Salmones Camanchaca SA

SGO:SALMOCAM

Earnings Call Transcript 2022-Q2

[Ricardo Garcia Holtz, executive]

Thank you for attending the second quarter earnings report of Salmones Camanchaca. I have a good news and a bad news. The bad news is that we have some technical problems, and we are 20 minutes late, I very much apologize for the delay. Everything was ready 1 minute before the presentation and suddenly our server collapsed, and the system went off. So very sorry for that. And the good news is that we are reporting an excellent quarter.

In summary, what I would say about this quarter is this: it's a significant recovery of the biological condition of the biomass, a significant recovery of the profitability, therefore, although still affected by some surviving fish of the previous year algae bloom affecting the cost as we sold those fish. But overall, an excellent quarter. In fact, I would say firmly that this is the best second quarter ever made by Salmones Camanchaca, both in terms of harvest, sales and certainly EBITDA. It is the best second quarter that we've had in our history, almost $26 million in EBITDA as we will see now. A bit more than 12,000 metric ton harvest, 67% above previous years of the quarter and 66% higher EBITDA. So very good quarter. That's the summary of this.

What are the highlights of the -- of this quarter other than the profitability that I've just mentioned? Prices were extremely good for the company. We were able to get and capture these excellent moment in the market. The sole impact of prices is about $22 million in the quarter versus the second quarter of 2021, almost double the harvest of the previous year second quarter and 36% growth in sales volume. And also not necessarily due to the larger scale and volume, but also lower cost at harvest and farming, too. So very good. Certainly, a much better oceanographic condition in the southern part of Chile. It was a sunny summer, but it quickly become one of a very rainy autumn and it has been very rainy throughout the winter. So we've come back, what I would call a normal autumn and winter time. That's very good for the fish. And that translated into a much better performance of the fish and the biomass in the water. That was very good. We have a few extraordinary mortality, but in the normal ranges for the business. As I mentioned, prices were at the maximum that we've ever seen for the period, very good year for the price. Lower ex-cage cost in Atlantic. It's mostly related to the very high level of 2021, which the second quarter of 2021 was an awful quarter as you may recall, due to the algae bloom and the oxygen situation that we had in several of our ocean sites. So this was a very good condition in general.

I wouldn't say very good. I would say normal for the standard we've had in the past. I mean -- what else, the EBIT per kilo was $1.74 per kilo. That's a very good and the Pacific salmon was also very good, more than $1.6 per kilo. So both the Atlantic salmon and the Pacific salmon did very well during the quarter. We had a more aggressive than anticipated harvest plan during the quarter in order to capture better the higher prices that we were looking in May and June. And we sort of envisioned that, that was going to maybe reduce the guidance for the total year in terms of harvest. However, the good performance of the biomass meant that the biomass catch up, and we keep now the guidance for the year of about 51,000, 52,000 metric tons of bulk Atlantic and Pacific. As mentioned, revenue significantly recovered as a combination of 93% increase in the price achieved by the company and 36% growth on sales volume. Both higher prices and higher sales were also the result. As I mentioned, the result of the decision we made to anticipate some harvest to catch up later in the year with a good performance of biomass but it was a good plan in order to capture the higher prices. Quarterly EBIT was $21.2 million in the graph that you may see now. There is a mistake in the graph, as you may recall, because the EBITDA, it's really the EBIT there. EBITDA was almost $26 million in the quarter. The EBIT was $21.2 million. That number there is the EBIT, not the EBITDA. But very good performance, as I mentioned. We kept this quarter -- the guidance for the year. The volume is stable in the coming 2 quarters, a little higher in the third quarter and then lower in the fourth quarter, that is something that we anticipated to have a more stable second, third and fourth quarter of the year without the ups and downs that we had in the past. The second half of the year, we will be in the 13,000 to 14,000 metric tons harvest in the third quarter and a little lower in the fourth. Stocking are developing as expected for the year, reducing a bit the stocking of Atlantic salmon and increasing the Coho or the Pacific stocking. This is in line with the strategy of derisking our exposure [indiscernible] in other location of the tenth region, the Los Lagos Region and moving a little southern to the 11th region and utilizing some of our ocean sites in the tenth region with the Coho specie, which does not stay in the water during the summertime. We harvest the Coho in the spring -- at the end of the spring. So that's the reason. We've explained that in previous reports. Moderate -- very moderate growth on industry stocking, only 3%, 4% growth in stocking overall in the industry this year. This, I would say, is very moderate, given the attractive prices that we are looking today. Manuel, you may follow up.

[Manuel Arriagada Ossa, executive]

Okay. Good morning. Now we are going to cover the operational review. First, as Ricardo mentioned, we have very good indicators in biological indicators in general. We are having very good oceanographic conditions since the end of February this year. And have maintained very good allowing to have very low mortality levels, very good conversion ratio and very good also biomass growth during the first half of this year and especially in the second quarter also. As you can see, the old biomass mortality is in very low levels since the third quarter of 2021. And also, it's important to say that in the old biomass mortality, we are below the industry [indiscernible] since the Q3 of 2021. So very good performance. The closed site mortality for Q2 also is on a very low level. Also, the feed conversion ratio is improving very well at 1.09 as well as the yield, kilos per smolt that is 4.4 and also the harvest weight that is 4.9. So it's important to say that this good evolution of the biological indicators is in part because of the good oceanographic conditions. But in other parts, because an important strategic initiative that we are implementing in farming, that is an initiative that is -- that we call the Farming Excellence initiative [indiscernible] mainly 4 pillars. The first one, we are working with the human resources, attracting new talents at critical positions at the organization and also our training program. Second, we are conducting a pellet improvement in order to increase the growth and reduce the conversion ratio. We are also using special software with artificial intelligence to support the feeding through pellet detection and mass behavior analysis. Third, we are also working with the sites, engineering and infrastructure in order to improve the planning of the Sea farms operations and also to develop technical studies to improve all of the infrastructure of the site, including nets, modems, and accessories equipment. And finally, of course, we are working a lot in the [indiscernible] strategy in order to reduce the mortality, in order to reduce the diseases, to reduce the antibiotic usage and also to start with non-pharmacological sea lice treatment. So the biological performance is a combination of the good oceanographic condition and this farming initially. Because of that, of course, we are having a very good lightweight cost for the quarter, $4.05, that is below the previous quarter and 18% below the same quarter of the previous year that it was affected, of course, by the algae bloom, as Ricardo mentioned.

But if we compare the second quarter of this year with the second quarter of 2020, that is the comparable year in terms of the cycles, you can see that we are $0.73 above that. It's important to say that based on our estimation, 50% of that is because of the inflationary pressures of the peak price and 50% of that. And the other 50% is because other inflationary pressures, services, oil also and some other additional operational costs. In relation to the feed price, that is the most important price in farming. As you can see in the upper left chart, you can see that the feed price evolution in the last 2.5 years. It's important to mention that we are having a very important increase of the feed price since the Q3 of 2021. But what is the good news for salmon, even though that price increase, you can see in the other charts that the feed cost basket for the other competitive proteins increased more or less the same for poultry, pork and beef.

But in the case of salmon, we have a better feed conversion ratio compared with the other provinces and also the feed cost share as a percentage of the total production cost is nowhere in the case of the salmon. So we are in a better competitive position against the other competitive proteins in terms of the evolution of the production cost. The total cost, this is farming plus processing, $5.35 in the quarter that is below the previous quarter and, of course, below the same quarter of 2021. In terms of processing, that is basically well both primary and secondary processing in the quarter was $0.99 that was in line with our target, long-term target of $1 per kilo and, of course, well below the same quarter of 2021. Same as farming, we are also having some cost inflation pressure. It's important to say that in the last 12 months, in Chile, the inflation is 12.5%. And at the same time, we are having some devaluation of our Chilean currency of almost 30% in the last 12 months. In our estimation, our Chilean currency costs are more or less between 30% to 35% of the total production cost. Let's go to the markets. As you can see in the chart, the prices remain at a very high level because we are having mainly a low industry supply, both from kilo and also from the industry in the first half. During the second half, of course, we are going to have a very moderate growth. In Chile, it's going to be only 1% growth in the second half and no growth for the whole year, 0%. So we anticipate that prices will not easy to match going forward. However, of course, there are some economic ingredients that may generate a decline in the economic growth and may put some pressure in the salmon prices. In our -- in this context, it's critical, our processing sales and market flexibility to look for the market formats improve to achieve higher returns.

That was this [indiscernible] half of this year and especially in the second quarter of the year. As you can see here in this graph, the price achievement of our product mix compared with the market, with the [indiscernible] reference, the price realization following an upward trend as market price rise during the first event. That is the first point. Second, we are a little lagging behind, in line with our value-added strategy with more stable prices in general. Whenever the prices are going up, we are behind. And when the prices are reducing, we'll stay higher. That is the case of May and June of this year when we beat the benchmark. We have a great flexibility. We increased in May and June, our sales volume and also we increased our share in the fresh format to capture the high spot market prices. That was especially in the American market, but in the quarter, it represents 50% of our total sales, driven by an important increase of the fresh sales in order to capture the higher spot market prices. The second market for us was Mexican market with 18% of the total sales. We still are an important and leading provider of portion that is a format that explains 35% of the total sales in the world. One word for Coho. As Ricardo mentioned, we have a very good first half for Coho with an EBIT per kilo of 1.75 One part of the explanation of that, of course, is a very good performance and biological performance, very low cost and very high harvest weight. But at the same time, what it was very important was the marketing and sales strategy for Coho. The marketing strategy for Coho aims to: first, develop new markets out of Japan that is the traditional market portfolio. And we succeeded on that. As you can see, the American market is 29% of the total market sales for the first half, followed by Mexico and China. And then Japan was only 15%. That is the traditional market for Coho. The same for the product mix, you can see 46% in fillets followed by portion with 50%. So the HOG format process, that is the traditional format for Coho was only 40% in this product base. This was critical and crucial to obtain higher returns for Coho strategy. In terms of sustainability, in general, good evolution of the indicators, first one the Fish in Fish Out-ratio that is well below 1 and with an important improvement in the second quarter to reach 0.45. We have a little increase in the antibiotic usage compared with the same quarter of the last year. But a reduction compared with the second quarter of 2020, that is the comparable year in terms of the cycle. The reduction of the mortality is very important, 8% in the first half for closed sites compared with an industry average of 14.6%. The same with evolution for the economic feed conversion ratio that was 1.26 compared with an industry average of 1.34. And finally, the growth that is specific growth rate, SGR was above the industry in 0.79, which compared with an industry of 0.70. So good evolution of the sustainability indicator. The same for the ASC certified biomass that we completed in the first half. 71% of the biomass certified at this standard. Our goal is to be over 50%. And also in the first half, the reduction in the antibiotic use compared with the previous year and we reached 529 compared to 700-gram per ton produced. So in general also good evolution in sustainability indicators.

[Ricardo Garcia Holtz, executive]

Thank you, Manuel. Well, this is one of the occasions where there's very little to say more than what we have already said. But the EBIT $36 million improvement, as I mentioned, mostly explained by achievements in higher prices. Now that does not necessarily mean that Bread was coming from heaven in the form of higher prices. Because there is a lot of marketing activity in order to get and capture these prices.

And also production and harvest decision in order to rightly capture this good timing for the price. So there is more than just prices in the quarter. Extraordinary mortality had an impact of about $4 million during the quarter. That is half of what it was the previous year. The cost of goods sold was still impacted, not significantly but about what maybe $0.11, something like that in the quarter of the implication of the sale of the last surviving fish of one ocean site that was affected by the algae bloom of 2021.

At the time, the smaller fish now were harvested and that was certainly influencing the cost. And second, the inflationary pressure that Manuel mentioned also put a pressure on cost. And the favorable contribution of the Coho. That's mainly on the EBITDA side. On the P&L, what else can we say? Well, the trout business had not performed in terms of the result, as we anticipated, it has a negative contribution on the non-EBITDA result of about USD 700,000 compared to USD 200,000 positive. So it's almost $1 million reduction on EBITDA due to the Trout business. So that was one thing.

And also important was the increase in financing. The cost of the debt utilized by the company is higher, not significantly, but higher and that is reflected in the P&L. On the cash flow, very positive cash flow, operational cash flow. However, we use part of that cash flow -- part of that cash flow into the investment plan, which is now deploying all the resources for the derisking strategy that we have anticipated earlier. -- moving Atlantic farming southern to the 11th region and also introducing more of the Pacific salmon, especially in the tenth region. That strategy had investment implication and also a derisking strategy of more devices and technologies in the ocean sites in order to prevent incidents related to oxygen and algae and are looking now at the deployment of that strategy.

And also cash flow was utilized to reduce the usage of our leverage financing facility. That is mainly the financing or the financial implication. Some words on the Chile Atlantic harvest condition. As we mentioned, we anticipated that during the 4 or 5 first months of the year, we were going to have a negative growth or a decline in the harvest of Chile, and that was the case. And we also anticipated that in the second half of 2022, Chile will recover some of this reduction in production.

Overall, we see no growth in Chile in 2022. However, we definitely will have growth in the second half. That will impact the price as we have already detected that in the market. There has been what, from the peak of June about maybe a dollar decline in prices during July and has kept at that level during August. We anticipated some further decline during the year, not substantial, but further declined during the year. Overall, the prices will certainly be high compared to historical levels. That is part of the explanation of the harvest strategy that we've been following. So that's for Chile.

In terms of our growth going forward, and Manuel is already deploying that plan in terms of preparing the X and the elements and all the freshwater production in order to get to this number that we are looking, we have what I would say, almost all the 2023 harvest already in the water, and we are preparing in the freshwater the 2024.

So these are numbers that have behind the X and the elements and all that. So we plan to get to our potential of 65,000 to 70,000 metric tons in about 2 years' time. And that will contain a much larger fraction of Pacific salmon that we have had in the past.

Well, in summary, prices, very important in the quarter. The Coho is very important in the quarter in terms of the contribution and mostly for the future of the company and the use of our assets in the tenth region, much better performance. I would say, normal performance in the quarter in terms of biology and farming performance. Cost will continue to normalize in the coming quarters. In fact, we believe that given the condition of the ocean and the biomass during July and most of -- already almost August, we anticipated a normal condition also for the third quarter that will translate into normalization of cost in the third quarter of this year.

And finally, the plan in terms of harvest for the year is kept without change in the 53,000 metric tons approximately recovering from the 2021 incidents. So with that, we're finished. Thank you for attending and maybe there is questions. I don't see any question here. Let me see.

[Unknown Executive]

There are some questions. One coming from [indiscernible] Considering your contract structures and sales and growth we've seen in pricing during the third quarter. Should we see more resilience in Salmones Camanchaca, realized price during the second half of the year?

[Ricardo Garcia Holtz, executive]

Yes, certainly, yes. The -- it's not so much the contract strategy of the company. It's more important the advocacy for value-added that we had. When you get into the value-added world, very different from the [indiscernible] strategy, you get into clients that appreciate the fact that you have stability both in the procurement of the product, and also in terms of the condition, meaning that you have more stable prices throughout the year and also stable clients and accounts for our product. Salmones Camanchaca is a company that has a great advocacy for value-added and therefore, long-term relationship with our accounts. And therefore, stability in our trade condition. It's not so much the contract. It's a strategy that is behind that. That strategy when the commodity price of the little value-added product jumps to this -- to the roof as we saw this year, we obviously lag behind that, as you saw in the graph that was shown by Manuel. The other side of the coin is that when market decline, we keep more stability, and therefore, we overperformed the benchmark. So the answer is yes.

[Unknown Executive]

Two questions from [indiscernible] The first one is you mentioned that cost per kilo is still impacted by algae bloom in the Q2. Should we expect costs in Q3 to be lower than Q2?

[Ricardo Garcia Holtz, executive]

Just let me answer that, Daniel, and we'll get into. The late March, early April 21, that is 5 quarters ago. We have 5 ocean sites affected by algae blooms. The smallest fish affected 5 quarters ago were big now and was harvested the last one in April this year. And therefore, sales, cost of goods sold was affected in the second quarter by this last fish of affected by 2021 incidents. There is no fish in the third quarter. That was going to be sold. That was impacted by the cost of these incidents of 2021. So certainly, yes, that's the answer.

[Unknown Executive]

And the second question is what kind of non-pharma...

[Ricardo Garcia Holtz, executive]

Sorry just one word, [indiscernible] However, the feed cost has been growing and there are other inflationary pressures on other services. So the combination of a very substantial reduction in cost due to the absence of algae bloom will be balanced to a certain extent by the increase in the inputs necessarily to farm the fish. So what will be the final conclusion? I invite you [indiscernible] for the next earnings report, and we'll find out then.

[Unknown Executive]

And the second question is what kind of non-pharmaceutical sea lice treatment are you doing?

[Ricardo Garcia Holtz, executive]

Manuel? Maybe we can talk in these few minutes, we inaugurated in the second quarter of 2022, the newest wellboat that contains several of these devices.

[Manuel Arriagada Ossa, executive]

Yes, exactly. We started with the new wellboat in June this year. The idea is we are now preparing to use the full capabilities of the wellboat for non-pharmacological treatments. The wellboat is equipped with an OR plant in order to do freshwater treatment and also is equipped with an SFI mechanical system for [indiscernible]. That is the main tool that we're going to have in order to conduct this sea lice treatment also we had an agreement with a special boat that is called SalmoClinic that is also -- that also has some capabilities to do a freshwater treatment.

[Ricardo Garcia Holtz, executive]

[indiscernible] for example.

[Manuel Arriagada Ossa, executive]

And also [indiscernible]

[Unknown Executive]

[indiscernible] Do you think high prices in Q2 affected demand? And what kind of factors are you seeing in the market to make new anticipated softer prices for the rest of the year?

[Ricardo Garcia Holtz, executive]

Well, a higher price is the expression of the condition between supply and demand. Demand was very strong in the second quarter. Supply was very weak in the second quarter. The consequence of that was an increase in prices or put it in another way, the fact that the supply is extremely inelastic in the short term, mean that if you have a lower supply, then you need to reduce the quantity demand it. So that's the other side of the coin of the limited supply. Going forward, I think that in the short term, again, the supply is very inelastic. It's completely inelastic. Not totally because you can anticipate harvest or delay harvest. So there is some elasticity on the supply side in the short term. But overall, it does not last for more than maybe 1 or 2 months. So very rigid supply. And we are -- we know that the supply in the second half of 2022 will be, what, 15% more in Chile than in the second half of 2021. So there will be additional supply available in the market compared to the second half of 2021. And therefore, we see weaker prices. Now weaker prices, in a context, are very high prices. So overall, I think it's a bit more normalized. But the other important thing, is the context of these higher prices and the ability of the demand to absorb the higher prices. What do I mean is that, as Manuel put it in that graph, which was very appealing in my view, the inflationary pressure on cost of feed ingredients affect differently, the different proteins depending on how important is feed in the cost of that protein. And if you can compare chicken, pork, cow, salmon and the other competitive proteins that you can cultivate. You see that salmon has an advantage because the feed has a lower fraction of the cost. So a pressure on ingredients of feed for any product affect less salmon than other protein. And in that respect, it is more competitive in an environment of higher prices for the ingredients of the feed. So that translated into the fact that the prices of the other proteins have a lot [indiscernible] to increase their prices. And therefore, the consumer today is confronting the decision of buying a salmon that is more expensive and other proteins that are also more expensive. But the other projects are less competitive than salmon when feed ingredient prices are putting pressure. So my view is that we are well positioned as a protein -- as a seafood protein in this market condition.

[Unknown Executive]

[indiscernible] regarding your implementation of commercial strategy for Coho would expand more, please to understand better if you are working on marketing strategies with the end consumer or with restaurants or retailers.

[Ricardo Garcia Holtz, executive]

Well, that is something that I would prefer not to reveal it as it's part of our advantages in the marketplace. But that should translate into more stability on the prices of the Coho. Historically, Chile has sold the vast majority of the Coho production in Japan in the form of whole fish. We are taking a different path. And that should translate into the stability of our margins in the future, and I hope to prove that with numbers in the coming quarters. Okay. Very well. Thank you. And again, very sorry for the delay in the -- in starting. It was a server that collapsed and therefore, it was completely out of our hand. Manuel and I was very early in the office. So I hope to see you in the next earnings report. Have a good day.