Salmones Camanchaca SA

SGO:SALMOCAM

Earnings Call Transcript 2020-Q3

[Ricardo Garcia Holtz, executive]

Good morning. Thanks for attending tenth earnings report from Salmones Camanchaca after the IPO in 2008. You will agree with me that this is an unforgettable year with the largest economic downturn in more than 90 years. We will only speak about 1 quarter figures in this context, but I think the few words need to be said on the context precisely. Both producers and consumers have been under greatest stress during the quarter and during the last 6 months. Many, many industries have suffered structural challenges. And the population has lived under a variety of crisis across the globe. And that has affected consumption and working patterns globally.

Other industries, on the other side, have advanced more than 10 years in their growth plans. And in this context, the question becomes -- and the salmon industry, where is it? Where is the salmon industry positioned within this crisis? I think a few words need to be said on that.

We, the salmon industry, is best positioned for people's immune system and focus -- new focus on health. We have had major, major advancements in salmon at home, super simple, super food. We entered into people's homes and did it after buying online and delivered at the door. That is a major challenge for many, many food services, and we did it.

Large market share gain in restaurants' menu as restaurants simplified their processes, salmon has gained share in the menu. In the awful pandemic context, we lead. Industry sold -- the Chilean industry sold the same amount of salmon as in 2019. We did not leave the plate. We did not leave the table. Indeed, we sacrificed price and profitability for a while, and our numbers show that. And profits for us are bad now, but we did not abandon people. And we are in people's mind, heart and mouth.

We are left wounded after these couple of quarters with a few scars but with a lot of learnings. I personally see a very bright future for our product and not long from now. This is the agenda we will cover today. And let me jump to the highlights of the quarter. As you go through our earnings report, one conclusion arises clearly, we were hit by the pandemic on something we couldn't prevent, revert and hardly managed, weaker demand globally and fewer markets open. The impact on price is unquestionably, historic low for the last 8 years.

We react quickly by enhancing and strengthening our production and marketing strategy, process flexibility and market and format selection. Being a midsized supplier, allow us to move quickly. We moved to value-added to help retailers to serve their growing demand and help final consumer cooking at home, simply and super food. And 87% of our quarterly sales were value-added. And we expect more than that in the fourth quarter.

While prices damages us, we delivered good operational performance. Harvested fish have lower farming and processing cost. Our long-term unit cost target of $4.23 per kilo WFE was not only achieved, but we were below that at $4.15.

Despite the worst time of the pandemic in Chile, we were at the winter time. We kept up and running our full value chain from stocking, harvest, processes and sales. We had no fatalities, very few people got sick. None of one were serious. We proved people safety and business continuity we're competitive.

Today, 100% of our people get preventive test every week, with less than 0.5% positive. We had an important turnaround on the trout JV, adding compared to the third quarter of last year, $3.2 million more, with cost as low as $3.2 per kilo, live. And unchanged prices compared to third quarter last year. 85% premium product harvested in the JV trout.

Our cash position and liquidity indicators gave us space and flexibility. Salmones Camanchaca entered this pandemic with almost all its extraordinary 2018, 2020 investment plan completed, and with low leverage levels due to our IPO almost 3 years ago.

By 2020, Atlantic harvest will be in the upper side of our previous guidance, and we expect to harvest 53,000 metric tons of Atlantic in the year, plus/minus 1%.

Going into more details on the financials. Harvest volume was lower in this third quarter compared to 2019, in part, for the processing limitations, self-imposed by our value-added strategy at capacity that substantially expanded at the end of September. By the fourth quarter, we expect to harvest something around 16,000 metric tons of Atlantic, and we expect to do value-added proportionately than in the third quarter.

28% lower revenue had a double punch, 25% lower price compared to 2019 and close to 10% lower volume sold in the quarter. And our sold price, average price of our sales had a big fall of $1.37 per kilo during the quarter, while our EBIT kilo fall by $1.29 between the third quarter of 2019 and '20. Again, $1.37 lower price, $1.29 lower EBIT meant that our processing cost helped these demand situation. Our EBIT year-to-date is still positive at $5.6 million.

Let's get into the operational review, which I will hand it out to Manuel Arriagada, Managing Director.

[Manuel Arriagada Ossa, executive]

Okay. Hello. I will cover the operational, mainly the farming and also the processing. For farming in the quarter, we have a very good performance. The ex-cage lightweight cost was $3.06 per kilo, that is 2% above our target of $3 per kilo, lightweight.

If we compare the Q3 cost with the previous comparable quarter that is Q3 2018, we were $0.15 decrease, that is mainly driven by good growth. As Ricardo mentioned, we have some delays in harvest in Q2 and Q3, mainly July and August, that implies an increase in the average weight. The average weight of the quarter was 6.4 kilo, lightweight. That is compared with 5.8 of Q3 2019.

We have a little increase in the cost compared with Q3 2019, mainly driven by the sea lice treatments. It's important to mention that the sea lice situation in farming in general is under control. We still have a very good efficiency of all of the tools of pharmaceutical products, but we have a little pressure on frequent treatment. Currently, our sea lice cost is around $0.16 per kilo, that is more or less $0.05 more than the previous year.

In relation to the processing cost, the processing cost was below our target of $1 per kilo WFE, 14% below this quarter, $0.86. That is a $0.02 increase compared with 2018 and 2019 Q3, mainly due to the preventive measures of COVID-19. The preventive measure of COVID-19 implied $0.05 per kilo in processing.

We also increased our value-added production. This month -- this quarter, we had 87% of value-added, mainly fillets and portions. That is very important in our processing strategy in relation to address the market requirements of -- especially in this COVID situation.

In Q4 2020, we will have fully operational, the new capabilities of the secondary processing at Tomé plant. We will double our production capacity for portions, accounting for 55% of our total value-added capacity. The total investment included portions and fillets graders, packaging and leveling new equipment, portion and slicing equipment, and all of that control with an Innova process control. So we started these new capabilities of processing in the middle of September. So we were able to increase the volume of harvest and produce since the middle of September.

All in all, the total finished product cost, that is the farming, wellboat, primary processing and secondary processing in the last 12 months was in line and below our long-term target of $4.23 per kilo WFE. That is very important because the total cost is highly stable and below our target, despite of the fact that we have some action costs, such as additional vaccines for SRS and sea lice, new devices to reduce the risk at sea farms, such as oxygen system and algae bloom warning systems and the preventive COVID-19 measures that I mentioned.

In relation to the harvest and the stockings, as you see, in Q3, we increased our harvest volume to 13,400 tons. And we -- our expectation for Q4 is to reach to 16,000 tons. Q3 2020 is down 3% in relation to Q3 2018, that is the comparable side. Yes. In relation to our stocking plan, we maintain our stocking plan for the full year in 12 million smolt, the same stocking plan.

In relation to the industry, cumulative until September, the stocking of Atlantic is minus 3% compared with the previous year. The same for Pacific salmon, that is also minus 3% down compared to 2019.

In relation to the biology, as you see here, the all biomass mortality in Q3, the dark line was 3.4%, that was below Q2, where we have the Islotes incident. The main reason of the mortality of the Q3 is SRS. We have 1 site with an SRS complications at the final part of the cycle and also some sea lion attacks in also in 1 site that are the main explanation of the 3.4% of mortality of the quarter.

If we look at the closed side mortality, that was below Q2 but still high at 9.6%. This is mainly driven by sea lion attacks in one center, but at the beginning part of the cycle, so without any major implication in costs. We reduced our feed conversion ratio compared with the comparable cycle of Q3 2018, and we increased our yield to 5.1 kilos per smolt.

And finally, in relation to the biology and sustainable indicators. As you see here, we increased the length of the cycle in Q3 2020 because of the COVID restrictions and the restriction of the secondary possession for value-added. So we have an 18-month length of the cycle. But we were able to reduce, that is a very important new, the antibiotic -- the number of antibiotic treatments and the antibiotic usage. We reduced from 600 grams of antibiotics per ton produced in Q3 2018 to only less than 300 grams per ton produced in 2020.

The only bad news is that, as I mentioned, we need to increase the usage of anti-parasite treatments for sea lice in order to keep the sea lice under control, but still with a very good efficiency.

[Ricardo Garcia Holtz, executive]

Thank you, Manuel. And we'll cover now some of the markets and how Salmones Camanchaca has reacted to these market conditions. In this graph, you see the evolution of the last 10 years of Chilean price measured by the Miami Trim D fillet per pound. And you will see here that we have been surfing during these last 2 quarters in almost the lowest level of prices in the last 10 years. The short light spike in the market price in the middle of the quarter was only attributable to a truck strike that we had in Chile in August, but it was short-lived.

Price still volatile, although in the last few weeks of the quarter has been more stable, particularly during October. Our vision and conviction at the end is that we are bottoming price-wise. As you all know, the vaccine -- the COVID vaccine is improving, and it's probably going to be launched within the next 60 days or so. And we believe that 2021 will see a strong recovery on prices.

In terms of price achievements in Salmones Camanchaca, we continue to show more stable prices due to our selection of markets and formats, particularly value-added. It is likely that we will not recover as quickly as the commodity Hon or Trim D fillets in the coming months as market recovers because of our contracts and the like. But we will continue to show more stability in the next year.

Large fraction of the value-added production in the third quarter brings more stable prices and better price achievements, with the 87% that we have mentioned value-added sold as you see in this graph. In the pre-pandemic context, Camanchaca sales were proportionately higher in the foodservice segment versus the retail, and we have switched that during these last 6 months. We forced a quick shift to retailers, a more competitive and less inclined to long-term contract segment, though. But that offered us an opportunity to position better our brand, Pier 33.

In terms of the sales mix and market allocation, important changes during this last quarter once again proved the ability to Salmones Camanchaca to adapt and be flexible to the market condition, thanks to our mid-sized, if we were too low or too small or too large, it would be very hard to move around to chase for better opportunity. We are in the right size for the current context.

The U.S. remains the main market for us with 46%, but that it will change from third quarter last year. But a significant increase in allocation to Japan from 9% to 21%, more than double allocation to Japan. A very large decline in our allocation to Brazil from 10% to only 4% during the quarter as Brazil got a substantial amount of supply from -- from very large fish from the 12th region of Chile.

China, as we said earlier in previous presentations, accounted this quarter only for 2% of sales, and prices have been under severe pressure on the Hon formats. We believe that China will take a while to recover because of the reputation of the product with this incidence of COVID found in the packaging. Value-added products, as I said, reached 87%, almost 8% more than in the same quarter of 2019.

In terms of the industry projection for '21, which I think is an important element once we try to forecast the recovery of the market and particularly the price. In the middle of the pandemic -- and this graph is very evident. In the middle of the pandemic and the largest global crisis in the last 90 years, Chile exported the same amount of volume than in 2019. Second and the third quarter were very, very similar.

With a weaker demand condition globally, this obviously was translated into a lower price, weaker demand, same supply, people needed a lower price to consume that supply. There are some discussions in reference to what's going to happen in the fourth quarter, and Aquabench and Kontali has some differences as you see in this fourth quarter estimate for 2020.

Our view is closer to Aquabench, and we believe farmers cannot hold for longer an already large fish, which will be supplied to the market in the fourth quarter. If so, volume will be smaller in 2021 than Kontali expects. Every quarter in 2021 we expect we have a lower supply from Chile than in 2020. We will see a double-digit decline in Chilean supply in '21. That lower supply will come to the market in a context of a much stronger demand once the Northern Hemisphere get vaccinated, something that we expect in the first half of 2021.

To finish on the financial review. Strong price impact on EBIT in the third quarter was the consequences of what we have already said. And this waterfall analysis of EBIT shows the relevance of the price implication, which explains more than 2/3 of the fall in EBIT.

Cost of goods sold included $0.27 more on sales of 11,700 tons WFE. We sold during the third quarter products that were produced in the second quarter where we had some additional cost. So that this is consistent with lower cost in the third quarter in farming, in production, which will be sold this -- at the end of this quarter and in the next quarter. $0.13 from farming and higher ex cage costs due to high mortality for SRS and sea lice treatments, $0.14 due to higher processing costs for more value-added and COVID preventive measures implemented in the second and third quarter.

Coho negative impact of $2.3 million as lower density affected these specie in this first cycle. And a market decision was taken not to take 1 Coho site to complete the cycle, and we decided to terminate it earlier than initially expected, also contributed with a negative Coho EBIT. All these in a context of lower sales than in the third quarter. So that is mainly the explanation for the EBIT.

On the P&L, the turnaround of the JV -- the trout JV was very important. We contributed -- it contributed with $1.5 million profit to the quarter compared to a negative $1.7 million in the third quarter of 2019, that's a $3.7 -- sorry, $3.2 million additional than the third quarter of 2019. Excellent cost, as I said, $3.2 per kilo, lightweight. No decline on prices, very stable market for trout as the supply has been shrinking in the last years.

And I remind you that this settlement or this agreement with the trout terminates in 2022, and we expect shortly to announce what's coming after '23. We had a $1.1 million additional loss accounted in the third quarter for the Islotes extraordinary storm that damage one of our largest site. The total impact for Salmones Camanchaca of these nature's incident in the second quarter is going to be $5.2 million. That is our best estimate net of the indemnity that we expect to get from the insurance, which have started to pay some of the coverages. Favorable exchange condition, foreign exchange conditions this quarter balance some additional financial expenses in the quarter.

On the cash flow analysis, debt financing facility were used to fund additional working capital needed due to the operational $4.3 million deficit that we had in the quarter. Investment spending forecasted for 2020 is 65% of prior year, that is we cut our investment plan in about 1/3 compared to previous year and substantially reduced the second quarter to fourth quarter investment plan, so reducing the cash needs for that purpose. Investments in third quarter was only $5 million and mainly focus on value-added capacity in our secondary processing plants.

Today, $94 million of the $100 million are used from our main syndicate committed loan facility. And we have additional noncommitted short-term lines available in an amount in excess of $20 million. Total liquidity there for today in Salmones Camanchaca is close to $30 million.

I would like this slide to get some conclusion of our 2019 IPO. It provided us a perfect positioning to confront this pandemic. It funded our expansion in organic, profitable, new volumes. It funded our efficiency plan in processing plant, reducing our costs and adding value-added capacity. It funded the ability today to serve the market with more value-added product, as I said, so that we prepare and better confront this 2020 market condition. It provided additional liquidity and equity to preserve the current solid balance sheet.

Our equity position is now $175 million, with an equity ratio of 46%. Net financial debt at the end of the quarter was $10 million more than in the end of the second quarter. Committed long-term credit line of $100 million, as I said, 94% utilized, $10 million of that line was supposed to be amortized this month of November and was postponed to provide additional cushion. As of September, our covenant ratio of 4x net interest-bearing debt over EBITDA is well covered. While the equity ratio covenant of more than 40% is well covered as well.

Summarizing this third quarter. Historic low prices, due to weak demand and reduced market access explained more than 70% of the EBIT pull. EBIT year-to-date -- EBITDA, sorry, year-to-date is still positive. Strong operational performance in terms of cost imply that our total product cost is below the target at $4.15 per kilo WFE. Very important, business continuity achieved, despite pandemic context in operating geographies. No fatalities and few positive cases detected, compatibility between business continuity and people's safety.

Production and sales restrained our value-added capacity during the quarter, and therefore, lower harvest and lower sales. Favorable year-to-date turnaround in the trout JV contributed $3.2 million additional compared to the third quarter of 2019. Atlantic volume harvested was 17% below third quarter of 2019. However, more than 10% above year-to-date than 2019. And volume guidance for 2020 is in the upper range at 53,000 metric tons WFE. And our guidance, volume guidance for 2021 is between 55,000 and 57,000 metric tons, combining Atlantic and Coho production.

All in, I think that we have served this context with the flexibility that we needed to adapt to market condition, but I am personally very optimistic for 2021 because the product is, again, the winner in the protein world. As soon as the Northern Hemisphere get vaccinated, which I believe is going to be soon, demand will get back to street and prices will get back up.

Thank you very much for your time. And now have some time for Q&A.

[Ricardo Garcia Holtz, executive]

First question is, do you expect the very strong harvest weights to remain going forward, both for you and the Chilean industry and also for next year?

Our target harvest weight is between 5.5-kilo and 6-kilo live fish, and we expect in 2021 to keep that. Now speaking about the industry, large fish has been appreciated by the market in normal circumstances, in normal demand circumstances. As those conditions get back in 2021, I believe that in the industry, there will be an increase in the average harvest weight, particularly coming from the 12th region. Manuel, I don't know if you want to add something on that?

[Manuel Arriagada Ossa, executive]

The same.

[Ricardo Garcia Holtz, executive]

Okay. Second question from our Carl-Emil friend. Do you expect your frozen inventory to develop -- how do you expect your frozen inventory to develop in the next quarter?

In the next quarter, I believe it will remain the same because we will be producing value-added products, and we will deliver that to the market as market needs. But for the next quarters, that is 2021, I will -- I think that it will get back to pre-pandemic levels. Today, our inventories are around 1 month production. And historically, we've had maybe 2 to 3 weeks production, and we will probably get back to that by '21.

Are you comfortable with your covenants for fourth quarter 2020 as well?

Well, the covenants will not change. Our indicators might change. And we have a lot of comfort with our equity position and our financial condition. So for any reason we have some month in which the covenants are not met, I think that we have, in the contract, enough cushion to go through those conditions smoothly.

How do you expect your frozen inventory to develop in -- okay. What else? And what should we expect regarding CapEx plan for '21?

We will have the same criteria for '21 that we have had in 2020 that is limited CapEx expenses. I would like to remind that the IPO in 2018 had a purpose of an extraordinary CapEx for the year 2018 to 2020, and that is completed. I would say that going forward, other than the maintenance and normal CapEx to preserve the quality of the asset, we have rather marginal CapEx expenses, and there will be no pressure on the cash from that side.

I think that is all. I don't see any other questions. If so, thank you very much for your time. I know that we are all disappointed with the financial numbers of this quarter. And questionably, I cannot hide that. But I can tell you that the company is extremely well positioned for 2021 to benefit from what I am sure will be a great recovery of demand, and therefore, price. Financials will come along the side. Thank you very much.