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Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the High Liner Foods Incorporated Conference Call for Results for the Fourth Quarter of 2023. [Operator Instructions] Following the management's prepared remarks, we will conduct a question-and-answer session. [Operator Instructions] This conference is being recorded today, Thursday, February 22, 2024 at 10:00 a.m. Eastern Time for replay purposes.I would now like to turn the conference over to Kimberly Stephens, Vice President of Finance for High Liner Foods. Please go ahead.
Good morning, everyone. Thank you for joining the High Liner Foods conference call today to discuss our financial results for the fourth quarter of 2023. On the call from High Liner Foods are Paul Jewer, Chief Executive Officer; Deepak Bhandari, Interim Chief Financial Officer; and Anthony Rasetta, Chief Commercial 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 does a thorough discussion of the risk factors that can cause its anticipated outcomes to differ from its actual outcomes and is publicly available disclosure documents, particularly in its MD&A and annual information form. Please note that High Liner Foods is under no obligation to update any forward-looking statements discussed today.After markets close yesterday, February 21, High Liner Foods reported its financial results for the fourth quarter ended December 30, 2023. That news release, along with the company's MD&A and audited consolidated financial statements and annual information form for fiscal 2023 have been filed on SEDAR+ and can be found on the Investors section of the High Liner Foods website. If you'd 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 we otherwise note. High Liner Foods common shares trade on the Toronto Stock Exchange and are quoted in Canadian dollars.I will now turn the call over to Paul for his opening remarks.
Thank you, Kimberly, and thank you all for joining us today to discuss our financial results for the fourth quarter and full year 2023. I would like to welcome Deepak Bhandari to his first earnings call in his position as our Interim Chief Financial Officer. I am also joined today as usual by Anthony Rasetta, our Chief Commercial Officer. Together, we will discuss the performance, strategy and outlook for the company.As we disclosed in our news release last night, we generated record free cash flow last year of over $179 million, an increase of $255.5 million or 335.3%. We took the opportunity to strengthen our balance sheet, exceed our leverage ratio goal and position the company for future growth. This allowed us to continue returning capital to shareholders through a steadily rising dividend and an increase in our normal course issuer bid. This past year, we purchased 413,200 shares and can purchase up to 700,000 shares to continue to surface value for our shareholders. Given the headwinds we continue to face, our strong balance sheet gives us the financial resilience that is needed to navigate near-term challenges as well as the strength and flexibility to capitalize on these dynamic market conditions.We are well positioned to seize opportunities and make investments today that will position us for the next generation of growth for High Liner Foods. Our increased cash flow, reduced leverage and balanced approach to capital allocation, our accomplishments we are proud of from the past year. From a profitability and growth perspective, however, we still have some work to do to deliver the performance our business is capable of delivering. Nonetheless, our efforts during the year to optimize and diversify our portfolio, support our customers, deliver for strategic and targeted promotions in high-growth categories and drive efficiencies across the organization have helped to mitigate the impact of very challenging market conditions on our financial results.To understand the drivers of performance in 2023 and the outlook for the year ahead, we need to zoom out a little. In 2021 and 2022, High Liner Foods demonstrated tremendous resilience in the face of a global supply chain crisis. At that time, the strength and diversification of our supply chain, global relationships, scale and the financial health of our business enabled us to invest in inventory to satisfy demand and [Technical Difficulty] top and bottom line growth. The positive effect of having reliable and consistent seafood supply at a time when most did not, cannot be understated. The impact on our relationships and reputation in the market continues to benefit High Liner Foods today.In the second quarter last year, supply and demand dynamics in the market shifted again. Inventory levels for us and across our industry were elevated as consumers started to pull back from proteins in response to the prolonged impact of inflation and economic concerns. This impacted our overall profitability due to both product mix as consumers focused on value options as well as volume as consumers left the category. While our business was supported significantly by our diversification and our strong performance in food service, we could not fully offset the impact of retail contraction, margin compression and some plant underperformance.As a result, our track record of year-over-year and quarterly adjusted EBITDA growth stalled last year starting in the second quarter and continued to our most recent quarterly results. All external and internal signs continue to indicate that while we expect market conditions to remain challenging, we are well positioned to return to year-over-year adjusted EBITDA growth. As you will hear from Anthony, our strategy, product portfolio and competitive positioning are in good shape and we are taking proactive steps to [Technical Difficulty] capitalize on the category rebound when consumer purchasing habits normalize.One final important piece of context around our results and our outlook is the work we did during my time as CFO to strengthen our adjusted EBITDA margins. Now as CEO, I look forward to leading the company back to top line growth while ensuring that growth does not come at the expense of profitability. Overall, the fundamentals of our business are strong. This, together with our experienced team and our cultural commitment to continuous improvement, safety, quality, underpins the confidence I have in our business. We are focused on driving improved performance to the top and bottom line and I believe that we will be able to steer back to adjusted EBITDA growth again in 2024.I will now hand it over to Anthony to discuss our operational highlights. Anthony?
Thanks, Paul. And diving right in, our operating conditions are indeed very challenging. Nonetheless, we are mitigating the impact, staying the course and seeing signs that validate our strategy is working and our portfolio is well positioned. For example, we grew volume last year. Our performance continues to outpace the category. We are also largely holding our own with respect to market share. In U.S. foodservice, our market leadership grew year-over-year. In Canadian Retail, we saw market share growth for the third consecutive quarter. We continue to win new business across retail and foodservice and are working even closer with our customers and partners to help consumers change the way that they see food.We were encouraged by our continued market share gains in Retail Canada during the fourth quarter, driven by improved promotional activity on our Pan-Sear premium product line. We saw this shift as private label growth started to slow during the fourth quarter and it's a great reminder of the power of our strategy to offer choice across price points and we intend to flex this in the year ahead. U.S. retail continued to be challenged across the category, with value species and products performing better, albeit still declining, especially private label, which is a significant portion of our U.S. business and will continue to be a part of our strategy to build customer relationships and offer consumers the value they are seeking. We anticipate that consumers will gradually return to branded offerings through the course of the year and we'll continue to ensure an optimal mix in our portfolio to offer consumers the opportunity to enjoy high-quality seafood at home alongside private label and value offerings.Turning now to our robust foodservice business. Once again, foodservice anchored overall volume growth for the fourth quarter and we continue to solidify our market position here. Our momentum is driven by strong performance across the major noncommercial segments, including long-term care, recreation and schools. The strength of this side of our business coupled with contract manufacturing has positioned us to offset the slight slowdown we're starting to see across foodservice segments as consumers pull back slightly on eating out of home. Nonetheless, we still outpaced the category across all channels in 2023, including our target growth channels of casual dining and quick service restaurants.We are doing this by working very closely with commercial operators to support them with solutions to help drive traffic and back up host efficiencies, while demonstrating the innovation and simplification we can bring to the menu through our value-added offering. Overall, across both retail and foodservice, we're focused on optimizing our portfolio mix to increase profitability while continuing to diversify across species, especially in whitefish. In retail as well as foodservice, our approach is to become the increasing -- to become increasingly informed by data and analytics. By leveraging these insights, we tap into consumer preferences to bring market innovations that not only drive growth for us but are designed to help drive consumers back to the category.For example, our Signature Cuts Beer Battered Haddock launched in early 2023 and is already a top-performing retail innovation and demonstrates how we can strategically use innovation to broaden the choice we offer the consumer and heighten the appeal of frozen seafood to draw shoppers back to our category. Our focus on data-driven insights coupled with strategic promotional activity and omnichannel marketing investments to leverage our 125th anniversary year will form the basis of an aggressive and proactive plan for the year ahead.With that, I'll hand over to Deepak to walk through the numbers.
Thanks, Anthony. Turning now to our financial performance. Please note that all comparisons provided during my financial review of the fourth quarter of 2023 are relative to the fourth quarter of 2022, unless otherwise noted.Sales volume increased in the fourth quarter by 1.2 million pounds or 2.1% to 59.6 million pounds. In our foodservice business, sales volume was higher due to increased contract manufacturing business and improved customer service levels. This was partially offset by lower sales volume in our retail business due to the continued impact of inflation. This resulted from softer demand for protein, including seafood products as consumers switch to lower-cost alternatives. Sales decreased in the fourth quarter by $13.2 million or 5.3% to $237.1 million due to changes in sales mix and lower pricing, most notably on some of our commodity products during the fourth quarter of fiscal 2023 compared to the inflationary environment in the same period last year. The weaker Canadian dollar in the fourth quarter of 2023 compared to the same quarter of 2022, decreased the value of reported USD sales from our Canadian denominated operations by approximately $200,000 relative to the conversion impact last year.Gross profit decreased in the fourth quarter by $6.1 million or 11.1% to $48.7 million and gross profit as a percentage of sales decreased by 140 basis points to 20.5% as compared to 21.9% in the fourth quarter of 2022. The decrease in gross profit reflects changes in product mix, lower pricing on some of our commodity products and some inefficiencies at our plants. The decrease in gross profit was partially offset by the increase in sales volume. The weaker Canadian dollar decreased the value of reported USD gross profit from our Canadian operations in 2023 by nominal amounts relative to the conversion impact last year.Adjusted EBITDA decreased in the fourth quarter by $3.5 million or 13.8% to $21.9 million and adjusted EBITDA as a percentage of sales decreased to 9.2% compared to 10.1%. The decrease in adjusted EBITDA reflects the decrease in gross profit, partially offset by a decrease in distribution costs and net SG&A expenses. The weaker Canadian dollar had a nominal impact on the value of reported adjusted EBITDA in USD from our Canadian operations in 2023 relative to the conversion impact last year.Reported net income decreased in the fourth quarter by $4.7 million or 42.3% to $6.4 million and diluted earnings per share decreased by $0.12 to $0.20. The decrease in net income reflects the decrease in adjusted EBITDA and increase in depreciation and amortization costs and income taxes, partially offset by lower finance costs. Excluding the impact of certain non-routine or noncash expenses that are explained in our MD&A, adjusted net income in the fourth quarter of 2023 decreased by $5 million or 40.7% to $7.3 million and correspondingly, adjusted diluted earnings per share decreased by $0.12 to $0.23 in the fiscal 2023.Turning now to cash flows from operations and the balance sheet. Net cash flows from operating activities in the fourth quarter of 2023 increased by $122.7 million to an inflow of $66.9 million compared to an outflow of $55.8 million in the same period in 2022 due to continued improvements in noncash working capital after significant investment in inventory during fiscal 2022. We remain focused on maintaining the strong improvements made in working capital and net cash flows in fiscal 2024. Capital expenditures were $19 million in 2023 compared to $20.7 million in the prior year, reflecting the continued investment in our business.Net debt at the end of fourth quarter of 2023 decreased by $135.6 million to $249.9 million compared to $385.5 million at the end of fiscal 2022, reflecting lower bank loans and long-term debt as we continue to direct higher cash flows from operations towards net debt. Net debt to adjusted EBITDA was 2.6x at the end of December 30, 2023 compared to 3.7x at the end of fiscal 2022. Net debt to rolling 12-month adjusted EBITDA increased during fiscal 2022 due to the increased investment in inventory. However, we continue to make additional progress in reducing the ratio and exceeding our long-term cost target. In the absence of any major acquisitions or unplanned capital expenditures in 2024, we expect this ratio to continue to be lower than the company's long-term target of 3x at the end of fiscal '24.I will now turn the call over to Paul for some final remarks before opening up the call to questions. Paul?
Thank you, Deepak. As you have heard, High Liner Foods is well positioned for growth. I believe this is true culturally, operationally and financially. We have built a high-performance team and a cohesive culture across our global operations. It's a team that has been forced to work together in new ways through pandemic and global supply chain crisis to find creative solutions to support our customers and consumers and preserve a reliable supply of seafood. It's a team that has risen to the challenge, time and time again, and I am confident they will be able to reposition us on our growth trajectory in 2024.Operationally, continuous improvement is built into our business practices and we are directing this to strengthen plant performance. We remain focused on delivering the highest levels of safety and service while carefully managing costs associated with storage and freight, which have now normalized after the past period of elevated inventory. As we go to market, we will continue to refine our portfolio so that we serve the needs of our customers, distributors, partners and of course, the end consumer. I believe Anthony and his team are just scratching the surface in terms of the impact they can have by leveraging data and analytics to further tailor and personalize our solutions. This will be an exciting driver of organic growth for us.Similarly, investments in omnichannel marketing will remain a priority in the year ahead as we lean into the category and ensure a strategic promotional calendar designed for maximum consumer appeal, capitalizing on key opportunities such as Lenten and back-to-school and not to mention our brand heritage in our 125th year. I have already spoken about how we are well positioned financially and I think the numbers speak for themselves in that regard. With our strong balance sheet, significant free cash flow, we are committed to being prudent and disciplined in capital allocation.Together with the Board of Directors, we are being extremely thoughtful considering how every dollar is used to appropriately balance priorities of investing in the business, investing in our future value creation potential and returning capital to our shareholders. We will remain extremely disciplined in this regard as we continue to generate free cash flow in the year ahead and explore the market for potential value-accreting opportunities. As we have discussed for some time now, we are excited about the potential for M&A, but we will only act if it is the right opportunity to position High Liner [Technical Difficulty] for the next generation of growth.In the near term, my optimism is coupled with realism that significant challenges of our operating environment persists and there is much that remains out of our control. There's a great deal of uncertainty in the market from the North America economy to the global [Technical Difficulty] to political environment. While we have been grappling with headwinds and uncertainty for the past few years, we have shown we are accustomed to responding quickly to focus on the factors within our control. We remain confident in the fundamental appeal of seafood as a healthy, affordable and sustainable source of protein and the long-term growth potential of our business. I look forward to reporting back on our progress in Q1 and demonstrating the actions we are taking to strengthen our profitability, position High Liner Foods for long-term growth, ensure responsible and sustainable business practices and unlock value for all stakeholders.With that, I will hand things over to the operator to open the call for questions. Operator?
Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session. [Operator Instructions] Your first question comes from Kyle McPhee from Cormark Securities.
Starting on volume [Technical Difficulty]
Your next question comes from Sabahat Khan from RBC Capital Markets.
This is Alqaim on for Sabahat. So my first question on the customer backdrop and customer switching to lower-cost alternatives, is there any indication you're seeing based on your outlook that some of these trends could be reversing over the foreseeable future, looking out to 2024?
Yes, Anthony, thank you for the question. And we are still seeing a shift into value parts of the portfolio, in particular. So, we do think that the right promotional activity and with the right innovation and activation plans, we will see consumers coming back into our category as well as returning to the branded part of the portfolio. But for us, we also compete and have a significant portion of our business in private label, which is winning as consumers are looking for more value. So, it's going to take a little bit of time given the headwinds and the inflationary impacts, but we do see consumers returning to the category within value and we'll continue to offer them the breadth of portfolio as they return with different choices as well.
And then also, now that your leverage is below that 3x target. I know that you mentioned, we can expect for leverage to remain below that in the absence of any unexpected unplanned expenditures. But how are you thinking about the M&A pipeline in terms of opportunities that are coming across your desk?
Yes. I think the great news for us is a lot of opportunities come across our desk. We're very well positioned in the industry to look -- to cast a wide net and look broadly at opportunities that we think are the right fit for us. But we're being very disciplined. And we're making sure that not only is it the right strategic fit, but that it has the right growth potential that we have the right capability as we look forward to integrate it in the right way and that it can become truly value accretive for the company and our shareholders. So, we're looking at lots. We haven't pulled the trigger on anything yet as you've seen. But we're confident that we will continue to honor some good opportunities in the near term.
And if I can just sneak one more in. If you could just share an update on how the supply chain is trending for you. And in continuation of that, any bottlenecks that you would point out that you anticipate?
Yes, I guess a couple of things I'll mention, and then the team may want to jump in as well. We are seeing some delays in shipping as you are probably hearing from anyone who's buying internationally these days just with what's going on in the Red Sea and with what's going on in the Panama Canal. And so that's taking some time and bringing with it some additional cost. So, we're seeing that in the supply chain. From a raw material pricing perspective, while we were seeing more favorable pricing, we think with what's going on in the geopolitical environment overall, we may start to see some inflation in seafood as we move through the year. And of course, our job is to make sure that we price accordingly for that. And as we've talked about a number of times in this call, make sure that we're finding ways to protect our margins and to grow our profitability. But overall, we feel certainly compared to where we've been, if you think of through COVID or the real significant global supply chain disruptions, we feel like we have the supply that we need in order to execute on what we believe the growth opportunity is for us and our customers.
Your next question comes from Kyle McPhee from Cormark Securities.
Not sure what happened last time. Just on volume performance, you reported an improved volume trend quarter-over-quarter. It's up more. And I think if you adjust for client [ sorting ] from previous quarters, it actually shifted from negative to positive. So, I'm curious if this trend is even better foodservice performance to your team? Or is the retail just becoming less of a headwind? And also in the retail channel, is inventory among your clients not at normalized levels, making that less of a headwind going forward?
Kyle, it's Anthony. Yes, absolutely, foodservice has been the driver of our volume growth consistently overall. It's not the uptick in retail that we're seeing in terms of the offset there. We had our 11th consecutive quarter of share growth in foodservice. As we've talked about previously, the big advantage we have in foodservice is our development in noncommercial segments, in particular. So, things that are not focused on out-of-home dining, which is seeing a little bit more softness in the market right now, although value within out-of-home designing is still experiencing a bit of growth in QSR. So, our focus on noncommercial schools, long-term care facilities, recreation and our portfolio within that has allowed us to continue to drive volume growth in addition to some of the growth we pointed out that we have in our contract manufacturing business.So, we will continue to leverage foodservice and noncommercial as the largest parts of our portfolio and things that are more inflationary resilient. But we are obviously continue to be focused on helping to turn around the category in retail with good innovation. In terms of the question on inventory, we do feel like the inventory challenge for us is largely behind us right now and customer service levels are strong. And as you heard us talk about in our performance, we have inventory levels in a place where we feel good about them going forward.
And then on margins, EBITDA margins, that path back to 10% plus margins was disrupted in 2023. Is 10% still a reasonable goal for High Liner? And what are the major moving parts that are going to get you there if that is still a reasonable goal?
Kyle, it's Deepak. So, I would say absolutely 10% is still a reasonable goal for a High Liner going forward. When we think about some of the issues that impacted us in 2023, a large part of that was dealing with the excess inventory and the investment in price that we had to do to move that inventory throughout 2023. So as Anthony mentioned, that inventory situation is largely behind us now. And so as we move into 2024, we will start to see margins normalize and kind of get back to that 10% level.
And then just on another moving part maybe in there, has the mix impact of more contract manufacturing volume been a material kind of moving part triggering the lower gross margin percentage in recent quarters?
It certainly has in Q4. Absolutely, a lot of our growth in the quarter was driven by that contract manufacturing, which, as you pointed out, comes at a lower margin. So that certainly has impacted our mix and our margin in the quarter year-over-year for sure.
And then just shifting to CapEx. You're accelerating CapEx spend a bit in 2024. Can you speak to some of the things you're doing, the programs you're executing and how they might be supportive of volume growth or margin gains?
Yes. I wouldn't say we're accelerating the CapEx in 2024, Kyle. We've got a range of $20 million to $25 million. We've tried to be in that range for the last couple of years. We think -- that's a good number for us, which is the right balance of ongoing maintenance CapEx, but also, to your point, some investments in technology, automation and efficiency in the plant that can help our plant performance, but also add to our capability in areas like packaging as an example, where we think we can better meet consumer demand as well. So, I think that number is a good number for '24. And you would expect to see a number similar to that as we look forward as we still have some opportunity to invest in our supply chain for growth.
[Operator Instructions] There are no further questions at this time. Paul, please go ahead with your closing remarks.
Thank you, operator. And to close, I want to thank you all for joining our call today. We look forward to updating you with our results for the first quarter of 2024 on our next conference call in May. Please stay safe and be well.
Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect.