Salmones Camanchaca SA

SGO:SALMOCAM

Earnings Call Transcript 2021-Q4

[Ricardo Garcia Holtz, executive]

Good morning, everyone, to this earnings report of Salmones Camanchaca, concluding 2021, a year that started very challenging, but ended favorable, in our view. And we are happy with the result of the last quarter despite still challenges ahead, which we'll cover during this presentation. But I guess, the main introduction is -- of this quarter, or this fourth quarter, is getting out of the tune-up that we had for the last about 18 months. As usually, we will cover markets, financial review of the company and we'll touch on the specifics of the quarter that are important to be highlighted.

What are the main highlights of this quarter? Certainly, a very important increase in the volume of the company, which was affected in the second and third quarter by the incidents of early 2021. But the company recovered it's, I would say, normal volumes at the end of the quarter. Very important also, a gradual reduction on the cost and an improvement in the operational performance of the company as we left behind some of those incidents mentioned before.

The harvest of the quarter was about 40% of the total harvest for the year, and that was expected and we guide that earlier in the year. Very important, the capital increase in the quarter, not so much for the size. It was about 15% of the equity of the company. But it was important to recover the financial position that we want to have in this company, which is very strong. And because of the events of 2020 and early 2021, that was weakened than what we think it's the proper level. So the capital increase was targeting that. And we achieved that with more than 95% of the shares being subscribed and paid at the end of 2021.

And I would say that one of the most relevant highlights of the quarter is that was a great quarter for the advocacy of the company for sustainability. Not only we signed and agreed on a new debt for the company, a much longer than -- debt than what we had, but also it is a truly and generally linked to sustainability with KPIs that will be measured on a yearly basis. We were included this year on the Dow Jones Sustainability Index at a very high ranked position. And also, we are part now of the Standard & Poor Sustainability Yearbook as an industry mover, someone that influences the industry. And these are recognitions for the company and the sustainability advocacy that we have.

With that, we get into more details. On the financial highlights, as I said, volume was restored. If we add up the Coho harvest for the quarter at around 2,000, a little less than 2,000 metric tons in the quarter, we reached almost 17,000 metric tons of volumes, exceeding the combination of the previous two quarters, so very important total in volumes. Revenue moved alongside the volume, but also fueled by a very substantial increase in the price achievement on the quarter. Also as we expected in the previous quarter, about the fourth quarter, sales volume was higher than the harvest volume, meaning that the inventories built up in previous quarters where the prices were much lower were sold in this quarter at a much better return for the company. Finally, an EBIT of $13 million, almost $17 million EBITDA for the quarter was a very important recovery of the profitability of the company, with an EBIT per kilo on Atlantic of about $0.75. Not as good as we expected, but certainly a very important recovery and a very good performance of the EBIT per kilo on the Coho. We will cover that.

Moving into some of the operation review. Fourth quarter ex-cage cost was better and coming down as what we expected in the previous quarter. In this particular quarter, in the fourth quarter, we harvested 25% of the harvest -- of the total harvest of the quarter that came from sites that were affected by the early 2021 early incidents. That, for example, can be compared with the second quarter of 2021, where more than 50% of the fish came from sites affected by these incidents. So we are gradually leaving behind these incidents and the impact they had on the performance -- on the operational performance of the company.

We certainly are facing some pressure on the cost side -- on the input cost side, feed, logistics, and other part of the value chain pressured by inflation. We estimate that, that will put a $0.30, $0.40 pressure on costs for 2022. We still believe it's something relatively short term, but will be with us in 2022. We will certainly provide updates on our targets, longer-term target post once this sort of volatility in the marketplace was resolved.

On finished product, and this relates more to processing because we've covered already farming, it was an excellent quarter, well below our target of $1. Most of this is coming from the recovery of the volume of the plant that now is exploring its full potential. I don't think that we should add more on this. It was a good quarter for the processing.

On volume increase, you can see that the evolution quarter-by-quarter during the last 3 years and the forecast for 2022. It was a strong recovery of the volume in the fourth quarter. It was the best quarter or the strongest quarter volume-wise of 2021. And as you can see, our guidance for 2022 is at the 45,000, 48,000 metric tons for both -- for Atlantic, and we will have to that about 5,000 additional on Coho.

Important to say that the stocking plan in 2021 was as expected, we fulfilled our stocking plan. And also, you can see in this slide how the stocking has evolved vis-a-vis the stocking Atlantic versus Coho. Coho will have, in 2022, an important increase, more than twice as much as in 2021, and there will be a slight reduction on Atlantic, not material, so that by 2022 and 2023, we expect a larger contribution for the Coho in our mix. Very moderate growth on stocking at the industry level in Chile, below 5% in 2021, so we don't expect any pressure volume-wise by 2022, 2023 from the Chilean market.

On the biology, well, the biology is the other side of the coin of the incidents that we had. Very strong and very large incidents in the first and second quarters of 2021 because of the algae situation. But these are coming down to normal levels at the mortality dimension, and that you can see on the total biomass mortality that is the existing mortality -- sorry, the existing biomass of the fourth quarter, had a, I would say, relatively normal mortality. Still, the close cycle farming mortality is still high because we finished one site in the quarter that came from the Comau Fjord affected by these instances, not much to say about that.

The oceanic condition of the Patagonia remains a bit unstable, and we had a relatively sunny and warm summer in 2022. Storms and bad weather is coming now these days, and that is, I would say, well received by us. And we have not had any material incident with respect to mortality during 2022. Incidents here and there, but nothing that is material for the company. So far, so good on that side.

Now, getting into sustainability, I think that this is probably the star of the quarter together with profitability. FiFo ratio remains well below 1, as we are targeting that as a very important KPI, part of the Sustainability Linked Loan also. Antibiotic usage is much higher, but this is more related to the lack of volume and the reduction in the volume that we had than to the situation -- the real situation. We also have some SRS outbreaks in the Comau Fjords because of the instance of the algae that put some stress on the fish, and that stressed fish had an SRS outbreak. And therefore, they need to use antibiotic. But I don't think that these numbers are what we expect normally. So we should get back to normal levels, gradual reduction and decline in the usage of antibiotic.

Excellent quarter, as I said, for our advocacy for being a sustainable farmer. Dow Jones Sustainability Index is a reputable, well-known globally watched index that shows the companies that are performing well on sustainability. And we made the application during the last period, and we were included at a very high ranked position within this index in 2021. Also, recognized, as I said, as an industry mover by the S&P, Standard & Poor Sustainability Yearbook 2021, meaning that we are influencing the rest of the sector in moving forward. That is also important.

But also is the Sustainability Linked Loan, the first of its type in the Chilean sector. It fulfills all the requirements and requisites to be called a Sustainable Linked Loan according to the global market standards. It has 5 KPIs for sustainability that will be measured on a yearly basis, and we'll be reporting that starting in 2022. Very good year for this.

On markets, well, I think that the graph speaks by itself. We are having a truly historical high-level prices for the salmon, which is very good. It is in line with the increase on price of other proteins such as meat, for example, and therefore, the competitive -- or the relative competitiveness of salmon has not deteriorated when we see this price increase. If you take a look of the week 5 and week 7 of this year 2022, we are talking about 30% to 50% increase in price, well above the range for the last 10 years, well above last year, well above the average. So this is a very, very positive and favorable environment, and we said that, when we did the capital increase. That was one of the reasons why we felt confident on the future of the company because the demand was strong and the product well-perceived, and this shows that.

The prospect for 2022 is that the price will remain very high in the first half of 2022 because this Chilean supply will decline at double digit in the first half of 2022. We expect part of that to be recovered in the second half of 2022. Overall, for 2022, there will be no growth from Chile. Negative in the first half, positive in the second half. So for the remaining few months, we'll have a very strong market for our product.

On price achievement, that was something that cost us some headaches in the previous quarter because of the lack of volume, we're not able to really get this higher price that we will see -- we were looking at the market. But this quarter, with the renewals of contracts at a much higher terms price-wise and the recovery of the volume, we were able to capture these. And as you can see, the last 4 months of 2021, we have a better price achievement than the peers from Chile. Continue to have this strategy for high value, and this is show in these slides where we have a very important part of our production in the form of value added, targeting the main markets, the U.S. and Mexico. Mexico, where we have opened in 2021, a new vehicle to distribute our products locally. That also is behind this important increase in a market that is over 100 million people. A very, very attractive market for us.

The value added, if you compare last year to this year, it went from -- portion, sorry, within value added, portion went up from 32% to more than 40% of our production, becoming one of the largest, if not the largest, producer of portions from Chile to the main markets. The total value added in the last quarter was slightly below previous quarters. That was basically because there were attractive HOG markets opened in that quarter, so some of the production went into that fourth quarter. But the positioning of the company as a very strong value added producer is still there and will continue to be with us in 2022.

Short financial review of the quarter. Much better price realization, better volumes are behind the recovery of the profitability of the company in the fourth quarter. Important to say that the Coho contributed very favorable with a larger than Atlantic EBIT per kilo. Very good year for the Coho shows that our strategy to have a bit more of this species in the future that contains a much lower risks because it has been harvested before the summertime and before the riskier quarter or month of the summer, is the right one.

On the P&L, the recovery of the operational EBIT resulted in almost $10 million profit after tax, which is an important recovery for the year. Some financial effect attributable to the new much longer term debt that we signed during the quarter explains some of the non-operational favorable results that, in a way, offsets part of the higher interest-bearing debt costs that we had in the quarter.

The trout joint venture that goes into the non-operational side of the business, came at almost 0 in 2021, and that is not far away from what we expected because in the odd year such as '21, the farming site where the trout JV operates are in their follow-up period during the first 3 months of the year, so we only are able the stocking in April of the odd year, and therefore, not enough time to harvest and sell all the products of these odd years. That is completely opposite in the even year, such as 2022, where we are collecting the sales of 2021 and as well as stocking earlier, and therefore, selling and collecting earlier then odd years. So that is an explanation why there is this odd/even year volatility in the JV.

Cash flow, obviously affected very favorable by the capital increase that raised almost $20 million or roughly $23 million in the last month of the year, offset the negative operational cash flow. By the way, the negative operational cash flow is a positive news because it is the other side of the coin of a much stronger volume sold in the fourth quarter, which collections are obtained in the early part of 2022. So this negative cash flow is a favorable outcome of a much larger sales in the quarter that will be collected in the early years -- in the early months of 2020.

Also important to mention that we already have the settlement for the insurance indemnity attributable to the incidents of the Comau Fjords mortalities because of the algae. And we already collected $10 million indemnity from the insurance in January 2022. Not in the cash flow in the fourth quarter, but will be in the cash flow of the next quarter, this [indiscernible].

Investment plans. Investments for current year at $15 million since we have some delays in the plan. We acted prudently during 2021, delaying part of the plans for investments because of the context in which we operate in the early part of 2021. And that explained why 2021 was a low year in terms of investments. That will be recovered in 2022 and 2023 because of the strategic move that we are conducting such as diversifying more into the XI region, adding technologies and equipment that mitigate the risk of algae and oxygen that we explained in the previous quarter.

Financial position, much stronger. As I said, equity ratio, I think that, that summarizes that was declining in previous quarter because of the EBIT situation, was recovered in the fourth quarter as a combination of favorable profitability as well as the capital increase. And now, the equity ratio is above 40%, which is the target that we have, part of the agreement with the banks. And the net interest-bearing debt showed a decline, consistent and current with the capital increase and the favorable outcome.

In summary, also, I would like to make a comment on Chilean industry supply condition. As I said, these are the last 3 years -- or the last 2 years and the projected 2022 industry production. We see a very, very drastic decline in early part of 2022. As you can see in the graph, the first quarter of 2022 will drop maybe something like 20% with respect to the first quarter of 2021, very important decline. Second quarter will not grow, so the first half would have, I would say, more than 10% decline in the supply, and that will be partially recovered in the second half of 2022. So negative growth in the first half, positive growth in the second half. Overall, no growth for Chile this year.

Our growth plan within this context remained unchanged from the guidance that we gave in the previous quarter 3 months ago. Essentially, we will have a 2022 that will recover the volume from 2021. 2023 will not be that different from 2022. And the growth will come in '24, '25 at the level that we projected years ago at around 70,000 metric tons. That is our target for the middle of this decade, not much change on that.

In summary, this quarter, very important price increases during the quarter, and recovery of the volume explain the much better profitability and the recovery of the profitability of the company. Operational performance is also improving. On the farming cost, it's declining. Although there is some inflationary pressures. Feed, ingredient, prices pressures are affecting the farming costs, so we see some gradual reduction during 2022. Processing costs at a very good level. An important strengthening of the financial positioning of the company with a capital increase and a much longer duration debt that we have now that gives us 5 years ahead with that flexibility for the company, as well as the capital increase that we made at the end of 2021.

And finally, the start of the quarter other than profitability is sustainability, with these very high-profile recognitions for the company: the Sustainability Yearbook of Standard & Poor's; and the Dow Jones Sustainability Index, both are, I would say, confirming the advocacy of the company to be a sustainable farmer in the future.

And with that, I leave you for this report. Daniel Bortnik, the CFO of the company; and Marta Rojo is with us. Is there any questions from investors?

[Daniel Ventura, executive]

The first question come from Arturo Murua. For first quarter '22, how much of the harvest will come from the centers affected in 2021 by the algae bloom, I suppose?

[Ricardo Garcia Holtz, executive]

In the first half of 2022, there will be a marginal effect, very marginal in the first quarter because of some volume harvested at the end of 2024 that will be sold in early -- sold and recognized as revenue in the first quarter of 2022. But that is very small and there will be nothing after that. So I would say, from a financial, economic and marketing point of view, that incident is behind us.

[Daniel Ventura, executive]

Second question. Which do you think will be the impact of the new Chilean constitution over the salmon industry, especially over concessions?

[Ricardo Garcia Holtz, executive]

That is a very good question, but I think Paulina, that we are too early in the process. There is a lot of discussion, there is a lot of questioning, and we are far, far from having a well-defined proposition.

I can say that overall, our assessment is that sustainability and the care for the environment will be within us in the future. And we are putting more effort, more intelligence, more energy in being a more sustainable farmer to prevent us from being outside of the rules of the future. Which rules will be and what is the specifics? I think, as I said, it's too early to say.

[Daniel Ventura, executive]

Next question. What do you think will be the supply growth in Chile over the coming 5 years? Any chance of industry growth through licensed rating or large to small investment, or do you think we stay here at 700,000 to 800,000 tons annually?

[Ricardo Garcia Holtz, executive]

Yes. Philippe, it's a good question. And I don't have a mathematical model to give you, but I can have you -- I can leave you with some highlights.

The first is that the regulation in Chile does not open opportunities for increasing supply through larger smolts. That is different from Norway. In Norway, since you have a maximum allowable biomass and the companies are always struggling to be at the maximum allowable biomass, the fact that you have larger smolt allow you to increase the supply. In Chile, the regulation basically limits not the biomass, but rather the stocking. And therefore, whether the stockings, which is in numbers, number of individuals, whether the individual is 150-gram or 500-gram does not make a difference in terms of the growth, so there is not a shortcut to regulation on larger smolt.

Now, additionally, what I believe is that the regulation will be more strict or stricter in the future. And therefore, the opportunities to material growth for Chile, I don't see that in the short term or the medium term. The mortality of Chile, which is another source of growth, is relatively low compared to our competitors in Norway, for example, right? There might be incidents of algae incidents here and there, but overall, mortality is much lower in Chile than in Norway. And therefore, I don't see that there is a large opportunity in growing the volume by having a reduction in the mortality.

So my view for the next maybe 3 years, maybe 5 is too long, but maybe for the next 3 years, is a very moderate growth, if any.

[Daniel Ventura, executive]

Next. Can you please give some comments around the company exposure to Russia going forward?

[Ricardo Garcia Holtz, executive]

Well, Russia has been, for us, strategically defined as a market where we consider it as an opportunistic market. There are times where it's open and times when it's closed. I believe with this -- today's incidents, it will be back into the closed market. It's not relevant for Camanchaca. We have not been selling to Russia in 2021 other than in the last few months because there was a lack of volume for us and the core market were more attractive. I don't think that there is any material impact on Salmones Camanchaca from these events in Russia. As far as sharing part of our production, we don't allocate to Russia a lot.

[Daniel Ventura, executive]

Next, what should we expect for prices in Q1 versus the undervalued price?

[Ricardo Garcia Holtz, executive]

Well, I -- we've been surprised, to be honest, of the strength of the price in the core markets, including the U.S. And with the situation of the Chilean supply that I mentioned earlier, I don't see any drastic change of the existing level of the price. There might be some additional upward pressure in the first quarter, but I think that we are already a lot higher than we expected. There will be an important reduction in the Chilean supply in the first half of 2022, and that will remain the price at a high level.

[Daniel Ventura, executive]

And how is the current logistical cost from Chile to Miami?

[Ricardo Garcia Holtz, executive]

Well, it has not changed a lot since the last quarter, but it's better than what we had in previous quarters because of the recovery of the flights and the airfreights from Santiago to Miami. That is a big important recovery of the number of planes flying now, and that gives us opportunities to move fish.

Not any material change in the first quarter of 2022. The fuel, the cost of fuel might put some pressure, but I would consider that among the many inputs, cost pressures that we have that we mentioned already.

[Daniel Ventura, executive]

Can you share with us how the commercial efforts being done to expand the Coho market have been evolving? Should we think that your 2022 volumes should be mostly delivered to Japan still?

[Ricardo Garcia Holtz, executive]

You should consider exactly the opposite. A minor part of our 2022 Coho production will go to Japan, and that's part of the strategy. Our strategy both for Atlantic and Coho is to have a large fraction, a very substantial fraction of our production in the forms of value-added, and that will target the main market. The Japanese market for Coho is a market that we will consider it marginal for us.

[Daniel Ventura, executive]

Can you give some more comments about the increase in your investment plan in 2023 from $32 million guided in Q3 to now $39 million?

[Ricardo Garcia Holtz, executive]

Yes. It's all related to moving farming sites from the X region to the XI region, providing us with more de-risking to algae and oxygen and in more dynamic farming sites than in the X region, and that is the core of the investment in 2022. There is also additional equipment and technology that will be put in place to mitigate the risk. It's not different from what we have already said in the third quarter.

[Daniel Ventura, executive]

Your total EBIT cost per kilo dropped substantially in Q4. Should we expect this to be stable for Q1? Higher fixed costs offset by fish harvest from better biological conditions?

[Ricardo Garcia Holtz, executive]

What is EBIT cost? It's cost per kilo.

[Daniel Ventura, executive]

Cost per kilo, yes.

[Ricardo Garcia Holtz, executive]

Cost per kilo, yes. As we said, we had an incident or various incidents related to the oceanographic condition and algae at the late of 2020 and early 2021 that affected the fish that were in the fjords of Comau and Reñihue. Different algae, different situations, different impacts. Comau, more mortality, Reñihue, more lower harvest rates. But these fish were harvested between the end of the first quarter of 2021 and December '21, and therefore, the sales of those fish in the market were done at a high cost for us.

As the fraction of these volumes are declining to almost 0 in first quarter and 0 in the second quarter, the embedded cost of the non-affected farming sites will be expressed in our cost and EBIT. And therefore, we believe that the first quarter will also have a gradual reduction, and that will be more so in the second quarter.

Despite that, the warning or the disclaim is that we are having $0.30, $0.40 cost pressure because of inflation, logistics, and feed ingredients. Cost pressure, for example, that has nothing to do with Salmones Camanchaca. It's a global situation that has affected not only salmon farmers, but generally, the globe.

[Daniel Ventura, executive]

Next. Do you expect to achieve prices in line with Urner Barry in Q1, or should we assume a discount due to the contracts at lower levels?

[Ricardo Garcia Holtz, executive]

No. No, we expect normalization on our price achievements in the first half of 2022. And therefore, historically, we've been able to sell our product above Urner Barry, and we continue to think so for the first half on average.

[Daniel Ventura, executive]

We don't have more questions.

[Ricardo Garcia Holtz, executive]

Okay. With that, thank you very much for attending this earnings report. In summary, getting out of the tunnel, good profitability, good volume, an excellent quarter for sustainability for Salmones Camanchaca. See you in a couple of months to report at the first quarter of 2022. Bye.