Atlantic Sapphire As

Hello everyone, and welcome to Atlantic Sapphire's earnings call for the first half of the year, and an operational update. My name is Johan Andreasen, and with me to present today is a student, our CFO, Karl-Erik.

Good morning and good afternoon. Going forward, we'll keep all of you updated on the latest developments in Atlantic Sapphire on a quarterly basis. Our quarterly operational update will follow a similar format as previous monthly updates, where we will open up for a Q&A at the end of the presentation. You type your question in the Q&A tab, but note that we will only ask questions from attendees that have identified themselves with names. John?

Thank you, Carl. In the first six months of the year, we were able to give the fish stable conditions that allowed us to work on fine-tuning in our blue house operations. We have harvested out all our initial batches with a high degree of maturation and higher than normal day-to-day mortality. Positively, we see no sign of the above normal earlier maturation issues nor higher day-to-day mortality on the new batches that are currently in the farm. After a very challenging ramp-up and commissioning period of Phase 1 in 2021, We saw a reduction of overall cost per kilo compared to the same period in 2021, despite seeing price inflation for most of our key production inputs. This summer, our new filleting facility was completed, which ensures cost-efficient processing, higher yields and improved quality control. Since we started harvesting in the U.S. in September of 2020, we have delivered consistent price premium achievements on our premium fish. Risk mitigation strategies have been implemented to address key operational, systemic and diversification risks. Phase 2 construction is focused on optimizing quality and cost, not speed. Finally, we completed financing of the Phase 2 expansion through a $125 million private placement, combined with a $98 million in additional debt from BMD. The net biomass gain of the new batches in Q2 came in at 1240 tonnes, an increase of 300 tonnes compared to Q1 2022. So far in the third quarter, we have seen significant improvements in our key operational KPIs. First, we are seeing low maturation across all batches in the Blue House. Further, we are also registering low mortality across the farm, and considerably lower than in the first half of the year. We are currently feeding approximately 28 tons of feed per day, which is the equivalent of approximately 77% of our targeted daily feeding once phase 1 is in full steady state. Another milestone is that all our 19 RAT systems, both fresh and saltwater, are now stocked with fish for the first time. It's also worth noting that we have been operating the Miami facility for 17 months and counting, without any larger mortality events. To put that into perspective, it is the equivalent of operating one single RAS system for more than 20 years without incidents. As we have communicated earlier, we continue to expect to hit steady-state standing biomass early in the fourth quarter of this year. This means that we will have the necessary volume of fish to be able to reach our targeted biomass gain, as I will get back to on the next slide. The Q2 harvest volumes was about 400 tons hog. As pre-announced, we harvested quite low volumes in June as we were installing the new filleting line. In Q2 as whole, we had an average JAA index of 0.25 across the whole farm. We continued to take more tanks in use, which added more cubic meters of tank volume to distribute the biomass gain on. Right now, our standing biomass is approximately 3,500 tons, which is about 83% of the planned Phase 1 steady-state biomass. That means we will add another 20% of biomass to the farm. If we assume that we will have no further improvements from the actions we have taken, but simply keep the current growth rates, but assume that we have 20% more biomass on a fully stocked farm, that would yield a GA index of 0.42, or the equivalent of 8,500 tons of harvest annualized. Of course, our target is to continue the improvements over the next few weeks and months. so we can close the gap after the 9,500 tons budgeted. Seeing where we are tracking now makes us confident that we will be able to reach our budgets once the farm fully stops. I will give you some more details on that on the next slide. I would also like to point out that the tools we have to improve the JA index include both higher growth rates and higher standing biomass. The third quarter is going to be a ramp-up quarter as we get towards steady state. The Q4 biomass gain is expected to be in the range of 1,750 to 2,250 tons hogs. depending on our growth rates and FCR during the fourth quarter. The operational focus areas. On this slide, I would like to give you some more color on where we have identified room for improvement and a selection of initiatives that we expect will have a positive effect on growth rates and biomass gain. Number one is temperature. We are currently installing a new pre-cooling system for the intake water from the wells that will give more temperature stability than we have had in the past. Instead of sending 26 Celsius groundwater into our systems to be cooled locally in the systems, we will now be able to send 14 Celsius water from the wells directly into the systems. Second, lighting. Underwater lights is important for both growth and for mitigation of potential maturation. We have done a scrutiny evaluation of our farm and we have found that we can do better on lights. So we are now installing additional tank lights across the OG systems. Thirdly, nutrition. We have made some feed formula changes that will give positive effects on both appetite, growth, and product quality. Other than that, other focus areas are in processing. Our filleting line is operational, as mentioned before, but we are still doing fine-tuning in operations with a focus on yields, cost, and product quality improvements. Cost cutting, on that side, we have multiple opportunities identified. It's worth mentioning that in Denmark, we did experience significant reduction in OPEX costs once we achieved a stable operation for a period, and the tail of the commissioning-related costs eased off. Although we are battling cost inflation across the board on our consumables, We expect to see efficiency in the consumption of various production inputs going forward.

Okay, then we move over to the price achievement and our footprint. In June, we continue to see an improvement in average price achievement as we harvested out the last fish from the initial batches. For the last month of Q2, we achieved an all-in price of $8.8 per kilo. The price achievement for our superior 3 kilo plus fish was consistent around the $12 per kilo mark. Although we're entering a quite steep ramp up in weekly harvest volumes, and we'll have new programs rolling out over the next weeks and months, we expect a gradual increase in the average price achievement in the months ahead, as we see the effects of fish with less maturation. As we've stated before, the number of stores will also increase once we ramp up harvest this fall. Over to the key figures of the first half of 2022. Starting on the revenue side, the group had revenues of 9.7 million for the first six months of this year, compared to 10.9 million in the first six months of 2021. This resulted in an EBIT of negative $12.3 million, which is an improvement from negative $49.7 million in the same period the year before. This left us with an EBITDA of negative $5.7 million for the group versus negative $42.2 million for the same period last year. Looking at some adjustments to that EBITDA figure, if we were to add back depreciation and amortization of 6.6 million and the fair market value adjustment on our biological assets of 1.9, that would leave us with an EBITDA for the first six months adjusted of negative 7.6 million this year, compared to negative 47.2 for the same period last year. Finally, if we were to add back the insurance proceeds gain that we've booked in the first six months of this year of $25.3 million, that would leave us with a fully adjusted EBITDA of negative 32.9, which is an improvement versus the 47.2 negative that the group had for the first six months of 2021. Our total assets as of June 30th this year 363.4 million dollars, margin down from 392 million dollars at the same time last year. We invested on an accrual basis 33.6 million dollars for the first six months, mostly towards phase two. This is up from 21 million dollars in the same period last year when we were finalizing phase one construction and also doing the first initiatives on our Phase 2 CapEx projects. At the end of Q2 this year, the group had net interest-bearing debt of 41.4 million dollars. We had a negative interest-bearing debt of 37.2 million dollars for the same period last year, explained by the timing of the equity races in 2021 and 2022 For further details on the financial statements, refer to the full first half 2022 report. Then we'd also like to highlight some key takeaways from the P&L statement. Our harvest volume came in at the 1,217 tons, which is slightly below the first half 2021 volume of 1,275 tons. Note that this volume in the same period last year also included Denmark volumes. If you look at the US standalone, harvest volumes here were up by 68% year-over-year. An important effect to note is the $25.3 million gain on the other income that reflects the Denmark insurance proceeds that we secured in May. The successful insurance claim is treated as a reversal of the impairment that we took after the Denmark fire in September 2021. Looking at group costs in the first half of the year, the total expenses were down by $13.3 million year over year if we exclude the gain from the Denmark insurance settlement. This is despite harvesting a similar volume of fish. First, as we had no mortality events in 2022, we've also seen a significant reduction year over year in the mortality costs, which was $1.3 million this year, down by $6.2 million from 7.5 million in the first half of 2021. We also saw significant savings on the cost of renting temporary chillers as we were able to connect the chillers to electrical grid instead of relying on diesel and generators to keep the water in the Blue House cool. In line with guidance given earlier, this cost came in at $2.7 million, down from 7.4 million in the same period last year. We also booked the $8.2 million of indirect and unallocated production costs directly to the P&L to reflect underutilized capacity. This calculation is based on ceiling compared to the budgeted full phase 1 capacity. And as ceiling was up, the chart is slightly lower than the same period of heat. This accounting treatment ensures that the biomass value on the balance sheet is not inflated by taking more costs up front rather than at harvest. At the closing of the first half counts, we also elected to write down $1.4 million of the value of our frozen inventory. This warm-up cost is linked to our expectation that we'll get slightly lower price achievement when selling the rest of this inventory. Looking into the second half of 2022, we are also, as Johan already mentioned, experiencing price inflation across most of our key production inputs from feed to labour, chemicals, oxygen and electricity. For most of these production inputs, we are price takers, which limits our ability to negotiate unitary costs. Therefore, our primary focus is to become as efficient as possible in the volume we require of each of those inputs. For example, the Q2 2022 feed price was 2.3 dollars per kilo of oil, including 30 cents that we pay for transportation to get the seed here to our Miami facility. These 30 cents highlight why it's so advantageous for us to get the new scraping seed plant constructed on site, as it will lead to immediate cost savings. Looking at seed prices in Q3, these are marginally up from the Q2 level. Another example of a large production input where unitary prices are increasing significantly is chemicals that we use to maintain key water quality parameters. In the first six months of 2022, we spent a total of $3 million on chemicals. Due to both an increase in unitary costs and an increase in consumption as we we think most of the production costs are going to be quite stable on an absolute level from the first half to the second half of 2022, except chemicals and feed that will come up driven by higher volumes. So despite inflationary pressure on our cost base, we're still pleased to see that we've achieved significant cost per kilo savings across the board compared to last year. Over to phase two, CapEx. When it comes to the basic capex, there is no significant news since the update that was given as part of the private placement on the 28th of June. At the end of June, we had invested approximately $17 million in the Phase 2 project. As we discussed back then, we have been experiencing significant inflationary pressure on the capex presence, which is why our budget was adjusted up to $275-300 million. The focus of the engineering team remains on value engineering and working with our contractors to optimize costs and quality for outstanding Phase 2 CapEx items, even though that might mean that the project completion date is pushed out in time. Currently, we are estimating completion in the first half of 2024, but we repeat that this is still subject to change. On the photo on this slide, you might be able to see some progress on the Phase 2 CapEx In addition, the new Chile building for Phase 1 and 2, which is not visible on this photo, has also been erected since the end of June. Then, I'll give the word back to Johan for a summary and a few forward-looking statements.

Thank you, Carl. So, in conclusion, we have seen solid improvements in the feeling so far in the quarter, and we expect further improvements as Phase 1 now finally transitions into what we call steady state later this year. The expected harvest in the second half of the year is in the range of 800,000 to 1 million individuals. The harvest volumes in kilos will depend on the average harvest rate, which is primarily driven by how quickly we get the feeding up to the steady state target. But I assume that it will be in the 2,300 to 3,000 tons range for the half of the year. Out of that, approximately two-thirds of the fish will be harvested in the fourth quarter. In Denmark, we have started a strategic review on the future of Videsande and the site over there. There are some remaining assets there that have a value for multiple purposes. On phase two, value engineering is ongoing. We are working diligently with our engineers and contractors to optimize cost and quality for what we believe will be an outstanding phase two facility. On the off-take side, we expect to bring online additional programs and customers as harvest volumes increase significantly. significantly and we expect the achieved sales prices to gradually increase over the months to come. Even though we have a lot of inflationary pressure and recession going on in the U.S., the U.S. salmon market stays strong and we think at least the long term that we will see a continuous outperformance in the U.S. market versus other markets. So with that we will then go over to the Q&A section, and then, yeah, Karl, you can take over.

Perfect. Let's do it. And just to repeat, we take a question through the Q&A tab that you can see here in the Teams Live window, and as always, we kindly ask you to state your name, and then you type your question. So, moving over to the first two questions that come from Alex Ochner at DVMarkets. And the first one is how are you able to pre-cool and what cost does this add? And I assume it's referring to Johan's comments on temperature and the initiative we're doing on the chiller step.

Sure. Well, what we do is that we relocate all the chillers that are scattered around the property because we are now doing the cooling inside each system, inside each RAS. So instead of doing that, we're moving those chillers over to a centralized pad. We're connecting this together in a series of chillers. And we are basically replacing the cooling we do inside the RAS systems to a pre-cooling of the incoming water. So it's not going to add power consumption at all. As a matter of fact, we are able to send home some of the chillers that we have because they have too high capacity for the heat exchangers that they are hooked into so it will not drive costs if anything it might reduce cost and it will increase the stability significantly inside the facility thank you

The next question is on cost of goods sold. Can you break down the cost of the fish, $17.5 million? What is variable and what is fixed so that we can model costs when volumes ramp up going forward? As a first comment to that question, the cost of goods sold is obviously what we've had on the balance sheet and what gets expensed at the time of harvest of the fish. So in part, it's historical cost of production. If I take that number first, it's uh other than 17.5 would argue that the real variable cost in that number is heat and then i'd say that the heat probably makes out seven out of those seven point five uh 17.5 million dollars in that number for for that period what's also very important to keep in mind is that we also took the charge of 8.2 million dollars for underutilized fancy batteries These are basically other real production costs that we've incurred that have not been allocated to the balance sheet. If you want to try to get an overview of what are the fixed costs of producing the fish, then you should take both into account the cost number, that's of course the feed, the true variable, but also the true costs that lie in the underutilized capacity expense of $8.2 million. Next question comes from . Should we assume that the J index of 0.42 in phase one will be sufficient to draw from the phase two terminal? Would you assume first harvest in phase two in 2025? I can start with the first part of the question that addresses the terminal. Basically what everyone was sharing during the presentation, 0.42 with the fully stocked farm would yield approximately 8,500 tons of production. And depending, of course, on your assumptions in your models and what you assume on price achievement, that is probably going to get you pretty much into that number. So, of course, it depends on how aggressive one is on estimates. So we think that that's definitely a level where we can achieve that. But of course, as Jan pointed out, our target is to continue the positive trend we've seen over the last weeks and also see better growth rates going forward so that we can exceed the 8,500 tons. And then, Jan, would you like to comment on when we expect first harvest of phase 2 volumes?

Yes, sure. So we are still... Even though I don't want to commit to it because we, as we spoke about earlier, we are focusing on cost and quality on phase two rather than speed. So we will not do construction if we don't like the numbers that we're getting from the suppliers. And we actually start to see some improvements here on the cost of inflation easing off a little bit. So I'm relatively optimistic that things are about to change for the better. But we are still planning to be ready to stock the first fish into the Phase 2 facility sometime in the first half of 2024. So with that said, yeah, I think you can, for planning purposes, assume that we will start to see the first harvest volumes in Phase 2 in 2025.

Thank you. In addition to temperature pre-filling that Johan already mentioned, where have you identified cost-cut opportunities? If you want, I can start and then you can fill in. I think we can group our cost-cutting opportunities into one that we can absolutely influence, which is how much do we use of different consumables. Here on this side, I think chemicals is one where we see opportunities to be more efficient in the way we use it. Similarly, we also see opportunities to get down the volume of oxygen we consume to offset some of those price increases that we've seen. And then over to those pricing, which is the other side of the equation. Obviously, as we talked about, a lot of the different production inputs that we have in our Blue House are global commodities, where we do not have a very visibility to impact the price and little negotiation power so obviously the biggest costs cutting opportunities would be if those were to reverse down towards levels as we saw at the start of the year and but at least for our own budgeting and planning purposes we assume that the unitary cost we're seeing now is what we'll have to face going forward so the focus remains on how we can get more efficient in the way we produce fish

Yeah, I can also add that some of these cost saving opportunities also depends on when, because as Carl mentioned, chemicals has sailed up to be one of the largest OPEX costs we have. That can be reduced by the efficiency in how we consume it, like the dilution of the caustic before it goes into the systems, for example. But you also have opportunities down the road to start manufacturing and producing some of these key consumables on site. As we mentioned earlier, we are planning to, for example, on the oxygen side, to produce our own oxygen on site already from phase two. And the same thing goes for cost take down the road, that you can produce this locally and significantly reduce the cost. I also want to add that we have had a tale of a lot of mechanical repairs and fixes after the phase one commissioning. that we expect to see starting to ease off. We have used a lot of external contractors for cleaning and fixes here, and that is starting to ease off. So there's a lot of line items where we see opportunities to save costs over time. It's not going to happen overnight, but I expect it to be a tale there you see a gradual reduction in multiple of these line items on the OPEC side.

Our next quick question comes from Nils Thomas, a journalist. When you refer to phase two completion in the first half of 24, does that refer to first relief of smolt? And yes, that is what we are referring to. Going on to the next question, which is from Alex Jones in Bank of America. How long do you expect it to take for growth rates to improve to the budget level?

Yeah, I mean... One way of looking at this is that we are, as we shared earlier, we're feeding approximately 28 tons of feed in the farm, as we speak, and that has to go up to 36, 37 tons a day, depending on what we assume on FCR. So we're not that far away in considering that we still have to build another 700 tons of biomass that alone should eat five to six tons, just incremental biomass. So I expect this to gradually happen. Once the improvement on the diet kicks in, once we get all the tank lights installed, once we get the temperature more stabilized, it's a sum of small factors here that is going to take us there. And we're not that far away. This is fine-tuning. This is not fixed with a sledgehammer hammer, but with a screwdriver. So it's You're very excited for the future here.

Next question is from Dan Kim. Can you give us more context on how much cost efficiencies were achieved in Denmark as a broad reference to the potential in Florida? And here I'll also start, and then Jan, please feel free to fill in. When we commissioned phase two in Denmark, which was, of course, a big wrap-up there, we saw that initially, once we took the system into operation, we had high costs. One very good example was the maintenance costs that we had and took over the P&L, where we saw very large numbers. Once we had operated the farm for more than a year and really were in stable operations, had done all that fine-tuning with the screwdriver, as Johan was referring to, we saw that, for example, maintenance costs came down to a sixth of what it was the previous period. Similarly, we saw improvements also in the use of unitary costs, such as oxygen, such as more industrial heating, such as the use of chemicals, because we think we were able to fine-tune and make sure that we were not wasting or over-utilizing production inputs. So I think that is the type of development that we are also expecting here in Miami. The final question that we have on the list for now is from Alex Jones from Bank of America again. You mentioned the Danish assets have some value in multiple purposes. Can you elaborate a bit on what is left and what they could be used for? To start with the technical answer to that question, in Denmark, of course, the main a bit of infrastructure. For example, free treatment of intake water and large infrastructure to gather all the water in and out from the North Sea for the production. In addition, the site, of course, has large infrastructure for power, has a few pieces here and there of tanks, etc., that definitely still have value. And maybe just as important, the range facility has a long list of permits and also a very good land lease that makes this an attractive asset for the right buyer. Johan, I know if you want to share some more thoughts on strategy going forward and what work will be happening when you consider that much?

No, I mean, obviously, aside from what you said, we still need to clean up the site. all the remaining of the buildings are still there. We will initiate that as soon as we are given the green light to do so. And we don't expect that to cost any money, any meaningful money, because the value of the steel that is there is almost equal to the cost of removing it. Yeah, but aside from that, I think you summed it nicely up. I just want to add that all the permits we have there has a value. It's almost impossible to get permits for aquaculture in Denmark anymore. So for the right operator, I'm sure this is something that might be interesting.

Thank you so much. I'll give you a few more seconds just in case there is a last question that comes in before I'll... Give a word back to Johan for a final remark. It does look like we've been through the full list of questions. So thanks everyone for joining the update. And maybe you want to... Sure.

Yeah, I just want to say that we are on the verge now of... Finally, making land-based salmon farming profitable. We are that close. And for me personally, I've been working on this for 10 years, and I finally see my vision coming true. Now we have two circles of feed coming in every day. We have two circles of fish going out. A fully stocked farm. And everyone in the house here is exciting. So it's fun to be a fish farmer, finally. Thank you, everyone.