Atlantic Sapphire ASA (OTCQX:AASZF) 2021 ESG and Annual Report Earnings Conference Call April 21, 2022 11:00 AM ET
Company Participants
Johan Andreassen – Chairman, Co-Founder and Chief Executive Officer
Karl Øyehaug – Chief Financing Officer and Managing Director
Conference Call Participants
Johan Andreassen
Good morning and good afternoon everyone and welcome to the Investor Call in conjunction with the release of Atlantic Sapphire’s 2021 ESG and Annual Report. My name is Johan Andreassen, and with me today to present is Karl Øyehaug. As we are reporting monthly on the operational development in the company, we will keep this presentation short and is focused solely on the annual and ESG report. The next monthly update will be in the beginning of May. The report is, in my view, a great piece of work that our team has spent months on preparing, and I encourage everyone that loves Atlantic Sapphire and is interested in land-based salmon farming to read it.
Karl Øyehaug
Hello, everyone. This is Karl Øyehaug. We will go through the highlights of the report and open up for a Q&A at the end of the presentation in the same fashion as we do it with our monthly updates. You can ask your question in the Q&A tab. And as with the monthly updates, we will also only take questions if the person asking has identified him or herself, so please add your name. Thanks. Johan?
Johan Andreassen
Yes. Before our CFO takes you through the highlights of the numbers, we wanted to take the opportunity to highlight our ESG report. In Atlantic Sapphire, we see sustainability as an integrated part of our business and also work to always improve our reporting and transparency. Following a material assessment, we have identified four key areas that we believe are the most important to Atlantic Sapphire and its stakeholders. Our ESG report is structured along these four categories: product responsibility, economic responsibility, environmental responsibility and social responsibility.
Looking at our updated materiality metrics on this slide, we have this year elevated fish health to the top right quadrant. This is because we believe that the events of 2021 have increased the importance and impact of fish health and fish safety on our own internal decision-making and on our stakeholders’ assessment of our company and last but not least on the profitability of the business. First, we are focused on lowering our salmon fields’ impact on the ocean. To Atlantic Sapphire, one of our most important sustainability challenges is that the industry today still relies on a limited resource, which is marine ingredients, to feed the fish. Our ambition is to lead the transition of the industry into the ocean – sorry, out of the ocean.
Last year, 25% of the fish oil in our fields were replaced with domestic land produced algae oil, naturally rich of Omega-3s. This has taken our marine-derived ingredients factor FFIF down to under 0.75 and makes us a net marine protein producer, and also taking the FCR into account.
Further reducing freshwater consumption is important as freshwater is becoming a scarce resource in many places and focus on preserving fresh drinking water is just going to increase in the years to come. In 2021, approximately 95% of water used was saline water from the Floridan Aquifer. And we see a room to reduce the freshwater consumption even further in the future by amongst other things to use brackish water for some of our current freshwater consumptions.
The next point is recyclable packaging. In 2021, we achieved to a 50% reduction in the Styrofoam, thanks to compostable and recyclable shipping boxes being introduced. And this is something that we have a better opportunity achieving than suppliers that rely on air freight. As in air freight, you have to use Styrofoam.
Then another very interesting bullet point here is carbon sequestration identified. One very exciting piece is that thanks to our unique Bluehouse water chemistry in combination with our injection well into the Boulder Zone, we have been able to quantify the large amounts of CO2 that we are capturing in the water and later disposing safely into the ground.
Once Phase 1 and Phase 2 are brought into operation, we estimate that we will inject approximately 120 tons of CO2 per day, which of course comes on top of the significant reduction in carbon footprint of not having to fly the fish with airplanes to reach the customer.
Circular economy, last year a 100% of our by-products from fileting was sold as pet food ingredients. We have even greater ambitions for the future, and we hope to also be able to turn our byproducts into value-added products for human consumption.
Our fish is not only delicious, it’s also very healthy protein. In 2021, we were granted the American Heart Association’s Heart-Check certification.
And then last, local job creation. Finally, we are proud of all our employees as of December 31 last year, the company had 166 full-time employees. And of course, many times that working together with us on the construction and supplier side, summing up to several thousands of local jobs impacted. Karl?
Karl Øyehaug
Thank you, Johan. So over to the financials, starting with the consolidated group P&L, Atlantic Sapphire had revenues of $16.9 million in 2021, up 170% from $6.3 million in 2020. The increase in revenue is naturally linked to the ramp up of harvest volumes here in U.S. The group harvest volumes increased by 140% year-over-year to 2,374 tons in 2021. At the year-end 2021, we recognized an impairment of $34.8 million linked to the loss of the Danish growth systems in the fire last year. Although, we at December 31st believed that the insurance claim was very probable. We took the conservative accounting approach because no settlement had yet been reached and the police report had not yet been concluded at that point.
However, we continued to expect to recover the book value of the Danish facility, less the value of the assets that were undamaged by the fire. Therefore, we’ll reverse the impairment by recognizing a gain in the P&L, with the insurance claim once that is concluded. So if one adjusts for the Denmark impairment, the group EBITDA in 2021 would have been negative $82.4 million.
The group had a cost of materials in 2021 of $65.6 million, up from $18.2 million the proceeding year, reflecting the ramp up in farming activity in the U.S. included in that figure is $16.6 million of indirect production costs for underutilized capacity, rather than these costs being booked in the balance sheet. To explain the accounting behind this, direct production costs are allocated fully to production costs and capitalized on the balance sheet. Indirect production costs which consists of personnel costs, depreciation and other overhead costs are allocated based on a ratio of actual versus designed feed capacity per system that approximates normal capacity under the IIS to accounting principle.
This means that underutilized portions of indirect production costs due to underutilized Bluehouse production capacity are recognized as cost of materials in the same period as they are incurred. Other operating expenses in 2021 were up from $11 million in 2020 to $24.6 million in 2021.
The increase is mainly explained by the $11 million in temporary chiller and generator rental costs in the U.S. following the breakdown of the chiller plant the so-called PEC in Q1 2021. As we’ve discussed in the past $10 million insurance claim process is ongoing to recover these incremental costs due to the chiller plant breakdown. Looking into 2022, we expect approximately $5 million in chiller rental costs quite even the distributed between the first and second half of 2022.
Over to the balance sheet, the group ended 2021 with total assets of $312 million. The largest figure on the balance sheet is property plant and equipment of $264.4 million. Despite large investments in 2021, the PP&E line was only up by $7 million as the full impairment of $34.8 million for Denmark is reflected here in this line as discussed on the last slide.
Total 2021 CapEx was $57.5 million mostly tied to U.S. Phase 1 construction. Other than the U.S. Phase 2, we also invested $9 million in U.S. Phase 1 CapEx in the start of the year and in total $2 million in Denmark. Atlantic Sapphire ended the year with the $17 million of cash on the books with $50 million of drawn term that at the end of the year. The net interest bearing debt of the group as of December 31 was $33 million. Positively and as expected, we did book $1.1 million gain on our COVID-19 related CARES Act, PPP loan, which was forgiven in September of 2021. On the working capital and liquidity side, the full $20 million RCF facility was undrawn as of yearend.
Jumping to the next slide, here we’ve split up for a segment. Here you’ll see that the gravity of the company’s operations has completely shifted to the U.S. If one excludes Denmark, the U.S. company reported a standalone EBITDA for 2021 of negative $71 million. This result reflects both the one of events in the first half of 2021, but also that the U.S. company was in ramp up mode incurring all fixed costs while still building up buy and mass to get to Phase 1 steady state production in Q3 of this year. You’ll also note that with the U.S. Phase 1 in operation, the company started depreciating the U.S. infrastructure in 2021 by a total of $12 million.
The last slide on the financial side that we’ve included this time is what we call our fixed costs based walk.
On the next slide, we will then look at more of the underlying costs in 2021. 2021 was the first year with close to full production as more and more of our ongoing systems were brought online. If one adjusts for one of costs in the year, it allows us to identify an underlying fixed costs of the business and also calculate what the production cost per kilo would’ve been at steady state production volumes.
In a simplified world, we like to say that salmon feed is the main variable cost of operating facility like this. The variable feed cost that comes on top of the fixed cost base is calculated by taking the biomass gain for the period in round living weight, move to play in that number with the feed conversion ratio, and lastly, multiplying with the feed price.
The table on the right side of the slide takes the total expenses we recorded in the U.S. in 2021 on an EBITDA level, and then just south the extraordinary cost, tighter rental of external chillers and extraordinary mortality that we incurred in the first half of the year.
If we also remove the actual feed cost in 2021 of $13.1 million, you’re less with what we call our 2021 fixed cash cost base. So as an example, if we assume, we have the exact same base with no cost improvements and the produce steady state volumes in the U.S. Phase 1 facility of 9,500 tons, then your total cost of production would be the $53 million plus the feed cost of 11,000 tons around living weights of production multiplied by 1.2 in FCR. And that multiplied by approximately $2 per kilo in feed cost.
This example would get you to approximately $79 million in total costs or what you can call a cost per kilo of the around $7.2 per kilo around living weight, which is approximately $8.6 per kilo head on getted. However, we see large room for improving on the fixed cost side. First, we see significant economies of scale with Phase 2 coming online. Overhead costs excluding the current temporary chiller rental costs should only increase marginally with the additional 15,000 tons.
There will be economies of scale across the shared services and infrastructure that both Phase 1 and 2 will benefit from, for example, on the maintenance fresh water and processing side. The design of Phase 2 includes some clever learnings that ensure an easier to operate farm that should reduce both labor and maintenance costs.
Naturally, operational cost reductions are expected under stable conditions. This is exactly what we saw in Denmark as well, where costs initially were quite high, but then quickly fell as the systems got fine tuned and things started working reliably. Numerous cost saving opportunities have been identified all across the USA on Bluehouse. Some will take longer time than others to leverage. So I’d expect a gradual cost reduction over time. Finally, we expect lower processing costs, better yields and more consistent quality grading when our new in-house filleting line comes online this summer. So in conclusion, we are already seeing that even the cost base from a challenging 2021 supports profitability, once we reach Phase 1 steady state production.
With that, Johan back to you.
Johan Andreassen
Thanks, Karl. So in summary the key operational focus for 2021 was centered around keeping the fish safe and sound. Our risk for mortality events is now significantly reduced both in size and frequency. In the year all the growout systems in the farm will split in two, which is limiting intoxication mortalities risks from a six tank to a three tank size. And it’s leading us with 12 independent salt water growout systems in the Bluehouse. Then, all the center drains were modified throughout the facility, reducing the risk when we have initial smaller mortality that potentially could disrupt the flow on new water into the tanks. And hence, by doing that, we avoid subsequent larger events, which the small mortality we had in March is a good example.
Key water quality parameters were adjusted through a thorough vetting process, which is significantly reducing the H2S toxicity risk and in addition to that reducing the CO2 levels drastically in our water, which has also proven to be very beneficial for fish welfare.
We have had a severe organizational restructuring with significantly higher amount of staffing outside regular working hours, as well as having dedicated staffing, owning their own systems, which both drives healing of ownership and it drives accountability. In 2021, we also established the Facilities Operation Advisory Board, which is evaluating and vetting activities that are outside standard operating protocols, reducing the risk of human error. We had an advanced build-out and fine tuning of our automation systems, including operational dashboards, giving us valuable data on both snapshots and trends, which we leverage for better decision making, both to reduce risk as well as increase in productivity.
All in all, I want to summarize that we have done significant operational improvements that in some have dramatically reduced the risk of large events as well as put us in a place where we can more quickly react. The amount of learning in the company is like a hockey stick.
That said, I want to emphasize that in biological production, you can never completely eliminate risk of fish loss and events. Our job is to get as close to elimination as possible.
With that said, we will move over to the Q&A session. Karl?
Question-and-Answer Session
A – Karl Øyehaug
Perfect. Thank you. So to recap, we’re open up for questions in the Q&A tab. And I can see that we already have two questions. So we’ll start there, but feel free to add additional ones.
The first question comes from John D. Karuna, who is asking when do you anticipate breaking even? And I can answer that question.
We have already communicated on this previously that once we reach our Phase 1 steady state, that will also bring with it breakeven production. And we expect to be at that steady state production level sometime in Q3 of this year, so only months away.
The next question comes from Nils Thommesen. His question is, if we can provide an update on pockets of liquidity at the end of 2021 and the status of those now. I can also give that one a shot.
So the recap, other than cash on the balance sheet, the Atlantic Sapphire has a $200 million debt package that consists of different parts. The first part is the $50 million that already is drawn and on the balance sheet. The second is the $20 million RCF that is further committed and available to the company. The third part is $32 million of undrawn available term debt that is committed by DNB and Farm Credit. And the last part is an uncommitted $98 million term debt facility.
When we say uncommitted, that means that the credit decision has not been taken in the banks. And back when we announced the $25 million of short-term liquidity that was granted to us by DNB, we also said that we expect to have a long-term solution for the Phase 2 financing in place now by the end of Q2. So speaking to the $98 million of uncommitted debt, then that’s naturally a part of what we’re working on. So we’ll of course, let the market know as soon as we have something to share on that topic.
The next question comes from Alex Jones at BofA. He has two questions. The first is, can you please reconcile the 46 million 2021 CapEx that you referred for Phase 2 in the presentation today with 34 million that you said have invested in Phase 2 as of December 31 when you gave the monthly update at the start of February.
The second question is taking into account the cost numbers you walk through and the harvest volumes you have already discussed. Can you give us any guidance on adjusted EBITDA for 2022?
And to start with the question on CapEx, then we have probably – if you look at the figure for phase – maybe I can even get the slide up if we can show it here as well. Give me a second. You’ll see that the total CapEx for 2021 was $57.5 million. Out of that number, $11 million was non-Phase 1 related, which is [indiscernible] $46 million of CapEx for Phase 1.
And the reason why there’s differences probably due to a little bit of the accounting, what is taken in what periods between basically things that might have moved accounting wise from year end 2021 and into Q1 2022. The audited figures for 2021 on what we spent on CapEx are of course the most accurate ones. The ones that we’re giving in the monthly updates every month, they of course reflect that this is somewhat more work in progress. And what I would call a very live animal [ph] in terms of the CapEx budget that is being moved around.
So that being said that the 34 million that sounds lower, I believe that number is actually a little bit higher if you go back to the monthly update from February, when we reported, I think it might be somewhat higher number than that we reported, closer to 46.
The second question taking into account the cost numbers and when, if we can give a guidance on adjusted EBITDA for 2022, we don’t really have an exact guidance from our sake. But I think if you use the fixed cost base and make your own assumptions on what that might look like in 2022 compared to 2021
And then you look at our guided expectation of around 1,000 tons of harvest in Q2 and then reaching steady state on time in Q3 with Q4 2022 being the first full quarter of steady state harvest volumes. Then that will give you an idea and the last pieces of the puzzle so to speak, to be able to play around with that calculation is that you can assume probably a field conversion ratio of anywhere close to 1.2, that’s a fair estimates, and on the feed costs using $2 per kilo as a round number is not going to be far away from the reality. Even though as we’ve talked about before we are seeing fluctuations in feed prices as we speak, but that that should at least give an indication.
The next question we have is from [indiscernible]. Has it been any additional elevated mortality in Batch 2 in the last couple of weeks?
I’ll hand that question over to Johan, if you want to comment on that?
Johan Andreassen
Sure. The answer to that question is no. And that goes for all the other batches in the farm as well. We have very, very low and normalized mortality so far this month.
Karl Øyehaug
Good. Then the next question we have is from [indiscernible]. 2021 cost of materials, salaries and other opt-ups add up to $100 million in 2021, which are excluded from the $84.7 million figure on Page 8.
The $84.7 million figure is basically the U.S. stand-alone EBITDA cost base. So what is not in there, for example, is the depreciation. So that’s the Delta. To get to the $84 million, you can go to the slide in the footnotes or at the footnote where you’ll see the U.S. broken up, excluding Denmark, and simply take the EBITDA and add on the revenue for the U.S. segment to get to the same number.
And I don’t see any more questions yet. So let’s give it a minute to see if there are any more questions. Doesn’t look like it. So with that, I’ll, of course, encourage anyone who has any questions after this call to contact Johan or myself directly. We’re always happy to help, and I’ll give the word back to, Johan, if you have any closing remarks.
Johan Andreassen
Thank you, Karl. Yes, I just wanted to wrap this up saying that even if 2021 was a year with a lot of setbacks for our company, it was also a year of growing up as a company. We had key information, restructuring, consolidation and improvement across all aspects of our business. 2021 has created the foundation for a bright future, and we’re looking forward to prove to the world in the second half of this year that Bluehouse farming is profitable.
In addition, I will say that we are better positioned than most companies to leverage a historical strong outlook for Omega-3 rich fish such as salmon in the years to come. And aside from that, stay tuned for our next operational update in a couple of weeks. And until then, take care.
Be the first to comment