High Liner Foods' (HLNFF) CEO Henry Demone on Q2 2014 Results - Earnings Call Transcript

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 |  About: High Liner Foods Inc. (HLNFF)
by: SA Transcripts

High Liner Foods Inc (OTC:HLNFF) Q2 2014 Earnings Conference Call August 12, 2014 2:00 PM ET

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 2014.

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. (Operator Instructions) This conference call is being recorded today, Tuesday, August 12, 2014 at 02:00 PM Eastern Time for replay purposes.

I would now like to turn the conference over to Heather Keeler-Hurshman, Director of Investor Relations for High Liner Foods. Ms. Keeler-Hurshman. Please go ahead.

Heather Keeler-Hurshman

Thank you, Tracy and good afternoon everyone. Thank you for joining High Liner Foods conference call to discuss our financial results for the second quarter of 2014. On the call today from High Liner Foods are Henry Demone, Chief Executive Officer; Paul Jewer, Executive Vice President and Chief Financial Officer; and Keith Decker, President and Chief Operating Officer.

Today's call will start with Paul reviewing the Company’s financial performance for the second quarter of 2014 followed by Keith who will describe operational highlights of the quarter and then before opening the call for questions, Henry will provide an update on strategy and concluding remarks.

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 uncertainties. 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 and 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 2014 by news release along with the Company’s MD&A and unaudited interim consolidated financial statements for the second quarter of 2014 have been filed on SEDAR and can also be found in the investor information section of High Liner Foods’ Web site. If you would like to receive our news releases in the future, please visit the Company's Web site to register.

Lastly, please note that the Company report its financial information in U.S. dollars and the results to be discussed today are stated in U.S. dollars unless otherwise noted. High Liner Foods’ common shares trade on the Toronto Stock exchange and are reported in Canadian dollars.

I will now turn the call over to Paul. Paul, please go ahead.

Paul Jewer

Thank you, Heather and. 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 expecting the Company’s financial performance. These measures are fully described and reconciled to IFRS measures in our MD&A. I’d also like to remind listeners that we acquired American Pride Seafoods on October 1, 2013 and this is the third quarter that our results have included the impact of this acquisition.

Lastly, on May 30th of this year, High Liner Foods’ outstanding common shares were split on a two for one basis and the impact of this stock split has been retrospectively applied such that all comparative earnings per share information discussed on the call today have been restated to reflect this split.

In the second quarter of 2014, reported sales increased by 14.9% to $235.5 million compared to $204.9 million in the second quarter of 2013. American Pride contributed $32.1 million to sales in the second quarter. In domestic currency, which is before the impact of converting Canadian dollars denominated sales to U.S. dollars, sales increased by 17.4% to $242.6 million compared to $206.6 million in the same quarter last year.

The weaker Canadian dollar in 2014 increased the value of reported sales by approximately $5.2 million relative to the conversion impact in the second quarter of 2013.

Sales-by-volume increased by 12.7% to 66.6 million pounds in the second quarter of 2014 compared to 59.1 million pounds in 2013. American Pride added 9.3 million pounds to the second quarter and excluding American Pride pounds sold decreased by 1.8 million reflecting lower sales volumes from our U.S. foodservice business.

Adjusted EBITDA decreased by $2.6 million to $16.7 million in the second quarter and was 7.1% of sales compared to 9.4% of sales in the same period last year.

American Pride contributed $0.3 million in adjusted EBITDA in the second quarter. Excluding this adjusted EBITDA, decreased by $3 million, reflecting lower sales in our U.S. foodservice business and lower product margin in our Canadian business. Both of which Keith will elaborate on in a few minutes.

In the second quarter, reported net income was $5.2 million with diluted earnings per share of $0.17 compared with net income of $9.9 million and diluted earnings per share of $0.32 in the same period of 2013. The $4.7 million decrease in reported net income reflects lower adjusted EBITDA along with higher stock compensation expense, finance costs and one-time costs related to acquisition and integration activities. Partially offsetting the unfavorable impact of these items was a lower effective income tax rate compared to last year. Excluding the after tax impact of certain items, which are explained in our MD&A, adjusted net income in the second quarter decreased by $1.7 million or 18.5% in 2014 to $7.5 million and correspondingly adjusted diluted earnings per share decreased by $0.06.

Turning now to the balance sheet, net non-cash working capital balances were $244.4 million at the end of the second quarter and $70.8 million higher than the balances at the end of the second quarter last year, reflecting the American Pride acquisition along with increased inventories and decreased payables related to the rest of company’s operations. Inventories were higher this year, reflecting a build up to the first quarter to minimize the risk of product shortages during the high volume Lenten period combined with lower than expected sales volumes in the first half of 2014.

We were pleased to announce in late April that favorable amendments have been made the Company’s debt facilities, both in term loan and asset base loan, or ABL, were amended to reduce interest costs, expend their respective terms and increase capacity and flexibility for acquisitions, investments, distributions, capital expenditures and operational matters. In addition the term loan facility was increased by $50 million to $300 million, which we’ll use to pay down a portion of the ABL and a number of covenants were improved or removed.

At the end of the second quarter, our net interest-bearing debt was $333.6 million and $67.3 million higher than the balance at the end of the second quarter last year. This increase reflects increased non-cash working capital requirement, as just discussed, and the use of debt to finance the American Pride acquisition and the purchase of a previously released cold-storage facility in March of this year.

Our net interest-bearing debt to adjusted EBITDA ratio, calculated on a rolling 52-week basis, improved slightly to 3.8 times at the end of the second quarter compared to 3.9 time at the end of fiscal 2015.

That concludes my financial review for the second quarter of 2014. And I would now like to turn the call over to Keith to discuss operational highlights of the quarter.

Keith Decker

Thank you Paul and good afternoon everyone. I’d like to elaborate on some of the items Paul mentioned that has an impact on our second quarter results, starting with those related to our Canadian operations. Sales in the second quarter from our Canadian business in its domestic currency increased by $7 million or 9% to $85 million with sales volume being consistent on a year-over-year basis at 18.3 million pounds, reflecting a higher average selling price per pound in 2014.

Adjusted EBITDA from our Canadian operations in the second quarter, again, based on domestic currency, decreased by $2.7 million or 29.7% to $6.4 million compared to the second quarter last year. Lower product margins were realized on certain products as cost increases were not fully recovered through price increases. In some instances price increases on products lags will be began to realize higher associated raw material input cost and in others due to the magnitude of cost increases primarily on haddock and a highly competitive marketplace the full amounts of the increased costs were not passed on to customers.

Additionally, products margins were lower in the second quarter of this year compared to the second quarter last year. Because last year the Canadian business benefited from higher product margin that reflected lower raw material cost of certain products in advance of cost savings being passed on to customers. Express differently, we had a benefit last year from experiencing the opposite situation that would have being experienced this year.

Turning to discussion now to our U.S. operations, American Pride added $32.1 million in sales and 9.3 million pounds of volume in the second quarter. Excluding American Pride, sales decreased $3.1 million or 2.4% and volume decreased by 1.7 million pounds or 4.2%. The decline in volume was in U.S. foodservice business. Unfortunately, this part of our business remains challenged as many of our major customers operating in the U.S. foodservice industry are continuing to experience soft sales. However, we are a leader in product innovation in our sector and are committed to working with our customers to bring new and innovative menu-offerings to their customers.

American Pride added $0.3 million to adjusted EBITDA in the second quarter. And excluding this amount, adjusted EBITDA from the U.S. business was consistent with last year. Adjusted EBITDA reflects resolution of the operating issues experienced in 2013. However, the benefit of this was offset by increased selling, general and administrative, or SG&A spending. SG&A was higher in the second quarter this year compared to last year but lower in the first quarter and its lower overall in the first half of 2014 than the first half of 2013.

Before turning the call over to Henry for an update on strategy, I know we mentioned on last quarter’s call that the process to fully integrate American Pride has been efficiently kicked-off following the conclusion of the busy Lenten period in April. But I want to provide you with a quick update and let you know that integration activities are proceeding as planned and remain on track to be completed by the end of this year.

With that, I will now turn over the call to Henry.

Henry Demone

Thank you, Keith. I’d like to take this opportunity to reiterate much of what I said on last quarter’s call regarding our strategic goals for this year, which are; profitable growth, supply chain excellence, and succession planning.

With regard to the profitable growth, we continue to believe that there are acquisition opportunities to further consolidate the frozen seafood industry in North America. And we are focused on achieving internal growth through continued innovation and product expansion, including new species and formats. We need to find creative ways to increase the overall demand for frozen seafood products and grow our market share.

As Keith has already stated, we are committed to working towards this end, in conjunction with our customers, who are operating in segments of the U.S. foodservice industry that are continuing to be challenged with lack-buster growth. Our goal regarding supply chain excellence remains to decrease cost by $20 million to $25 million annually through plans and supply chain efficiencies that take advantage of our scale in the industry.

We have completed the selection and engagement process of the outside expertise we believe will be required in order to be successful given the significant scope of work to be undertaken. Cost savings will begin to be realized in 2015 with the full benefit being realized in the following year 2016.

On last quarter’s call, I was pleased to be able to share that Peter Brown was going to be joining the Company as President and Chief Operating Officer of our U.S. operations. Peter started in May, and as expected, his 25 plus years of experience in the food industry and leadership style, have made for very smooth on-boarding process. His leadership skills and experience will be valuable and working towards the achievement of our strategic goals and to grow our business successfully.

Lastly, before opening the call for questions, I’d like to share with you that earlier today the Board of Directors of the Company approved a quarterly dividend of $0.0150 Canadian per share of the Company’s common shares payable on September 15, 2014 to holders of record on September 2, 2014.

Operator, I’d now like to open the call for questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is from Marc Robinson with Cormark Securities.

Marc Robinson - Cormark Securities

Thanks. Good afternoon. I noticed the margins, EBITDA margins, at American Pride were pretty thin in the quarter. So can you just give some commentary on what’s happening in American Pride within the quarter and maybe bit of an outlook?

Paul Jewer

Yes, sure. Yes, you are right Marc. There was very little EBITDA contributions from American Pride in the quarter, some of that was expected there was some seasonality in that business but some of it does reflect some weaker than expected call of sales, which you would have seen in the top line number as well for American Pride and that’s been driven by the high prices in scallops in the marketplace. The second thing I would highlight is that part of the American Pride which we acquired is National Accounts foodservice business in the U.S. similar to our foodservice business in the U.S. that business was particularly challenged in the quarter. And finally, as you know, we just began the integration process of the American Pride business following line so there are no synergies reflected in the second quarter number. At this stage, we expect to -- became realizing those and to continue to realize those for the balance of this year.

Marc Robinson - Cormark Securities

Okay, thank you. And then there wasn’t any disclosure provided, but in previous quarters you’ve referenced challenging private label market, north and south of the border. Just wondering if you can provide an update on that?

Paul Jewer

Nothing specific that I highlight there I mean in private label is not a significant part of our business and it isn’t that part of our business that’s really bowing to any degree, so not really much else to add there.

Marc Robinson - Cormark Securities

Okay. And then finally maybe a question for Henry, so still reiterating the $150 million EBITDA target by 2016, I’m looking at LTM number of -- looks like 88.5 and wondering if you have any renewed thoughts on that particular target.

Henry Demone

Well, I think if you look at things we know today we’re confident in the supply chain management targets. The 20 to 25 number was a number that we developed internally. We can put very thorough process but outside expertise who have done this and other operations and they’ve reconfirmed that number, so we feel confident about that. We’ve got a couple of other smaller opportunities that take us to around $125 million based on what we know today. So, clearly, we need and this doesn’t change, we need a couple of small acquisitions or one medium sized acquisition in order to get that close.

Marc Robinson - Cormark Securities

Okay. So you continue to think that sort of your existing platform can support over the near-term 125?

Henry Demone

Yes.

Marc Robinson - Cormark Securities

Okay, thanks.

Operator

Your next question comes from Michael Mills with Beacon Securities.

Michael Mills - Beacon Securities

Hi. Good afternoon guys. Just on the broader U.S. foodservice segment, obviously it’s tough first half of the year. Are there any signs of life? And if there are not, what is the plan of attack? Is it kind of redoubling efforts on the new product development front, maybe just shade a bit of light there?

Henry Demone

Michael, we don’t think that that’s a cyclical issue. I mean there are times when we did, if we go back two or three years, we thought when unemployment gets down and consumer confidence increases that things will get back to normal. But I think this has been normal. And the market has changed. Restaurant visits are still not back to where they were in 2007, except for white tablecloth and fast-casual. Both segments, where we don’t play very much, there is no growth in the industry.

Having said that, it’s an enormous industry, and this is America. There is a lot of well hunt businesses and they are adapting and will adapt. And we think this adaption process it’s going to take one to two years. In most cases, we are their seafood supplier partner and we’re working with our customers to come up with new menu items to get their business growing again. And as I said I think it’s a one to two year process before they get back to growth again. But it’s not like I can say if consumer confidence goes up 3 points, things are back to normal. And as the market changed ever since 2008 its economic pressure on the middle-class combined with demographics older baby boomers, more millenios and this has fundamentally changed the industry. And we’re going through an adaptation process and we’re very close to our customers as they do this and they will adopt.

Michael Mills - Beacon Securities

Okay. I appreciate those frank comments. And in terms of the U.S. retail segment, what can you tell us there? Are we seeing a bit of volume growth in retail? How pleased are you with that business?

Henry Demone

Yes, we’re pleased with our retail numbers. We’re very pleased with our retail results. We’ve had solid growth on the top line overall to the business, which includes across scores and on the Sea Cuisine brand. In traditional retail we’ve also had good growth. So I mean part of what I discussed in question about foodservice was how the market changed and one of those things is that people need homework. So naturally our retail businesses are benefiting from that.

And in Canada the businesses for High Liner are close to the size but in the U.S. our retail business is one-third the size of our foodservice business, so it’s not an even swap dollar-for-dollar but our retail business is going quite nicely in the U.S.

Michael Mills - Beacon Securities

And then just in Canada, obviously, you’ve faced some FX headwinds and increased raw material costs, and you’ve obviously been passing through some pricing increases given the domestic growth. Are there more pricing increases to pass through and do you think you can kind of narrow the gap and pump up the margin profile back to closer to where it was over the last three years in Canada?

Henry Demone

We had a big increase in haddock costs. And if you include FX in that, it’s in excess of 40% and haddock is very important for our retail business. We did successfully increased prices at the end of the second quarter but we didn’t recapture all of the cost increases. You guys follow the Canadian retail industry I think it’s an understate of the states affected the market these days, so we’re proud to have successfully executed a price increase but it is going to take some time to fully restore the margins.

We’re not going to do another price increase before the end of this year but I think overall our Canadian retail business is in very good health, the market share has never been better. And we will adjust either by package size or swapping out some species for haddock and haddock cost don’t go down. The fundamentals of the Canadian retail business, in terms of our brand equity, and our market share, and our distribution, are very strong. But this was too big an increase to pass along in one quarter.

Michael Mills - Beacon Securities

Final question and just geopolitical I guess I believe you procure some raw material from Russia. Wondering if you can give us an idea of the size of that purchase? And if there were to be some trade or heat-up, what the impact could be?

Henry Demone

We buy very little directly from Russia but a lot of Russian raw material gets reprocess in plans in third-countries. So, if there is a -- sanctions on Russia, which only affect direct imports, which are product to Russia, the import will be minimal. If we have sanctions on Russia, which are Cuban or Iranian in nature, which means absolutely no business whatsoever with Russia, directly or indirectly, anything we buy from Russia we can buy elsewhere.

But there will be increase in costs when the elections and the regions and the Icelanders and to a smaller sense of Canadian to understand that the Russian raw material is no longer in the market. So our cost will go up and that will be a period of adjustment should that happen. Right now there is no talk of sanctions against Russia from Washington or D.C., but it’s a very fluid situation and in Ukraine and we’ll have to monitor this as the fence unfold.

Michael Mills - Beacon Securities

Okay, thanks for answering my questions.

Operator

(Operator Instructions) Your next question is from Rob Gibson with Octagon.

Rob Gibson - Octagon Capital Corporation

Good afternoon everybody.

Henry Demone

Hi Rob.

Rob Gibson - Octagon Capital Corporation

Hi. Can we just get some color on haddock and where you see that fish going sort of near and longer term?

Henry Demone

Yes, the haddock quarters went down dramatically. If you go on a global basis, these aren’t exact numbers but they are very close. From memory the haddock quarter globally a few years ago was 450,000 tons and it went down to about 250,000 tons, so big reduction. And that had lead to a big increase in cost. As I mentioned, if you included -- this is price in U.S. dollars and then if you include the weakening of the Canadian dollars since the beginning of the year, it adds up to 44% increase in our haddock costs.

And we expect that haddock fisheries will start to recover and prices will come down. If they don’t, we will have to modify our product line to use less haddock. There is two ways that we can do that, we can swap PCs or we can sell haddock products in smaller package sizes and reduce the size of the packaging, which is the way that a lot of food manufactures are dealing with inflation these days.

Rob Gibson - Octagon Capital Corporation

And what would the species that would swap?

Henry Demone

COGS would be the most likely.

Rob Gibson - Octagon Capital Corporation

Alright, and can we just talk sort of your financials for just a few minutes, 3.8 times debt to EBITDA, which seem to be really good. If you were to make some kind of an acquisition, do you have a ceiling on that ratio or how do you look about making an acquisition?

Paul Jewer

I think the first thing I would say is, our plan of reasons our free cash flow for now to continue to bring that ratio down, as a first step. Our goal we set a quite clearly and purposely the tax needs to be closer to that three times number. But as the acquisition opportunity presents itself, prior to getting there, we’ve shown in the past we’ve got a willingness and an ability to take that up into the force and then usually cash flows get back down into the threes very quickly and you should expect that we would certainly be willing to continue to do that for the right strategic acquisition as it becomes available.

Rob Gibson - Octagon Capital Corporation

Great, thanks so much guys.

Operator

Your next question is from Richard Kitson with CBC.

Unidentified Analyst

Well, hello. Yes, Richard here from CBC. There is mentioned there that you’re going to be looking for some cost savings. I’m just wondering if that means job cuts. And if so where those might come?

Paul Jewer

Operator I think all of the questions are supposed to be end what’s only on this call.

Operator

At this time, there are no further questions in queue.

Paul Jewer

Thank you everyone. We appreciate the time today and we look forward to following up with you again on our third quarter conference call in November.

Operator

Thank you for joining ladies and gentlemen. This concludes today’s conference call. You may now disconnect.

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