Salmones Camanchaca SA

SGO:SALMOCAM

Earnings Call Transcript 2022-Q4

[Operator]

Thank you very much, everyone, for joining us today for Salmones Camanchaca Results Presentation. Today, we have Ricardo Garcia, CEO. [Operator Instructions] So now I hand over to Ricardo Garcia to start with the presentation.

[Ricardo Garcia Holtz, executive]

Thank you, Marco, for the introduction and the help of Credicorp organizing this event, where we are planning to report the earnings of Salmones Camanchaca of 2022, the fourth quarter in particular. I am reporting from the Patagonia of Chile, very south in the middle of the [indiscernble], connected through a Starlink connection, the Elon Musk new internet devices. And I'm sorry if there is some misconnection during the presentation because the technology in the far South of Chile has sometimes a bit of seconds of interruption. So with that, we are reporting after our fifth anniversary after the IPO. And I would say that this is a satisfactory report after a couple of rough years that we went through. We initiated 2022 with a lot of expectation and a lot of challenges ahead, and we are finishing 2022 with many results and good results as we will be reviewing today. On the highlights, I would like to highlight five messages for you. The first one is an EBIT of $60 million for the year versus a negative EBIT in 2021, led by an EBIT kilo of 147 in the fourth quarter and 123 in the whole year for the Atlantic and an outstanding results for our Coho production with an EBIT kilo of 142 for the whole year higher than the EBIT per kilo on the Atlantic, very outstanding, that's #1 message. #2 message is the harvest grew 11% and reached almost 45,000 metric tons of Atlantic, very similar to what we said we were going to have. In the Coho, also an important growth of more than 120%, although it was lower in the fourth quarter because we initiated a little later, the harvest of these '22, '23 -- sorry, correct '21, '22 season, which ended in January '22, and this season started in the fourth quarter and is ending in the first weeks of 2023. So there was little harvest at the end of 2022, but it was an excellent 120-something percent growth on the Coho. Many opportunities lay ahead for the Coho in 2023. Great -- the third message is great price achievements in the last 3 quarters, outperforming our peers in addition to the price increase. So this is two elements, very favorable price condition in the marketplace but also within that context, 2022 below -- in the fourth quarter of 2022 was below the fourth quarter of 2021, slightly below, but below despite the many pressures on cost that we have faced, both on the feed cost, on the devices and technology that we have implemented to mitigate the environmental risk associated with the [indiscernible] and oxygen as well as inflation in other parts of the value chain. The harvest grew 70% overall year-on-year and reached 49 [indiscernible] that is [Technical Difficulty] fourth quarter of 2022. Next slide, [Technical Difficulty] was down in the fourth quarter of 2022 because we wanted that. We [Technical Difficulty] and was profitable because we exploited the opportunities, as I said, either advancing or vesting for the third quarter of 2022 and the price evolution during the third quarter, fourth quarter and first quarter of 2023 is showing that we were right in that. Other large amount of inventory at the end of 2022. It was on Atlantic more than 3x larger inventories at the end of 2022 [Technical Difficulty] at the end of [Technical Difficulty] in the fourth quarter. [Technical Difficulty] of our revenue set on third and fourth quarter [Technical Difficulty] harvest away [Technical Difficulty], we have increased substantially, as you can see, the Coho stocking in 2022 and the same thing for 2023 from less than 1 million fish in 2020 to close to 3 million in 2023 that is our plan. [Technical Difficulty] our volume will happen in 2024 [Technical Difficulty] and seen very little growth [Technical Difficulty] on the supply side, both for this year and then next year. Well, Manuel, hand it out to you now.

[Manuel Arriagada Ossa, executive]

Thank you, Ricardo. Welcome to everyone.

Let's go to the review of the operations and also markets. Okay, first, in relation to the Atlantic farming. During past year, we had excellent biological performance. As you can see in the graph, the total mortality rate was below the industry average in 10 months during past year. The only big exception was February where we had a high mortality due to a particular oxygen deficit in only one particular site. We ended the year 2022 with an average mortality rate for close cycles of 11.2%. That is below the industry average, as you can see in the right table, that was 14.3%. Also, compared with the industry, we had a better conversion. We have a better growth, a better cycle [lend] and also a marginally better antibiotic consumption. The only exception in the indicators was the harvest wait because we have one site lagging behind in the first quarter. However, from the second quarter of last year, we had weights exceeding 5 kilos WFE [indiscernible]. It's important to say that all of these productive outcomes are the result of the implementation of a farming improvement program initiated over 1 year ago, which comprises a range of initiatives, including the strengthening of human resources, improvements of the site's infrastructure, needle feeding strategies supported by software and health and sanitary new strategies. We are currently witnessing the positive outcomes of this program. Next one, in relation to the farming cost, the Q4 came with an ex-cage cost in line with the same period of the last year. 3.91 lightweight compared with 3.95 Q4 2021. In this quarter, we have been pressed by higher feed costs, mitigation cost of our risk reduction strategy and also some inflationary pressures. Of course, we are experiencing cost pressures due to the global inflation, especially in feed ingredients and logistics. In the past quarter, only feed price increase, had an incidence in the ex-cage cost of $0.30 higher compared with the same quarter of 2021, as an example. Next one. The total cost that is farming plus processing was 5.47 kilos WFE that is up 6% compared with the same quarter of last -- of '21. The processing cost was 1.26. That was $0.37 above the same quarter of 2021, mainly due to lower-than-normal process volume, as Ricardo mentioned, that was part of this strategy in order to capture the good market opportunities in the market. Also, it's important, the inflation, the Chilean inflation during 2022 was 12.8%, especially for the [wines] costs. Also the packaging we have an important increase of more or less 40% increase in the prices of packaging that also press the processing cost.

Next one, in relation of the use of the funds of the capital increase that we received back in 2021. At the end of 2021, the company receives funds from the capital increase to finance its growth plan; second, the investment plan after the risk diversification program. In relation to the diversification program, this plan consists of producing Atlantic in sites located in the 11 region, and leaving the Fjords of the 10th region for coho farming. Fjord in the 10th region are more suitable for Coho since the farming period does not include the summer where the risk is higher. Second, the use of alternative species. We are starting the reduction of Coho salmon. This season, as Ricardo mentioned, we doubled the volume of the previous season, and we will double again in the next season. And third, we use the funds to the use of new technologies and devices to reduce the risk. CapEx and OpEx. And you will note that is already in place since May last year, we have also backup sites for any contingency, oxygen support system, upwelling and [indiscernible] systems and also a mass mortality logistics plan just in case. In the picture, you can see fun mitigation of [indiscernible] system in 1 site located in the -- in a Fjord in the 10 region. This picture was taken 2 weeks ago. Already, we have 6 sites in the 10th region implemented with this kind of systems. Also, during last year, we implemented two new Atlantic sites in the level we do to diversify risk. And also, we have started the Coho production, as you know, with two proper sites, one more than the previous season, plus all of the processing equipment to produce value-added from Coho. Sustainability indicators. We have a good evolution of sustainability indicators in farming with improvements, as you can see in the table, in all key indicators. In fact, during this quarter, we had the best value in the last 4 years for the second quarter in all of the indicators. Fish-in, fish-out well below 1, a reduction in the length of the cycle and a reduction in the number and antibiotic and antiparasitic usage. The decrease of antibiotic usage this quarter is driven by good sanitary conditions in general. Let's go to a review of the markets. Okay, this is the evolution of the market price and [ VariMajani ] between the fresh. As you can see, the prices remain at a high level and are expected to remain high. Somehow, they were in a lower level during the second half of the past year, as Chilean supply recovered in the second quarter and third quarter of last year. It has a growth of 13% and 26%, respectively, in those quarters compared with 2021. In light of the negative growth for the first 3 quarters of 2023, we anticipate prices that were not easy too much going forward. We will have a decrease of minus 6% in the first quarter, minus 1% in the second and minus 5% in the third quarter. However, of course, there are some economic ingredients that might generate a decline in the economic growth, the general economy. However, in our opinion, since the consumers' behavior is changing towards healthier food choices, the demand for salmon has remained consistently high, supporting a good price level. For the full year, Kontali expects a decline in the Chilean supply of 1% and overall globally, an increase of 2% in harvest volume for 2023. Next one. Okay, so this is a price achievement of Salmones Camanchaca compared with the market benchmark. The return on raw material, that is the metrics. For Salmones Camanchaca's Atlantic Salmon was behind the market benchmark during the first half of last year, but increases and was above it since June, and it has remained above it throughout the second half of the year. So finally, during 8 out of 12 months, we were above the benchmark in 2022. In the Q4, in particular, Salmones Camanchaca return was $0.70 above [indiscernible] benchmarking. It's important to say here that the key to achieve this is the flexibility in our production mix and in the markets in order to capture the higher prices. For example, during the second quarter, we switched to fresh during the third and fourth quarter, we increased the frozen. Next, please. In relation to the sales and value-added strategy mix. The American market is still the largest market of 40%, followed by Mexico, our second most important market with 20% and the value added represent 80% of the total sales in the last quarter. Our marketing strategy aims to: first, to focus on our core markets, mainly American market and Mexican market, to leverage our long-dated relationships and strong positioning to allocate our value-added portfolio. And second, our strategy is to be a leading provider of [ fillets and portions ], a format that explains 80% of our sales in Q4. This is our strategy for Atlantic. In the next slide, same strategy for Coho. As you can see here, the evolution between 2 years, 2020 compared with 2022, as you can see in terms of the sales by market, we diversified the sales, including new markets, mainly Mexico, American markets, Chinese market, Southeast Asia also. So a diversification of the market; and second, an increase in the value added. This is part of our strategy. 70% value added of [ fillets ] 50%, on portions 20%. So our strategy is to develop new markets, and second, to have the same production mix flexibility as Atlantic's, increasing the percentage of value added as part of our strategic initiatives. So we can adapt our product mix to capture demand and higher prices. Ricardo?

[Ricardo Garcia Holtz, executive]

Thank you, Manuel. Quick on the other financial takeaways of the quarter. This is a waterfall analysis and the EBIT on the fourth quarter at $18 million compare very favorable with a $13 million that we made in the fourth quarter of 2021, 35% higher or $4.6 million higher. How can we explain that. First, there is a higher price and end price achievements which explain about 18 -- sorry, $19 million higher result with the volumes of 2021, so the exercise here is to isolate the effect. So when we say Atlantic price, it's the Atlantic price of 2022 or the fourth quarter of 2022, using the volume of 2021 in the fourth quarter so that we can isolate that. And that impact is about 19. Same with the cost of goods sold, which is the second column, uses the volume of the fourth quarter of 2021 and the cost of 2022 to make the difference of $6 million. Then the volume is the 2021 margin applied to the new volumes of 2020 or the fourth quarter of 2022, which again is a negative one. And the residual effect is the other part of the equation where you add up all the deltas of the analysis. So that's mainly the reason. So in summary, I would say that the reason of the increase is a substantial improvement on prices and price achieved by Salmones Camanchaca that was more than able to compensate higher cost of the goods sold and the lower volume of the fourth quarter of 2022. Next, well, we -- on the P&L, we go over a little bit more on the details. We've already explained the EBIT of the quarter. So that's done. The lower first value as we can see here on the fourth quarter, we have a lower fair value than 2021. That is a consequence of a lower price level at the end of the year that is during the fourth quarter, the prices were lower than in the third quarter, and therefore, there was a negative impact on the first value as well as the reversal of the margin that we accounted in the firm value for the units that were sold in the fourth quarter. Per value is precisely accounting for the future margins that you will make when the units were going to be sold. Once you sold them, then you reverse that margin. So that's the reason of the negative one. On the negative nonoperational items of the P&L, this is a mix of first and very important, we made a profit of about $2.7 million in the fourth quarter of 2021. When we renegotiate and refinance the credit lines of Salmones Camanchaca and the extension of the duration according to IFRS 9 made us a profit, a nonoperational profit in the fourth quarter of 2021 when we made that renegotiation of the loans of Salmones Camanchaca. And therefore, this year, that is not in the books anymore. The second reason is a higher interest rate on our loans, net financial debt at the end of 2022 was about $75 million. And therefore, the higher interest rate that everyone is paying now costs us more cost. Also better trout results in our JV. Yet, it's still a low number, and we are not happy with that. We still believe it's a good business going forward, but the results of -- of the last year has not been particularly exciting, but it was better than the previous year, and that helped. And therefore as a consequence of this, the distributable profit will be closer to $40 million in 2022, something that will be considered by the shareholders' meeting in the next few weeks compared to nothing in 2021. So very good news for the shareholders. Next, [Alberto], on the cash flow, very strong operational cash flow in the $76 million level, which is added to a high cash level at the beginning of 2022 as a consequence of the capital raise that Manuel was mentioning, permitted us during the year 2022 to fund about a $29 million investment plan as well as a reduction in the use of our credit lines of about $58 million. The investment, as Manuel mentioned was mainly driven by our strategy of reducing the risks at Salmones Camanchaca. Next, [ Alvaro ] on our future estimates. I think that the messages here are in 2022, there was no global supply but a small growth for Chile. But in 2023, there will be reversed. We are expecting very little no growth from Chile, particularly negative growth in the first 2 or 3 quarters of 2023 with some growth in the fourth quarter. But we'll see also a very small to maybe 3% growth on the global supply for 2023. But overall, I would say the picture for 2023, 2022, is very limited global growth. That is a situation where in light of the robust demand that we are experiencing for our product led us to think that the price will be on the high end of the expectation for the coming year. Our estimate -- our own estimate for 2023 with current stocking and under a normal biological performance of the fish that are in the water is that we will have a stable level of Atlantic harvest in 2023 in the area of about 45,000 metric ton of Atlantic, but as Manuel mentioned, the stocking plan of Coho will led us to double again the production of Coho this 2023 to get to around 55,000 metric tons overall harvest production in 2023. And as you can see here, we are stocking Atlantic in 2022 and in 2023, so that by 2024, we will be leveling the Atlantic harvest that we had in 2019 and 2020. So in the year '19, '20 level will be recovered on the Atlantic side by 2024, and we will be adding in 2024 more than 10,000 metrics of Coho production. So our estimate for 2024 is exceeding 60,000 metric tons of total harvest with the existing asset-based capabilities base, both on concessions, ocean sites, harvesting capabilities, primary processing capabilities, value-added capabilities and also marketing capabilities with the existing one, that's important to mention this. In summary, therefore, what are the takeaways of today's earnings report, I would say, maybe 4 or 5 takeaways. The first one is a remarkable turnaround of 2 poor and rough years with this year higher margins than our peers. The second is that it's not only better prices in the marketplace, but also the ability of Salmones Camanchaca to achieve an even better condition for our products. [Technical Difficulty] performance with low biomass mortality in the second, third and fourth quarter. The fourth is Coho expansion is working well under the strategic definition we have set with high value added and new markets. And is getting higher EBIT per kilo than Atlantic at least for 2022. Our goal is that it will not be lower than that. Also, our close to 10% expansion in volume harvested is based on Coho and the growth in the future will most likely be based also on Coho. It was rather small the last year. It was more sizable this year and is going to be even more sizable in the coming years. We are aiming to be more than 55,000 metric tons in 2023 -- sorry, yes. Another important summary is the important deleveraging of Salmones Camanchaca, but with net interest-bearing debt ratio with EBITDA of lower than 1x, an equity ratio higher than 50% [Technical Difficulty]. The main takeaways of the earnings report, we were pleased with the outcome of the company, particularly relative to our peers, both on price achievements and margins. And with that, we leave it for the questions. Q&A.

[Operator]

[Operator Instructions] I think Daniel, we'll read the question.

[Daniel Ventura, executive]

The first question is, can you comment on price realization and cost going forward?

[Ricardo Garcia Holtz, executive]

Yes. Yes, the answer for that is quite simple. The -- what are the capabilities of Salmones Camanchaca. Yet price realization above our peers. And I'm back on Manuel's point. We have the size of the company in the 50,000 metric ton, let's say, 50,000 to 60,000 metric tons, which is going to happen in this year and the next. That level of production. That level of production makes us a midsized player globally with the agility of moving more or less into the markets with a lot of speed. And that is also supplemented or complemented by the fact that we have great agility to change our formats and product types in our processing plants, both from frozen to fresh, both from [ fillets to portions], both from [ fillets ] to whole fish. So the ability to move around both on production and on marketing, give us an opportunity, given the size that we have to extract these opportunities in the various markets that we see all the time. So in terms of the relative price realization, I am optimistic going forward. Now on the price level in the market, which is a different question, I again emphasize the fact that the stocking numbers that we are receiving from public information, and the estimates that we are getting from analysts from various sources point to a very, very limited global supply growth going forward. And at the other side of the coin, we see a very robust [Audio Gap] of the consumers. So we see a very good scenario for the prices in summary.

Daniel?

[Daniel Ventura, executive]

Next question is, what is the current status of the biomass now that you have entered into a period of higher temperatures, any signs of slower growth, low oxygen or [indiscernible].

[Manuel Arriagada Ossa, executive]

I can proceed with that answer?

[Ricardo Garcia Holtz, executive]

Yes. Yes.

[Manuel Arriagada Ossa, executive]

[indiscernible] frozen. Yes, the current summer status until this week, February, was, in general, good stenographic conditions, both in algae levels. We have no presence of harmful algae in any site. So good for that. also the oxygen levels, I would say, in normal levels. So in general, the oceanographic conditions in this quarter are quite well. And at the same time, as I mentioned, we are better prepared than other years with the mitigation upwelling systems in 6 sites located in the 10th region. So just in case if we have any situation in the future, we are better prepared than previous years.

[Daniel Ventura, executive]

Manuel, may you comment on the fact that whether you've used already the devices that have been put in place in the sites, and how are they working?

[Manuel Arriagada Ossa, executive]

Exactly, even though we are not having a harmful algae in any site, we are currently using the devices, mainly because it's a better oceanographic condition for the fish to have better renovation of the water with the [upwelling] systems. So we were able to improve the growth. And we were able to have a more standard water column at changes with these kind of systems. So in general, we have a very good evaluation of the implementation. We had implementation during January, so it's very recent, but with very good news until now.

[Daniel Ventura, executive]

Next question. Do you see a similar movement in tax increases in Chile as we are seeing in Norway and now in Canada?

[Ricardo Garcia Holtz, executive]

I am not aware of any tax change in Canada. I'm aware of some restriction to farm in the British Columbia area, but maybe there is some. On the Norwegian side, it's still early to conclude because as you [Audio Gap] and then straighting the handful of these high taxes that were presented. So the story is not ended there. And we are not aware of anything in Chile.

[Daniel Ventura, executive]

Ricardo, you were disconnected when you were speaking about cost looking forward. Can you repeat the answer, please, for the audience?

[Ricardo Garcia Holtz, executive]

Okay. I did not mention any cost going forward. I mentioned the agility and the flexibility of our processing and marketing condition that allow us to be optimistic on price realization going forward. On the cost side, I will leave it to Manuel, but I would say that at the moment, we believe we have seen already the peak of the feed ingredients prices. And therefore, we don't envision substantial pressure from the feed side, Manuel?

[Manuel Arriagada Ossa, executive]

Yes, exactly. The same answer Ricardo in relation to the ex-cage cost. Last year, we ended with an [ex-cage] of $4.43 per kilo WFE. And we expect a marginal increase as an average for the full 2023, a marginal, I would say, marginal less than 5%, mainly because the biomass that currently is in the water received during 2022, the increase of the feed price. So the inventory for that reason is a little higher. But since Q1, we have seen a little, I would say, normalization and production of the feed prices. So overall, a minor impact in the ex-cage cost.

[Daniel Ventura, executive]

Can you please give us more color on the Coho market, how new markets development has been? Is the good price achievement in Coho something particular or more permanent?

[Ricardo Garcia Holtz, executive]

Excellent question. It [Audio Gap] is this. The Coho is harvested at the end of the year. Let's say, fourth quarter to be simple. And therefore, any volume that you have of Coho is concentrated on 3 months. So if you have one Coho, the capabilities that we need to have are equivalent to [Audio Gap] because the Atlantic is harvest throughout the year. Therefore, all the harvesting capabilities, primary processing capabilities and value-added processing capability needs to be quadruple for Coho compared to Atlantic. That limits substantially the ability of anyone to process large volumes of Coho with value-added, that's one thing. And therefore, when you harvest and sell whole fish, which is what everyone has been doing or almost anyone has been doing in the past, the only market that really can absorb that amount of fish is Japan. So the situation was very restrictive in the future -- in the past because of the value-added capacity and the market capacity with [Technical Difficulty] leveraging outstanding capability of Salmones Camanchaca in value-added processing and by leveraging the good Salmones Camanchaca capability of marketing new markets for the Coho, which are traditional market for us in the value added of Atlantic. How unique is that? I would say that to a good part, it's unique and will continue to be unique for a good time. There is nothing on the Coho that prevent us from getting the same margins of Atlantic in the future. In fact, it's a more beautiful fish, if I may say. It's readier than the other one. And has the advantage, as Manuel explained, that you are out of the site before the summertime, which is the riskier area or risker time of the year. And therefore, you can utilize the excellent size that we have in the fields, excellence in many ways, except that they are a bit more riskier in the summer, which is what Coho prevents. So the combination of sites of Camanchaca plus the marketing and production processing capability makes us very competitive, extremely competitive in this business -- in the Coho business. That's why we believe 20%, maybe 25% of the production will be coming from that special in the future.

[Daniel Ventura, executive]

Next question, in the press release, there is a comment on certain performance levels to be achieved in the JV, if there are not met and trigger at end of the JV trials. Can you please give us more information on this?

[Ricardo Garcia Holtz, executive]

In simple terms, if the JV does not perform with a minimum margin in this cycle, then we can skip from entering into the JV in the last cycle of the contract in simple terms. So it's a way out from the JV if the margins are not good enough for us in the coming cycles. So we have until 2028, Manuel, correct?

[Manuel Arriagada Ossa, executive]

Correct.

[Ricardo Garcia Holtz, executive]

So it's a cycle '27, '28, '25, '26, and '23, '24. So I understand, Manuel, if the performance in the next cycle is not good enough, then we can get out earlier from the JV and get the concessions and the ocean size back to us earlier.

[Manuel Arriagada Ossa, executive]

Exactly. So one comment Ricardo to inflation to the EV. Of course, we are taking all of the necessary measures in order to improve the profitability of the JV. One of the main ones is to, let's say, analyze and re-accommodate the harvest plan in order to increase the harvest weight. That was one of the elements that affects the last 2 years because we have a lower price achievement because of the lower sizes. So the idea is to modify that in order to increase the profits of the JV. It is not written in the presentation, but we achieved that in the last quarter of 2022, where we increased the EBIT per kilo of the JV up to 0.8. So we are now seeing a better performance in the last quarter of last year. So we expected to do so next year. So the main idea is to improve the profitability of the JV, of course.

[Operator]

There is no more questions, sir.

[Ricardo Garcia Holtz, executive]

Well, with that, then we thank everyone for joining the call. There was almost 60 people connected, so very good attendance. And I would appreciate very much if you can respond the questionnaire that will give us the feedback to make it better in the coming earnings report meetings. Take 1 minute to respond please the questions, and we'll do better next time. With that, thank you very much. Daniel, Manuel, is there anything left?

[Manuel Arriagada Ossa, executive]

No.

[Ricardo Garcia Holtz, executive]

No.

[Operator]

Thank you, Ricardo and Manuel. That concludes the presentation. So on behalf of [indiscernible] Capital, we found the company and all the investors joined the presentation, and I don't know if they are -- if Ricardo, you would like to give some final remarks, but...

[Ricardo Garcia Holtz, executive]

No. I think that I'm okay. I think that the messages were clear and see you over the next 2 months or 3.

[Operator]

Perfect.