Atlantic Sapphire ASA (OTCQX:AASZF) Q2 2024 Earnings Conference Call August 20, 2024 11:00 AM ET
Company Participants
Gunnar Aasbo-Skinderhaug – Chief Financial Officer
Pedro Courard – Chief Executive Officer
Gunnar Aasbo-Skinderhaug
Good morning, America. Good afternoon, Europe. Good evening, Asia. Welcome to the Atlantic Sapphire First Half 2024 Report. My name is Gunnar Skinderhaug. I’m the CFO of the company. Together with me, I have Pedro Courard, who’s the CEO of the company.
Pedro will start with an operational update. I will continue with a financial update and then Pedro will finish off with some closing remarks.
So, Pedro, over to you.
Pedro Courard
Thank you, Gunnar. Hello, everybody. As mentioned by Gunnar, I will start making the operational update and then I will give the word to my colleague.
Okay. Moving to the company highlights. Main highlights are as follows. Starting by the normal statement said in previous presentations, the combination of our permits and licenses together with the closeness to a huge market should give the company all the competitive advantages required to become a unique supplier in the United States.
We have stabilized our production, which in this kind of business is key. That means we are starting a period where we plan to achieve the full utilization of Phase 1 while we prepare the next step by finishing the Phase 2 decision process. Our plan, together with better size of fish as well as consistent production, is to increase our prices and, at the same time, optimize the operation in term of performance and cost.
Once Phase 2 is in fully operation, we estimate an EBITDA generation above $100 million considering a margin of $5 per kilo HOG. The process will be performed by the combination of the competence of the existing team with the new management focused in adding value and fulfilling committed plans. We have defined a company business plan divided basically in three stages.
Stage 1, called proof-of-concept, will have as an output the proof that the farm can raise fish at all the required characteristic to be sold at a premium price in the American market in stable farming and biological conditions. This stage is expected to be realized by the end of 2024.
Stage 2, called resiliency and efficiency, running in parallel with Stage 1, will be the step to optimize Phase 1 by fixing main bottlenecks that are currently limiting our production capacity as well as our feed conversion rate. The final outlook of the stage should be deemed cash positive by the end of 2025. And Stage 3 called Phase 2 investment decision correspond to Phase 2 investment decision.
We plan to finish all the design and the engineering by the end of first quarter 2025, allowing us to have the final CapEx that will permit to make the final decision. In terms of biological development during first half of the year, from one side, we had the consequences of maturation events in summer 2023 due to high water farming temperatures.
This situation produced bad quality fish, both in terms of color and average size, affecting sales price. On the other hand, and due to operational improvements done by the end of 2023, mortality during the first half was very low, even much lower than traditional farming industry.
Being a very positive aspect, low mortality result in a bigger stock of fish that was not possible to feed well with current feeding capacities, forcing us to make elimination or early harvest of very small fish, having also, as consequence, lower prices.
However, and is it possible to see in the graph, all this process ended with current very good picture in term of biomass distribution, where for the first time in the history of the company, more than 30% of the fish is about 2.5 kilos, showing a very good perspective.
In term of harvest, during first half, we harvest 2,400 tons HOG of fish, which is a record, and a much higher volume compared to same period in 2023.We expect a similar level of harvest for second half, but at much better harvest average weight and better prices, especially during last quarter.
As part of the Stage 1, the change done in the second half of 2023 like the installation of new chillers to avoid future maturation, the elimination of different bottlenecks, the implementation of new protocols, and the change of our technical service from a reactive maintenance to preventive one has allowing us to stabilize water quality, producing a drastic drop to normal water temperature level as well as very low mortality.
Low mortality in a RAS operation is one of the main indicator of good farming conditions, which is, without no doubts, the main challenge in a land based operation. This graph is probably the best way to show difference in performance for different group of fish. The graph shows the evolution of average weight for different groups for the same farming periods.
As reference, we have light blue line that correspond to the Denmar curve and in dark blue our current growing model. Then we have in red line our historical batches and in green current batches from 28 to batch 34. As it is possible to see, new generations are coming with much better performance, not only compared to previous batches, but also compared to our model.
The impact of that, especially in batches 28 and 34, will be a better tank volume utilization of the farm, an increase of the superior share product, and final, an improvement of cost and the reduction of RAS load. What do we understand of proof-of-concept? For us and that’s very important, proof-of-concept will be a stable production in many aspects.
First, we consider four consecutive weeks of average weight above or equal to 3 kilos HOG, a biological feed conversion rate below 1.3 for harvest fish and at least 80% of harvest in superior grade. We will need to have stable farm operations for 12 months, that means monthly average water temperature below 14 degrees for our on-growing phase and monthly mortalities below 1% per month.
In land-based, one of the production restrictions is the feeding capacity, which is directly linked to the capacity of the system to keep good water quality. Since Q4 2023 to-date, feeding rate has been constantly increasing through the elimination of part of existing bottlenecks.
In this stage, from November 2024 onwards, we are planning to make improvements to increase the water quality and, in consequence, increase gradually our feeding capacity to reach, by the end of 2025, an estimated annualized harvest volume of 8,000 tons HOG defined as a breaking point to move to cash positive.
To increase our feeding capacity, we will need to do some investment. First, oxygen and ozone distribution system. Second, water flow improvements. And third, the degasser and skimmer capacity. The combination of these three investments is what we are thinking will help us to move from 23 tons per day of feeding to 33 tons per day of feeding.
Also, we plan to invest in a new water well to serve both Phase 1 and Phase 2. We are now working in the final step of Phase 2. Phase 2 design is considering all the improvement and the lesson learned from Phase 1. After we finish the engineering and the design of Phase 2, we will start with the tender process in order to have the final investment required for this important step.
Now I will give the word to Gunnar, who will explain the financial update. Gunnar, thank you.
Gunnar Aasbo-Skinderhaug
Thank you, Pedro. The company is in a bit of a paradox, with good biological performance, stable growth, increasing fish weight, stable conditions, while the financial situation is a very challenging one.
For the first half of 2024, the main negative deviation from plan has been that the fish has been smaller than estimated, partly because the facility has a capacity limitation and partly because we’ve had too many fish compared to the feeding capacity. The sales price in the first half has been low and lower than expected.
In the first quarter, we harvested fish with early maturation issues due to prior high temperatures. The growth of the fish was slow and the price achievement was low. In the second quarter, we harvested mainly fish of small size with sales price far lower than expected.
The lower sales price have given lower revenue and thus lower cash flow from operation. This is the main negative deviation compared to earlier plans. In addition, the low average fish weight has reduced access to revolving credit facility with DNB under the borrowing base as smaller fish gives significantly lower borrowing base.
We have taken measures to improve the situation, both short-term to reduce the number of fish affecting harvest weights in the summer of 2024, then midterm to improve the capacity of the farm by removing bottlenecks.
This require both capital for CapEx items and operational active activities as we have realistic plans to build up the feeding capacity. Hence, the company needs additional capital, which I will come back to.
We had a harvest volume of 2,395 tons in the first half of 2024 and a revenue of $11 million. Revenue is higher than last year despite small fish size and low sales price of $4.6 per kilogram. However, on premium fish, we had consistent price achievement, although very low share of premium fish during the quarter last quarters.
EBITDA of negative $40 million and also lower than the same period last year despite production cost is lower this year. However, the EBITDA per kilogram with a sales price of $4.60 per kilogram is negative and thus increased production explains the negative development of EBITDA compared to last year.
EBIT is negative $48 million and with $4 million in net financial cost, we have a net loss of $52 million for the first half of 2024. Total assets is $328 million. Net interest bearing debt is $23 million and the equity ratio is 80%. Revenue is higher than last year, as mentioned, driven by the higher sales volume and offset by low sales price per kilogram.
Cost of goods sold is close to $20 per kilogram, still affected by low production volume in the facility and poor FCR, especially on mature fish. However, cost of goods sold is around half the level it was the same period last year.
Salary, personnel cost, and SG&A cost is affected by the litigation cost related to the aftermath of Phase 1 construction, change of management, and employee share option program as well as provision for bad debt and higher cost of property insurance.
With regards to the balance sheet, cash balance is $10 million plus an additional $15 million in restricted cash. We have CapEx of $6 million in the first half mostly tied to Phase 2 preparations, but the total capitalized cost is $130 million at the end of June.
On the debt side, we have drawn $6 million on the revolving credit facility with DNB and have $11.4 million undrawn on the facility. Long-term debt is $41 million and the Phase 2 loan of $100 million is undrawn and we are canceling this loan in order to reduce the commitment fees to the bank going forward.
With regards to the segments in the company, all attention is now on the US operation. We are considering to divest the remaining Danish assets. For the first half, both Q1 and Q2, we have realized good prices on Bluehouse Premium products. However, the share of those products have been low.
The average sales price has been around $4.6 per kilogram in the first half and was driven, as mentioned, by harvesting of mature fish and small fish, both neither qualifying for premium market prices. Our ambitions are unchanged. Harvest size will increase with the measures taken and we are targeting $12 per kilogram on average for the volume from the current facility under stable conditions when production is ramped up.
As Pedro already has mentioned, we have strong focus on continuing developing Atlantic Sapphire. The most significant development is the completion of Phase 2, which is a very different facility than the current Phase 1 facility.
Design is based on all the knowledge we have gained in Phase 1 over the last six years and also with extensive use of vendor experience and enrollments. Phase 2 will enable a potential also in Phase 1 in addition to adding total capacity to Atlantic Sapphire production.
The company has not performed any pricing activity, so we are basing the estimates for completion of Phase 2 on prior estimates. However, we acknowledge that there has been significant inflation and there’s also been some changes in design.
We estimate the total CapEx for Phase 2 completion to be between $350 million and $400 million of which $113 million are already invested. There are significant economies of scale effects for the operations here in Miami.
Phase 1 alone is expected to give an EBITDA of between $10 million and $20 million annually at scale. Phase 1 and 2 combined is expected to give an EBITDA of $125 million when fully ramped up per year.
For the following quarters, we will develop a new well for Phase 2 and continue engineering, pricing and together with providing proof-of-concept from Phase 1 work on financing for Phase 2.
For financing, we have a capital need of $94 million to get to a cash positive Phase 1. Included in those numbers is $11 million for development of the Phase 2 well, as Pedro mentioned.
Beyond that, we are investing $25 million into Phase 1 improvements and debottlenecking items. And we are increasing the working capital with $19 million through buildup of biomass and accounts receivables.
Operational costs are $29 million, net and finance cost, and general company first purposes are $10 million. The capital will be covered by three main sources.
Number one, existing debt facility with DNB will be amended with no installments over the next 18 months. Reduction of restricted cash of $5 million and the cancellation of the commitment of Phase 2 loan which gives a lower commitment fee.
Two, subscription rights issue of up to $60 million which is fully underwritten by a list of guarantors. The subscription price will be NOK0.10 per share, and shareholders will be given warrants to subscribe for their shares. Three, convertible loan of minimum $20 million directed at to investors.
With a six year tenure, a 8% cash interest or 10% peak interest at the company’s decision. The combination of rights issue and convertible loan will be $80 million. Then there will be warrants issued for the participants in the capital raise, which will be available to be used for the future Phase 2 expansion funding.
Guarantors and subscribers from this round will be given warrants to subscribe for shares under certain conditions in the future Phase 2 financing round. And for further complete information on this, please see separate message published on the NewsWeb.
And I’ll pass on the words to Pedro who will do a closing statement.
Pedro Courard
After probably longer challenging period than expect, Atlantic Sapphire is embarking now on a new chapter of its history. As we have present, since October 2023, the most important productive parameters like biomass gain, feed conversion ratio, and mortality were stabilized.
We have prepared the farm to progressively increase its standing biomass and output and project to start harvesting with premium commercial pricing from October onwards this year proving the feasibility of the business plan, at least from technical perspectives.
While this proof-of-concept is achieved, we will start additional investment that will allow us to increase our production from the current annualized level of 5,000 tons HOG to 8,000 tons HOG by the end of 2,125, production level that is required to reach cash flow positive operations.
In addition, we plan to finalize the design and engineering for Phase 2 in the first quarter of 2025. Once Phase 2 is fully implemented, Atlantic Sapphire should reach a very healthy profitability, compensating the shareholders that have had the courage to invest in the most advanced plant-based company and in a technology that will probably be the future of the salmon industry in the world.
When Atlantic Sapphire was created, one of the drivers to justify the project was that production salmon in the largest market in the world would have advantages in term of cost by eliminating air freight from Norway and Chile as well as a fresher product, thanks to the proximity to the end consumer.
To these two drivers that still fully apply, an additional one, probably more powerful, has emerged during the last 10 years. The projected production limitation from traditional salmon farming is here. For those of us who come from the traditional salmon farming industry, it’s not a secret that every single year producing in sea farms seems to be more complex with a sustained increase of cost.
Reason behind this new scenario can be attributed to climate change, sanitary challenges, but also to political pressures and regulations coming from the authorities, environmental NGOs, and other agencies. While the demand for an amazing protein like salmon continues to increase, the supply will continue to be limited, opening the door for future production technologies, land-based being the most advanced one and Atlantic Sapphire being the most prominent project of the planet.
Currently, Atlantic Sapphire has all the required component to fill part of the gap between supply and the band of salmon. The experience gained at a very higher cost is today probably one of the main assets and consists not only of specific production practices, but also a fully committed and very competent human capital.
The appointment of new professional to the management team with experience in the aquaculture industry will permit complementing current capacity for future steps. Our vision of the future is a realistic one.
Despite being full of ambitions, we are pragmatic, and we know we will need to commit the best of ourselves to recover the market’s confidence.
We have a big task in front of us, but we are convinced that by strengthening what has been done well, avoiding what has been done bad, and continuing to look at the future with an innovative view, we will achieve what we all of us are looking forward to.
Thank you, everyone, and I give the final word to Gunnar.
Gunnar Aasbo-Skinderhaug
Thank you very much for attending the presentation. We will not take Q&A here in this session, but you’re welcome to reach out to investor relations at atlanticsapphire.com for investor question or atlanticsapphire@brightredagency.com for press questions. Thank you.
Pedro Courard
Thank you.
Question-and-Answer Session
End of Q&A