Salmones Camanchaca SA

SGO:SALMOCAM

Earnings Call Transcript 2023-Q2

[Ricardo Garcia Holtz, executive]

[Audio Gap] Northern Hemisphere. This is the second quarter earnings report of Salmones Camanchaca, 5.5 years after our IPO. And we plan to cover within the next 25 minutes, the main highlights of this second quarter. The agenda, as usual, we will cover some of the operational review markets, financial review and some summary at the end.

What are the highlights of the quarter? I think it's obvious from the reading that we have lower harvest volumes. However, this was according to the company's plan for the quarter. And that also allow us to do a major maintenance of the plants, both in the primary and the secondary plant that were interrupted its function for about 5 weeks, meaning that the process volume and all the fresh sales were much lower. But that was according to the plan, as I said. In fact, that maintenance plan had an impact on the financials of the second quarter of about $3 million alone. That's a onetime, nonrecurrent effect.

The volume reduction is part of the mitigation plan. As we have mentioned in the past, we have moved some of our Atlantic stocking and harvest, therefore, from the fuels of the 10th region to the 11th region with more open and with more energy sea farms. That takes a little bit of a time by reducing sea farms in the northern part of the Patagonia and moving into the southern part of the Patagonia. That plan will be fully executed in place in 2024. And therefore, in 2023, this quarter, there was one sea farm less in the 10th region, not yet compensated by one sea farm additional in the 11th region. And that is where the lower volume of the second quarter came from. That was part of the plan, as I said. Not necessarily good, but that is part of plan.

As of June, however, in the first half of 2022, operating revenue and EBITDA were in line with the previous year. And the ex-cage cost, the farming cost that we had high cost in the second quarter is expected to be lower in the second half of the year. It's worth mentioning very low impact of extraordinary mortality, as extraordinary mortality have been kept within low levels this year. That's excellent. Harvest volumes in the second half -- in the second quarter, was 48% lower than the second quarter of 2022. That's where the lower volume came from.

In summary, I should say that the quarter was very weak, but about 50% -- a little less than 50% of that weakness of the second quarter was part of the plan and was not an accident. The other 50% is mainly related to some incidents that we have in two sea farms that was harvested in the second quarter of this year related to sealice, to predators' attack and some SRS condition of these two sea farms. But overall, in the first half, we were in line with 2022.

On the financial highlights. As mentioned, 35% lower revenue attributable to the lower volume that I mentioned related to the plan, partially offset by better prices on Atlantic. If we consider both, Atlantic and Coho, the EBIT was close to 0 in the quarter. That's very weak, as I mentioned, for the reason I already said. About 40%, 45% of that, in our view, is nonrecurrent, a onetime impact. The quarterly EBITDA at $4.3 million is more than $20 million below the previous year second quarter for the reason I mentioned. And as of June, both, operating revenues and EBITDA, is in line with the previous year.

In terms of the growth in harvest and stocking in 2023, I mentioned already the volume harvested. However, we have completed in the first half of 2023, about 40% of the annual harvest plan. And therefore, there is a much higher volume coming into the second half. That's going to be about 60% of the yearly Atlantic volume. The annual harvest plan for 2023, and that is something worth noting, it has been moved slightly up from our last earnings report of the first quarter to something between 56,000 to 60,000 metric ton both, from Atlantic and Coho. About 80% of that is Atlantic, 20% of that is Coho this year, 2023.

The stocking for 2023 are in line with our plan. Coho this year will roughly double the production of 2022. That's going to be harvested within 4 months between October and January, probably the coming October and January. And it's going to be in the 11,000, maybe up to 12,000 metric tons of Coho. The process of moving some of our Atlantic from the 10th to 11th region, I mentioned, is already in place and will be fully implemented in 2024.

Some of the operational review. On the biology, it's a favorable outcome within the last 12 months compared to the industry's benchmark. As you mentioned -- as you can see there, there are 9 out of 12 months where Salmones Camanchaca has had a monthly total biomass mortality, well below industry level. And when we review the closed sea farms that have already completed their cycle in this first half of 2023, which is the table to the right, you can see that all the key KPIs are below the benchmark or better than the benchmark. And it's worth noting, in my view, the reduction in the length of the cycle of the Atlantic from 16- to 14-month roughly. That is 2 months less in the sea, and that's good for the biology. It's good for the cost. Also, the reduction in the use of antibiotics in the quarter on the closed cycles, the mortality, the conversion factors, I think that these are very good indicators. And remember, these are indicators that refers only to the sea farms that closed their cycle completely in the quarter, not necessarily those that were harvested within the quarter that has not been complete.

On the Atlantic farming cost, this is certainly high. The reason for that is, I would say, two family of reasons. One is what I could consider something structural. That relates to the fact that we are implemented, in almost all of our sea farms, mitigating measures and technologies and devices that tend to reduce the risk of impact or sorry -- reduce the impact of the risk of algae blooms and declining oxygen level in the ocean. That [ devices ] and that strategy cost, obviously. And this is, I would say, something that will remain. However, within the quarter, there was a few incidents in two sea farms that were in the process of being harvested that affected the cost of those units that were sold within the quarter as well as the cost that we are showing in this table. That is, we had a situation with SRS. We had a situation with sealice, and we also have several incidents with predators, sealice, that affected two of our sea farms. That is why we have such a high farming cost with a low volume. That does not show the low volumes of that.

If we go into the total cost, in addition to the farming costs that I mentioned, some of which is, I would say, structural, some of which is, I would say, temporary, we had a situation on the processing, which is the other side of the coin of having a very low volume in the quarter. The plans were interrupted or closed for 5 weeks, that is almost 50% of the quarter. And therefore, all the fixed cost of those weeks were embedded -- were absorbed by the fewer units. And therefore, the processing costs are much higher than the target. And that is something that we expected. That is not necessarily bad, because the maintenance and the improvements on the plant were necessary and it's going to be profitable in the future. But in the short term, in the quarter, it showed, naturally, a much higher processing cost. I think that there is nothing very extraordinary on that. There is no further -- there is also a few, I would say, onetime, the maintenance cost itself impacted about $3 million in the P&L. That is not part of the unit cost, but it does part of the unit cost, the -- an extraordinary compensation for the unionized labor of the plants that completed their negotiation within the quarter. And therefore, that was part of the unit cost of those units produced within the quarter.

On sustainability, this is much similar to what I already mentioned in the previous slides, and I will go over that. Just only say that we are good in terms of the performance of the indicator vis-a-vis our sustainability-linked loan. That contains five indicators that need to be completed in order to get a lower margin on the debt. On markets, it was a shaky quarter, certainly, very high prices at the beginning of the quarter. Very low, I would say, prices at the end -- sorry -- that on prices, get back. Very shaky quarter. I would say, very high price in the first quarter of 2023. It was good beginning of the quarter, but it was a sharp reduction in the price in May and June. We attribute that reduction to the stress in the marketplace on all categories of groceries that we see in the main markets as a consequence of inflation and higher interest rates globally. That came to a bottom at the end of the quarter, and it is precisely that bottom that you see in the chart. At the end of the second quarter at the end of June, that is behind the fair value. The fair value was negative for the quarter and negative for the first half. And that is a consequence, which is attributable to that reduction in the price.

However, as you can see in the table, the prices have gone up during July and part of August, actually quite stable in the last couple of weeks. And we see that, that will continue as the Chilean supply is sharply reduced in the third quarter of 2023 and slightly negative also in the fourth quarter of 2023. So we had, I would say, negative growth from Chile in the second half that we keep the prices high despite the fact that we see, I would say, a very depressing seafood market globally with reduction in almost all categories. And this is in line with what's happening in the grocery markets in general. People are going into cheaper protein such as chicken and pork because of their financial stress due to the interest rates and inflation. We don't see that as a trend going forward as people continue to look for healthier food such as salmon.

Now within that context of prices, the achievement of price of Salmones Camanchaca was very stable in the quarter, almost no change in our price in the second quarter of 2023 compared to the second quarter of 2022. And if you take a look of the earnings report for the first half of 2023, there was slightly better prices in our products than in 2022. So I would say good news from the price side for Salmones Camanchaca, which [ is ] a more stable price than the benchmark. And if you can see there, almost in all quarters, we've been having a better price than the benchmark. So that's good. In fact, if you take a look at June of Salmones Camanchaca's price compared to the benchmark, we were more than $1.50 above the benchmark. And for the whole quarter, that was a little less than $1, but very high compared to the benchmark.

On sales, well, this graph is illustrated well, in my view, the strategy that we have on the marketing side that is keeping flexibility both on, formats and markets, for our products and for our fish. And if you take a look at the table, the HOG, the lower value-added product or format has gone from 30% at certain quarters to 10% in other quarters. In 2023, I would say we've been on the higher side or the higher range of that. And on portions, for example, we've gone from a little less than 50% in some of the quarter to almost one quarter or 26% in some of the other quarters. So very flexible processing capabilities and marketing capabilities to allow the company within a certain context of stability in the main markets such as the North American market, be able to exploit the opportunities in the marketplace.

The Coho is the same story. I mean, it's good to take a look at the longer-term perspective of the table. If you see HOG, for example, it is a typical format of Chilean Coho export, has gone down from 86% of sales in 2020, when we started these Coho projects, to less than 10% or close to 10% in the last quarter, very sharp reduction. If you take a look of Japan, for example, the main market has gone down from 70% in 2020 to, again, 10% in 2023. So that is a reflection of our strategy of having high value added on the Coho and penetration on the main markets and the more developed markets such as the North American one.

On the financial review, the EBITDA, well, it's well explained by what I already mentioned. The volume is about 50%. If you -- actually, if you take a look at the differential of the EBITDA and you divide -- not here, but if you segmented the reduction between things that I would consider them nonrecurrent and onetime, such as the low volume and the plan's interruption, for example, you come up with almost $10 million for that. So I would say 50%, roughly speaking, of that reduction in EBITDA is attributable to things that we do not expect going forward. The other 50% are related to additional cost of the units sold for the reason I mentioned. That are some of that structural, such as the mitigation of algae bloom and oxygen incidents. And some of that temporary or extraordinary, such as the predators. Sealice, very high sealice in two sea farms, and SRS situation in those two sea farms. Overall, the biological condition of the fish have been very well. Overall, that is all the sites. The indicators are better than the benchmark. And therefore, we don't expect that to continue going forward.

On the P&L, different from EBITDA, I think that the fair value -- negative fair value is attributable to what I mentioned that relates to the price as well as the cost going forward in the units that we expect to sell within the next few quarters. On the nonoperational, there is an increase in financial expenses of $700,000 attributable to the higher interest rate of the financial debt, and that is part of that, it's an important part of that. And the other nonoperational relates to the joint venture of the Trout, where the performance has been, I would say, extraordinarily weak. Part of that is attributable to the depreciation of the Japanese [ gen, ] where the joint venture sells most of their products, and therefore, it's been a very low price for the Trout, the Chilean Trout in that market. And we continue to think that, that joint venture, where we have 1/3 of the result, is good for the company. And that is expected to be completed between -- within the next 4 years approximately.

On the cash flow, positive cash flow of about $15 million on the operating. It's lower than the operating cash flow in the second quarter, but good operating results. Investments were $4.6 million. That is much less than 2022. We are -- we have been conservative on the investment side, keeping that only to the maintenance and keeping the assets as -- at an appropriate level. The equity ratio is good, 47%. That is more than the -- what is necessary for the financial commitments to the banks. Net debt, it's a little less than $100 million, and the debt-to-EBITDA is well below what is committed in the financial credits that we have, 1.27. So I would say, healthy cash flow, generally speaking, and financial condition.

In relation to the Salmones Camanchaca growth plan going forward, I think that I mentioned already that we have increased slightly the guidance for 2023 due to the Atlantic performance. And we are expecting this year to be in the 56,000, 60,000 metric tons of both, Atlantic and Coho, 19% approximately the Coho, 81% on the Atlantic. For 2024, for those that have been following the previous earnings report, we've reduced about 5,000 metric tons in 2024. The only reason for that is we decided to stock in 2024, one -- to stock one fewer Coho sea farm in 2024. Instead of three, we will be stocking two Coho for 2024, meaning that the Coho projection for 2024 is about 8,000 metric tons of that specie. Atlantic is going to be the same, in the 56,000, 57,000 metric tons, approximately. So that's why we've produced slightly 2024. Strong in Atlantic in 2024, slightly less than Coho in 2024, but still important to consolidate our strategy in the Coho of doing a lot of value-added, sold in the main market for Camanchaca.

With that, we go into the summary. What do I think are the 1, roughly, points that I would like you to have in mind? The lower harvest and sales volume were in line with the company expectation. That is important. Consequently, part of the cost -- of the additional cost is something that we expected for the quarter. Farming cost was affected by incidents in two sea farms related to SRS, sealice and predators on those two sea farms. We expect that not to continue in the future, as we have taken measures for that. The market price decreased within the second quarter but recovered almost fully in the beginning of the third quarter. And we expect, I would say, strong prices for the second half of 2023, as the Chilean supply is very limited or negative growth for the semester.

The harvest plan for 2023 has been increased slightly because of good performance overall on the Atlantic side. We have reduced one sea farm of Coho, the plan for 2024 that I mentioned. And I think it's always good to know that the extraordinary mortality of the second quarter was very, very low. And the general biological performance of the fish was excellent for the quarter and for the semester. With that, I open for questions.

I think that we received no question. Well, I hope then, it was clear. It was a weak quarter. I want to emphasize that. It was a weak quarter, but a good part of that was something that we expected because of the mitigation strategy going to the south with Atlantic and the interruption of the plant. That was something profitable and necessary. So with that, thank you very much, and we'll report the third quarter in November. I would appreciate greatly if you can complete the survey, so that we can improve our presentations in the future, okay? Thank you.