Salmones Camanchaca SA

SGO:SALMOCAM

Earnings Call Transcript 2020-Q1

[Ricardo Garcia Holtz, executive]

Good morning. This is our eighth earnings report from Salmones Camanchaca since we did the IPO in 2018. We expect to cover today the business but particularly with a focus on the COVID-19 situation and how that is affecting our operations throughout the business line.

The highlights of the quarter, I think that the harvest volume were substantially higher than in the first quarter '19, yet it was 1,000 ton less than what we have expected that was caused by certain disruptions during March as a consequence of COVID-19. Coho harvest was still in the first quarter. There was about 800 metric tons of Coho that was left for harvest in the first quarter of this year. On Atlantic, it was 3,000 metric tons more than in 2019. So volume was an important driver for the first quarter.

Revenue were up almost 13%, yet revenue were affected by approximately 5% or $0.27, $0.28 lower price than the achievements in the first quarter of '19. We completed, as I said, during this quarter, the first generation of Coho. It was the first year of Coho. The total harvest for this new specie was about 5,000 metric tons. As always, we've said this Coho project in its first 2 years contribute negatively to the EBIT of the company, that will not be the case in '21.

The minority participation in the trout business had a turnaround. We had a negative in the first quarter of '19. Now we have a positive in the first quarter of '20. It was not substantial, about $0.5 million. But the important message on the trout is that the problems that we had earlier in the last year has been overcome.

Most important in our view is the cost. We do not control the environment, but we do control our operations. And the cost -- live weight cost was only slightly above our target, $3.15 live weight cost, slightly, as I said, above the $3 target.

Normal conditions in the ocean, we have episodes of oxygens and algae but minor, did not affect in a material way our farming operation. And the EBIT lower than the previous year is fully explained by the price achievement that I mentioned and the Coho situation, which contributed with about $1.5 million negatively in the quarter.

On the financial highlights, as I said, EBIT kilo was $0.78. The -- it was about $3.5 million affected the EBIT by the price. If you compare the price of the first quarter last year with respect to this price, that is about $3.5 million to $4 million. Plus the Coho, which is $1.5 million negative contribution in this quarter, that's roughly $5 million between the price and the Coho that affected the EBIT. If we would have had the same price and no Coho negative contribution, EBIT from the Atlantic operation net of the price reduction would have been 10% higher because of the cost.

Let me jump into COVID impact for the business. Our main goal and challenge has been during these last, I would say, 6 week to prove to our people and, in general, our communities, that caring for people's life and people livelihoods are things that are not opposed, that we can work safely in our workplace as well as taking care of our people. Particularly important this is for our value-added plant, where between 800 and 1,000 people are working now on 3 shifts rather than 2 shifts. So one of the important measures taken has been to reduce the density -- the people's density within the shifts and within the facility and the premises.

We have taken a multidimensional measures to prevent contagious within our premises and workplaces, so far, very successfully. We've had only 2 positive COVID-19 in Salmones Camanchaca. Those have been contagious outside of our operations and premises, and they have not generate any further contagious within our workplace and premises. So from that point of view, we've been able to contain this virus and keep the operation running, which is very important, but also to prove to people that we can do that as safely as they are at home.

And the commitment of the people to the operation, particularly in the domain value-added plant, has been very, very important for us. We're very early in the process. Early March, take -- took several measures to contain contagious. I have to recall that we are a company that process food for people, direct consumption. And in many situation, it's raw. Therefore, our hygienic sanitary condition in our plant are very extreme, and therefore, taking further measures to prevent contagious within our premises has been something that comes naturally to Salmones Camanchaca.

As said, we have had no business interruption so far, not in the hatchery or the farming or the primary processing or the value-added processing. We have, though, reduced the capacity at the end of March and throughout April to about 60% capacity. We are planning to start next week at 80% capacity, and our plan is to come back to full capacity by June or, at most, July. That is already embedded in our harvest plan for the quarter and for the year.

We've put a lot of emphasis and focus on value-added products as the HON market has dropped more substantially than the value-added. That is our full capacity today in the value-added product is on fillets and portions, which is about almost close to 100% of our production today. Our base scenario is that we will be running between 60% and 80% in the first half -- that is in this second quarter, sorry, and going back to 100% and slightly above 100% in the second half to catch up part of the production that will not be produced in the second quarter. Some of which may be pushed into '21.

We've cut our investment plan by about 50% on the remaining investments for April, December. That is about 33% of the annual investment plan. We will be investing, therefore, something about $24 million, $25 million instead of about $33 million, $35 million, which was originally planned.

We've also increased our cash liquidity. Currently, today, we are running at about $50 million available liquidity for Salmones Camanchaca, which is rather substantial for the size of the company. And we plan to keep this availability in place for the remaining part of the year.

I would end up with COVID-19 saying that the good results of Salmones Camanchaca in the last 3 years, particularly 2017 and 2019, plus the IPO we made and the equity raise we made 3 years ago, has put Salmones Camanchaca in a very good condition to face these sanitary crisis, this virus crisis. I couldn't remember any opportunity in our history where we are better prepared to face this situation, COVID-19.

The operational review, I think that this is most important, live weight cost very much in line. As you can see, it's substantially below first quarter last year. It is quite similar to what we believe should be the long-term target of $3, only 5% above that. I think that the -- it's important to mention that we had slightly lower harvest weight coming from the 11th region, 4.9 kilos versus 5.3, 5.5 kilo, which would have been normal. That had some implications in the cost.

The Caligus situation is under control. It's not fully controlled yet, but we have only 3 ocean sites with more Caligus than the requirement that are being treated, and Manuel will cover that in a minute. But I think that compared to 6 months ago, the situation is under control, obviously, at a cost of more treatments and more actions.

On the processing cost, well below our long-term target of $1, $0.91. The combined -- therefore, the combined cost of harvest of farming and processing is on target, $4.27 per kilo is only $0.03 or 1% above the target of $4.23. So this is good news. It's below first quarter in 2019. So we are very pleased with the cost, and this is one of the stronger points of Salmones Camanchaca to face this situation, this crisis. We are having a very controlled cost condition in our farming and our processing.

Next is the volumes. As mentioned, first quarter was 36%, 37%, up from the previous quarter. That is a substantial growth. It is about 1,000 metric tons below our target. Our target for the quarter was in the 14,500 metric tons for the quarter. It was 1,000 below that. And we expect 3,000 to 4,000 below our plan for the second quarter, which is the quarter that we would have to face the largest part of the COVID-19 situation. We expect to recover that -- part of that in the second half of the year and push about 1,000, maybe 2,000 metric tons into '21. So our final guidance for the year is 51,000 to 54,000 on Atlantic harvest. That is 2,000, 3,000 metric tons below. Important to mention also that because of this COVID situation, we have reduced our Coho stockings for 2020. We were planning to do 2.3 million...

[Manuel Arriagada Ossa, executive]

No, no. From 5,000 to 3,000 in 2020.

[Ricardo Garcia Holtz, executive]

Yes. So we had about 50% of the stocking of '20 of Coho. We will be, therefore, having 3,000, approximately...

[Manuel Arriagada Ossa, executive]

Yes.

[Ricardo Garcia Holtz, executive]

Metric tons of Coho harvest. The project of Coho had in 2019 and 2020 learning curve for us, both on farming, processing and marketing. And this will not change that goal of learning the process to be well prepared for '23 when we plan to expand much more that initiative.

Let me give the word to Manuel for the biology of the fish.

[Manuel Arriagada Ossa, executive]

Okay. Yes. Okay. Good morning. In relation to the Atlantic salmon biology, in general, we have very good biology indicators. And in Q1 2020, very comparable with the biology indicators in the comparable cycle that is Q1 2018. If you see the graph, the all biomass mortality, very similar, 7.8%, very similar to Q1 2018. The same with the old biomass, 2.6%, very comparable with Q1 2018 of 2.6%, okay, same number.

The same with the feed conversion ratio. And with yield, we have the average weight a little lower, 5.2 compared with 5.3. That is mainly because of the reason that Ricardo explained. We have 1 site harvested from the 11th region with a more presence of SRS. So we need to harvest before. That is the only reason in Q1 2020.

In relation to the sea lice situation, as you see in the graph, first of all, the biomass is more or less stable. That is the gray area. And in terms of the sea lice counts, that is the gravid females or [ old ] females, you can see a little increase in the last part of 2019. We have a little loss of the efficiency of Azamethiphos, that is the most widely used chemical treatment. But we increased the number of treatment of Azamethiphos as an industry. And we're also using new tools such as Alfaflux that is above treatment, chemical treatment, such as hydrogen peroxide. And we were able to control the sea lice level. Now in Q1 2020, the level of sea lice is completely under control. But of course, we need to increase the number of chemical treatments.

The Azamethiphos efficiency has been more or less stable at around 70% efficiency in the last 6 months, that is a very good new. The other chemical treatment that is the hydrogen peroxide, the efficiency is around 95%. So very good efficiency so far. And the new chemical treatment that is the Alfaflux, we have a very effective and proven protection up to 6 months since the 800 grams up to 3 kilos, so very good news on that.

And also, we are having the initial results of the nonpharma treatments like Optilizer and the type of etherizer with a very good results also. So I will say in control. Just to have a number in mind, the total sea lice cost for Q1 was $0.20 per kilo WFE compared with $0.14 per kilo in the previous cycle, a little increase because the extra treatment.

Okay. So in relation to the markets, here, you can see a comparison between our raw material return that is the orange line compared with the spot market raw material return also. In general, as you see here, our return is more stable than the spot market because 2 reasons: first reason, we have long-term contracts, so more stable; and second, we have flexibility to change the allocations between markets and between products. All in all in Q1, the price achievement was in line with the market, as you see. The market price -- spot market price recovered very quickly in January. And Salmones Camanchaca had contracts in place, so our price was more stable.

Our price dropped a little in March, okay, mainly because of the Russian ban at the end of February. And in relation to the spot market, as you see here, the price in Q1 was very stable. Since the second week of April, we are having a very important drop in the U.S. price -- market price, more or less $1 per ton in the last 2 weeks, but this is enabled and mainly because of the COVID situation. In the Q1, very stable prices in the back.

In relation to the sales mix, in the total sales mix, the American market is our biggest market by far, 50% allocation compared to 39% allocation last year Q1. We increased the allocation to the American market since the better conditions there, of course, and of course, because of the poorer conditions in the Chinese and Brazilian markets, okay?

The second market in importance is Mexico with 12%. And the third one is Russia. As I mentioned, since the last week of February, we have the ban to Russia, and we have our 2 plants closed for that market. So we plan to open that by the middle of this year, okay?

In relation to the product type, it's important to say that we are very focused on value-added. If we consider portions and fillets, 79% of our production was value-added. That was higher than Q1 2019, despite we had much larger volume. The price achievements and the stronger processing capabilities was the main reason of that.

One thing that is very important, especially for COVID, and especially for the retail demand, is that if you see here the proportion of portions was 24% in Q1 2020, and we are increasing our capacity -- processing capacity during 2020 -- during the first half of 2020, and we will be able to process portions and produce portions more than 50% of the total production. So we are going to double our capacity of portion. That is a very good new in order to be more prepared to the demand of the retail sector because of the COVID situation.

Okay. And finally, a word on the sustainability. If we compare Q1 2020 with Q1 2018, that is the comparable year, we have a reduction in the fish in-fish out ratio cycle-on-cycle. That is very important because the improvements in the feed conversion ratio, the improvements in the mortalities and also the use of high-energy diets with less inclusion of fishmeal and fish oil. It's important to emphasize that we have 0 escapes incidents for the 4 consecutive quarters. That is a very important new.

In relation to the antibiotic treatments, we are still working on that. We had a little increase in the antibiotic usage, mainly because of the SRS situation in one site in the 11th region, but we are still working in our goal to cut by 50% the use of antibiotics by 2025, using LiveVac vaccine and implementing several sanitary and biological measures in the farming period.

And finally, in relation to the anti-parasite usage, as I mentioned, we doubled the use in grams per ton produced, mainly because of the increased use of Azamethiphos and the chemical treatment because of the loss of efficiency of that chemical treatment. That's the reason why we increased from 8 grams to 15 grams per ton the use of -- anti-parasite use. We probably -- our idea and our goal is to reduce that by implementing the nonpharma tools.

[Ricardo Garcia Holtz, executive]

Thank you, Manuel. Just a few words on the P&L. As mentioned, the quarter EBIT was affected by the price, fully explained the quarter-over-quarter difference on the price reduction of about $0.27. The negative contribution, as mentioned of the Coho, in the first year was USD 1.5 million. Net of Coho, the reduction would have been, of course, much lower.

Important to mention on the operational side, the efficiencies on sales and administration support areas, despite the further freezing capacity and storage for Coho that was present in the sales and distribution, we kept the ratio with respect to revenue at about 6.1%, 6.2%. Profits were substantially lower entirely or almost entirely explained by the fair value. The fair value in this particular situation where volumes are relatively stable over time is signaling lower price for the remaining months ahead of us, particularly in the second quarter. So that explains the substantial reduction of the profit of the quarter, not fully captured by the EBIT in the first quarter.

On the financial position of the company, I want to mention that, as we said last quarter, receivables and inventories built up at the end of 2019 that was in the balance sheet at the beginning of the quarter were released, and we cashed them in. And therefore, the inventories and receivable were reduced throughout the quarter and the consequent reduction on the net debt of the company.

We have renewed and increased our credit lines with banks with very positive results and feedback from them, increasing the lines for Salmones Camanchaca. We only have 1 amortization at the end of this year of $10 million of our long-term facility that is in November 2020, and therefore, we have a clean path throughout the year with our credit lines.

If you add the credit lines available nonutilized as of today of about $30 million to $31 million, plus the available cash as of today of $24-something million, we have a total available liquidity of about $55 million. $55 million, just to give you an idea, is about 2.5 months of expenses and administration. That is, in our view, a very solid cushion to face any disruptions that may occur as a consequence of COVID.

We do not envision that at the moment, as the operation is running, as the logistics is working, as the market are absorbing, obviously, not at the price that we had, but demand is absorbing supply at the moment. And we believe that there will be a recovery in the second half of the year. And therefore, we don't envision at this point and with the information that we have at this point any major disruption in our financial condition.

In summary, we are on track on our investment plan and growth plan. The first quarter was a minor reduction in our growth plan for the remaining part of the year and next year. The Coho project is running well. The productive and operational outcome is in place and according to what we expected. We have some lower price than anticipated on the Coho. But from a productive point of view, from a farming point of view, from a processing point of view and in terms of the access to new markets, it's been running as we expected.

The total cost of the company is in line with the long-term target. All finished product cost is in line, and that is a very standing point to face any crisis in the market today.

In reference to COVID-19, in summary, the situation within our premises is safe. No one has been contagious within our premises, and the people that had a positive, 2 people, were contagious outside of Salmones Camanchaca, and therefore, the measures and protocols that we have in place are working. And the best outcome of that is that we are running our operation in next week, as Manuel mentioned, we will be at around 80% of normal capacity.

COVID found Salmones Camanchaca in a very good financial condition after several years of good profits and results and good credit lines, good cash position. That does not mean that we pay a lot of attention, and we are working 24/7 in the entire value chain to find out every week better protocols to prevent problems and, therefore, prove to the workers and to the communities that working in Camanchaca is as safe as being at home.

Yet, we've cut our investment plan, increased our liquidity position, reduced expenses as a prudent measure to face the second quarter, which we believe is going to be the most challenging one. The total impact of what we expect for the year is between 2,000 and 3,000 metric tons of lower harvest compared to the original plan. On the price side, which is where the game will be played in 2020, we believe it's going to be depressed during the second quarter, with a recovery starting the third and fourth quarter.

Thank you.

[Ricardo Garcia Holtz, executive]

We have 3 questions from DNB. Who bears the increased transport cost to the U.S.? That's the number one.

We've seen $0.20, $0.30 additional airfreight to the U.S. as a consequence of the much fewer commercial flights to that market, and it's been absorbed by our return of the raw material at the moment.

What cost impact should we expect from the 80% utilization in May and June, probably of second quarter, that will affect the value-added plant? Manuel, do you have a view on that?

[Manuel Arriagada Ossa, executive]

Yes, yes. Probably more than of Q2, if we consider the rest of the year, we are expecting no major changes in the processing cost because we are doing a lot of savings, a program of savings in expenses in general. And also, the devaluation of the local currency also helps. If we consider the current local currency price compared with 1 year ago, we have a 24% devaluation. So that also helps, especially in the processing cost.

[Ricardo Garcia Holtz, executive]

In the value-added plant, where labor is one of the major drivers for cost.

[Manuel Arriagada Ossa, executive]

Yes. Yes.

[Ricardo Garcia Holtz, executive]

And the third is, do you have a higher-than-normal level of Atlantic salmon on storage?

No. I would say no, on the contrary. We've been very very fast and agile in selling our inventories. And at the end of the first quarter, the only thing that may be mentioned is that we have about 1,000 metric tons of Coho in our storage, which should be dispatched within April and May. On the Atlantic, nothing special.

[Manuel Arriagada Ossa, executive]

Yes. One point, Ricardo, only to mention at the end of March, we have an Atlantic total stock of about 2,000 tons, and we expect to have at the end of April, 1,500, so less stock in April compared with March. So we are reducing -- actually, we are reducing the level of inventory for Atlantic.

[Ricardo Garcia Holtz, executive]

Second, it's come from -- can you give more color regarding expected prices going forward? Particularly, how do you see each market in current condition, for example, U.S. and Brazil?

I think that we are seeing now the worst possible price because the agents in general, retailers, food service and everyone in general, are only starting to adjust and absorb the conditions as of now. And therefore, the solutions that the agents will find in the markets is yet to come.

For example, everyone knows that food service is affected in the U.S., in Europe, in Asia, but the degree of growth on retailers and e-commerce is substantial. That is not put in place in a second. It takes weeks, and it takes maybe more than a month to really develop that. And agents and buyers, as we have spoken with them every week, in the U.S. particularly, is running like rabbits to open up new doors and new avenues for the product to get to the consumer.

This is -- fortunately, this is food, this is protein, this is healthy food for people in a time where people are eager for healthy solutions. And therefore, we see the demand coming back as agents generate the channels to the markets in May and June. I think that, at this moment, we are probably facing the worse scenario and will be recovering as we go forward. And particularly, the markets that can develop easier, the channels and the distribution channel to the consumer are going to be the ones that will recover the first. Particularly, I think that Europe and the U.S. and Asia will be able to recover faster than the other markets with more traditional distribution channels.

How is the contract situation into Q2? Do you expect to achieve better prices than undervalue price given the massive drop we've seen in the Miami price lately?

I think that one important message from the measures and the strategy that we have described today is that we have, as everyone, moved from selling to food service to retailers, from food service to more online. As we do that, we get closer to the volatility of the market. The best way of having long-term contract with stable prices is to have more contract with food service. As that particular sector has been more depressed than other, then we will be more exposed to the fluctuations of the market in the coming quarter. That's my view.

Whether we'll be above the undervalue? The return that we get on our fish depends on the markets in which we are as well as the component of value-added and frozen that we put in our fish. It's hard to say. It will depend on how the undervalue goes. But I would say that under normal circumstances, the focus on the value-added that we have today should give us an advantage on the undervalue.

When do you expect Russia to open up?

Again, it's a very speculative response from my part. I would say that it's safe to respond within the second half of the year.

How the logistic is working? More expensive?

Logistic is working. We've had some disruptions in the Chiloé Island as we transport fish from the south of Chiloé to the north of Chiloé for our 11th region harvest. That was a situation early in April. But as COVID conditions are absorbed by the communities and by the authorities, the logistics routes and the transportation is now running. I don't think there is any material impact on the cost on that particular situation on logistics other than the airfreight that was mentioned earlier.

How do you find the market access to your most important market at the moment? Are some markets showing signs of improvements in demand?

I think that China is picking up. It's being recovered. Prices in China are low. Obviously, there's a lot of competition from Norwegian farmers in China, but it's absorbing more demand. The U.S. is increasing demand substantially on the retail side and on digital sales. That has been increases of 300% to 400% growth in some of the players in the digital market. So that's promising.

We don't see at the moment any pickup on Brazil. We have seen some pickup on Mexico on the retailer sector, but not on the food service yet. I think this is too early to see signals. April was the month where we have the hit of this chunk. People are absorbing, adjusting and taking measures to get out of this. May will be the implementation month, where we will see how the food and the protein and the salmon flows to the market. And I believe that June will be the recovery. April, impact; May, implementation; June, recovery.

Do you see the Chilean industry on average cutting back on smolt [ put to see ] in 2020, which, therefore, reduces volume growth into '21?

I think that that's a good question. There are some signals that these small releases in Chile were down in the first quarter. I don't think that, that has anything to do with COVID at the moment. We will probably have to see the numbers of April and May of stocking to have a conclusion of that. But I can say one thing, and I will repeat what I said a quarter ago, Chile's smolt releases are not growing and have not been growing in the last quarters. And therefore, the supply going forward into '21 does not look higher than the current one.

How has commercial activity been in Brazil and Mexico during April? Any view on your outlook? It's -- it is a follow-up question to one you already answered but focus on the U.S.

We don't see any pickup, as I said, in Brazil and only slightly on Mexico, as we develop the retail. No, I don't think that -- as of April, there is any news on pickups and recovery yet in Latin America. But as I said, April is the impact. So we should not be looking now at any recovery. May, it's going to be implementation of hundreds of measures and strategies developed by retailers, by food service, by other marketplaces. And we -- in a month from now, we will probably have a better view on that.

Do you think supply will adjust lower for next year given the stock -- shock in demand?

No. I certainly think that demand will be strong as ever in '21. On the contrary, I think that demand will be even stronger because people will be more focused on health and healthy food, and salmon is the winner in that battle. So I don't think demand will be slower at all.

I do believe, though, that there will be no further supply. And because of the financial impact in every farmer globally of this crisis, there will be less appetite to growth. So if you have any growth plan on supply going forward in '21, I think that the current situation means that there will be less supply in '21 than otherwise without the COVID-19. So from a price recovery point of view, I'm very optimistic on '21.

How do you see the alternative to push more volume into Europe with respect to market dynamics, freight and customer relationships?

To push more volume into Europe with respect to market dynamics, we sell very little to Europe, almost nothing. We don't think, for us, Europe is a main market. I do believe that Europe will recover very shortly. That will leave us space in other markets, such as China, for example. So it's an indirect way that will be affected by the European recovery.

So these are all the -- these are the answer that we -- the questions received. We have about 50 people connected, so thank you very much to all of you. We certainly have been working 24/7 on this COVID situation, but I could not find any moment in time in Salmones Camanchaca that we are better prepared to face these challenges. And therefore, we will be first in line to get out of these conditions.

We have a very, very solid cost condition. We have a very, very solid financial and liquidity position. We have a very solid marketing capabilities to be there in time of the recovery. And therefore, we'll be a winner when we get out of this. Thank you.

[Manuel Arriagada Ossa, executive]

Thank you.