Salmones Camanchaca SA

SGO:SALMOCAM

Earnings Call Transcript 2021-Q3

[Ricardo Garcia Holtz, executive]

Good morning. We are now reporting the third quarter earnings of Salmones Camanchaca. Together with me is Manuel Arriagada. And we expect for the next 30 minutes, 35 minutes to go over the earnings report that was reported yesterday. The agenda for the day is similar to previous reports with one other item at the end refers to the capital increase that the company is undergoing now.

One of the key highlights of this quarter I believe that in the context of the incidents that we have had in the early part of 2021 in reference with the summer blooms that we experienced. I think that the quarter clearly signaled a recovery from that moment. And we saw a very positive recovery of both earnings -- of revenues and earnings as we will cover in this report.

Price achievements were particularly strong in the quarter for reasons that we will cover where we also leverage our value-added strategy in the main and core markets. With the recovery also on the volumes sold, processed and sold. Processing costs, which were somewhere high in the previous 2 quarters came back to below the target that we have for long term.

And finally, the other highlight is the capital increase of about $30 million, which is aiming to reduce the risk that we face in the fjords and provide more stability for the company in the years to come. I think that these are the highlights of that -- of this quarter.

On the financial highlights, I think that it's worth mentioning that despite the fact that the revenue were about 30% below the same quarter of 2020, that is the third quarter in the previous year. It showed a recovery of almost 50%, 5-0 percent, increase with respect to the previous quarter that is the second quarter of this year, and that's an important recovery in volume in this quarter vis-a-vis the previous one.

Also, revenue grew by 19%, that's very strong, and this is mainly attributable to price increases, as we will see. And the other, I think, highlight of this slide is that the EBIT showed a very positive recovery within the quarter. We still have a slightly negative -- marginally negative EBIT in the quarter. But if you double-click within the quarter, we saw a positive EBIT in the month of September.

If we also would isolate a reclassification of a loss of $2 million that was booked on other operational or nonoperational loss, which refers to the deductible of an instance that we had in early 2021 due to the bloom, the EBIT was positive as we will cover during the presentation. We see here volume ex-cage cost and EBIT per kilo at the quarter showed a continuous recovery throughout the month of July, August and September. Gradual increase in harvest volumes, stronger price realization, lowering cost, both farming and processing, which signal that within the quarter, although you might not see the full number in the total quarter, it was clearly a turning point in the month of September.

The cost evolution was mainly due to the fact that all the Reñihue Fjord sea-sites were fully harvest in the early part of August. So these higher cost farming sites were completed about -- within the about -- within the half of the quarter. Let me hand it out to Manuel to go over the operations within the quarter.

[Manuel Arriagada Ossa, executive]

Good morning. Now I am cover -- I will cover the operational review. First one is the evolution of the live weight ex-cage cost. As you can see in the graph, remember that the algae incidents that we have since the end of 2020 until April of this year affected all 7 sea-sites that we have at the fjords, in the Comau Fjord and also in the Reñihue Fjord. With ex-cage live weight cost implications for all 2021. In particular, the 3 sites of the Reñihue Fjord were harvested in the second and the third quarter of 2021 and were impacted by poor feeding conditions, high mortalities and very low harvest weight.

This situation, of course, impacted the ex-cage cost for the second quarter and third quarter of this year. Even though that the live weight cost improved to $4.18 per kilo in the third quarter, and it is a reduction compared to the previous one. In the last quarter of this year, Q4, the cost will still be impacted by the Comau Fjord sites that will be harvested in that quarter.

Now we are starting a normal and gradual normalization of the cost, and we are going to see a more normal performance since the beginning of the next year. It's important to say that also we are having some feed ingredients increases in the prices that are pushing the live weight cost as the vegetable ingredients mainly are following the price increases of several commodities. The feed cost in the third quarter of this year increased by 16% compared to the same quarter of the previous year, mainly because of the prices of the vegetable oil and other ingredients in the feed.

In relation to the total cost that is ex-cage plus processing. The processing cost, as you can see, significantly reduced from previous quarter due -- mainly due to the increase in the processing volume from our own harvest and also due to raw material that we bought to third parties. The processing cost is getting back to the normal level of our target of $1 per kilo WFE mainly because of the high processing volume despite the higher proportion of value added.

We reached a historical record in the quarter of 90% of value added, including fillets and portions. We envision that our processing cost will be in line with our target in the last quarter of this year and the same for the next year. As we mentioned, the total finished product cost is still impacted by the ex-cage cost, of course, and we will see a normalization in 2022.

The volumes, we increased the volume in the third quarter to 9,500 tons, but it still is a very low volume as we compare with the same quarter of 2020. It's a 30% reduction compared with the third quarter of last year. In the last quarter of this year, we are harvesting a volume of between 15,000 to 16,000 tons that represents 40% of the total harvest of the year. The total volume that we will harvest this year will be in the range of 40,000 to 41,000 ton of Atlantic.

Our stocking program is in line with our budget. And in relation to the industry, it's important to say that the year-to-date stocking in 2021 is up 11% compared to last year and 7% compared to 2019, that is the comparable year in terms of the sites. Biology. In the third quarter, the closed side mortality, as you can see, we closed 2 sites from the Reñihue Fjord, heavily affected by poor feeding conditions, high mortalities and very low average weight. So the mortalities was very high, 23.4%.

But the good news is the old biomass mortality that is the leading one -- leading biomass, return to more normal levels in the range of 1% per month. Of course, because of the situation of the Reñihue, the geos that is the productivity is very low kilos per smolt and also the average weight at 3.7 because of the poor feeding conditions because of the algae blooms. In terms of sustainability, also the same situation in Q3 2021, closed sites from the Reñihue Fjord affected by the algaes.

So we increased the number of the antibiotic treatments and the antibiotic usage compared with 2020, the previous year, third quarter. But if we compare it with 2019, that is the comparable year, you can see a reduction of 15% in the antibiotic usage. That is important. We are increasing the use of anti-parasite pharma solutions to keep sea lice under control.

[Ricardo Garcia Holtz, executive]

Thank you, Manuel. It's worth mentioning a few developments on the market, particularly in the North American market, where the company sells about 65% to maybe even 70% sometimes between the U.S. market and the Mexican market. In that market, in the U.S. market, the food service segment is experiencing a very, very strong demand. And certainly, certain supply disruption from Asia in the seafood imports, which are benefiting the Americas producers such as Salmones Camanchaca.

Just to give you a few examples in terms of numbers, grocery sales in the U.S. supermarkets in September were growth versus 2019 previously to the pandemic. And they are -- they were in September, 9% above September 2020 in the middle of the pandemic. 10 months in a row, growing at a double-digit, the grocery sales in the U.S. market. And the expectation for 2021 is that the growth will be about 5% with respect to 2020, a year where supermarket sales were very strong because of the food service closures.

The conclusion of this is that the food service reopening in 2021 are not declining retail sales, and that is very important because it shows consumption current changes in the U.S. Seafood is up 32% this year with respect to 2019 in the food service. The largest market share increase in the plate in the food service, very strong frozen sales in the supermarket. Food service with respect to 2020 is obviously much larger, but also now is larger than the pre-pandemia [indiscernible] .

So the conclusion is that Americans are not eating more at home, buying more in supermarket, but also they are eating more than the pre-pandemia level at the restaurants, which is -- which implies a much larger per capita consumption of seafood in particularly salmon, very strong within seafood. The Chilean salmon product is getting more and more stronger positioning in the U.S. as the Chilean Salmon Marketing Council developed and [ upgrade ] its marketing strategy for the third year consecutive year.

We also see very positive prices, very strong prices in China, in Russia and in Brazil. This might be a consequence of lower average weight in general in Chile due to the summer that we had. And finally, good news is that the Russian market reopened for some companies that were closed in 2020 as well as Salmones Camanchaca where we are now selling back in the Russian market. Manuel, can you cover this?

[Manuel Arriagada Ossa, executive]

Yes. In relation to our Salmones Camanchaca price achievement. It's very important to say that finally, we was able to catch up on price achievement during this year after 8 months affected by lower volumes. During 2020, the price achievement was very strong, as you can see in the evolution mitigating a very weak market condition, proving that our strategy works as an insurance that provides extra return on weak price context.

During this year, we are seeing a very important evolution of the price achievement. And during especially the last part of this third quarter, the contract renewals and also the larger harvest volume allow us to have a much higher prices than in the first and second quarter of this year. We expect to continue to do so in the last quarter of this year also.

In relation to the -- okay. Market and product distribution, the American market remains the #1 market with 55% of the sales of the quarter, followed by the Mexican market. Both markets, American and Mexican with a very important and significant increase compared with 1 year ago. Also, we have been producing with a significant increase in the value added, especially in portions, as you can see in the evolution, almost 50% of the production in portions compared with Q3 2020, that is almost half.

The marketing strategy in pandemia and also post-pandemia has been, first, to focus on our core markets, leveraging our long-dated relationship and strong positioning in the American and Mexican market, first; and second, to increase the value-added products and particularly portions, reaching up to 90% of value added in this third quarter.

Finally, it's important to say that we started to get again with Russian sales that accounted for 6% of the total sales of the quarter.

[Ricardo Garcia Holtz, executive]

Thank you, Manuel. On the financials, this was a quarter with light and shadows because as you can see here, we have a much higher cost than in the third quarter of 2020 for all the reasons that we already know. But on the other hand, we have a much brighter environment on the market and the price. And what I believe is more important is that the recovery of the third quarter compared to the second quarter of 2021 was significant, and it signals a turning point in our early part of 2021 profits.

As you well know already, the cost of goods sold were heavily influenced by the Reñihue incidents and the fact that during the quarter, we completed the harvest of those fish from the fjord and therefore, getting better after we complete that. However, going forward, in the fourth quarter, as Manuel mentioned, there's still going to be some impact on the cost side because of the Comau Fjord incident in April 2021, which have a harvest in the fourth quarter of 2021. So don't expect cost to be normal in the fourth quarter, but rather, I would say, within the first half of 2022.

In addition, during the quarter, we have a $1 million impact of an SRS incident in the Reñihue. And also worth mentioning during the quarter is a positive contribution on the Coho, which is now, as we speak, in the process of winning a harvest. And therefore, you will see in the next quarter report the outcome of that, which looks better than 2020 due to prices and cost.

What can I say in addition to what EBIT told us on the P&L, but I think that the recovery of the EBIT within the quarter and a fair value, which shows a positive evolution on price, volumes and costs going forward, meant that there was a positive or a profit of 4.6% -- sorry, $4.6 million, which is about $40 million higher than the loss of 2020.

Again, the fair value, although not part of the EBIT or the EBITDA, it's signaling a positive environment in the months and quarters to come. With that description of the quarter, let me touch slightly on the capital increase. The capital increase was approved by the extraordinary Shareholders' Meeting held in October '18 that is within the fourth quarter. And the takeaway of that is that the company faced substantial price impact due to the pandemia in 2020 and early part of 2021.

It also faces a very important material impact due to the bloom explained by the dryest and sunniest summon in 60 years in the south of Chile in 2021. What did it meant? It means that the equity of the company was helped by about USD 55 million. That is about 25% of the equity pre-pandemia. And therefore, the shareholders of the company considered that it was worth adding some additional capital to face the future.

This capital increase will help us recover in 2022 and 2023 as well as reducing the risks associated with blooms in the 10th region in the fjords and the priority of the biomass. As said, the equity of the company declined $55 million between the fourth quarter of 2019 and the third quarter of 2021. That is the pandemia impact and the bloom impact cost of around 25% loss of the equity and that's the capital increase context.

It also meant slight breach in the equity ratio covenant, which now is formalized and fully authorized by the member banks, which have supported the company strongly within all this period and I'm looking forward for better results in the quarters to come. With the capital increase, we will recover the ratios that are needed to comply with the lenders. In terms of the growth plan future -- for the future, I think that the 2021 production is well explained and you have already incorporated that into all the analysis.

In 2022, we will recover the biomass and execute a partial transitioning from the 10th to the 11th region harvest -- stockings and harvest. And we will be back in terms of total production to the 50,000, 55,000 metric tons by 2023 -- '22 and '23, adding Atlantic and the Pacific salmon production Long-term goal and capacity is kept at 65,000 to 70,000. And the timing when we will achieve that is obviously dependent on the execution of the transition from the 10th to 11 regions, the inclusion of new equipment and technology in our fjord and in our sites as well as the market environment. But we envision that by middle of the decade we'll be utilizing the full capacity of the [ sites ].

I think this is the last slide about the extraordinary investments. Obviously, in 2021 due to the context that already know, we were somewhat conservative in our investments, and they were lower than we anticipated. And for 2022, we envisioned about $20 million to $25 million to recover the biomass loss and the equipment technology and transitioning from 10 to 11 regions, and that is behind the capital increase that you have already known.

I'm pleased within half an hour, a summary. EBIT is certainly not good, not well. But most important than that, which is a forensic analysis is that within the third quarter, there was a turning point. We get back to positive numbers, and the fourth quarter and '22 looks much brighter than the early part of 2021. That's a clear takeaway of this presentation. Second is that the demand is very strong. The recovery of the demand after the pandemia, the reopening of the food service, the restaurants, the hotels, not only now are larger than pre-pandemia, but also the retail market has not declined as we may have anticipating.

And therefore, the seafood consumption per capita in particularly salmon is much higher than the pre-pandemia, that in our view, is a structural change in the consumption pattern. Cost was not well, was not good during the quarter, but it was a lot better than the second quarter, showing again a signal of recovery and normalization. Costs will not be as good as we expect or as good as we like in the fourth quarter because of the consequence of the Comau Fjord that is old news for you, but it will normalize in 2022.

We see very positive developments on the capital increase. The process is fully underway. We expect to be completed within December, and we are welcoming the decision of the controlling shareholder of Salmones Camanchaca, who has indicated that it will subscribe and paid the entire pro rata of the capital increase that is about 70% of the total capital increase.

We expect, as I said, this to be completed and fully executed within the month of December that is in about a month or 1.5 months. By 2022, we see an important recovery in volumes between 15% to 20% recovery from 2021. And therefore, we are delighted to finish this 2021 and embrace the brighter future in 2022. Thank you very much. And Daniel Bortnik, the CFO, do we have questions from this?

[Daniel Ventura, executive]

The first question came from [ Antonia Wittmann ]. I would like to know what are you expecting for prices going forward for 4Q and also 2022?

[Ricardo Garcia Holtz, executive]

We would certainly like to have a crystal ball for 2022 in terms of price. But everything points now to stability. Very -- I wouldn't say surprising, but certainly welcoming. We have had almost 2 months of very, very stable price at a much higher level than any previous year for the months of August, September and October, which are not strong months seasonally speaking, and we see very stable prices. That indicates that as the year ends and as the new year comes, particularly in the second quarter, the prices should be higher than now. So we see very positive but stable prices.

From the supply side, what we are expecting is that the growth on supply is not going to be more than 5% to maybe 6% globally in the salmon market next year, indicating the strength of the regulations in general in Norway and in Chile. Canada is somewhere down for the incidents that you all know.

[Daniel Ventura, executive]

Next question comes from Carl-Emil Johannessen. It is confirmed that it will be issued 12 million shares at $2.5 per share?

[Ricardo Garcia Holtz, executive]

Good question, Carl. I can say that the Shareholders' Meeting have approved 20 million new shares issued. And I can say that the Shareholders' Meeting have delegated into the Board of Salmones Camanchaca the exact number of shares that will be offered and the price at which they will be offered. I can anticipate or I can estimate that, that decision of the Board will be taking -- will be taken within the month of November.

And therefore, we will communicate the terms and conditions that is the number of shares and the price to be offered as soon as the Board takes that decision. So unfortunately, you need to wait, Carl-Emil, I would say, a couple of weeks to know exactly what are the trends.

[Daniel Ventura, executive]

[ Ignacio, Citibank ], do you expect in 2022 to achieve your long-term cost target? Or you expect some negative impact from the regulation -- localization of some sites?

[Ricardo Garcia Holtz, executive]

We certainly will not show in our earnings report, the normalization of cost in the first quarter, and that's because part of the harvest of the fourth quarter of 2021, which are still affected by the Comau Fjord incident will be sold in the first quarter. Not everything that is being harvested in what quarter is sold in that particular quarter, but rather there is a lag on that. So there will be some impact on the cost of goods sold in the first quarter. We envision that for the remaining 3 quarters of the year, it will be closer to the normal. How much closer, we'll have to wait the development of 2022.

[Daniel Ventura, executive]

Do you expect an increase in sales to China going forward?

[Ricardo Garcia Holtz, executive]

China is not normal yet, as you all know. It's pretty close in several aspects. China will have to compete for the fish and the other markets are very strong, the Americas market in general that is the North American market, the Mexican, the Brazilian market is very strong. The Russian market is also strong. So they will need to compete. I do think that in our share, China will be significant in 2022.

And sorry, and one more element on that response is that Salmones Camanchaca has a clear [indiscernible] for value added. China is mostly a market for the whole fish, whether fresh or frozen. And therefore, unless we can find the way to sell value added in China, China will remain for us as a commodity market and that we will exploit that when the prices are good. But it's hard for us in our strategy to commit to China on our value-added production if the market remains only for fish.

No more questions? Well, thank you very much all. I hope to see you in the next earnings report, which will happen in the month of March. But before that, you will know from us and the success of the capital increase. So thank you very much.