High Liner Foods Incorporated (OTCPK:HLNFF) Q2 2022 Earnings Conference Call August 10, 2022 2:00 PM ET
Kimberly Stephens - Vice President, Finance
Rodney Hepponstall - President and Chief Executive Officer
Paul Jewer - Executive Vice President and Chief Financial Officer
Conference Call Participants
George Doumet - Scotiabank
Kyle McPhee - Cormark Securities
Sabahat Khan - RBC Capital Markets
Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the High Liner Foods Incorporated Conference Call for Results of the Second Quarter of 2022. [Operator Instructions] This conference call is being recorded today, Wednesday, August 10, 2022, at 2:00 p.m. Eastern Time for replay purposes.
I would now like to turn the call over to Kimberly Stephens, Vice President of Finance for High Liner Foods. Please go ahead.
Good afternoon, everyone. Thank you for joining the High Liner Foods conference call today to discuss our financial results for the second quarter of 2022. On the call from High Liner Foods is Rod Hepponstall, President and Chief Executive Officer; and Paul Jewer, Executive Vice President and Chief Financial Officer.
I would like to remind listeners that we use certain non-IFRS measures and ratios when discussing our financial 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.
Listeners are also reminded that certain statements made on today's call may be forward-looking statements that are subject to risks and uncertainties. Management may use forward-looking statements when discussing 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 the actual outcomes in its publicly available disclosure documents, particularly in its annual report 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 ended July 2, 2022. That news release, along with the company's MD&A and unaudited condensed interim consolidated financial statements for the second quarter of 2022 have been filed on SEDAR and can also be found in the Investor Center section of the 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 results in U.S. dollars, and therefore, the results to be discussed today are also stated in U.S. dollars, unless otherwise noted. 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 Rod for his opening remarks.
Hello, everyone. Thank you for joining us today to discuss our financial results for the second quarter of 2022. First, I'd like to take this opportunity to welcome our new Vice President of Finance, Kimberly Stephens. Kimberly really brings over 10 years of experience in the public markets, and we are excited to have her as part of the High Liner Foods team.
During the second quarter, we delivered year-over-year growth in sales, volume and gross profit. We increased sales volume by 8.4 million pounds or 16.7%. We increased sales by $63.7 million or 33.6%. We increased gross profit by $12.1 million or 27.3% and we increased adjusted EBITDA by $5.9 million or 31.1% to $25.5 million.
We experienced continued strong demand for our products across our foodservice and retail businesses. In foodservice, our second quarter sales were strong in all segments and species with particularly high demand for our products from schools, hospitals and other non-commercial businesses as in-person dining in these establishments continue to ramp up following pandemic-related closures.
In the time of significant supply challenge across all industries, our global diversified supply chain continues to be a source of competitive advantage for us. And thanks to the resilience and the teamwork of our people, we are increasingly turning a time of supply challenge and constraint into a time of significant market opportunity for High Liner Foods. Our team is working to effectively mitigate supply chain risk, invest in inventory and leverage the benefits of our scale and diversified supply chain. This approach is helping us drive year-over-year growth in the near term, and we believe will strengthen our ability to continue to do so as supply conditions normalize over time.
As we increase sales and demonstrate the quality of our products and reliability of our supply to our customers, we continue to make significant gains in market share. In Q2, we built on our first quarter gains such that our overall market share in both channels on both sides of the border is higher today compared to the prior year. We are reasserting our market leadership in the areas where we are traditionally strong such as U.S. food service and Canadian retail and making headways in the areas for targeted growth, such as quick service and casual dining and U.S. retail.
We are performing particularly well in the premium and value end of the pricing spectrum and anticipate these offerings will continue to have significant appeal to consumers given current economic headwinds. With another strong quarter under our belt, we are increasingly confident in our ability to deliver adjusted EBITDA growth. And despite the challenges of our operating environment, I am optimistic about the opportunity ahead as we execute against our strategy to become a North American leader in branded value-added seafood.
I will now hand the call over to Paul to review our financial performance, I will speak to you again shortly to provide more color on our activities during the quarter and outlook for the year ahead.
Thank you, Rod, and good afternoon, everyone. Please note that all comparisons provided during my financial review of the second quarter of 2022 are relative to the second quarter of 2021, unless otherwise noted. Sales volume increased in the second quarter by 8.4 million pounds to 58.8 pounds. In our foodservice business, sales volume was higher due to strong demand for our products from our customers and supported by reduced COVID-19 restrictions on the company's foodservice customers in 2022 as compared to 2021.
The increase in sales volume was also due to growth in our retail business due to marketing efforts and increased sales in newer product lines and new business in both foodservice and retail with almost no lost business. These increases were partially offset by the impact of global supply challenges on raw material supply to North America. That impacted the company's sales volumes by an estimated 4 million pounds or 6.8% in the second quarter.
Sales increased in the second quarter by $63.7 million to $253.5 million, reflecting higher sales volumes discussed previously as well as pricing actions related to inflationary increases on input costs. In addition, the weaker Canadian dollar in the second quarter of 2022 compared to the same quarter of 2021 decreased the value of reported U.S. dollar sales from our Canadian dollar-denominated operations by approximately $2.6 million relative to the conversion impact last year.
Gross profit increased in the second quarter by $11.9 million to $56.3 million, and gross profit as a percentage of sales decreased by 120 basis points to 22.2% as compared to 23.4% in the second quarter of 2021. The increase in gross profit dollars reflects the higher sales volume and pricing actions, as mentioned previously.
The decline in gross profit percentage was largely driven by the impact of inflation as we took pricing action to cover higher input costs. In addition, the weaker Canadian dollar decreased the value of reported U.S. dollar gross profit from our Canadian operations in 2022 by approximately $600,000 relative to the conversion impact last year.
Adjusted EBITDA increased in the second quarter by $5.7 million to $25.3 million, and adjusted EBITDA as a percentage of sales decreased to 10% compared to 10.3%. The increase in adjusted EBITDA is a result of the increase in gross profit, partially offset by the increase in net SG&A expenses and in distribution expenses.
In addition, the weaker Canadian dollar decreased the value of reported adjusted EBITDA in U.S. dollars from our Canadian operations in 2022 by approximately $200,000 relative to the conversion impact last year. Reported net income increased in the second quarter by $11 million to $19 million and diluted earnings per share increased by $0.31 to $0.54. The increase in net income was largely due to the increase in adjusted EBITDA and a decrease in share-based compensation expense, as well as $10 million from insurance proceeds that were received during the second quarter of 2022, which are described in the financial statements.
Excluding the impact of certain non-routine and noncash expenses that are explained in our MD&A, including the $10 million insurance proceeds discussed earlier, adjusted net income in the second quarter of 2022 decreased by $400,000 or 3.8% to $10 million, and correspondingly, adjusted diluted earnings per share decreased $0.01 to $0.29 compared to $0.30 in the same period in the prior year.
Turning now to cash flows from operations in the balance sheet. Net cash flows provided by operating activities in the second quarter of 2022 increased by $3.4 million to an inflow of $9.3 million compared to an inflow of $5.9 million in the same period in 2021 due to the increase in net income as discussed earlier, as well as lower interest and income taxes paid, offset by changes in noncash working capital.
During the second quarter, the company put our financial flexibility and capacity to work investing and, in some cases, prepaying for inventory to manage supply chain disruptions and support service levels for our customers. This impacted the company's noncash working capital.
Net debt at the end of the second quarter of 2022 decreased by $1 million to $294.2 million compared to $295.2 million at the end of the first quarter, primarily reflecting lower long-term debt and lease liabilities, partially offset by higher bank loans.
Net debt to adjusted EBITDA was 3x at July 2, 2022, compared to 3x at the end of fiscal 2021. In the absence of any major acquisitions or unplanned capital expenditures in 2022, we expect this ratio to be slightly below the company's long-term target of 3x at the end of fiscal 2022.
I will now turn the call back over to Rod for some final remarks before opening up the call to questions. Rod?
Thanks, Paul. As the numbers demonstrate, our strategy is working and our business is operating effectively and efficiently. We have proven our ability to withstand significant pressure in an operating environment. Our job is now to stay the course and to maximize every opportunity to demonstrate the High Liner Foods value proposition to our customers and consumers.
This means that, we will continue to leverage our competitive advantage to expand distribution and position High Liner Foods for ongoing growth once supply normalizes. We successfully expanded distribution in U.S. foodservice and U.S. retail during the second quarter and are confident that there is more to come as customers continue to seek out the quality of our products, especially branded value-added and the reliability of our supply.
We will also continue to work with our foodservice customers to find innovative ways to feature seafood on the menu. We're excited about the potential to demonstrate how we sell -- how well seafood can fare in QSR and are actively exploring menu innovations with our customers.
In the second quarter, this led to a new partnership with a leading QSR customer with a limited time menu offer that is in the market right now.
We will keep investing in our brands, value-added offering in support of our growth strategy and in recognition of growth potential of our High Liner quality products. In foodservice, our branded value-added products continue to help ease the pain related to the tight labor market on both sides of the border.
Operators are drawn to products that deliver value and convenience to them without sacrificing taste or menu appeal for customers. For example, we are having particular success converting operators to branded value-added products with our best-selling Country Style cod, Alaskan pollock wings and breaded shrimp.
On the retail front, our branded value-added products gained popularity during the pandemic, and we believe that consumers now have a better appreciation of how easy it can be to enjoy restaurant quality seafood at home. In an inflationary environment, we anticipate that, that appeal of an elevated dining experience at home will continue. Our value-added offering isn't only for premium -- for the premium end of the market. With brands like Fisher Boy, we are also able to capture consumers motivated by price point and convenience. We have recently expanded our reach into the segment of the market through a leading U.S. discount chain.
To date, we have rolled out products such as our Fisher -- as our fish sticks and popcorn shrimp to approximately 7,000 stores with an expected near-term growth of 10% beyond that. The partnership with the discount retailer is well-timed given the inflationary environment, and we are excited to offer quality seafood at affordable prices for the most cost-conscious consumer.
To further support our marketing position in this regard, we are offering new pack sizes and price points to attract shopper seeking value in other major retailers. We will continue to double down on what is working. From a product perspective, this means expanding distribution on our best-selling products and working to replicate that success.
Right now, our Canadian test of our successful Sea Cuisine skin-pack line is in market with selected locations of one of our major customers. This initial reaction has been extremely positive. We have the benefit of experience with this brand and are applying insights with respect to demographic appeal and consumer purchase patterns to inform our market test and rollout patterns.
For now, we are trialing three products: our best-selling Potato and Herb Crusted Cod, Honey Chipotle Salmon and Teriyaki Sesame Salmon. We expect the market trial to continue until the end of the year, and we begin to expand distribution strategically in early 2023.
We will continue to support our brands with marketing dollars and e-commerce initiatives. We are active in this regard in Q2 and the timing served us well because many others in the industry have eased off promotional activity due to the lack of supply.
Our approach has been extensive, covering national television, online paid search advertisement, social media and influencer engagements. And it almost goes without saying that we are dedicated -- we have dedicated significant time and resources to mitigate ongoing supply chain risk. When it comes to our supply chain, there is no doubt that the investments we have made over the past five years to drive the efficiency and the global integration is a competitive edge for us today in today's market.
Our team are doing tremendous job at turning a time of supply constraint into opportunity for our business. The strength of our balance sheet enables us to continue to invest in inventory. Nonetheless, significant challenges with the global supply chain persists, and we are not immune from the impact. As Paul mentioned, once again, we are unable to fulfill fully satisfy demand of our products in this quarter. The overhang of uncertainty regarding the future supply chain remains.
We are fortunate to have the diversity and relationships in place to help us navigate this and believe that ongoing work to invest in inventory, drive continuous improvement and further advance diversification will continue to serve us well.
Lastly, we will continue to realize our purpose to reimagine seafood to nourish life and maintain a steady supply of seafood across North America. We will continue to use our purpose to guide all aspects of our business from future innovation to how we engage with our stakeholders. It is an exciting time to be part of High Liner Foods, and I look forward to building on our momentum in the third quarter and beyond.
With that, I will wrap the call up once again to reiterate my confidence in our ability to deliver another year of adjusted EBITDA growth.
I will now turn the call over to the operator for questions-and-answer period. Operator, please go ahead.
[Operator Instructions] First question comes from George Doumet at Scotiabank.
Congratulations on a really good quarter. I was just wondering if you can maybe give us a little bit of color on those 8 million pounds increase in terms of volumes. How much of that came from foodservice? I think you spoke to retail, so maybe some color there. Are you seeing at all any demand destruction or trade down either at retail or food service from the higher pricing?
Yes. No, at this point, George, thankfully, we aren't seeing any increase in demand. In fact, demand continues to exceed our expectations, which is partially what's leading to the shortages that we talked about. And the good news is we're seeing increases in volume across both retail and foodservice. Foodservice, stronger than retail. We talked about, in particular, the recovery from COVID and the strong demand that we're seeing for our products, but really pleased with the performance in both channels.
Okay. And you used to give us a little bit of a breakdown in terms of where foodservice sits versus pre-pandemic levels in the past. Can you maybe share that with us today?
Yes, we're essentially just slightly below 2019. We've gotten to the point now where the recovery has allowed us and our performance has allowed us to get to that level.
Okay. And more of a general question. Just wondering to what extent you'd be able to hold price in the eventuality that we see kind of substantial deflation in our input costs over the next little bit.
Well, I think that has a number of factors in it. Number one, we believe that we're driving real value for our customers and the price value equation is significant. I think that depends on what the global supply chain looks like, right? As -- our supply chain has truly proven to be a competitive advantage and kept our customers in stock with product where our competitors have struggled a bit more, we will certainly support our ability to maintain pricing levels in -- even in a deflationary environment.
Yes. I guess my question was related more to like featuring a promo. Like, I mean, if you can talk to the level -- to what extent that can come back if it does or any ability to maybe hold margins in that context?
Yes. Certainly, in retail, George, there will be an opportunity, we hope, for us to continue to promote our products and reinvest in the opportunity to grow volumes in that channel. That will be the case if we had the opportunity to do so with lower costs.
Okay. And just one last one for me, Paul. Your leverage guidance suggests another year of, like, I guess, quite a bit of working capital requirements. Can you maybe -- I know it ebbs and flows but can you maybe talk to how we should think of that working capital requirement or any number that you want to share with us for the year?
Yes. I mean at this stage, George, I think we'll see some improvement in our working capital position by the time we get to the end of 2022. And that's what'll allow us to be slightly better than where we are today from a leverage perspective. 2023 at this stage, too hard to call. I mean our goal, obviously, is to get to a better supply position and if there is some deflation, then obviously, that'll support lower working capital levels as well.
But we see no reason at this stage in 2023 that we can't continue to drive leverage lower and continue to drive cash flow higher.
Next question is from Kyle McPhee at Cormark Securities.
Just to start, can you quantify more specifically what the year-over-year pricing gain was in Q2?
In terms of how much of the sales growth was driven by inflation versus volume? So I think you see from a...
Yes. Yes, the inflation in the revenue. What was that number?
Yes. So the volume growth was 8.4 million pounds in total and our sales dollars were up $63.6 million. So volume was up 16%. Sales were up 33%. So you can see the gap there, Kyle, in terms of how much was driven by the substantial inflation. And that inflation made its way into the cost goods line and into the sales dollars line. And that's why you saw that little bit of compression in margin as a percentage.
Okay. Okay. So you're implying the entire volume versus revenue dollars is gapped with pricing?
Okay. And then are there more pricing gains to come? Or are upcoming quarters -- or the pricing gains that show really just the kind of year-over-year lapping dynamic from prior pricing gains?
Yes. Most of the cost increases we've seen are year-over-year cost increases and we've had the price to reflect that. At this point, we're certainly hoping that we won't have to do more price increases or face higher cost increases. And -- but we'll continue to monitor that closely and look for some opportunities, if there is deflation, to continue to look for opportunities to drive more value, as Rod spoke of, and drive more volume in the business.
Got it. Okay. And then I just wanted to dig in to your volume growth. I know regaining of the prior COVID drag and foodservice channels was part of that. But by my math, that really only explains about 70% of the volume growth you reported. So it looks like you still have meaningful organic growth from other sources as well and kind of -- it worked out to low to mid-single-digit range. So does that sound about right? And Rod, you walked through a lot of the growth drivers, but what are the kind of the main volume growth drivers that explain this math? Like the main thing that...
Yes, I think there's -- yes, yes, a couple of things we'd highlight for sure. Innovation was very good in the quarter. So that drove new product growth. And as I mentioned, we had very little in the way of lost business, so that was all incremental. The other thing that I'd highlight is we did have distribution gains. And we talked about a couple of really strong customer examples where customer acquisition and distribution gains supported the volume growth as well.
Yes. If I can add. I think there's one other thing. We've talked about this over the last several years with us really positioning ourselves with the right customers for growth, particularly in the foodservice market. We are partnered with the top 4 leading broadline distributors in both their strategic partner and our brand as well as their brand. And if you look at their performance, they are taking share in the market. So by the nature of the right customer strategic alignments, we're growing as well. So we can -- expect that to continue.
Okay. And just on the first part of that question, does that kind of math sound right? That beyond just the COVID lapping gains, it's kind of low to mid-single-digit organic volume growth?
Yes, I think that's right. Yes, there was some COVID impact, but that wasn't what we would point to as the only reason for our growth. We're very pleased with our commercial performance and the demand that we're seeing in the business.
Next question comes from Sabahat Khan at RBC Capital Markets.
Great. I guess maybe just starting with a bigger picture question. I think over the last couple of years, the company has undergone quite a bit of a transition. And if you were to comment on, and I know that we're coming out of the pandemic, sort of what inning we are in this sort of transformation versus when you think kind of going a bit more of a forward foot, a bit more aggressive with the growth initiatives, whether it's M&A, whether it's other initiatives. Where would you say we are, I guess, in sort of the repositioning of the business that you've kind of undertaken over the last couple of years?
Yes. Sabahat, I appreciate the question, although I'd put it in different context. Although I'm baseball fan, it does contemplate a completion at the endgame. So we'll -- we're well on our way. I would say, if we think about this as a journey, we are going to continue to push ourselves to be the leading branded value-added seafood supplier in North America. I think if we think about how we've positioned the organization, and to your point, are positioned to accelerate our growth, I think you're seeing that now. The organization has been absolutely aligned from the One HLF which was our -- one of our initiatives to maximizing our supply chain and all the work we've talked about over the last three, four years.
So if we think about the work we did in our supply chain, specifically three years ago, that has really positioned us and proven to be an absolute competitive advantage. If you think about the changes we've made in our sales and marketing area, that has allowed us to take that strength from a supply chain perspective and show up very, very differently on our customers, not only in how we bring innovation to the marketplace, but also how we engage with our customers, using far more analytics and fact-based propositions to help drive and increase consumption of seafood in both the retail and foodservice channels.
So I would say, while I'd love to tell you that we're midway on our journey, I think that we're probably maybe a third-way of a continuous journey. So I'm not sure there's even a factual number to give it, but we feel good about where we're at.
Yes. And Sabahat, just to add to that, in addition to all we've accomplished to get to this level of organic growth that the numbers clearly reflect, the other part of your question was other opportunities for accelerated growth, M&A, and we're in a position to really move on that if the right opportunity presents itself at the right price and it aligns with what we're doing from a strategy perspective. We've clearly got nothing to announce or talk about, but we're well prepared should those opportunities present themselves.
And then I guess just following up on this last comment there. I guess are there any obvious areas of your business that you sort of identified that, look, whether it's retail, certain category or it's foodservice or geography, like, is there -- is it kind of the categories to speak to that and historically involve with? Or has kind of the focus shifted as we come out of pandemic? Maybe there's different consumption trends. Just kind of your perspective on where you see the opportunity, where you see, maybe, there is a piece to add to the puzzle here.
Yes. I think that's one of the beauties of our business. We are not short of opportunities. If we take a look at our retail -- Canadian retail business, that's certainly around driving consumption and frequency of purchase. There's significant plans underway for that. If we look at our U.S. retail business, it's about distribution gains and partnering with new exciting customers, and we've talked about that. And we've -- quite frankly, with this discount retailer, I think that's a great example of executing against the playbook.
In our foodservice business, while we feel extremely confident about our position and continue to take share in the marketplace, we have opportunity, as outlined in segments like QSR, where we historically have not been the leader in that marketplace. But with the evidence on this most recent LTO, which is surpassing our early expectations, we're proving to be more effective in our targeted approach. So I think there's ample opportunity across all legs of our business.
Yes. And just to add to that, Sabahat, clearly, with the size of the U.S. market, that will be our larger growth opportunity. You see the strength of our presence in Canada. We've got a very strong presence in U.S. foodservice that we know we can continue to grow upon, and we've got lots of opportunity in U.S. retail.
Okay. Great. And then, I guess, just kind of last question. I think, Rod, when you sort of joined the company kind of in the initial quarters, call it, erstwhile, we saw the benefit in the results kind of on the cost side, things are being streamlined. Based on what you see in the business today, should we expect the combination of both revenue growth and sort of continued margin improvement? How should we think about the algorithm to get sort of the EBITDA and earnings throughout over the next one, two years?
Yes. There's a question. Early on, we focused on maximizing the opportunity to drive bottom line growth while making the appropriate adjustments in our product portfolio and customer portfolio. I would say we are certainly now in a place where we intend on both driving top line and bottom line growth. We have an emphasis on continuous improvement, and we'll attempt to drive -- as we have proven to, over the last several years, drive efficiencies through our business that will help us either secure new business with the right customers or expand margins.
So just kind of based on current visibility, you do see opportunities for kind of ongoing organic growth over the next -- as you come out of the pandemic and things normalize?
Without questions. Yes.
Thank you. There are no further questions. You may proceed.
Thank you. I'd like to thank you for joining the call today. We look forward to updating you with our results for the third quarter of 2022 on our next conference call in November.
Please stay safe and well.
Ladies and gentlemen, this concludes our conference call for today. We thank you for participating, and we ask that you please disconnect your lines.