final transcript

Transcription

final transcript - High Liner Foods

FINAL TRANSCRIPT
High Liner Foods Incorporated
Second Quarter Results
Event Date/Time: August 5, 2015 — 2:00 p.m. E.T.
Length: 28 minutes
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High Liner Foods Incorporated Second Quarter Results
CORPORATE PARTICIPANTS
Heather Keeler-Hurshman
High Liner Foods Incorporated — Director, Investor Relations
Paul Jewer
High Liner Foods Incorporated — Executive Vice President and Chief Financial Officer
Keith Decker
High Liner Foods Incorporated — President and Executive Officer
CONFERENCE CALL PARTICIPANTS
George Doumet
Scotiabank — Analyst
Sabahat Khan
RBC Capital Markets — Analyst
Marc Robinson
Cormark Securities — Analyst
Bob Gibson
Octagon Capital — Analyst
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PRESENTATION
Operator
Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the High
Liner Foods Incorporated Conference Call for the Results of the Second Quarter of 2015. At this time
all participants are in a listen-only mode.
Following management’s prepared remarks, we will conduct a question-and-answer
session. Instructions will be provided at that time for you to queue up for questions.
If anyone has any difficulties hearing the conference, please press the * key, followed by 0
for Operator assistance at any time.
This conference call is being recorded today, Wednesday, August 5, 2015 at 2:00 p.m.
Eastern Time for replay purposes.
I would now like to turn the call over to Heather Keeler-Hurshman, Director of Investor
Relations for High Liner Foods. Ms. Keeler-Hurshman, please go ahead.
Heather Keeler-Hurshman — Director, Investor Relations, High Liner Foods Incorporated
Thank you, and good afternoon, everyone. Thank you for joining High Liner Foods
conference call to discuss our financial results for the second quarter of 2015.
On the call today from High Liner Foods are Keith Decker, President and Chief Executive
Officer, and Paul Jewer, Executive Vice President and Chief Financial Officer.
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Today's call will start with Paul reviewing the Company's financial performance for the
second quarter of 2015, followed by Keith who will discuss key developments in the quarter and
provide an update on our 2015 strategic goals before opening the call up for questions.
Before turning the call over to management, listeners are reminded that certain
statements made in today's call may be forward-looking statements that are subject to risks and
uncertainty. Management may use forward-looking statements as they discuss the Company's
strategy and business in the future. Actual operating or financial results could differ materially from
those anticipated in these forward-looking statements.
High Liner Foods includes a thorough discussion of the risk factors that can cause its
anticipated outcomes to differ from actual outcomes in its publicly available disclosure documents,
particularly in its annual MD&A and Annual Information Form. Please note that High Liner Foods is
under no obligation to update any forward-looking statements discussed today.
Earlier today, High Liner Foods reported its financial results for the second quarter of 2015.
That news release, along with the Company's MD&A and unaudited condensed interim consolidated
financial statements for the second quarter of 2015, have been filed on SEDAR and can also be
found in the Investment Information section of High Liner Foods' website. If you would like to
receive our news releases in the future, please visit the Company's website to register.
Lastly, please note that the Company reports its financial information in U.S. dollars, and
results to be discussed today are stated in U.S. dollars unless otherwise noted.
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High Liner Foods common shares trade on the Toronto Stock Exchange and are quoted in
Canadian dollars.
I will now turn the call over to Paul. Paul, please go ahead.
Paul Jewer — Executive Vice President and Chief Financial Officer, High Liner Foods Incorporated
Thank you, Heather, and good afternoon, everyone. Before beginning my financial review
of the second quarter, I'd like to remind listeners that we use certain non-IFRS measures and ratios
when discussing our results, as we believe these are useful in assessing the Company's financial
performance. These measures are fully described and reconciled to IFRS measures in our MD&A.
Please note that all comparisons provided during my financial review of the second quarter of 2015
are relative to the second quarter of 2014, unless otherwise noted.
I'd also like to remind listeners that we acquired Atlantic Trading Company in October
2014 and, therefore, the comparative results do not include the impact of this acquisition.
Sales volume decreased in the second quarter of 2015 by 6.4 million pounds or 9.5 percent
to 61.3 pounds. Volumes declined by 2.1 million pounds in Canada and by 4.3 million pounds in the
US, reflecting that in the US the impact of the Atlantic Trading acquisition only served to partially
offset declines experienced in the rest of our US business.
Over the last year, significant price increases have been passed on to customers to recover
increased raw material costs, including higher foreign exchange in our Canadian business, and these
price increases have in turn had an adverse effect on sales volume in both retail and foodservice.
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We also believe that in certain areas of our business volume declines were partially as a result of
some sales execution and promotion challenges, which Keith will discuss further in a few minutes.
Sales in US dollars decreased in the second quarter by $9.2 million or 3.9 percent to $226.3
million. The weaker Canadian dollar in 2015 decreased the value of reported sales in the quarter by
approximately $8.6 million, relative to the conversion in the same period last year.
In domestic currency, which is before the impact of converting Canadian dollardenominated sales to US dollars, sales decreased by $0.8 million or 0.3 percent to $241.8 million,
reflecting lower overall sales volume partially offset by the impact of price increases in both
countries.
Gross profit decreased in the second quarter by $5 million to $43.2 million, reflecting
lower overall sales volume, the effect of an unfavourable change in the exchange rate used to
translate our Canadian dollar-denominated operations to US dollars, and a decrease in gross profit
as a percentage of sales. Gross profit as a percentage of sales was 19.1 percent compared to 20.5
percent last year, reflecting price increases that did not fully recover cost increases in the US, and
gross margins on Atlantic Trading Sales are lower than the overall average margin on the remainder
of the Company sales.
Adjusted EBITDA decreased in the second quarter by $4 million or 24 percent to $12.7
million, and was 5.6 percent of sales compared to 7.1 percent last year. $900,000 of this decrease
reflects the unfavourable impact of converting our Canadian dollar denominated operations to US
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dollars due to the weaker Canadian dollar in 2015. The remaining decrease reflects lower overall
sales volume and lower gross profit as a percentage of sales, partially offset by lower distribution
costs and lower SG&A spending.
Distribution costs were lower as a result of lower sales volume, and SG&A spending was
lower due to the impact of synergies related to the integration of American Pride and other savings
in the US, along with the timing of spending in the Canadian business.
Reported net income decreased in the second quarter by $1.2 million or 23.1 percent to
$4 million with diluted earnings per share of $0.13. This decrease primarily reflects lower adjusted
EBITDA, as I just discussed, partially offset by lower onetime costs and income tax expense.
Excluding the impact of onetime costs and other certain items, which are explained in our MD&A,
adjusted net income decreased in the second quarter by $2.8 million or 37.3 percent to $4.7 million.
And correspondingly, adjusted diluted earnings per share decreased by $0.09 to $0.15.
Turning now to the balance sheet. The net working capital balance was $257 million at the
end of the second quarter. This was $13.4 million higher than it was a year ago due to the impact of
the Atlantic Trading acquisition along with the impact of higher inventories related to the remainder
of the Company's operations.
Net interest-bearing debt was $348.2 million at the end of the second quarter, which was
$14.6 million higher than the balance at the end of the same period last year. This increase reflects
the use of debt last October to finance the Atlantic Trading acquisition and the $5.7 million payment
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made to close operating leases relating to that American Pride business in Q4, partially offset by
cash flow generated from operating activities.
Our net interest-bearing debt to adjusted EBITDA ratio, calculated on a rolling 12-month
basis, decreased to 4.2 times at the end of the second quarter. This was an improvement compared
to 4.4 times at the end of fiscal 2014, but an increase from the four times that was reported at the
end of the first quarter this year. We expect this ratio to improve during the remainder of 2015 as
adjusted EBITDA is expected to increase and free cash flow will be used to reduce debt.
That concludes my financial review for the second quarter of 2015, and I would now like to
turn the call over to Keith to discuss key developments in the quarter and provide an update on our
2015 strategic goals.
Keith Decker — President and Executive Officer, High Liner Foods Incorporated
Thank you, Paul, and good afternoon, everyone. The results for the second quarter did not
meet our expectations. As Paul shared, sales volume declines are due in part to the impact that
increased pricing has had on demand for our products. As most of you are aware, the cost of certain
key species increased significant during 2013 and 2014.
Seafood is purchased in US dollars, and as a result raw material price increases have been
even more acute for Canadian business due to that weak Canadian dollar. While price increases
have been necessary to help mitigate the impact of increased costs on product margins, they have
adversely impacted volumes.
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In addition to the impact of higher prices, certain sales and promotional activities were not
executed effectively and contributed to volume declines in certain areas of our business, particularly
US foodservice. We have taken corrective action and experienced improved sales toward the end of
the second quarter. We are focused on continuing to improve sales volume in the reminder of 2015,
which should in turn lead to improved earnings. Efforts to increase volumes will be assisted to the
extent we realize expected lower seafood raw material prices in the back half of 2015.
The second quarter was a difficult quarter but we remain committed to the strategic goals
previously shared with you, being supply-chain optimization, profitable growth through organic
growth in acquisitions, and succession planning.
I am confident we are focusing on the right activities to drive performance and that
continued focus on these will move the organization closer towards its goal to be the leading frozen
seafood supplier in North America.
Our strategic goal to optimize our supply chain continues to be a top priority for the
organization. Activities related to this goal continued during the second quarter. However, reduced
production volumes were a challenge and delayed realization of savings related to certain project
activities.
Improvement in sales volume in the second half of 2015 will help to achieve benefits
related to our supply chain optimization activities, and we continue to expect net cost savings will
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be realized in 2015 related to this project and that total annual cost savings of 20 million to $25
million can be achieved by the end of 2016.
By way of update on product development, we are continuing to ramp up the launch of
our fully cooked barbequed salmon line that was launched at the Boston Seafood Show in March.
Our next line of products will launch in late 2015 and then consistently throughout next year with
product offerings that focus on convenience and target various market segments, including the
growing fast-casual restaurant sector.
We do not have a specific update related to acquisitions, but continue to believe there is
opportunity for further consolidation in the North American seafood industry.
Before opening the call up for questions, I'd like to share with you that earlier today the
Company's Board of Directors approved a quarterly dividend of Canadian $0.12 per share on the
Company's common shares payable on September 15, 2015, to holders of record on September 1,
2015.
Operator, I would now open the call for questions. Thank you.
Q&A
Operator
At this time, I would like to inform everyone in order to ask a question press *, 1 on your
telephone keypad. We will pause for a few moments to compile the Q&A roster.
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The first question is from George Doumet from Scotiabank.
George Doumet — Scotiabank
Good afternoon, guys.
Paul Jewer
Hello, George.
Keith Decker
How you doing, George?
George Doumet
Can you guys quantify the magnitude of the sales execution and promotional challenges
you've had in the quarter, please?
Paul Jewer
Well, in terms of the overall—you've seen the overall sales impact in terms of volume.
That is a mix of what we believe is a customer reaction to the significant increases in prices that
we've had to pass on over the course of the last 12 to 18 months. We have seen a decline in
demand there. And we talked about this at the end of our first quarter. We exited the first quarter
with some challenges in terms of sales trend. Those continued obviously into the beginning of the
second quarter.
As we said, they were exasperated by some challenges we had on the sales and
promotional front. We promoted, coming out of Lent, trying to drive some volume. Those
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promotions were not effective. And sales only started to recover as we got closer to the end of the
second quarter. So I can't really break out specifically how much was price versus how much is sales
execution. Frankly, we're focused on addressing both of those items to get some sales volume
increases back into the business in the back half of the year and feel comfortable that we can do
that based on the results we see coming out of the—at the end of the second quarter.
George Doumet
Okay. And gross margins declined for the US business, I think it was north of 300 basis
points. It's one of the lowest levels we've seen in a while. This is in an environment where humble
(phon) raising of prices. Can you guys like provide any colour in terms of margin recovery and what
it's contingent on in the back half of the year?
Paul Jewer
Yeah. Sure. So there are a couple of pieces to the margin decline. One which will, in terms
of margin percentage, one which will continue into the back half of the year which is the ATC
acquisition is a little dilutive to margins, given the nature of those products versus the other highermargin value-added products that we have in our portfolio.
The second piece is tied to sales volume. When you're promoting to get sales and spending
sales promotional and allowance dollars to do that and you don't get the volume, obviously that is
dilutive to margin. We experienced that in the first half of the quarter, are confident that we will see
that improve in the back half of 2015.
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The fact that we passed on prices to cover cost increases have not been able to do it
entirely. But even when you pass on price to cover cost increases that is actually slightly dilutive to
volume just from a mathematical perspective, and as a result we've experienced that.
And the last item I would highlight is we did have some mix shift in the business in the
second quarter where the declines were a little more significant in our value-added business,
compared to our commodity business, and obviously we make more margin in our value-added
business.
The final point I’d highlight, which is obviously relevant to our Canadian business, which
we referred to earlier, is the impact that currency has had on the Canadian business.
So those are all the factors that impacted the second quarter. As I said, a couple of those
we believe we’ve taken corrective action on so that we will see margin improvement in the back
half of the year.
George Doumet
Okay. One last one, if I may. We’ve seen some increases in the TAC (phon) and some of the
key species that we procure. What’s the timing expectations there for us to actually see it translate
into lower raw material prices? Thanks.
Keith Decker
George, it’s Keith. I would say that if you think about the time lines on most of these, some
of those prices are starting to be realized on the buy side, but I would anticipate, as was consistent
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with some of our conversations earlier in the year, that we would start to see those roll through our
P&L starting in the end of the fourth quarter and then being fully realized in 2016. And to your
point, this is on a number of our key species, to include cod, haddock, salmon, shrimp and a number
of other species. So raw material prices are moving in the right direction.
George Doumet
Okay. That’s it for me. Thanks.
Operator
The next question is from Sabahat Khan from RBC.
Sabahat Khan — RBC Capital Markets
Yeah. Thanks. Maybe you could talk a little bit about the supply chain optimization
program. And what were some of the delays that you had and where you kind of stand on—when
do you expect to see some of the savings start to flow through? I guess is it later into this year, I
think you mentioned?
Keith Decker
If you recall, in the first quarter and coming out of that into the second quarter, these
were—a lot of these supply chain optimization activities are back-loaded, and the full running rates
really aren’t going to be achieved until we get into 2016, but they will start to materialize more so in
2015 in the last couple of quarters.
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Volume does play a factor in that, and from our perspective the volume declines in the
second quarter did slow down some of our realization of that. However, we do anticipate that we
will start to realize the benefit of that, provided that the volumes will come back in the second half
of the year.
Sabahat Khan
All right. Great. And just in terms of the pricing that you took earlier this year. I guess,
would you say that—I guess are you responding to the lower volumes by kind of changing your
prices? Or how do you kind of see that playing out for the rest of the year in terms of the pricing
impact and the volume impact?
Keith Decker
I think there’s a couple of opportunities here. One is more effective promotions. We ran
some post-Lenten promotions. They didn’t return the anticipated sales that we had hoped for, so I
think that there is a more focused approach on executing effective promotions. So I would say that
what we have done and what we saw as we got into June was that we increased our promotional
support, both the depth and the frequency, and volumes came back as a response to that.
So I would anticipate that as we move into the back half of the year the focus is clearly on
sales volume as an organization. And to the extent that we can use more effective promotions and
sales execution to drive those promotions, I think that we’ll see some results out of that.
Sabahat Khan
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Okay. Great. And are you able to share how much sales Atlantic Trading contributed during
the quarter?
Paul Jewer
We haven’t identified that number specifically. It did have a positive contribution,
obviously, but was offset by declines in the underlying base business.
Sabahat Khan
Okay. Thank you.
Operator
The next question is from Marc Robinson from Cormark Securities.
Marc Robinson — Cormark Securities
Thanks. Good afternoon. Any provide—which species in particular had the biggest pricing
headwinds in the quarter?
Paul Jewer
Headwinds?
Marc Robinson
Pricing input cost pressure.
Paul Jewer
Well, it’s really, frankly, the prices that we passed all through last year and into the first
half of the year, so I wouldn’t say it was just increases in the second quarter. And in the Canadian
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business, haddock was certainly the one that was the most significant, and obviously had an impact
on volume. And in Canadian retail and US retail, obviously we have the benefit of market share data
to know how much is driven by price. And the fact that we saw category declines that made up the
bulk of our declines, rather than us seeing a disproportionately different outcome than the category
overall, helped us with the conclusion that it was primarily price.
But haddock was certainly a significant species in the back half of last year. As Keith said,
we’re expecting an improvement in that pricing environment as we move to the back half of the
current year. But it was—that would also have been the case in scallops as well through last year.
Keith Decker
And we passed price starting at the first of the year, in January, and then with subsequent
price increases rolling through right as Lent was finishing, which was going into the second quarter.
And that last price increase went through into the Canadian retail market, and we did see some
impact on volume due to those price increases.
Marc Robinson
Okay. And recognizing that supply chain savings have been pushed out a little bit and for
sure back end-weighted, have you realized anything thus far? Or any of the sort of LTM results?
Does any of that reflect any of the supply chain savings as yet?
Paul Jewer
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There is a little bit recognized in Q1 and a nominal amount, I would say, in Q2. What we
have seen, Marc, is benefits associated with the specific initiatives, whether they’re labour
improvements or yield improvements. But they get offset by the absorption challenges when you
have the volume decline that we did in the second quarter.
Marc Robinson
Okay. And then finally, just stepping back a little bit. There’s been—I think the number’s
13—sequential quarterly declines in US volumes and going back to the Icelandic Group acquisition.
Can you provide any colour on what exactly is going on in that market and the prospects of any
near-term improvement in US foodservice volumes?
Keith Decker
I would say that if you think about the US business from the terms that it’s a 70 or 75
percent US foodservice-related, is the portion of the business, and then you think about the fact
that you had the—going back to 2009—the major reset in the US marketplace when it came to
foodservice consumption and foodservice dining trends. We’ve been fighting those headwinds now
for a few years. I will say that the industry itself is looking in better shape this year, particularly
going into the latter part of this year.
The key for us is can we shift our customer base more effectively into the operators which
are doing well. So if you think about our customer base, and you look at a couple of our large
customers, QSR accounts, you can look at the media and you can see their results. One of the
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largest in the world would report results that are, quite frankly, kind of disappointing. And so we see
that in our results with their promotions or lack thereof.
That being said, I think that the opportunity for us is to continue to focus on innovative
products, which as I’ve talked about we’re going to start bringing some products in the latter part of
this year into the marketplace, which will address some of those convenience and fast-casual
segments. And I think that there is some opportunity to grow from that.
But at this point, it’s really around can we start to take advantage of the price decreases
that are going to be coming into the market and drive better price points, which ultimately should
have better consumption behind that.
Marc Robinson
Okay. Thank you.
Operator
Again, if you’d like to ask a question, press *, 1. The next question is from Bob Gibson from
Octagon.
Bob Gibson — Octagon Capital
Good afternoon, everybody.
Paul Jewer
Hi, Bob.
Keith Decker
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How you doing, Bob?
Bob Gibson
Let’s start with integration costs. They weren’t much this quarter. Can you give us some
colour on the second half?
Paul Jewer
Well, they won’t be much in the second half either. Obviously we’ve completed the
integration of American Pride, so there are no costs left with that. The other piece there would be
costs related to the supply chain optimization initiative, and those are winding down now as we
complete the activities on the plant optimization side.
Bob Gibson
Okay. Cool. Can I get a little colour on what the competition is doing as far as pricing? And
did they see a similar decline in volume over the quarter?
Keith Decker
I can speak specifically to retail because we have, obviously, the market data from both
Canada and the US. On the retail side of the business, US retail unprocessed and Canadian retail,
both of them were down a commensurate level, approaching double-digit numbers for the entire
category both in Canada and the US.
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So I would say that the other major seafood competitors in the US market in retail were
down across the board in the second quarter. And in Canada we’re the industry leader, but the
category was down commensurate with what our levels were.
And on foodservice, we don’t really have a good indicator of what’s going on in the
foodservice market from that perspective because there’s really no benchmark at this point that
would allow us to see that.
Bob Gibson
Okay. Great. And, sorry, just a little colour on the taxes. Could you, for me anyway, walk
me through what happened and how come you got the bump-up?
Paul Jewer
Yeah. Sure. So, as you know, we have some tax planning structures in place related to the
fact that we have operations in both Canada and the US. They provide a beneficial overall tax rate to
us that’s lower than the statutory rates in the US environment in particular. And as income is lower
in the US, that benefit—the tax rate ends up being even more significantly lower than the statutory
rate than is anticipated.
So you should expect, as we improve our income in the US, to see that tax rate start to
climb back up but not reach the statutory tax rates that are in place.
Bob Gibson
Perfect. Thank you, guys.
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Keith Decker
Thank you.
Operator
There are no further questions at this time. I will turn the call back over to the presenters.
Keith Decker
Thank you very much, everyone, for joining us today, and we look forward to updating you
on our results for the third quarter on our conference call in November.
Operator
This concludes today’s conference call. You may now disconnect.
*****
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