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Edited Transcript of BMKB.L earnings conference call or presentation 28-Aug-20 7:30am GMT

Q3 2020 Benchmark Holdings PLC Earnings Call

SHEFFIELD Sep 30, 2020 (Thomson StreetEvents) -- Edited Transcript of Benchmark Holdings PLC earnings conference call or presentation Friday, August 28, 2020 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Septima Maguire

Benchmark Holdings plc - CFO & Director

* Trond Williksen

Benchmark Holdings plc - CEO & Director

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Conference Call Participants

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* Carl-Emil Kjølås Johannessen

Pareto Securities AS, Research Division - Analyst

* Damian Paul McNeela

Numis Securities Limited, Research Division - Analyst

* Espen Korsmo Granly

DNB Markets, Research Division - Analyst

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Presentation

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Trond Williksen, Benchmark Holdings plc - CEO & Director [1]

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Good morning to all of you, and welcome to this webcast. I am Trond Williksen, the CEO of Benchmark. And together with me today, I have our CFO, Septima Maguire, and we are going to give you insight into the third quarter 2020 report just issued this morning. And we are going to cover the highlights of -- and the trading and the financial figures as well as the status and outlook for the remainder of the financial year. At the end, there will be an opening for a Q&A where we will answer any questions you might have.

You can flip to the next page. As many of you might have expected, the highlight of this quarter has been the progress that we have made on the program to restructure Benchmark to become a streamlined, sustainably profitable group. I am very satisfied that the -- through the quarter and post period, have been able to reach many of the milestones that we set out to meet, the substantial events. And this have, of course, been communicated to the market as we have moved along, last one being the sale of our vaccine facility, which was signed mid-July and closed at the end of that month.

Through the third quarter and post period, we have completed 5 substantial transactions with net proceeds to the group up to GBP 44 million. And for all practical reasons, we have substantially completed the restructuring program we set out to do. What we are left with is a group that has taken huge steps towards becoming more streamlined and focused, and we are given the opportunity to focus on developing the 3 business areas which are going to be the core of Benchmark going forward and that is Genetics, Advanced Nutrition and Animal Health. When it comes to the trading in the period, it has been according to the expectations we had entering into the quarter.

And Genetics has had another good quarter. This is a very well-positioned part of the group that this year has kept on delivering good results. This is also the case in third quarter even if this quarter, traditionally, is a low season for this part of our business.

In Advanced Nutrition, we have seen some recovery of delayed sales during the quarter, thus, a stronger financial performance. But all in all, if you look at that business area, volumes and margins are still impacted by the underlying challenging market conditions within the shrimp industry and the pricing of artemia.

The Animal Health division has, of course, been impacted by the restructuring activities that we have undergone in the quarter but has kept its focus on the main target for this division going forward and that is a successful launch of BMK08 and CleanTreat. And we are on schedule for launch at the second quarter in calendar year, calendar year '21.

Both for the Genetics division as well as for Animal Health, the resilience of the salmon industry underpinned ongoing operations as well as our ambitions going forward. As I stated initially, I am very satisfied that we substantially have concluded a very significant restructuring process.

Despite COVID, we are also ending this period in a stronger financial position than we were when we entered. As of yesterday, pro forma figures shows a net debt position of GBP 36 million and available liquidity of GBP 84 million, which should give us the opportunity to develop the core businesses going forward as well as be resilient to COVID.

COVID, which still impacts us as most businesses these days through more volatile and fragile markets, more cumbersome and resource-demanding operations as well as challenging logistics. This is a situation we expect will continue in the months to come and that we will be prepared to and able to deal with.

It goes without saying that a key priority for us going forward will be to keep our strong financial position, and we continued to have a cash conservation plan in place and advanced on restructuring to deliver the GBP 10 million in annualized cost savings that we previously have been communicating.

Next page. The last 12 months has really been a transformational period for Benchmark. I'm very satisfied that throughout this period of significant change, we as a group have been able to deliver on the promises we've given, changing this group towards becoming focused and streamlined with a clear aim to become sustainable, profitable over time.

Through the process and the divestments of noncore businesses areas, we have reduced our organization from approximately 1,100 employees to 850 as of today. We have been able to do so, keeping almost all jobs for those who used to work for the group. This has been the mantra throughout the process, and we have managed to live this mantra and in new homes for the noncore business areas, including their employees.

Next page. A quick overview of the main numbers and trading for the quarter before I leave it to Septima to take you through the details of our financials. All in all, as I said, the trading through the quarter has been rather resilient given COVID as well as the focus on the restructurings that we have had of the group in the quarter. We have been able to put in place and enforced process that had protected all our employees, at the same time that customers [try] and services has been maintained.

Our total group revenue ended at GBP 24.5 million in the quarter, which is an increase of 8% compared to third quarter last year. Also, adjusted EBITDA had a positive development from last year, ending at GBP 0.3 million compared to a negative of GBP 1.4 million last year. Septima will take you through the details, but I will just highlight a couple of points looking into the business areas behind the group numbers.

As I mentioned earlier, the Advanced Nutrition saw some recovery due to delayed orders, which has suffered in significantly higher revenues of GBP 16 million and an adjusted EBITDA of GBP 2.8 million compared to last year. But still, volumes and margins are and will continue to be influenced by the underlying challenge -- challenging market conditions in the shrimp as well as the pricing of artemia.

The Genetics division had a good quarter with revenues of GBP 7.2 million, slightly ahead of third quarter last year, and margin improvement with an adjusted EBITDA ending at GBP 1.2 million compared to GBP 0.8 million last year. The improvement is partly due to reduced costs following the measures taken through COVID and more in-house production. As mentioned initially, Q3 is not the high-volume and earnings quarter in our Genetics business area.

Animal Health has been influenced by the restructuring we have gone through. This has especially been impacting this business area and this division. Revenues are down but adjusted EBITDA was the division that showed an improvement from a loss of GBP 3.3 million last year, reflecting some of the cost mitigations that we have been able to put in place during the quarter.

But now I will give the word to Septima, who is going to take us through the details of the financials. So Septima, the floor is yours.

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Septima Maguire, Benchmark Holdings plc - CFO & Director [2]

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Thank you, Trond. If we can start on Slide #6, please. Just to clarify upfront for everyone, discontinued operations do not include the vaccine facility which was divested in July as this was a post-period end event. It's therefore included in continuing at quarter 3 2020 in accordance with the accounting standards, but will form part of our discontinued operations in our full year results.

So moving on to quarter 3. Trond touched on some of these themes, but hopefully I can flesh out some of the trading issues that we've encountered.

Quarter 3 has been a solid quarter for our core business on the back of very different trading environments across each of our divisions. For the continuing business, revenue exceeded the same quarter by GBP 1.7 million with EBITDA being positive by GBP 0.3 million versus the loss of GBP 1.7 million (sic) [GBP 1.4 million] last year. This quarter's results were driven by a number of factors, the impact of which I'll go through now.

COVID-19. As previously referenced, COVID-19 has impacted on our employees, our customers and our markets to differing degrees, as can be seen in the trading analysis for each division. But resulting from this, cost control and curtailment across all divisions was very much the mantra of quarter 3, with an estimated positive impact of GBP 2.5 million to GBP 3 million on the income statement in the quarter resulting from these activities. This curtailment came from areas such as discretionary spend, the plc and operations Board taking 20% temporary pay reduction and the use of furlough and short-time working schemes where available, amongst other things.

From a trading perspective, Nutrition, as Trond noted, saw the effect of slower demand in H1, consequently driving all -- higher orders in quarter 3, which would normally be a period of slower demand. This can be seen by the quarter-on-quarter increase versus last year. This quarter was also the first quarter after the artemia price reduction was implemented in H1 as part of the strategy to ensure we're positioned competitively to defend our market share. Taking those factors into consideration, quarter-on-quarter revenue versus last year, we were ahead on an adjusted EBITDA level by GBP 1.4 million.

Genetics reported solid revenues, with volumes flat, with continued improved selling prices due to the high number of attractive traits in the salmon eggs being offset by adverse FX of GBP 0.9 million in the quarter. During the period, we also added cost of additional shifts and other protective measures put in place to protect our employees, which drove the gross margin downwards. But this was offset by good cost control, which resulted in a positive performance quarter-on-quarter versus last year.

Animal Health. Animal Health revenues quarter-on-quarter were impacted by reduced toll manufacturing as the facility was partially closed during the period, lower Salmosan sales and also there was no Ectosan trial revenue in quarter 3 2020 versus last year, where we saw GBP 0.6 million in quarter 3 2019. And all of these factors adversely impacted the adjusted EBITDA but were offset by good cost control and also the use of government schemes where available.

Moving to Slide #7. As you can see, at a group level, the revenue and EBITDA improvements in the quarter aren't sufficient to catch up on the lag on prior year. In Nutrition, the revenue shortfall has been driven mainly by the COVID and weak market. Demand for artemia and diets are down year-on-year by 17%, but demand for the health products has grown by 12%, which, whilst it is the smaller of the 3 areas, it is still a positive.

Our health products are focused on the grow-out market rather than the hatchery segment, and long-term, this represents a growth opportunity for us. In the hatchery segment, our main target market, while stocking remains slow, we have maintained good relationships with customers through online forums such as training videos and seminars, which also will provide an additional technical support tool for existing and new customers as we move forward.

With respect to the Genetics division, we've seen consistent revenues year-on-year which, aided by Salten continuing to come online, have driven good margin growth. Even if we exclude the fair value uplift within the biological assets for the year, which is GBP 3 million for 2020 versus GBP 1.8 million for 2019, adjusted EBITDA has still grown 74% year-on-year. Health revenues and adjusted EBITDA have been impacted by a number of areas previously referenced. The lack of Ectosan trial revenue of GBP 0.6 million drops down directly to adjusted EBITDA as the costs associated with trials are capitalized in accordance with the accounting standards. In addition, the reduced total revenue year-on-year, without mitigating cost reductions, led to an adjusted EBITDA shortfall for the toll manufacturing of GBP 1 million.

With respect to the now-disposed toll manufacturing, on a year-to-date basis to quarter 3 2020, we currently estimate that at least GBP 3 million to GBP 4 million of net costs will be extracted from our cost base. This is part of the previously announced GBP 10 million of cost savings we referenced in H1 2020, and this will be shown in discontinued operations at the full year. We'll look at the improvement in the net debt figure in detail in a few slides.

So if we can move on to Slide #8 and talk about gross margin. In Nutrition, the quarter-to-date -- the quarter and the year-to-date, the mix effect from diets and health, which are traditionally higher-margin products, has mitigated in part the previously noted price reductions in artemia. But this mix effect cannot fully mitigate the overall downturn in margin within the Nutrition division.

In Genetics in H1, we saw a very significant gross margin accretion from 52% to 72%, which we guided was a one-off resulting in part due to replacing sales of eggs from third-party supply to our own supply from Salten. At the time, we noted that this would normalize, which you can see happening within the year-to-date Genetics margin.

There was also some impact from costs associated with additional measures taken with reference to COVID within the quarter in Genetics.

If we can move to Slide #9 and consider operating costs. On a year-to-date basis, we have GBP 1.6 million less operating costs than last year. But it should be noted that GBP 1.4 million of this saving has come from quarter 3 2020 through the cost curtailment exercise. This exercise was actively supported by all of our employees in all divisions as we work together to mitigate the impact that COVID was having on our trading. Moving forward, costs will continue to be tightly controlled.

In addition, we also paused any discretionary spend associated with R&D to ensure good EBITDA and good cash control. Where we did have spend, this was either contractual spend, which we could not avoid; people, where we could not avail of short-term working programs; or work on BMK08 to support the MRL and the EMA regulatory submissions.

If we can move to Slide #10. The current year-to-date took us from GBP 3.2 million of adjusted EBITDA to a loss from continued operations of GBP 27.2 million. The most impactful items on this are, of course, the noncash items of depreciation and amortization which totaled GBP 18.3 million; and the next one, the net finance costs of GBP 11.5 million, of which GBP 5.4 million is interest on the group's debt. The balance of the GBP 11.5 million is primarily made up of foreign exchange gains and losses and hedges associated with our debt.

If we can move to Slide #11. Net debt. From a cash management perspective in this quarter, the cash generated from operations, has been reduced as a result of the previously discussed difficult trading. But this has been offset by good working capital management and, of course, the net proceeds from the sale of our disposed entities have helped us maintain good net debt and cash positions.

On a year-to-date basis, the proceeds received to date have more than funded the business requirements. The IFRS 16 block refers to the impact of the new leasing standard where operating leases are now part of net debt. Now it should be noted that net debt does not include the proceeds from the sale of FVG, which occurred on the 1st of July, or the proceeds from the sale of the vaccines facility on the 31st of July. This has resulted in net debt of approximately GBP 36 million and cash of GBP 73 million on the 27th of August 2020. These strong cash and net debt positions provide us with the ability to build on the potential that we have in the 3 now remaining divisions, and we'll ensure that we can focus on building them towards the long-term aim of creating a profitable and, most importantly, cash-generative business.

Now I'm going to hand you back to Trond for some final remarks before we take questions. Thank you.

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Trond Williksen, Benchmark Holdings plc - CEO & Director [3]

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Thank you, Septima. And we are now moving into summary and outlook for the remainder of the year.

Summing up where we are. We have taken significant steps forward in our plan to become a streamlined business focused on 3 core business areas which are Genetics, Advanced Nutrition and Health. And we are happy to have taken those significant steps. Going forward, we will continue to work on cash contribution and restructuring to deliver the GBP 10 million in annualized savings, taking us even a further step closer towards our goal to become sustainable, profitable.

And we are still in COVID times. We have a flexible COVID process or processes in place in order to protect our employees and maintain operational continuity as well as a solid financial position, which together gives us resilience in the situation that we think will last going forward.

We have a good visibility of orders in Genetics, and our rather resilient salmon industry is underpinning our Genetics business and the launch of BMK08, which is on schedule to be launched in Q2 in the calendar year '21.

When it comes to Advanced Nutrition, challenging conditions in the shrimp is expected to endure. So even if the sea bass/sea bream market, which is part of what we do or part of the market for Advanced Nutrition, is more resilient, we expect this situation to continue to impact this business area going forward, and we expect this to last into the financial year of '21. It's not something that will go over very shortly. But all in all, where we are, we expect to deliver our full year result that is in line with the expectations.

Next slide. Towards the end, I would like to repeat. Our aim is to become a streamlined, focused and sustainable, profitable group. We are not there yet, but we will work hard and determined to get there. Our core business areas will be Advanced Nutrition, Genetics and Animal Health areas. We are in the position to support selectively investing and develop. The good thing here also, we have initiatives lined up in all of these 3 business areas to develop profitable growth in the years to come. To take out these potentials, these potentials will now be our focus.

Next slide. And to end with summing up what I've said since I entered close to 3 months ago. We are in a prosperous industry, the aquaculture industry, that we will and need to develop in a sustainable way going forward. And the industry has a lot of runway ahead of it. In this industry, Benchmark is uniquely positioned within the industry and with its business areas. Each of these and together, they hold good value propositions for the industry and the need of the industry going forward. And we are well underway to become a streamlined, focused and, I would say, motivating group ready to start on to realize our potentials in the time to come.

If I sound optimistic, I am, but make sure you understand, make sure you understand that developing performance and a great company always takes time, even more so in the times that -- with uncertainty that we are in at the moment. But we head in the right direction, and we'll do our best to guide you on the way. So that was my closing remarks. So now we can open for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll now take our first question from Damian McNeela of Numis.

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Damian Paul McNeela, Numis Securities Limited, Research Division - Analyst [2]

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A couple of questions from me. Firstly, I think, Trond, you mentioned that you've got good visibility in the Genetics business. Can you just sort of give us a sense of the time frame around that visibility, please?

And then just looking at the shrimp market. It's encouraging that you're sort of working with your customers through this sort of challenging period. I'm just wondering if you could provide any comments on the industry backdrop there and whether we should be expecting consolidation within the hatchery industry and how Benchmark would be positioned in that regard. Would that be seen as a positive from your point of view?

And I think just finally, Septima, could you please just clarify the comments on the vaccine cost savings. So I was trying to type and listen at the same time, and it didn't go all that well. Just on the sort of GBP 3 million to GBP 4 million cost savings, and just go over that again, please.

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Trond Williksen, Benchmark Holdings plc - CEO & Director [3]

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I can probably start out answering your questions, Damian, on the visibility in Genetics. As I said, the Genetics division is a very well-positioned division within our business and within the industry. I have been impressed. I've been here for 3 months now. I've been impressed with the way that has been positioned over the years and has been developed over the years. It's delivering strong results, and it has offerings to the industry that is very relevant and really has attracted the industry to buy services from that division.

And so most of -- especially within the salmon industry -- or it is within the salmon industry, we have our stronghold there. And when I say that we have good visibility, most of what we are doing towards the salmon industry is to sell Genetics on contracts or rolling contracts. And when I say that we have good visibility, we know what we're going to deliver in the relation going forward. And that's why I said that we have good visibility on the delivery from that division going into the next months and throughout this year.

In terms of the shrimp market, it is a difficult situation within that industry at the moment. If it will drive consolidations, yes, maybe. We are very well positioned. We have -- that's where we have the biggest order, the [bio test] footprint. And we are very well positioned in that market. And we are selling our products both to small players and bigger players. And we have very good relations also to those who will, if it happens, drive any consolidation.

So yes, the question, will it drive a consolidation? Yes, maybe. If it drives, does it impact us? Yes, but I think it will be kind of a neutral thing for us. I think we will be in position regardless how that industry goes forward. And we will be ready to take on when the industry also picks up in the time to come. The challenge for us now is that -- the challenge for the industry and challenge for us now is that it's still depressed from general conditions and that we don't know exactly when things are picking up again. Septima, you have got...

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Septima Maguire, Benchmark Holdings plc - CFO & Director [4]

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Yes. I'll pick up on the vaccines question. The point I was making was that we expect that in the results that we are showing within the continued operations, there is GBP 3 million to GBP 4 million of net-net loss effectively in the 2020 figures associated with the vaccines facility, which we will expect to see moving into the discontinued operations when we look at it in the full year. And of course, there will also be the month of July to top that up, so to speak.

So divesting the vaccines, well -- has been a very positive experience for us as a group because we were assured that there were jobs for all of the people involved in the facility. Yes, we did get the value for the facility. And also we have decided strategically the vaccines' [mantle] manufacturing wasn't something that we wanted to be part of, to be participating in, in the future. So for us, it's a very good outcome in terms of the facility.

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Operator [5]

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We'll now take our next question from Carl Johannessen from Pareto.

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Carl-Emil Kjølås Johannessen, Pareto Securities AS, Research Division - Analyst [6]

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Just a follow-up on the Advanced Nutrition. You say that there's been some catch-up demand now in Q3, but that there is still -- it's a difficult industry, they're struggling. Can you say something about what we should expect there shorter term? Is the demand for your products coming back down again after this kind of catch-up demand in Q3?

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Trond Williksen, Benchmark Holdings plc - CEO & Director [7]

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You had a special effect that we have described in Q3. And the challenge with the Nutrition division now is that the visibility in the market is low. We are trading at a decent level, but still it's depressed. And the visibility, how it will develop throughout this, is still low. But we are moving now into season that -- where you have a pickup in -- seasonal pickup in volumes and that we probably expect that we will see some of. But again, the visibility is low to say that -- for us to guide at a certain level. It's too low for us to guide on a certain level going forward, and that's why we are careful on doing that.

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Septima Maguire, Benchmark Holdings plc - CFO & Director [8]

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And if I may add as well. It's not just one specific market being depressed. Different markets are at different stages. If you look at India, India has experienced significant impact from COVID-19. So their rate at which they're stocking was not a very large territory for us. It's potentially at sort of 20%, 30% of their expected normal stocking levels.

Similarly, Ecuador, some markets are moving towards recovery. Thailand looks like it's, at present, in a recovery phase. So in terms of our expectations, we will not have certainty until we are out of COVID or until we have a degree of vaccines or treatments around COVID. And what I can say is that our salespeople are working immensely hard to get every sale that they get. So it is not for lack of effort, and it isn't the case that there's not a demand for the nutrition products. It's fundamentally, if the pond is not stocked, you do not need your artemia, you do not need your diet, you do not need your health products. If you decide to let 1 out of your 3 ponds go fallow, there is just an inherent reduction in demand. And this has been seen throughout all of the hatchery suppliers. It's not specific to us as an organization.

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Operator [9]

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We'll now take our next question, which comes from Espen Granly of DNB Markets.

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Espen Korsmo Granly, DNB Markets, Research Division - Analyst [10]

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First question I have is with regards to some of the disposals that you have. You may have mentioned this before, but being quite fond of this disposals of shrimp from a credit perspective in particular. But I was just wondering, will you in the future be buying services from some of these companies or some of the facilities that you now have sold off? And as such, will you then incur some expense going forward related to buying such services that you wouldn't have had in the past when you had this in-house?

Second question I have is could you just give us some brief comments on your salmon egg operations and expansions in Chile? Those are the 3 questions I have.

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Trond Williksen, Benchmark Holdings plc - CEO & Director [11]

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Could you, Septima, take the first one to make sure that we are specific there?

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Septima Maguire, Benchmark Holdings plc - CFO & Director [12]

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Yes, of course. Probably the best answer is not to a significant degree, although we will still add an arm's length to be using some of, for example, the diagnostic services at an arm's length basis, both because they are -- would be one of our preferred suppliers. And it is not going to be a material amount of services in the context of the overall cost base. So hopefully that answers that question, and I'll pass it back to Trond for the salmon egg expansion in Chile.

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Trond Williksen, Benchmark Holdings plc - CEO & Director [13]

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And we have communicated that we are doing this, and this is one of the main projects that we have within the Genetics division. We are progressing. We are still in initial phase on that establishment in Chile, but we are progressing according to plan with the ramp-up that we have planned. And the first year with commercial sales would be financial year '21. Low levels, we expect, compared to the potential, but we are stocking, and we think we have a very good opportunity to enter that market with a good value proposition on Genetics to the salmon industry there. And we will start next year, take it up to the potentials in the investments over the years to come. And I think it has been communicated that the capacity of that facility will be 50 million eggs. So that will be -- it will be a gradual process where we expect to fill in that capacity over the years to come.

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Septima Maguire, Benchmark Holdings plc - CFO & Director [14]

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And actually, just if I may just add to that point. One of the things that Trond and I and Benchmark as an organization have been talking about is selective investment. And Chile is a perfect example. It fits with our core competencies of strong genetics. It plays with the salmon market, which is a strong market. And we will invest in the facility from a CapEx point of view. But also when you're investing in a ramp-up of a facility, there's always that OpEx investment in the initial few years. But we can see the long-term payback in terms of that investment.

So when Trond has spoken of selective investment, it is selective investment in those core competencies that we have within those 3 divisions so that we can absolutely get that cash, that EBITDA payback on the CapEx and OpEx of, for example, Chile is a great example of ramping up that facility. I just thought it was a good point just to bring in at this stage.

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Operator [15]

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It appears there are no further questions at this time. I would like to hand it back to Trond Williksen, CEO, for any closing remarks or additional comments.

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Trond Williksen, Benchmark Holdings plc - CEO & Director [16]

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Thank you. Thank you. No, I think what we have come over with is this has been a very important quarter for us in the development of the company and positioning of the company going forward. We are very satisfied that we have been able to, for all practical purposes, complete most of the restructuring in this quarter, coming out in a much stronger financial position than we were when we entered the quarter. And that gives us a good ability to now focus on taking out the potential in the 3 business areas. That will be the core of Benchmark going forward, which is Genetics, Advanced Nutrition and Animal Health.

And there is work to be done in order to take out those potentials, but we are determined to do that in a very structural way, and we are in a position to support those initiatives in a good way. As I said, I am optimistic on the future development of the group. I think we have a good basis now to start from. But it is work to be done, and we will guide you on the way how we progress on that. And that will be my concluding remarks.