High Liner Foods Reports Operating Results for the Second Quarter of 2018
- New CEO announces organizational realignment -
LUNENBURG, NS, Aug. 14, 2018 /CNW/ - High Liner Foods Incorporated (TSX: HLF) ("High Liner Foods", "High Liner" or "the Company"), the leading North American value-added frozen seafood company, today reported financial results for the thirteen and twenty-six weeks ended June 30, 2018.
Today, the Board of Directors of the Company approved a quarterly dividend of CAD$0.145 per share on the Company's common shares payable on September 15, 2018 to holders of record on September 1, 20181.
The Company reports its financial results in U.S. dollars ("USD") and all amounts are reported in USD unless otherwise noted. High Liner Foods' common shares trade on the Toronto Stock Exchange (TSX: HLF) and are quoted in Canadian dollars ("CAD"). HLF shares closed yesterday at CAD$8.782.
"The Company's financial results for the second quarter of 2018 reflect continued challenges in the business related to soft sales volume, a shift in product mix from higher margin value-added products to lower margin commodity products, raw material cost increases not fully passed along to customers and inefficiencies in our supply chain," said Rod Hepponstall, President and CEO. "The impact of these challenges in the second quarter was most acute in our U.S. business."
"I believe significant opportunities exist for High Liner Foods, but after my first quarter as CEO, it is apparent to me that before we can fully take advantage of these opportunities, we need to operate more efficiently. As an important first step towards achieving this, I have already made changes to optimize the Company's structure by organizing it first and foremost by core function instead of by geography. This will take better advantage of our North American scale and provide a minimum of $10 million in annualized cost savings. The Company's executive leadership team has been aligned to this new structure and we are now aligning the rest of the organization which will be completed in 2018," explained Hepponstall.
Related to the Company's North American organizational realignment, Peter Brown, Chief Supply Chain Officer, has left the Company. Mr. Brown previously held the position of President & Chief Operating Officer, U.S. Operations, which was eliminated as a result of the organizational realignment.
Financial and operational highlights for the thirteen weeks ended June 30, 2018, or the second quarter of 2018, include (unless otherwise noted, all comparisons are relative to the thirteen weeks ended July 1, 2017, or the second quarter of 2017):
- Sales increased by $12.9 million to $245.3 million compared to $232.4 million;
- Gross profit increased by $5.5 million to $43.3 million compared to $37.8 million;
- Adjusted EBITDA3 decreased by $1.4 million to $12.0 million compared to $13.4 million;
- Net income increased by $2.2 million to $2.8 million compared to $0.6 million (and diluted earnings per share (EPS) increased to $0.08 compared to $0.02;
- Adjusted Net Income3 decreased by $2.3 million to $3.8 million compared to $6.1 million and Adjusted Diluted EPS decreased to $0.11 compared to $0.19;
- CAD-Equivalent Adjusted Diluted EPS3 decreased to CAD$0.14 compared to CAD$0.26; and
- Net interest-bearing debt3 to rolling twelve-month Adjusted EBITDA was 5.6x at June 30, 2018, consistent with at the end of Fiscal 2017.
| ___________________________ |
| 1 The Company now offers the ability for its common shareholders to receive dividend payments through |
| 2 Source: TSX August 13, 2018. |
| 3 Please refer to High Liner Foods' MD&A for the thirteen and twenty-six weeks ended June 30, 2018 for definitions |
The acquisition of Rubicon on May 30, 2017 had the impact of increasing sales volume by 3.5 million pounds, sales by $17.4 million and gross profit by $1.8 million, and decreasing Adjusted EBITDA by $0.3 million in the second quarter of 2018 compared to the second quarter of 2017.
The Company's product recall announced in April of 2017 had the impact of decreasing sales volume by 2.5 million, sales by $8.6 million and gross profit by $8.6 million in the second quarter of 2017.
In the second quarter of 2018, the Company successfully completed a significant upgrade to its enterprise resource planning ("ERP") system. The ERP system is the business management software that supports the Company's core business processes. The upgrade provides improved capability that will support the organizational realignment, current business objectives and future growth. The upgrade was completed on time, within internal spending targets, and without interruption to customers or the business.
Financial Results
For the purpose of presenting the Consolidated Financial Statements in USD, CAD-denominated assets and liabilities in the Parent's operations are converted using the exchange rate at the reporting date, and revenue and expenses are converted at the average exchange rate of the month in which the transaction occurs. As such, foreign currency fluctuations affect the reported values of individual lines on our balance sheet and income statement. When the USD strengthens (weakening CAD), the reported USD values of the Parent's CAD-denominated items decrease in the Consolidated Financial Statements, and the opposite occurs when the USD weakens (strengthening CAD).
Investors are reminded for purposes of calculating financial ratios, including dividend payout and share price-to-earnings ratios, to take into consideration that the Company's share price and dividend rate are reported in CAD and its earnings and financial statements are reported in USD.
The financial results for the thirteen and twenty-six weeks ended June 30, 2018 and July 1, 2017 are summarized in the following table:
| Thirteen weeks ended |
Twenty-six weeks ended |
|||||||||||
| (Amounts in 000s, except per share amounts, |
June 30, |
July 1, |
June 30, |
July 1, |
||||||||
| Sales volume (millions of lbs) |
65.5 |
63.4 |
153.6 |
146.6 |
||||||||
| Average foreign exchange rate (USD/CAD) |
1.2910 |
1.3448 |
1.2813 |
1.3343 |
||||||||
| Sales in domestic currency |
$ |
264,505 |
$ |
254,890 |
$ |
601,388 |
$ |
550,997 |
||||
| Foreign exchange impact on sales |
$ |
(19,193) |
$ |
(22,505) |
$ |
(36,892) |
$ |
(42,877) |
||||
| Sales in USD |
$ |
245,312 |
$ |
232,385 |
$ |
564,496 |
$ |
508,120 |
||||
| Gross profit |
$ |
43,310 |
$ |
37,807 |
$ |
103,871 |
$ |
93,315 |
||||
| Gross profit as a percentage of sales |
17.7% |
16.3% |
18.4% |
18.4% |
||||||||
| Adjusted EBITDA in domestic currency |
$ |
12,726 |
$ |
14,440 |
$ |
37,964 |
$ |
37,500 |
||||
| Foreign exchange impact on Adjusted EBITDA |
$ |
(676) |
$ |
(1,023) |
$ |
(1,692) |
$ |
(1,747) |
||||
| Adjusted EBITDA |
$ |
12,050 |
$ |
13,417 |
$ |
36,272 |
$ |
35,753 |
||||
| Adjusted EBITDA as a percentage of sales |
4.9% |
5.8% |
6.4% |
7.0% |
||||||||
| Net income |
$ |
2,804 |
$ |
644 |
$ |
13,055 |
$ |
11,386 |
||||
| Diluted EPS |
$ |
0.08 |
$ |
0.02 |
$ |
0.39 |
$ |
0.36 |
||||
| Adjusted Net Income |
$ |
3,766 |
$ |
6,054 |
$ |
14,469 |
$ |
16,869 |
||||
| Adjusted Diluted EPS |
$ |
0.11 |
$ |
0.19 |
$ |
0.43 |
$ |
0.53 |
||||
| Diluted weighted average number of shares outstanding |
33,635 |
32,017 |
33,580 |
31,594 |
||||||||
Sales volume for the second quarter of 2018 increased by 2.1 million pounds to 65.5 million pounds compared to 63.4 million pounds in same period in 2017 primarily due to higher sales volume in our U.S. business reflecting the following:
- An additional 3.5 million pounds in the second quarter of 2018 from Rubicon, which was acquired on May 30, 2017, as compared to the same period last year; and
- Lower sales volume during the second quarter of 2017 associated with the product recall in 2017 (2.5 million pounds).
Excluding the impact of these items, sales volume for the second quarter of 2018 decreased by 3.9 million pounds, reflecting lower sales volume in the U.S. retail and foodservice businesses and Canadian retail business.
Sales in the second quarter of 2018 increased by $12.9 million to $245.3 million compared to $232.4 million in the same period in 2017. Excluding the impact of a stronger Canadian dollar on the translation of USD sales from the Company's CAD-denominated operations relative to the conversion impact last year (approximately $2.7 million), the impact of additional sales from Rubicon ($17.4 million), and the impact of the product recall in 2017 ($9.1 million), sales decreased by $16.9 million mainly due to the decreased volume mentioned previously and changes in product mix, partially offset by price increases to recover raw material cost increases.
Gross profit in the second quarter of 2018 increased by $5.5 million to $43.3 million compared to $37.8 million in the same period in 2017, reflecting an increase in gross profit as a percentage of sales to 17.7% compared to 16.3%. This increase reflects additional gross profit from Rubicon ($1.8 million) and non-reoccurring losses associated with the product recall in 2017 ($8.6 million). Excluding the impact of these items, gross profit decreased by $4.9 million to $39.4 million (18.7% as a percentage of sales) compared to $44.3 million (19.8% as a percentage of sales) in the same period of 2017 due to lower sales volume, unfavourable changes in product mix and plant inefficiencies in our U.S. business, partially offset by price increases to recover raw material cost increases and improved plant efficiency in our Canadian business. In addition, the stronger Canadian dollar had the effect of increasing the value of reported USD gross profit from our Canadian operations in 2018 by approximately $0.5 million relative to the conversion impact last year.
Adjusted EBITDA in the second quarter of 2018 decreased by $1.4 million to $12.0 million (4.9% of sales) compared to $13.4 million (5.8% of sales) in the same period in 2017. Excluding the impact of converting our CAD-denominated operations and corporate activities to our USD presentation currency (a decrease of $0.7 million in 2017 and $1.0 million in the same period last year), Adjusted EBITDA decreased by $1.7 million reflecting the lower gross profit mentioned previously (after adjusting for the losses associated with the 2017 product recall ($4.1 million)) and higher distribution expenses, partially offset by lower SG&A expenses.
Reported net income in the second quarter of 2018 increased by $2.2 million to $2.8 million (diluted EPS of $0.08) compared to $0.6 million (diluted EPS of $0.02) in the same period last year. The increase in net income reflects the costs that did not reoccur during 2018 related to the acquisition of Rubicon and the 2017 product recall, partially offset by the decrease in Adjusted EBITDA mentioned previously, a decrease in income tax recovery and an increase in depreciation and amortization expenses and finance costs.
In the second quarter of 2017, net income included other non-cash expenses and "business acquisition, integration and other expenses" related to the acquisition of Rubicon and losses associated with the product recall. Excluding the impact of these non-routine expenses and other non-cash expenses, Adjusted Net Income in the second quarter of 2018 decreased by $2.3 million to $3.8 million (Adjusted Diluted EPS of $0.11) compared to $6.1 million (Adjusted Diluted EPS of $0.19) in the same period last year.
Net cash flows provided by (used in) operating activities in the second quarter of 2018 increased by $12.9 million to an inflow of $22.7 million compared to an inflow of $9.7 million in the same period in 2017 primarily reflecting more favourable results from operations, including a more favourable change in net non-cash working capital, and lower income tax payments, partially offset by higher interest payments.
Net interest-bearing debt to rolling twelve-month Adjusted EBITDA was 5.6x at June 30, 2018 and consistent with net interest-bearing debt to rolling twelve-month Adjusted EBITDA at the end of Fiscal 2017 when the latter is calculated including trailing twelve-month Adjusted EBITDA for Rubicon. This ratio is expected to improve throughout the remainder of 2018.
Outlook
"Organizational priorities for the next 12 to 18 months are focused on creating a more efficient company and improving performance. Specifically, the North American structure will be completed in 2018 and while there will be costs incurred this year related to this activity, it is too early to quantify these. We expect this optimized structure will result in a minimum of $10 million in annualized cost savings, on a run rate basis, starting in 2019. However, there are other areas of the business where additional investment will be required to ensure we have the right expertise, processes and tools required to capitalize on market opportunities. These will be determined as part of business objectives focused on profitable organic growth, business simplification, supply chain excellence, and integrating and growing the Rubicon business that was acquired in 2017. We will also work to mitigate the impact of higher raw material and supply chain costs through these initiatives," said Hepponstall.
On July 11, 2018 the U.S. Administration announced additional proposed tariffs that, if implemented, would apply to certain seafood imported into the U.S. from China. The proposed tariffs are currently open for public comment and could impact seafood purchased by the Company, and the industry overall, as a significant volume of seafood consumed in the U.S. is imported to meet U.S. consumer needs. The Company currently purchases its seafood raw materials from more than 20 countries around the world, including from the U.S., to meet U.S. consumer demand. A portion of this raw material is imported into China, for primary processing and then exported to the U.S. for sale and secondary processing. The Company will continue to monitor these developments closely, particularly as further information becomes available on what products could be impacted by these proposed tariffs and how these proposed tariffs would be implemented.
Conference Call
The Company's Audited Consolidated Financial Statements and MD&A as at and for the thirteen and twenty-six weeks ended June 30, 2018 were filed concurrently on SEDAR with this news release and are also available at www.highlinerfoods.com.
The Company will host a conference call on Tuesday, August 14, 2018, at 12:00 p.m. ET (1:00 p.m. AT) during which Rod Hepponstall, President & CEO and Paul Jewer, Executive VP & CFO, will discuss the financial results for the second quarter of 2018. To access the conference call by telephone, dial 647-427-7450 or 1-888-231-8191. Please connect approximately 10 minutes prior to the beginning of the call to ensure participation. The conference call will be archived for replay by telephone until Tuesday, August 21, 2018 at midnight (ET). To access the archived conference call, dial 1-855-859-2056 and enter the reservation number 3394765.
A live audio webcast of the conference call will be available at www.highlinerfoods.com. Please connect at least 15 minutes prior to the conference call to ensure adequate time for any software download that may be required to join the webcast. The webcast will be archived at the above website for one year.
About High Liner Foods Incorporated
High Liner Foods Incorporated is the leading North American processor and marketer of value-added frozen seafood. High Liner Foods' retail branded products are sold throughout the United States, Canada and Mexico under the High Liner, Fisher Boy, Mirabel, Sea Cuisine and C. Wirthy & Co. labels, and are available in most grocery and club stores. The Company also sells branded products to restaurants and institutions under the High Liner, Icelandic Seafood and FPI labels and is the major supplier of private label value-added seafood products to North American food retailers and foodservice distributors. High Liner Foods is a publicly traded Canadian company, trading under the symbol HLF on the Toronto Stock Exchange.
This document contains forward-looking statements. Forward-looking statements can generally be identified by the use of the conditional tense, the words "may", "should", "estimate", "will", believe", "plan", "expect", "goal", "remain" or "continue", or the negative of these terms or variations of them or words and expressions of similar nature. Specific forward-looking statements in this document include, but are not limited to expectations with respect to: anticipated financial performance including earning trends and growth; changes to sales volume, margins and input costs, including raw material prices; achievement, and timing of achievement, of strategic goals and publicly stated financial targets, including to increase our market share, acquire and integrate other businesses and reduce our operating and supply chain costs ; the expected timing and amount of recovery associated with product recall costs; our ability to successfully integrate the acquisition of Rubicon Resources, LLC; our ability to develop new and innovative products that result in increased sales and market share; expected leverage levels and expected net interest-bearing debt to Adjusted EBITDA; and statements under the heading "Outlook" including expected demand, sales of new product, the efficiency of our plant production and proposed U.S. tariffs on certain seafood products imported from China. These statements are based on a number of factors and assumptions including, but not limited to: seafood and other ingredient availability, demand and pricing; product pricing, including the cost of raw materials, energy and supplies; operating costs; plant performance; the condition of the Canadian and U.S. economies; our ability to attract and retain customers; required level of bank loans and interest rates; income tax rates and the interpretation of the U.S. Tax Reform by tax authorities; the impact of the U.S. Administration's proposed tariffs on certain seafood products; and our ability to attract and retain experienced and skilled employees. The statements are not a guarantee of future performance. By their nature, forward-looking statements involve uncertainties and risks that could result in the forecasts and targets not being achieved. Readers are cautioned not to place undue reliance on forward-looking statements, as actual results may differ materially from those expressed in such forward-looking statements. We include in publicly available documents filed from time to time with securities commissions and The Toronto Stock Exchange, a discussion of the risk factors that can cause anticipated outcomes to differ from actual outcomes. Except as required under applicable securities legislation, we do not undertake to update forward-looking statements, whether written or oral, that may be made from time to time by us or on our behalf, whether as a result of new information, future events or otherwise.
The Company reports its financial results in accordance with International Financial Reporting Standards ("IFRS"). Included in this media release are certain non-IFRS financial measures as supplemental indicators of operating performance. These non-IFRS measures are Adjusted EBITDA, Adjusted Net Income, Adjusted Diluted EPS, CAD-Equivalent Adjusted Diluted EPS, and Net Interest-Bearing Debt. Please refer to the Company's MD&A for the thirteen and twenty-six weeks ended June 30, 2018 for definitions of non-IFRS financial measures used by the Company and reconciliation of these non-IFRS measures to measures that are found in our consolidated financial statements.
The Company believes these non-IFRS financial measures provide useful information to both management and investors in measuring the financial performance and financial condition of the Company. These measures do not have a standardized meaning prescribed by IFRS and, therefore, may not be comparable to similarly titled measures presented by other publicly traded companies, nor should they be construed as an alternative to other financial measures determined in accordance with IFRS.
For further information about the Company, please visit our website at www.highlinerfoods.com or send an e-mail to [email protected].
SOURCE High Liner Foods Incorporated
Paul Jewer, FCPA, FCA, Executive Vice President & Chief Financial Officer, High Liner Foods Incorporated, Tel: (902) 421-7110, [email protected]; Heather Keeler-Hurshman, CPA, CA, CPIR, Vice President, Investor Relations & Corporate Performance, High Liner Foods Incorporated, Tel: (902) 421-7100, [email protected]
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