Salmones Camanchaca SA

SGO:SALMOCAM

Earnings Call Transcript 2022-Q3

[Ricardo Garcia Holtz, executive]

Good morning, everyone. Good afternoon. Thank you for attending this third quarter Salmones Camanchaca earnings report. It has been a rough road during the last 2 years to come to this 2022, where we have regained or recover our capacities and our profitability, as we will see during this report. We've taken a lot of lessons in the last 2 years with the pandemic condition and the climate change impact situation in the south of Chile. And we believe we came out stronger than before these 2 years, and 2022 will reflect that.

There is a lot of information in our earnings report, but I would summarize it as a very simple earnings report, and we'll make sure that during this presentation you take away the key elements of this report.

As you have seen in the report, profitability improved substantially compared to the same quarter of 2021 as a consequence of higher prices, larger volume sold and product format and market mix in our sales strategy that took -- opportunities in the marketplace that we saw during the quarter. That is the main force behind 7x higher EBIT and EBITDA from 2021. The better oceanographic condition of the Patagonia -- of the Chilean Patagonia led to better biological condition of the fish, and this better biological condition of the fish translate into a much better farming performance and the underlying cost of our fish. Very minimal impact of extraordinary mortality during the quarter. That's another element important to mention.

And that explains why, despite a very substantial increase in feed cost and other cost of production related to the inflationary process that we saw very broadly -- despite that, we declined in the quarter slightly the cost of the fish farmed. The prices continue at a very high level compared to historical history. And not only the base is higher, but also our price relative achievement was outstanding during this quarter with more than $1 price achievement vis-a-vis the other farmers. And harbor volumes sold was more than 50% above 2021. And EBIT kilo -- and I want to mention this because I think it's very important, EBIT kilo of the Coho production in 2022 year-to-date is as high as $1.7 per kilo. That is about the same as the EBIT per kilo of the Atlantic salmon in the third quarter.

And the good news on the oceanographic and climate condition of the Chilean Patagonia during the month of October and November, leading us to a good performance in this beginning of the fourth quarter of 2022 that we'll be reporting in about 3 or 4 months from now.

The better price and volume explain an increase of 46% in revenues, which is the main force behind the recovery of the EBIT per kilo. Very similar EBIT per kilo in Atlantic production than the second quarter, and obviously substantially higher than the previous year.

Quarterly EBIT of $21 million is with a very substantial increase on sales. And year-to-date, this -- again, I will highlight that year-to-date, the EBIT per kilo on the Coho is $1.7. That's a very substantial performance, very good, strong performance for the Coho production.

Quarterly Atlantic harvest volume was higher than previous 2 years, but is expected to decline in the fourth quarter and the first quarter of 2023. We are anticipating that strong growth on volume in the second and third quarter, but they will decline according to our plan in the fourth quarter and the first quarter of 2023. This better farming performance will take 2022 harvest to be around 10% above 2021 in the 45,000, maybe 46,000 metric tons of Atlantic. A similar volume will be harvest according to our plan and an estimate for 2023.

However, in 2022, we'll be doubling the production of Coho, and will again double the Coho production in 2023, when we expect to exceed 10,000 metric tons of Coho production vis-a-vis about 2,000 to 3,000 metric tons in 2021. In 2 years, we have quadruple the production -- or we will be quadruple the production of the Coho.

Atlantic and Coho stocking shows the pattern of our strategy of mitigating the climate change impact in the tenth region, in the fjords of the tenth region by increasing our Coho production, which is harvested before the middle of the summer and therefore, has less exposure and move some of our Atlantic production to the eleventh region southern of the fjords.

Manuel will continue with the operational review. I'll get back later on the financials.

[Manuel Arriagada Ossa, executive]

Thank you, Ricardo. So let's go to the operational review. The first is the biology of the Atlantic salmon. As you can see in the graph, the old biomass mortality, that is the blue line, is in very low levels. In the third quarter, it was only 1.6%, and it is a very similar level compared with the second quarter of this year, so very low level. Actually, the mortality levels in the second and third quarter of this year are the lowest levels of mortality in the last 4 years for the same quarters.

In general, the oceanic biological conditions have evolved positively in the Patagonia area this year and have maintained that way. We have a very low impact on sea lice and also a low impact on the SRS presence of that bacteria. Regarding, however, the closed side mortality, that is the orange line, we have a high mortality of 34%. But it is important to say that, that mortality corresponds to only one site closed in the third quarter, which was affected mainly by a low oxygen levels and also algal bloom back in February this year. This site, in particular, represents almost 80% of the accumulated extraordinary mortality in economic value this year, and represents also only 7% of the total harvest volume for this year. It's important to say also that this high mortality only affect this one particular site, because we expect that for 2022, closed site mortality for the full year, below 9% as an average.

In the right table, you can see also that the feed conversion ratio is continued at a very low level in 1.14, and the yield for that particular site is low because of the high mortality at 2.9.

This graph shows the good evolution, as I said, of the old biomass mortality compared in this case with the industry average. As I mentioned, the good oceanographic conditions in general, allow us to have mortalities below the industry average for all of the months of this year, with the exception of February when we have this high mortality that affect one particular site.

In October and November, the mortality levels continue to -- in very good conditions. And the mortality in October, it's going to -- it was 0.5%, so very low levels again. These good oceanographic conditions allow us also to increase the average weight. In the third quarter, our average weight -- harvest weight was 5.2. That allow us to have -- to increase the volumes and to achieve greater and higher productivity and yields in the secondary processing plants and also to have the volumes in order to obtain and capture the market opportunities in the second and third quarters of this year.

Live weight Cost. In the third quarter, we came with an ex-cage cost that was slightly lower than the same quarter of 2021, [ $4.17 ] compared with [ $4.18 ]. But of course, we are certainly experiencing cost pressures due to global inflation, as Ricardo mentioned, including feed ingredients, operational costs and logistics. If we compare the Q3 of this year cost with the equivalent cost of 2020, that is the comparable year in terms of farming, we have an increase of about $1.1 per kilo. 50% of that increase is because of the feed price. The other 50% is because -- due to inflation and also higher operational costs -- some of them because of the regulations.

In relation to the total cost, the total cost in the third quarter was $5.51, in line with the previous year, but higher than the same quarter 1 cycle ago in 2020, mainly because of the increase in the ex-cage cost, as I explained. The processing cost for the quarter was $1.03 in line with our long-term target, but higher than 2 years ago due to the lower harvest volume and also because of the inflationary pressures. In processing, also, we are having some inflation pressures that affected the wages of the personnel, the services and also the packaging cost, mainly.

In relation to the sustainability indicators, here we are seeing only 1 closed site in the Q3, as I mentioned, with a good evolution of the Fish In and Fish Out ratio now at a level of 0.44. However, we have an increase in the use of antibiotics this quarter for that particular site that was affected by the algal blooms and the oxygen levels in February that created a stress for the fish. So we need -- so we have a higher incidence of the SRS bacteria, and we need to treat with antibiotics.

Now it's important to say that this antibiotic consumption situation only affect this particular site. The other sites are having a very low consumption. And for 2022, we expect that our antibiotic consumption for the full year is going to be below 500 grams per ton produced. That is more or less a 30% decrease compared with the previous year. So a good evolution of the antibiotic consumption for the full year.

In the right table, you can see the accumulated figures as of September. We are having, in general, a better performance compared with the industry in the 3 main indicators: mortality, conversion, and growth rate.

Let's go to the markets. This is the evolution of the [indiscernible] index that is the fillet fresh in the American market. As you can see in the graph, the prices remain at high levels and are expected to remain high. However, they are in a lower level during the third quarter as Chilean supply recovered in that quarter. But in light of a very moderate Chilean growth for this year, that's going to be 3% according to Kontali.

We anticipate that prices will not easy to match going forward. In the last quarter of this year, we expect a drop in the Chilean supply of about 10%. And for the first quarter, for the next year, we also expect a drop of 6% compared with this year. This also is according to Kontali.

Price achievement. This is the return of -- on raw material of Salmones Camanchaca, Atlantic salmon, compared with the industry benchmark, in this case Salmones. And as you can see, during the first quarters of this year, we were below the industry average, but increases -- and was above the benchmark since June of this year and has remained close to $1 per kilo above it throughout the third quarter. We have a greater flexibility in our marketing and product strategy that allow us to modify our production mix in order to capture these market opportunities.

In the second quarter, we captured the higher fresh spot prices. In the third quarter, we captured the higher frozen prices. Frozen sales for the third quarter represented around 80% of the total sales. That is an important increase compared with the previous quarters. We also have reset our sales programs and contracts with our strategic customers in order to reflect the new market price conditions.

What are the Chilean industry Atlantic estimates? The forecast for the annual production in Chile this year will be a 3% increase compared with 2021. And it is, I call, posed by, first, a drop, as you can see in the graph, in the first 4 months of about 11%, followed by a recovery in the second and third quarter of 13% and 26%, respectively, and a decrease in the last 4 months of about 10%. This is the evolution of the pattern of harvest in Chile.

The supply grows, as I mentioned, in the third quarter, affected the market prices, resulting in a drop in the price, but still in a very high levels.

Regarding the value-added strategy -- sorry --, okay, here for Atlantic. We continue our marketing and product strategy that aims to: first, to focus on our core markets to leverage our long relationship and strong positioning to allocate our value-added portfolio, mainly, as you can see in the graph, in the American and Mexican market that represent almost 60% of the sales in the quarter. We still are a leading providing -- provider of fillets and portions, a format that explained 71% of our sales in the third quarter. We also optimize our processing flexibility in order to achieve higher frozen returns, especially also in EuroAsia market with 17% of market share.

And finally, one word regarding to Coho. The marketing and product strategy for Coho aims to 3 objectives. The first one is to increase the harvest weight in order to have the ability to produce value-added -- to increase the productivity and to increase the yields in the secondary processing plant. That is the first one. The second one is to develop new markets. As you can see in the graph, we are now diversifying in the season, the market, reducing the exposure to the Japanese market and increasing the market share in American market and Mexican market. The third point of the strategy is the production mix. We are increasing a lot the percentage of fillets and portions, almost 60% of the total sales of this season.

This strategy, as Ricardo mentioned, allow us to have an import kilo of Coho this year of 1.71, which is even higher than Atlantic salmon for the full year. We just started the Coho season this year 2022-2023. We will produce around 50,000 tons, which is almost double the volume compared with the previous season. And we expected to have a value-added production that represents 90% of the total sales. So it is an increase compared with the previous season. For 2023, we are preparing to double again the production and to reach around 10,000 tons.

[Ricardo Garcia Holtz, executive]

Thank you, Manuel. Let's cover quickly some of the financials in the earnings report. As you know, 2020 was a year where we were severely affected by a very sharp price decline. The 2022 year is the other side of the coin. There is substantial recovery on the price, and that is behind a good portion of the $21.5 million extra EBIT that we generated in 2022 vis-a-vis 2021. Very substantial.

The extraordinary mortality played a very mild impact in the third quarter. I mentioned that, too. Cost of goods sold during the quarter was more than $0.60 below the previous year, also adding extra EBIT for the quarter. The product mix and market mix that Manuel mentioned, also contributed to the improvement in the EBIT. And the positive contribution for the Coho is also very relevant this quarter.

On the P&L. Well, we've covered well the operational side of the business, as both Manuel and myself have explained. On the nonoperational, it's rather simple. And I think that the name of that game is back to normal or nothing extraordinary really, other than the more expensive financial debt cost that we have these days due to the base interest rate that have gone from close to 0 a year ago to about 5%. That is in addition to a larger spread that we have paid during 2022, because of the lower performance of the company in 2021, affecting the spread in 2022, something that will be recovered and turnaround as we approach the end of 2022.

Fair value is mild, that -- it is behind the fair value that we are showing in the report stability on volume, prices and costs going forward. So that's also a good news.

I wanted to make a comparison between the third quarter or I would say the first 9 months of 2022 compared to the first 9 months of the years [ 2020 ], [ '18 ] -- 2018, sorry, and 2019. Those 2 years were the first 2 years of Salmones Camanchaca as a public company traded in the 2 stock exchange on the one hand, and also the 2 years previous to the pandemic condition and the climate change impact that we had in the Patagonia in 2021. So we believe it's a good reference to judge the performance of 2022.

And as you can see in this graph, there is no [ evil ] that last 100 years, as we used to say, and we've came back to very similar EBIT per kilo of about 1.15 with similar volumes than the previous 2 years and the average of '18-'19. So it's a very comparable year in terms of the performance.

And now what is the extraordinary of 2022 compared to 2018 and '19 is that the price is much higher, as you can see on revenue, but the cost is also higher, as we have explained earlier. Therefore, the EBIT per kilo is similar at a higher scale, if you [ want ]. Good takeaway of this quarter.

Very strong cash flow. Operating cash flow was almost $20 million and was mainly, if not totally, used to reduce the debt. It is over, I would say, the times when debt was almost free. Now it's a lot more expensive, close to maybe 6%, 7% -- or closer to 7%, the base and the spread. And therefore, we need to make good use of the cash, and we use the cash, the surplus during the quarter to repay debt and reduce the net interest-bearing debt. That's good.

And investments, another use of the cash surplus was used to fund the strategy of mitigating risk and moving Atlantic to the south part of the Patagonia and include new devices and technologies and practices in our sites to mitigate the risk of climate change impact.

So that's in summary the quarter. If I would have to take away something, I would say, 5 or 7 points. One, the good condition on demand and the strict and tight conditional supply led a good price level that covered the cost pressures that we have for the various reasons that we already covered.

Number 2, the Coho contribution is substantial and it will be larger going forward as we have doubled, or we plan to double production this year, and again, double production of 2023.

The third is that, the good biological performance is the consequence of a better condition in the Patagonia, I would say, a normal winter, rainy, cloudy, and therefore, that's good for the fish, and that is something that we see continuing in the fourth quarter of 2022.

4 is that we expect the farming condition to be efficient and better for the remaining part of 2022.

5, cash surplus has been used to repay debt and save financing cost. And finally, that the harvest plan for 2022 make us to guide harvest -- a total harvest in excess of 50,000 metric ton. That is about 10% more than previous year, and we expect to increase another 10% in 2023. Very similar production in 2023 with respect to 2022 on Atlantic at around 45,000 metric tons, and double again, as I said, the Coho production. So our forecast for 2023 is about 45,000 Atlantic and 10,000 Coho production.

With that, I leave you to questions, and I believe we have some.

[Ricardo Garcia Holtz, executive]

Carl-Emil. Volumes from Chile has surprised on the upside the last month. Are you now seeing that volumes are dropping over volume in October also at high levels?

I will respond part of that, and I will leave Manuel to the second. But we believe that the good condition that we have discussed during this presentation on the Patagonia in terms of the weather, rain, cloud and so on, has also favorably impacted the remaining farmers, and therefore, better harvest weights and therefore, more volume.

How do you see Manuel, the fourth quarter?

[Manuel Arriagada Ossa, executive]

Yes. That's the same reason, Ricardo. And for October, in particular -- that is part of the question. The Chilean harvest of Atlantic was 67,000 tons. That is very in line with September, same volume, and very in line with October last year. 65,000 tons was last year. So in general, the good conditions allow the Chilean industry to have a good harvest level.

[Ricardo Garcia Holtz, executive]

Next question from Carl-Emil also. Should we assume that the 6,000 ton Coho volume will be harvested both in fourth quarter of 2022 and first quarter 2023?

Yes, part of the harvest of Coho will happen in the early weeks of 2023. But most certainly, you will see earnings of Coho being reflected in the first quarter of 2023, as there is some lag between harvest and earnings.

Carl-Emil also. You had very strong prices in third quarter versus a [indiscernible] price. Can you give me some more color on how you were able to achieve this? And what should we assume for fourth quarter in terms of price achievement versus the reference price?

Well, I think that -- as I mentioned before, Salmones Camanchaca has a very, I would say, positive positioning. We are a large company, but not so large. We have economy scale in our processing because we have volume, but we have not locked in one format or -- and/or one market, and therefore, we have flexibility. Some of you have already visited our value-added plant, and the name of the game there is flexibility, to use the processing capacity, to exploit the opportunities in the marketplace. And we saw in the third quarter opportunities in the Euro-Asia markets that we took it. We are looking at some other opportunities in the fourth quarter that we'll report in March next year.

In terms of the price level, Manuel, we've seen some decline in the fourth quarter. Correct?

[Manuel Arriagada Ossa, executive]

Yes, that is correct, but still, we expected to have a price achievement above the benchmark because of the value-added strategy mainly.

[Ricardo Garcia Holtz, executive]

Yes. How will CapEx be in fourth quarter and in 2023?

We have not closed our plan for 2023 or -- and, I would say, budget for 2023. But we -- what I can say on 2023 CapEx plan is that it will be prudent based on the market and the condition of Chilean farming.

How much of the higher -- [ Simon ], how much of the higher feed cost is reflected in the reported ex-cage cost of $4.5 in the third quarter? Should we expect cost to continue to increase? Or would you expect more stable development? Manuel?

[Manuel Arriagada Ossa, executive]

The feed prices increase is since the first quarter of 2021 until, I would say, Q3 2022. So of course, the farming ex-cage cost is affected by that. Out of the $4.5, around $1.8 is feed price cost. So we are seeing a little reduction in the prices in the last quarter, Q4, and we foresee also a little reduction for Q1 next year. So probably, we will reflect that in the ex-cage costs during the next year, a little reduction in the incidence of the feed price.

[Ricardo Garcia Holtz, executive]

It's important to mention that some of the ingredients of the feed has already saw a very substantial drop on their prices. So it will be, I would say, a more mild condition in 2023.

John Evans from IntraFish. Is there a region tax on salmon production tax creating opportunities for Chilean salmon in the U.S.? Because we are hearing that companies are reluctant to sign contract with the region salmon companies.

And as you may see, this is earnings reports of Salmones Camanchaca, we are not planning to mention the regulatory condition of the Norwegian market today. We all know that there has been a lot of discussion, and there is no tax already approved in Norway. So we need to wait until that discussion is completed. Once it is completed, then we will be able to say something on what we think may impact us.

The Chilean government disclosed a plan to change salmon farming laws within a year. What are your expectations on this?

We don't have a lot of expectation at the moment. We have only heard that -- from the [ Under ] Secretary of Fishing and Aquaculture that they are planning to write a new aquaculture law during 2023 and may expect to present that proposal to Congress at the end of 2023. So I think it's too early to mention because we don't have any clarity on the principles that they are aiming in this proposal.

I think that, that was the last question -- there is one more.

Jose Andres. Is there any comment on distribution cost?

Well, distribution cost is related to the formats -- the product formats that we are selling. And as Manuel mentioned, there has been a lot of sales on frozen formats, and that generate more distribution cost for the cold storage, for example. Any other comment, Manuel, on the distribution?

[Manuel Arriagada Ossa, executive]

No. I would say, in general, we are seeing also the starting of a decline in the freight cost internationally. I would say that's also important. But as you said, most of our sales in the third quarter was frozen, so maritime freight mainly, and we expected to have a decline on that in the next quarters.

[Ricardo Garcia Holtz, executive]

Important to mention, Daniel, and confirm this, that the freight cost is a reduction of our revenues, and it's not included in distribution costs. On the distribution cost, we have cold storage, for example, but not [ maritime ] transportation. It's a reduction on the revenues so.

Last. How would you characterize demand in your different markets and segments? Is demand holding up well despite price increases to the end consumer?

Well, it is of no surprise to us, or likely to you, that the price of our product has increased, particularly in those markets that are non-U.S. dollar, with the devaluation of those currencies. But I would say that here, we have a situation where, with a very tight supply, demand is expanding because people want to eat healthier. People want to eat more seafood and more salmon. That's one thing.

And also its decline in the quantity demanded because of the price increase, so which impact the expansion of demand at any price because people want to eat more and there is a consumer change -- habit changes that led people to eat more salmon, and the higher price that restrict the quantity demanded. So far, things have been very stable. Demand has been very robust, and that has given us support on the price that you have seen.

I think that with that, we have completed. We would appreciate your contribution with the survey at the end of this earnings report so that you will be able to have a better report in the next quarter. So take a few minutes, or maybe a minute and give us your feedback of the survey so that we can improve in the future.

Thank you very much, and see you in March, I would say, or early April -- sorry, February. [ Daniel ] is improving every year. Thank you.