2023, but our focus is on getting the conditions in the farm back on track, which is the prerequisite for getting the biological and financial performance we are here to deliver. :

Thanks to everyone for your attention. And as always, please don't hesitate to reach out to Johan or myself with any questions you may have.: