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 Andreassen; and with me to present today is, as usual, our CFO, Karl Øyehaug.

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 operation update will follow a similar format as the previous monthly updates, where we will open up for a Q&A at the end of the presentation. Type your question in the Q&A tab, but note that we will only answer questions from attendees that have identified themselves with name.

Johan?

Thank you, Karl. 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 Bluehouse 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 '21, 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 achievement on our premium fish.

Risk mitigation strategies has 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 DNB. The net biomass gain of the New Batches in Q2 came in at 1,240 tons, an increase of 300 tons 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 Bluehouse.

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 RAS 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 a whole, we had an average JEA index of 0.25 across the whole farm.

We continue to take more tanks in use which added more cubic meters or 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 are taking, but simply keep the current growth rates, but assume that we have 20% more biomass on that fully stocked farm, that will yield a JEA 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 up to the 9,500 tons budgeted. Yes, seeing where we are tracking now, makes us confident that we will be able to reach our budgets once we have the farm fully stocked.

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 JEA 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 that steady state. The Q4 biomass gain is expected to be in the range of 1,750 to 2,250 tons HOG, depending on our growth rate 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 the room for improvement and the 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 and 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 or 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 all these systems.

Thirdly, nutrition. We have made some feed formula changes that we will expect to -- that will gain 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 the 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 continued to see an improvement in average price achievement as we harvested out of 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 adjustment 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 million, 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 million 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 will leave us with a forward adjusted EBITDA of negative $32.9 million, which is an improvement of -- versus the $47.2 million that the Group had for the first six months of 2021.

Our total assets as of June 30 this year of $363.4 million and marginally down from $392 million at the same time last year. We invested on an accrual basis $33.6 million for the first six months, mostly towards Phase 2.

This is up from $21 million in the same period last year when we were finalizing Phase 1 construction and also, during 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.

We had negative interest-bearing debt of $37.2 million for the same period last year, explained by the timing of the equity raises in 2021 and 2022 respectively. 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 HOG, 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 U.S.

standalone, harvest volumes here were up by [68%] year-over-year. An important effect to note is $25.3 million gain on the other income that reflects 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've 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 rent in temporary chillers, as we were able to connect the chillers to the electrical grid, instead of relying on diesel and generators to keep the water in the Bluehouse cool. In line with the 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 $8.2 million of indirect and unallocated production costs directly to the P&L to reflect underutilized capacity. This calculation is based on feeding compared to the budgeted full Phase 1 capacity.

And as feeding was up, this charge is slightly lower than the same period last year. This accounting treatment ensures that the biomass value on the balance sheet is not inflated by taking more costs upfront rather than at harvest.

At the closing of the first half accounts, we also elected to write down $1.4 million of the value of our frozen inventory. This one-off cost is linked to our expectation that will 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 labor, 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 required of each of those inputs.

For example, the Q2 2022 feed price was $2.3 per kilo all-in, including $0.30 that we pay for transportation to get to feed near to our Atlantic facility. This $0.30 highlight why it's so advantageous for us to get the new Skretting feed plant constructed on site as it will lead to immediate cost savings.

Looking at feed prices in Q3, these are marginally up from the Q2 level. Another example of a large production input-grade unitary prices are increasing significantly is chemicals that we use to maintain key multi-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've taken more and more growout systems into use. We now expect that this specific cost factor will be around $5 million in the second half of 2022.

In general, 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 2 CapEx. When it comes to the Phase 2 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 $70 million in the Phase 2 project. As we discussed back then, we have been experiencing significant inflationary pressure on the CapEx budget, which is why our budget was adjusted up to $275 million to $300 million.

The focus of the engineering team remains on value engineering and working with our contractors to optimize cost 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're estimating completion in the first half of 2024, but 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 tanks. In addition, the new chiller building for Phase 1 and 2, which is not visible on this photo, has also been directed since the end of June.

Then I will give the word back to Johan for a summary and a few forward-looking statements.

Thank you, Karl. So in conclusion, we have seen solid improvements in the feeding 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 -- sorry, 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 2/3 of the fish will be harvested in the fourth quarter.

In Denmark, we have started a strategic review on the future of Hvide Sande and the site order, and there are some remaining assets there that has a value for multiple purposes. On Phase 2, value engineering is ongoing.

We're working diligently with our engineers and contractors to optimize cost and quality for what we believe will be an outstanding Phase 2 facility. On the offtake side, we expect to bring online additional programs and customers as harvest volumes increase 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 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, yes, Karl, you can take over.

Perfect. Let's do it.

[Operator Instructions]. So moving over to the first two questions that come from Alex Aukner at the DNB Markets.

And the first one is how are you able to precool? And what cool does -- or what cost does this add?

And I assume it's referring to Johan's comments on temperature and the initiatives we're doing on the chillers there. Johan?

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 our centralized pad. We're connecting this together as in a series of chillers.

And we are basically replacing the cooling we do inside the RAS systems to a precooling 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, Johan. The next question is on cost of goods sold.

Can you break down the cost of fish, $17.5 million? What is variable and what is fixed so that we can model COGS 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 out of the $17.5 million, would argue that the real variable cost in that number is feed. And I'd say that the feed probably makes out $7 million out of those 7.5 -- $17.5 million in that number for that period.

What's also very important to keep in mind is that we also took the charge of about $8.2 million for underutilized pad capacity. These are basically other real production costs that we've incurred that have not been allocated to the balance sheet.

So if we 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 COGS 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 Carl-Emil Kjølås Johannessen at Pareto.

Should we assume that the JEA index of 0.42 in Phase 1 will be sufficient to draw from the Phase 2 terminal? Would you assume first harvest in Phase 2 in 2025?

I can start with the first part of the question that addresses the term debt. Basically, what -- as Johan was sharing during the presentation, 0.42 with the fully stocked farm would need approximately 8,500 tons of production.

And depending, of course, on your assumptions in your models and what you assume on price achievements, that is probably going to get you pretty much into that numbers. So of course, a little bit depends on how aggressive one is on estimates.

So we think that that's definitely a level that where we can achieve that. But of course, as Johan 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 Johan, 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 2 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 and 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, yes, I think you can, for planning purposes, assume that we will start to see the first harvest volumes in Phase 2 in '25.

Thank you. Our next question comes from Axel Jacobsen at Arctic Securities.

In addition to temperature precooling 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, oxygen, 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 had in our Bluehouse are global commodities where we do not have a very credibility to impact the price, have little negotiation power. So obviously, the biggest cost cutting opportunities would be if those were to reverse down towards levels that we saw at the start of the year.

But at least for our own budgeting and planning purposes, we assume that the unitary costs 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.

Yes. And I can also add that some of these cost-saving opportunities also depends on when because, as Karl mentioned, chemicals has sailed up to be one of the largest OpEx cost we have.

And that is -- 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 2. And the same thing goes for caustic down the road that you can produce this locally and significant, reduce the costs.

I also want to add that we have had a tail of a lot of mechanical repairs and fixes after the Phase 1 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 cost -- to save cost over time. It's not going to happen overnight, but I expect it to be a tail there, there you see a gradual reduction in multiple of these line items on the OpEx side.

Our next quick question comes from Nils Thommesen from Fearnleys. When you refer to Phase 2 completion in the first half of '24, does that refer to first release 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, not giving up?

Yes. I mean, one way of looking at this is that we are -- as we shared earlier, we are 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 you assume on FCR.

So we're not that far away considering that we still have to build another 700 tons of biomass, that alone should eat 5 to 6 tons, just incremental biomass. So I expect this to gradually happen once the improvement on the diets 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.

It's -- this is fine-tuning. This is not fixes with a sledgehammer, but with a screwdriver.

So it's -- we'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 Johan, please feel free to fill in. When we commissioned Phase 2 in Denmark, which was, of course, a big ramp 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, really we're in stable operations, have done all that fine-tuning with the screwdriver as Johan was referring to, we saw that, for example, maintenance costs came down to a [6th] of what it was the year, the previous period.

Similarly, we saw improvements also in the use of unitary costs, such as oxygen, such as more efficient feeding, such as better use of chemicals because you simply were able to fine tune and make sure that you are not wasting or overutilizing production inputs. So I think that is the type of development that we are also expecting herein now.

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 growout systems was what was damaged by the fire. What is left is the small facility, the freshwater facility we had there and also quite a bit of infrastructure, for example, pretreatment 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 a large infrastructure for power, has a few pieces here and there of tanks, et cetera, that definitely still have value. And maybe just as important, the land 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 in a considered Denmark?

No. I mean, obviously, the -- aside from what you said, we still need to clean up the site.

They whole -- the remaining of the buildings are still there. But we will initiate that as soon as we are giving the green light to do so.

And we don't expect that to cost any money or any meaningful money because the value of the steel that is there is almost equal to the cost of removing it. So yes, but aside from that, I think you summed it nicely up.

I just want to add that all the permits we have there is -- 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 it a few more seconds just in case there is a last question that comes in before I'll run back to Johan for final remark.

Does look like we've been through the list questions. So thanks, everyone, for joining the update.

And then you want to wrap things up?

Yes. 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 it's -- for me, personally, I've been working on this for 10 years, and I finally see my vision coming through.

Now we have two truckloads of feed coming in every day. We have two truckloads of fish going out, a fully stocked farm.

And everyone on the house here is exciting. So it's going to be a fish farmer finally.

Thank you, everyone.