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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 2019. [Operator Instructions] This conference call is being recorded today, Wednesday, August 7, 2019, at 2:00 p.m. Eastern Time, for replay purposes.I would now like to turn the call over to Heather Keeler-Hurshman, Vice President of Investor Relations and Communications for High Liner Foods. Ms. Keeler-Hurshman, please go ahead.
Thank you. Good afternoon, everyone. Thanks for joining High Liner Foods' conference call to discuss our financial results for the second quarter of 2019. On the call today from High Liner Foods are Rod Hepponstall, President and Chief Executive Officer; and Paul Jewer, Executive Vice President and Chief Financial Officer. In a moment, I'll pass the call over to Rod for some brief remarks before handing it over to Paul who will review the company's financial performance for the second quarter. Rod will then wrap up the call with an update on the company's progress against its 5 critical initiatives and open the call up for questions.I'd 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 in today's call may be forward-looking statements that are subject to risks and uncertainties. Management may use forward-looking statements when 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 Report and its 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 June 29, 2019. That news release, along with the company's MD&A and unaudited condensed interim consolidated financial statement for the second quarter of 2019, have been filed on SEDAR, and can also be found in the investor information section from the High Liner Foods website. If you 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 the results to be discussed today are stated in U.S. dollars, unless otherwise noted. High Liner Foods' common shares trade on the TSX and are quoted in Canadian dollars.I will now turn the call over to Rod. Rod, please go ahead.
Good afternoon, everyone. Thank you for joining us today. Our financial performance this quarter reflects the significant strides forward we are making across the organization to transform our business. The improvements in margins, adjusted EBITDA and net debt are a direct result of executing against our critical initiative plan to reposition our portfolio to higher-margin products and transform to a leaner, more efficient and integrated High Liner Foods.I'll update you on each critical initiative later on the call but first, the key takeaways. Our critical initiative plan is working. We are building a better, more profitable business and reducing debt to build a stronger balance sheet. The market is responding well to our new product innovations, and we are launching more innovation in the second half of 2019.Our North American team is integrated and working well together. Our supply chain is increasingly efficient and our operating costs are decreasing.Finally, we are confident that the critical initiative plan will continue to deliver year-over-year adjusted EBITDA improvement in 2019 and 2020 as a result of efficiencies, improvements and further optimizations to our business.I will provide further commentary on our portfolio realignment and the steps we are taking to generate top line growth later on the call, and I'd like to now hand the call over to Paul to review our financial performance in the second quarter.
Thank you, Rod, and good afternoon, everyone. Please note that all comparisons provided during my financial review of the second quarter of 2019 are relative to the second quarter of 2018, unless otherwise noted.Before getting into the financial results, I'd like to remind listeners that the company adopted the new lease standard, IFRS 16, Leases, effective December 30, 2018. Implementation of IFRS 16 resulted in additional assets and liabilities on the consolidated financial statements, a financial position of approximately $14.6 million upon transition. And approximately $5.1 million previously accounted for as operating lease expense is now accounted for as $4.6 million of depreciation expense and $1.3 million of finance costs for fiscal 2019. The new lease standard was adopted using the modified retrospective method and therefore, comparative information for 2018 has not been restated.Sales volume decreased in the second quarter by 5.1 million pounds to 60.4 million pounds. The decrease reflects lower sales volume in our foodservice and retail businesses, including lower sales volume as a result of the significant customer loss in the latter half of fiscal 2018, and the exit of low-margin business. This was partially offset by a later Easter in 2019 compared to 2018, which shifted some sales volume to the second quarter of 2019 compared to the same period last year.Sales in U.S. dollars decreased in the second quarter by $22.3 million to $223 million, mainly due to the decreased volume mentioned previously and changes in product mix partially offset by price increases related to raw material cost increases and the later Easter in 2019 compared to 2018.Gross profit decreased in the second quarter by $500,000 to $42.8 million, while gross profit as a percentage of sales increased to 19.2% compared to 17.7%. The decrease in gross profit dollars reflects the lower sales volume and raw material cost increases partially due to tariffs on certain species imported into the U.S. from China. This was partially offset by sales price increases, favorable product mix related to the exit of low-margin business and improved plant efficiencies partly due to our supply chain excellence initiatives.In addition, the weaker Canadian dollar had the effect of decreasing the value of reported U.S. dollar gross profit from our Canadian operations in 2019 by approximately $500,000, relative to the conversion impact last year.Adjusted EBITDA increased in the second quarter by $5.9 million to $17.9 million, and was 8% of sales compared to 4.9% in 2018. This increase reflects the impact of adopting the new lease standard and the decrease in distribution and SG&A expenses, reflecting benefits related to our organizational realignment and supply chain excellence initiatives partially offset by the lower gross profit discussed previously.The impact of converting our Canadian dollar-denominated operations and corporate activities to our U.S. dollar presentation currency decreased the value of reported adjusted EBITDA in U.S. dollars by $300,000 in the second quarter of 2019 compared to $700,000 in 2018.The effective tax rate for the second quarter of 2019 was 44.9% compared to a statutory tax rate of 29.2%. However, we expect that the effective tax rate for 2019 on an annual basis will be more consistent with the statutory rate.Excluding the impact of certain nonroutine and noncash items, which are explained in our MD&A, adjusted net income increased in the second quarter by $900,000 to $4.7 million. And correspondingly, adjusted diluted earnings per share increased by $0.02 to $0.13.Turning now to cash flow from operations and the balance sheet. Net cash flows from operating activities increased by $28.6 million to $60.2 million in the first half of 2019, primarily reflecting more favorable results from operations and favorable changes in net noncash working capital partially offset by higher interest and income tax payments.Net debt decreased by $36 million to $324.6 million at the end of the first half of 2019 compared to $360.6 million at the end of fiscal 2018. Excluding the transitional increase in lease liabilities upon the adoption of the new lease standard effective at the beginning of fiscal 2019, net debt decreased by $50.6 million in the first half of 2019.Net debt to rolling 12-month adjusted EBITDA was 4.1x at the end of the first half of 2019, when calculated including trailing 12-month adjusted EBITDA for the new lease standard, compared to 5.8x at the end of fiscal 2018.In the absence of any major acquisitions or strategic initiatives requiring capital expenditures in 2019, we expect this ratio will continue to improve throughout 2019; however, not to the same degree as we experienced in the first half of the year, given increased working capital requirements in advance of the Lenten period.That concludes my financial review, and I will now turn the call back to Rod for some color on our critical initiatives.
Thanks, Paul. I'll now highlight some of our key actions over the last few months as we continue executing on our critical initiative plan to drive top and bottom line growth. In terms of our organizational realignment, the team continues to perform well within the new structure we've put in place at the end of last year. With each passing quarter, we are becoming a more cohesive organization and delivering improved execution in all areas of our business.Work on our supply chain-critical initiative is advancing well. We delivered an additional $3 million in savings in this area towards improved adjusted EBITDA in Q2. This brings the year-to-date benefit to approximately $4 million and can be attributed to activities like simplifying raw material specifications, realigning freight zones, along with improved plant run rate and decreased use of third-party co-pack services.I shared with you on our last earnings call, we expanded the original scope of our supply chain initiatives to include improvements from the plant level through purchasing and logistics, along with further reductions in SG&A spending. We engaged AlixPartners to support and accelerate progress on the expended scope so that we can start to realize the additional benefits as soon as possible. We continue to believe the results will be significant and drive ongoing improvement in adjusted EBITDA in 2019 and 2020.In terms of shrimp alignment growth, our shrimp business is integrated, and we are focused on positioning the business to best capitalize on the growing consumer demand for this specie.Regarding business simplification, we are executing in our plans to streamline our portfolio and drive profitability. We've identified those species and SKUs that drive the most value for High Liner Foods and have started to eliminate SKUs that create unnecessary complexity. As part of this rationalization exercise, we're eliminating 9 species and 240 SKUs from our portfolio in 2019. These product eliminations are not financially material but will certainly be impactful in terms of freeing up time and resources to focus on higher-margin products.We'll continue to evolve our portfolio as we drill down on product categories and SKUs, and we evaluate the business against detailed customer criteria, margin for profitability and run rate for growth.We are focused on the right product, right customer at the right price. We're also focused on realigning our portfolio to higher-margin products that will deliver over the long term. This requires a stronger portfolio of profitable value-added and branded products with broad appeal to retail and foodservice customers across North America. We are collaborating with industry-leading suppliers and other industry partners to ensure High Liner has on trend and industry-leading innovation. We're developing and rolling our products for fast-growing, nontraditional areas like snacking and enhancing packaging to align with changing demographic and to ensure the greatest market appeal and increased frequency of purchase.Early results are very promising. Our first snacking product, haddock bites, has been listed by all major Canadian retailers and several in the U.S., and we are pleased with the performance of this new innovation so far. We are further expanding into the snacking category with our recently launched fish [ wings ] in Canada, and I'm excited about the potential for fish wings, not because they incorporate a well-established and popular brand and flavor, Frank's RedHot sauce, to support a new type of value-added fish product. This innovation approach I expect you'll see a lot more from High Liner Foods in the future.Using established flavors is an effective way to encourage customers to try something new. It's working with our everything crusted bagel cod (sic) [ everything bagel-crusted cod ] product, and we expect the same success with our fish wings product.As with haddock bites, we are leveraging our North American scale and taking our fish wings innovation to market on a cross-border multichannel basis.Our refresh of the High Liner brand in Canada continues to be well received by our customers and consumers. We are securing enhanced opportunities for brand placement in stores with more prominent displays showcasing our Captain and value-added products from Canada. We are also taking advantage of this brand refresh by introducing our new innovation to the U.S. retail market using the High Liner brand.We are strengthening key relationships and winning new business. We are working on several LTO opportunities with national account customers in the U.S. And in the second quarter, we supplied value-added seafood products featured as part of 2 LTOs in Canada run by McDonald's and another large quick-service restaurant chain. The impact of these contract extends beyond the sales period. It is part of the longer-term strategy to work hand-in-hand with our customers to grow the seafood category, and they are extremely receptive to the idea and innovation we are bringing to the table.Of course, these new product innovations will take some time to come to fruition and deliver results. I look forward to providing further update as we continue to go-to-market and get traction with customers and consumers.In summary, over the course of the 15 months since I've been in the CEO seat of High Liner Foods, we have significantly overhauled the business. We have changed the way we work, the way we are organized and the way we operate and the way in which we make decisions and go to market. This has been a huge undertaking, and I am incredibly proud of the people who have come together as 1 High Liner Foods to unlock our potential.We are pleased to be returning to adjusted EBITDA growth in 2019 as a result of the hard work on the productivity and optimization activities. We are confident that top line growth will come over time as we realign the portfolio, launch innovation and manage through short-term market complexity.In conclusion, we are just getting started on what we can do as an integrated North American organization and I'm very confident in the value-creation opportunity ahead of us.Operator, I'd like to now open the call for questions. Thank you.
[Operator Instructions] Your first question today comes from the line of George Doumet of Scotiabank.
I just wanted to focus a little on the top line. Your organic declined 8% for the quarter. I know we're expecting improvements from last quarter, but it seems pretty low. Maybe give us a breakdown there in terms of what percentage -- or I guess what part of the declines are more of a deliberate exit? And maybe how much of that is just general industry trends?
Yes. So George, actually, the detail from the category would suggest the total seafood category is actually performing well. The business changes for us from a top line perspective as we mentioned last quarter, are very consistent with now; roughly 50% of that has been delivered as we work through portfolio optimization. As mentioned, we are eliminating 9 SKUs, 240 -- 9 species, 240 SKUs. And not to mention, we have a very, very specific focus on right products, right customer at the right price. That model is working for us. We feel very, very good about the innovation we're driving in the market, as I mentioned earlier, our haddy bites and our fish wings, new innovations being taken by all major retailers in Canada, several retailers in the U.S. as well as foodservice customers.And on a separate note on that, given the performance we're having across our 5 critical initiatives and the momentum we gained there. Over the last several months, I've had an opportunity to turn my focus and attention to our sales area. And I can tell you, I certainly see opportunity not only with the innovation we're bringing, but with enhanced execution and greater focus on customers and segments that quite frankly, we can win in and have significant opportunity to do so.
Okay. Is it your expectation still to improve from today's level into the back half and to grow volumes in 2020?
No question. That's one of the many benefits of a critical 5 initiative. Critical 5 initiatives are certainly designed to make us a much leaner and efficient organization that will help deliver both the top and bottom line growth.
Okay. And Rod, you also mentioned, I guess, give us an update on savings from, I guess, on the AlixPartners side of things. The things you mentioned, $4 million year-to-date, do you expect that cadence to continue for the rest of the year?
Well, we're certainly very -- we feel very good about the work that's being done, not only across our critical 5 initiatives delivering out above the expectation at this point in time and the work that AlixPartners is doing in conjunction with the High Liner team. Confidence is at a level that, as stated earlier, we feel that we'll have adjusted EBITDA growth not only in 2019, but as well as 2020.
Okay. But you guys won't provide a target in terms of what you think those incremental sales to us, those incremental efficiencies or savings could be?
No. We're not providing a specific target at this point, George. We're just really in the early stages of the initiatives, but we are quite pleased with what's been identified as an opportunity at this point, and that's why we provided the additional perspective that we believe EBITDA will continue to grow through '19 and also through 2020. We've identified initially, as you'll recall, that the critical initiatives were designed to deliver $10 million in savings opportunity. As we said, we expected to deliver more than that. In fact, on a run rate basis, we've already exceeded the $10 million at this point in 2019. So we expect to see further improvement on the 5 critical initiatives, and then a significant additional improvement associated with the work that we're doing with AlixPartners.
And that will all be achieved in 2019?
It'll be through 2019 and through 2020. Most of the work will occur in 2019.
Okay. And will the benefits be more 2020? Or we'll also see some in '19?
We'll see a little bit toward the end of 2019, but the maximum amount of the benefit will certainly be in 2020. And as we get further into the initiatives, we expect both in November and on later calls, we'll give additional perspective on those initiatives, just as we have in terms of our success in the critical initiative thus far.
Okay. And just one last one, if I may, Paul. On working capital, I think you had mentioned in your prepared remarks, a note on working capital. Is it -- should we expect a similar level of reversal as last year? I think last year, we were in the $4 million to $5 million range. Should we expect something similar this year, like a positive contribution? And lastly, maybe is there a leverage target that you'd like to share with us at all?
Yes. At this point, we do see working capital increasing a little bit in terms of utilization towards the end of the year, just given the fact that we build for Lent. It should be a similar trend to prior years at this stage. Although we've been a little more effective at managing inventory levels, which is one of the reasons we've been able to reduce the debt as much as we have in the first 2 quarters. In terms of leverage, listen, we said we expected to continue to get better, even despite that working capital need in preparation for Lent. And our focus is to continue to improve it both through the next 2 quarters, but also through the balance of 2020.
Your next question comes from the line of Sabahat Khan of RBC Capital Markets.
Just one more on the volume trends year-over-year. I guess, of that 8%, you said about half is intentional. Just want to understand of the overall mix of the decrease, how much is foodservice versus retail? I guess where are you still continuing to see more pullback in the industry as well as where are you pulling out of more as the company?
Yes. Well, I would say that there's a fair combination of both, but again, optimizing our product portfolio as well as the approach of right product, right customer at the right price is going to continue to support some fluctuations in that as we work through those transitional processes.
Okay. So should we, I guess, talk a little bit more about retail. Should we assume that more of the rationalization from your client is happening on the retail side as well?
No. I would say it's a fair assumption. I would say, we are very focused on, again, optimizing the portfolio against the key species that are driving growth, not only in the marketplace but for High Liner as well in the species that we currently participate in, the 6 out of the top 7 growth species as we talked about in previous calls, but I'd say, there would be a fair balance across all channels as we look at optimizing performance.
And then the 9 species and 240 SKUs, would you say that's the bulk of the rationalization you need to do? Or is this kind of step 1 or kind of majority of this weighted gets you to where you wanted?
Yes. We look at our simplification initiative. Simplification will continue to be a critical initiative for High Liner to quite frankly, again, support a much more leaner organization. We have continued opportunity across potential species and SKUs.
Okay. And then just on your commentary around looking for some more right products for the channel as you're putting out more products. I guess is that just -- the time to get there, is that just innovation? Or do you want to get a lot of the supply chain initiatives worked out of the way before you do that? I just want to understand the time line that just directionally when do you expect to put some of those newer products into the market?
No. We are focused right now in bringing the new products -- new customer acquisition into the High Liner portfolio here, per se. The fish wings, the haddock bites and so on have all been launched, begun shipping as of August 1. So we will continue to bring innovation, as mentioned, in the back half of '19 as well as in subsequent years, market as we continue to create a much more leaner and efficient organization.
And your next question comes from the line of Jonathan Lamers of BMO Capital Markets.
For the new products that were introduced earlier in 2019, the everything bagel-crusted cod, the haddy bites, are you prepared to share with us sort of the revenue run rate contribution from those at this point?
Yes. Jonathan, I would say, number one, I don't have the details right offhand but I would say, in the overall High Liner portfolio, it'd be relatively insignificant in relationship to the overall business.
And do you have any rejections for these major LTOs that you signed? McDonald's and the one other foodservice chain that you alluded to?
Nothing specific at this point in time.
Okay. And the products that you have in the pipeline for H2, do you have any -- can you give us any sneak peek as to what those might be beyond the fish wings that you flagged?
I'd love to give you a perspective on the innovation we're bringing to market. But I think my marketing folks will be a little disappointed if I let the cat out of the bag.
If I could tackle the question this way, as you think about projecting into 2020, where would we imagine the sales volume growth will come from? Can you kind of bucket -- can you kind of rank order what contributions are significant? Is it just sort of doing a better job blocking and tackling? Or it's sort of lost accounts on major product lines? Is it from these new innovations? Can you help kind of break that down for us a bit?
Yes, Jonathan. I think there's ample opportunity across the spectrum for us. If we look at not only the innovation we're bringing to the market, the innovation we're planning on bringing to market, the enhancements in our marketing effectiveness, marketing programs overall, the repositioning of our trade programs as we been working on those in simultaneous together, critical 5. But as I mentioned earlier, I've had the opportunity over the last several months to really turn my attention to the sales side given this momentum we've got on our efficiency and optimization projects. And there is ample opportunity for us against what I would service, to your point, some of the blocking and tackling opportunities. We are looking at the data and market opportunities differently than we ever have before. We're identifying customers that fit the High Liner portfolio that are winning and growing faster than the marketplace. So there's a number of different opportunities that quite frankly, when we execute better and more efficiently against them, we will certainly like the results.
Okay. I'm not sure if there's a way to comment on this. But has the company begun exploring, refinancing the term loan that I believe matures in April?
Yes. Sure. We are in regular contact with our bankers in terms of what the right opportunity would be in terms of refinancing that debt. Our desire would certainly be to get it refinanced well before the 1-year maturity in April of 2020, not due until April 2021, as you know. And we believe the improvements that we've made in terms of the business, the reduction and the leverage and favorable market conditions should certainly support us doing that.
And at this time, there are no further questions in queue. I turn the call back to the presenters.
Thank you. To close, I want to thank you for joining our call today, and we look forward to updating you with results for the third quarter of 2019 on our next conference call in November.
This concludes today's conference call. You may now disconnect.