Salmones Camanchaca SA

SGO:SALMOCAM

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Stein Aukner, analyst]

Good morning. Welcome to Salmones Camanchaca Conference Call. Ricardo Garcia, Vice President; and Manuel Arriagada, CEO, will make the presentation. Questions will be asked via chat and will be answered at the end of the presentation. Also, a link with a survey about the call will be conveyed to the chat.



Ricardo, Manuel, go ahead with the presentation.

[Ricardo Garcia Holtz, executive]

Thank you, Alex and Fernando from BTG for organizing this earnings report call, which we will utilize to explain the second quarter of 2024 performance.



In that quarter, the highlights that we intend to cover here is mainly that our operating revenue during the quarter were almost 50% higher than in the second quarter of 2023. And the reason for that is that we harvest and process a lot more fish than in 2023 second quarter. However, it was a much lower price that we sold our products.



The harvest for the quarter was 11,600 metric tons of Atlantic. And obviously, there was no Coho harvest in the second quarter, and that was in line with the company's planned and about 81% higher than the volume harvested in the second quarter of last year.



Harvest weights grew from 4.4 kilos in the first quarter of 2024 to 5 kilos in the second quarter of the same year 2024. That is very much in line with the harvest weights of the second quarter of 2023. Remember that we had some issues with the harvest weights in the first quarter of this year. Our 2024 plan for harvest is now at about 46,000 to 48,000 metric tons of Atlantic and about 4,000 to 5,000 metric tons of Coho.



In Coho, we harvested a bit more than 1,000 in January, and therefore, the harvest for this new season that will come in around October is about 3,000 to 4,000 metric tons of Coho. On the Atlantic, the number that I mentioned is about 10% higher than harvest in 2023.



The prices, as I mentioned, declined substantially in the second quarter of 2024, 10% lower in Atlantic, 25% lower in Coho, but with a better relative price achievement versus our peers, with a total impact of about USD 11.4 million only in the quarter and close to USD 20 million in the 6 months. That is, if we would have sold 2024 volume with the 2023 prices in the second quarter, we would have made about USD 20 million more in the semester and almost USD 11.5 million more on the quarter, very substantial reduction in the prices as we see the market declining during the quarter.



Price evolution, however, during the quarter was positive compared to December 2023 and therefore the inventories declined and this slightly better prices than in December made us reduce the inventory provision, net realizable value on the inventories of Atlantic and Coho, about 60% in Coho and 40% in Atlantic, with a year-to-date effect of about $4 million in Coho and $1 million positive in Atlantic.



That is, you may recall that in December 2023, we made provision because the prices were lower than our cost, and therefore we made this net realizable value provision. But the performance during the semester has been a little better and that has improved the provision.



Atlantic ex-cage cost decreased 7% in the quarter of 2024 compared to 2023. And in the quarter, we had no extraordinary mortalities in the period, and we have a very high survival rate in our fish throughout all -- almost all of the farming sites, better than industry indicators as Manuel will cover later.



When we get into the financial highlights, as I mentioned, revenue were higher than -- a lot higher than in the second quarter of 2023 because of the 64% more volume sold, despite the substantially large price decline. As I mentioned, if we compare quarter-on-quarter, the Atlantic price declined $0.80 in the quarter and $0.93 in the semester. Yet the EBIT kilo of Atlantic declined $0.65. So there was a substantial improvement also on the cost side. As I mentioned, this large price decline was not completely translated into margin declines.



On the price of Coho, for example, the decline was [ $1.71 ] in the first 6 months of the year and explained a reduction of about [ $1.13 ] in the EBIT kilo of Coho, thus a much better cost performance this year than the previous year on the Coho. Considering both Atlantic and Coho, the EBIT kilo was $0.54, Atlantic $0.75 and Coho was negative. And the Atlantic $0.54 compares to only $0.02 in 2023. So a very positive performance on the Atlantic side.



However, excluding some nonrecurrent operating margins that we booked in 20 -- in the second quarter of 2024, Atlantic declined $0.20 versus the previous -- versus that number that I gave you and $0.19 on the Coho. Coho EBIT kilo was negative $0.47 versus only $0.02 positive in the second quarter of 2023, again, explained totally by the price decline.



The EBITDA does include provision made on inventory valuation that I mentioned, the net realized value that is not included in the EBIT kilo because it refers to margin of units sold, and the provision is for unsold units. And the EBITDA this quarter was USD 1.5 million reversal of the Coho and about USD 1 million reversal on the Atlantic on the net realizable value.



The nonrecurrent effect that I mentioned on favorable effect on gross margin was related to operational contracts with counterparties that coincidentally happen in the second quarter, various contracts that coincidentally happened in the second quarter, totaling a nonrecurrent impact of $6.4 million.



Also important to mention here that the remaining inventory of [ 5.5,000 ] metric tons of fish at June, it's about 60% Atlantic and 40% in Coho, is substantially lower than December and also much lower than the inventories that we had in March.



In reference with harvest and stocking for this 2024, quarterly Atlantic harvest, as I mentioned, was 11,600 metric tons, 81% higher than in the second quarter of 2023, as we recovered harvest weights of first quarter of 2024, which I mentioned was harvest weights are only 4.4 kilo fish, mostly in the first quarter attributed to lack of fish appetite between October 2023 and February 2024 that affected substantially our cost performance in that particular quarter and the availability of fish.



Remember that we decided in the first quarter to postpone some of the harvest that we planned in the first quarter; because the fish was too small, we postponed it to the second quarter of 2024. That meant that we regained biomass in the second quarter. That's why we increased substantially the harvest and also the volume sold in the second quarter. 4.4 to 5 kilo was the improvement in the fish weight at harvest time.



Atlantic stocking in 2024 is expected to be higher than 2023. As we increase production plan for 2025 and 2026, when we expect to get into the 55 to 60 [Technical Difficulty] as we envisioned in the beginning of this year, a much weaker market condition for the Coho, particularly attributable to the Japanese yen devaluation, and therefore we reduced our stockings for this year. All in, between Atlantic and Coho, we expect to be around 51,000, maybe 52,000 metric tons of both Coho and Atlantic this year, 2024.



We also think that the industry will be conservative on the Coho stocking for 2024 for these market conditions that I mentioned.



Manuel, maybe you can get into the operational review of the quarter?

[Manuel Arriagada Ossa, executive]

Yes. Thank you, Ricardo, and good afternoon to everyone. Okay. So the first point is the Atlantic biology. In the first half of this year, we have had a very positive biological results for sea farms.



As you can see in the left graph, the evolution of the monthly mortality of Atlantic salmons which was under control in the first half of the year, with values far below the industry average, so very good performance for Atlantic. Also, it's important to mention that in the first half we ended without any extraordinary mortality.



In the right table, you can see that all indicators, biology indicators were better than the industry average for closed groups during the year, such as the mortality, the feed conversion, the growth, the length of the cycle and also antibiotics consumption. The only exception was the average weight as Ricardo mentioned, due to the fish lack of appetite during the summer.



However, the good news is that starting in March of this year, the conditions in general improved and now the feeding conditions are completely normal, which is helping us to improve the harvest weight since the second quarter. The harvest weight in the second quarter, as Ricardo mentioned was 5 kilos compared with 4.4 kilos in the first quarter. For the coming months also, we expect harvest weights above 5 kilos.



In relation to the Atlantic farming costs, this second quarter came with an ex-cage cost lower than the second quarter of 2023. It was $4.64 compared with 4.98, so $0.34 lower. The breakdown of that reduction consists of $0.10 on lower feed costs, $0.10 on lower treatment costs, $0.04 in lower mitigation costs and finally $0.10 in operational efficiencies and also a higher scale. Going forward, in the coming months, we expect also a decrease in the ex-cage cost to better harvest weights and also harvest from sites with more positive sanitary conditions.



If we now analyze the total cost which is the farming plus, processing, total cost for second quarter was $6.11 per kilo. It was 11% lower compared with the same period of last couple of year. The processing cost, in particular, was $1.12 per kilo, below the same quarter of the previous year; it was $1.49, mainly explained by a larger scale for volume processed, processing efficiencies and also, we had the effect of the exchange rate of the Chilean peso against the dollar.



Next slide please, in relation to sustainability indicators. As you can see in the table, the sustainability metrics are presented for closed sites in the second quarter. In the second quarter, we closed 4 sites. So the metrics corresponds to those 4 sites. For those 4 sites, the fish in fish out ratio, as you can see, was maintained below 0.5. That is consistent with our Sustainability Linked Loan target.



The farming length of the cycle was in average level, lowering the risks and also extending the fallow periods. In relation to the ASC certified harvested biomass, it was in a very good level, reaching 72% in the quarter. Also, it's important to mention the reduction in the antibiotic usage compared to the second quarter of 2022; that is the comparable year in terms of farming. In general, we have a biomass with better biological conditions. So we were able to reduce the antibiotic usage in the [ world ].



Okay. Let's go to the markets now. In relation to the Atlantic salmon price, the table shows the evolution of the Urner Barry price in the U.S. market during the year. As you can see, the price declined and remained in a downward trend on a context of a weaker U.S. demand, which is our main market. For this year, Kontali expects a 7% drop in the Chilean supply for Atlantic with a very big drop in the first half of the year. It was minus 16 in Q1 and minus 8 in second quarter. And for the next 2 quarters, we are expecting a drop of 2%. For global supply, Kontali expects a marginal increase of 1% for the year.



In the next slide in relation to the Atlantic price achievement, as I mentioned, the market prices had decreased in January, but at the same time Salmones Camanchaca price remained more or less stable since July 2023. Our raw material returns was $0.13 above the Urner Barry reference price during the quarter, ending with a positive gap of $0.29 in the month of June. So we have a better price achievement compared with the market prices during the quarter.



In general, our company's flexibility to react to the market changes by changing formats of markets allow us to achieve above market prices over the long term. At the same time, we have also medium-term commercial agreements with our many customers that also mitigate volatility in our price. So in general, more stable prices and with a premium compared with the [ exporters ]



In relation to the Atlantic sales distribution, as you can see, the American market continues to be the largest one and the most important, of course, with 45% of market share. That was up from 37% in the same quarter last year. The second market was Latin America with 18%, which is mostly the Brazilian market in this quarter. The value added was 72%, and the H1 sales were at a higher level in the quarter compared with the previous one due to a better harvest weight and the sales to the Brazilian market and Chinese market, mainly in the H1 [Technical Difficulty]



Let's go to the Coho situation. The graph presents the key metrics pertinent to the same performance of Coho. As you can see, the blue line illustrates the devaluation of the Japanese yen against the dollar. We have a 6% devaluation in the second quarter of 2024 with a cumulative depreciation of 12% in the last 12 months. This currency shift, of course, influenced the price of Coho in dollar in its principal market, which is Japan. Japan still represents 2/3 of the total Chilean export. So that has a ripple effects in the other markets and implies a reduction of the Coho price in all of the markets.



However, after the maximum devaluation of the Japanese currency at the end of June at a level of 160, since July, there was an appreciation of the currency at the current level of about around 147. The Chilean industry at the same time increased the Coho production since 2020, with an important increase of 20% during last year. However, this year, the total stocking of Coho was reduced [ to ] about 14% compared with the previous year, so we are expecting a harvest decrease in this new season of about 14% to 15%.



The graph also shows the volumes sold in columns and the global price for Salmones Camanchaca is the orange line. The good news is that currently we are seeing a recovery of [ global ] prices in the last month, especially in value added due to the lower Chilean expected production and also due to the market diversification, which is a good news for the coming season.



Finally, in terms of the Coho sales and value-added strategy, Japan and Korea was the largest market in the second quarter with a 27% market share, followed by China and Southeast Asia and then Latin American market, which is supposed to be -- the value added was 47%, that was below previous quarters due to the higher production of the last season, which also increased the production and sales to Japan in [indiscernible] format



Our marketing strategy remains the same. The idea is to develop new markets apart from Japan and also have a production mix flexibility in value-add.

[Ricardo Garcia Holtz, executive]

Just going quickly on the financials. Although most of the explanation of the financial has already been covered, but we, in the quarter booked $10.4 million additional EBITDA compared to the same quarter of 2023, which were, as we have covered during the presentation, attributable to mostly more Atlantic volumes sold with a positive impact of $5.4 million, whereas in the second quarter, the value-added [ plant ] was on major maintenance plan that we mentioned that last year. This particular quarter in 2024, the plant was fully available for our harvest process. And therefore, the negative impact of 2023 was not in our earnings this 2024. That is a positive $2.6 million.



As I mentioned, the several strategy counterparts in this quarter coincidentally made a nonrecurrent impact of USD 6.4 million. It was just a coincidence that happened in the second quarter of 2024, totaling that amount. And as I mentioned, as we sold a good fraction of the inventories of Coho and Atlantic, we reversed the net realizable value provision made in December for an amount of $2.5 million between Coho and Atlantic in the second quarter. Also, the cost of goods sold was lower than in the second quarter of 2023. And the impact of that lowering cost was $4.6 million in this particular quarter. And by far, the largest negative impact in our EBITDA performance in this quarter was on the substantial price declined in both Atlantic 10%, $0.80, and Coho total 25% and $1.70 between last year and this year.



On the P&L, following slide, non-operational results affected mainly by the Trout joint operation. As we mentioned, this is an operation that it's not managed, not consolidated into Salmones Camanchaca, whereas we have already made an agreement to discontinue Salmones Camanchaca participation as of this 2024.



However, there were some fish stocked already that has already been harvested and therefore are in the inventories of the Trout Joint Venture operation, which will be sold throughout the second half of 2024 and probably early 2025. So the negative impact that we have booked for Salmones Camanchaca will be extinguished, I would say, within the first quarter of 2025. So this is a run-off inventory that is in the joint venture operation. This is, I would say, the most relevant P&L comment other than the operational that we have already covered.



On the cash flow, positive cash flow of $24 million in this quarter as we sold the inventories, the large inventory more than 10,000 metric tons of both Atlantic and Coho. I think it was more than 12,000 or 15,000. It was a large inventory in December that has been running out throughout the year, and therefore, that has contributed to a positive cash flow in the second quarter, $24 million, as I said. Investments were $8.3 million compared to a lower number in 2023.



And financing was a negative $15 million in cash flow, meaning that we voluntarily reduced the debt that we had in the beginning of the year as we sold the inventory. Remember that we mentioned at the end of 2023 and early 2024 that because of this large inventory, we had more financial debt than normal, and that has been running out as we go through the year.



The equity ratio, equity over asset is 46%. That is above the threshold on the Sustainability Linked Loan that we agree, with a net financial debt, net of cash, of course, of $118 million at the end of June. That is higher than in June, but lower than what we had at the beginning of the year.



The net financial debt in relation to the last 12-month EBITDA, that's the key ratio that we had in our Sustainability Linked Loan, was obviously exceeded at a little bit more than 5x vis-a-vis 4x, which is in the Sustainability Linked Loan, something that was well understood by the bank with -- that gave us a proper waiver because of this extraordinary condition of the initial part of 2024.



On the growth plan of Salmones Camanchaca, just to finishing the presentation, we continue to have a guidance of 46,000 to 48,000 metric tons of Atlantic for the year and 4 to 5 metric tons of Coho. As I mentioned, Coho had some harvest made in January from the previous season, and therefore, the net Coho harvest for the last part of 2024 is going to be around 3,500 to maybe 4,000 metric tons of Coho. So far, the Coho has been doing very well, and we plan to start in the fourth quarter, the harvest and the sales.



The cost that we had on the Coho, as I mentioned, it's due to the weaker conditions that we envision in the market during 2024, has nothing to do with the long-term prospect of the Coho, but it was mostly affected by these large devaluations that Manuel mentioned in the main market for the Coho and therefore people were not able to sell the Coho at the Japanese market, and therefore, overflowed the other markets.



We have already stopped more than half of the smolts in the ocean for the 2025 harvest plan, and we are starting in the coming months for the 2026 plan. As I mentioned, we are planning in the next 24 months, that is in the next 1 to 2 years to reach our goal of 55,000 to 60,000 metric tons of Atlantic, which is what we expect to deliver sooner than later.



With that, the summary of the quarter and I think that we have already covered most of it, but essentially a much better operational results than in the first quarter of 2024 and also a much better performance than in the second quarter of 2023. And the reason for that is mainly more revenues and more sold volume that gave us about $10 million more in gross margin, lower margins than previous cycles, as we confront a weaker market condition and some cost pressures in the medium term, feed services, more extensive risk mitigating technology, struggling regulation and the like is affecting the long-term trend of cost.



Atlantic ex-cage cost lower than in 2023, good. And processing cost also was lower because of the much larger volume processed in this quarter than the same quarter of 2023. Salmo Cam relative price achievement still good and healthy compared to the peers. Very good biological indicators compared to the end of second quarter of 2022, which is the comparable farming sites that we should [indiscernible] and better than most of the peers as Manuel showed. The guidance that I gave you in reference with the total harvest plan for 2024, which is in line with our initial expectation, despite the first quarter setback that we had.



Chilean supply in 2024 for Atlantic is declining. We expect double digit for the first half and close to 0 growth in the second half of this year. And just to remind, the company announcement of its delisting from the Oslo Stock Exchange and formal request has already been submitted to the Norwegian regulator, which we expect to get a favorable approval at the end of this month, on early September. We expect and we estimate that the delisting will happen before year ends.



With that, I leave the audience for questions.

[Ricardo Garcia Holtz, executive]

How do you see U.S. demand currently? And what do you expect going forward?



A very relevant question because as you saw in the presentation, most of the loss of margin came from the weaker market condition. In fact, I've just obtained this morning, the last report from the U.S. It showed that all food and beverage prices in the U.S. grew 1.5% with respect to July 2023, but yet on the seafood category, the frozen seafood dropped 2.2% in the price, and on the rest of the categories of the seafood, it dropped more than 4%, the price. And yet, despite these lower prices, volumes were also lower.



So we are confronting a weaker market condition than anticipated. And according to experts, the reason for that is mostly attributable to the impact and erosion of real income, or real salaries that people have in the main markets because of the inflation. If you accumulate the last 3 to 4 year inflation, you come up with an erosion of real salary of about 20% to 25%, but the nominal salaries has increased about only 12% to mainly 13% in the same period, and therefore, there is a net erosion of about 10% real. That is affecting the decision, and we saw some cheap protein being sold more and the more sophisticated protein that comes from seafood, less. That's essentially.



What do I expect for the remaining part of the year? Well, I believe that the U.S. is gradually adjusting. It's gradually adjusting to lower price increases, lower interest rates. And therefore, I expect 2025 to be a better year for the U.S. consumer and in general for global consumption. And therefore, I believe that in 2025, we should regain the trend of seafood prices and seafood demand that we have had over the last several years.



Could we expect positive EBIT kilo on Coho sales for the second semester of 2024, given the recent appreciation of the yen?



Well, the yen appreciation is just a slight reduction of the devaluation, I would say. But yes, I believe that there is also another factor for that is the Chilean production of Coho is going to be lower this year. I anticipate without being too precise that it will also be lower in 2025. And therefore, I believe that market condition for our Coho will improve.



In fact, in the table that's showed by Manuel, the prices are a lot higher than what we had in the third quarter of 2023, where the price were very, very low, they are more stable now. And as we develop more markets, as we develop more formats, and Chilean suppliers cut their production, that will be translated into better EBIT kilo. We also have, as Manuel mentioned, positive news on the cost of the Coho and therefore, that also helps EBIT.



How about the ex-cage? this quarter you reached a better ex-cage, but still high. Can you give us some more color about the cost and the evolution of those as fish oil, fish powder and the main one, you mentioned the ingredients of the feed?



We certainly have a release in the cost of salmon feed and Manuel can mention what are the expected impact of that in the feed cost of the rest of 2024. But also, I have to say that, as I mentioned, there are other reasons for this pressure on cost attributable to the many technologies that we are implementing today in mitigating the natural risk that the fish faces in the ocean, which as -- the positive side of that is that, as Manuel showed, we have very, very good survival rates of our fish.



But Manuel, you can complement on that answer?

[Manuel Arriagada Ossa, executive]

So in relation to the ex-cage costs in the first -- the most important one is that we are seeing a very good biological conditions with very low mortality, with a good conversion and with a very good growth. So we are expecting a good level of scale at sea farms, with harvest weight above by 5 kilos. That helps a lot in terms of the ex-cage cost. So we are forecasting a reduction in the ex-cage cost for the second half.



And also in relation to the feed cost, even though the fish meal and fish oil is still in high level, it's important to mention that all the other ingredients are reducing a lot the cost in the last, let's say 6 months. Talking about the vegetable ingredients, such as the corn gluten, wheat gluten, the canola oil, the wheat, the soy protein concentrate, and also talking about the animal byproducts ingredients, such as the poultry meal, the [ feather ] meal, the pork meal, and so on.



So it's very important that all of these ingredients are reducing the price within the last months. So we are going to see a reduction of at least 50% of the feed price in the coming months, so which helps a lot also the evolution of the ex-cage cost.



It's important to say also that the fish meal and fish oil in total represents less than 10% of the total ingredients of the fish. So the most important part are the evolution of the vegetable and the animal ingredients.

[Ricardo Garcia Holtz, executive]

The other thing, Manuel, that is important is that, as you may know, the reduction in the cost of feed will translate into cost of goods sold probably in 2025. And we'll not see that in 2024, maybe at the end of the year, but not so much. I think that's the last question I can see. So unless there is some objection, I would like to thank BTG again, Alex and Fernando for this opportunity and also everyone attending this earnings report, and I hope to see you all in November when we report the third quarter of 2024. Thank you very much.

[Foreign Language] Yes, please leave your comments at the end on the presentation so that we can improve in the future.

[Stein Aukner, analyst]

Thank you, Ricardo and Manuel and all the investors who joined today. We remind you to complete the survey. The link is in the chat.

[Ricardo Garcia Holtz, executive]

Very well. Take care.

[Manuel Arriagada Ossa, executive]

Thank you.

[Ricardo Garcia Holtz, executive]

Bye-bye.

[Stein Aukner, analyst]

Bye.