High Liner Foods Inc

TSX:HLF

Earnings Call Transcript

[Operator]

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the High Liner Foods Incorporated conference call for the results of the first quarter and fiscal 2019. [Operator Instructions] This conference call is being recorded today, Tuesday, May 14, 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.

[Heather Keeler-Hurshman]

Thank you. Good afternoon, everyone. Thank you very much for joining High Liner Foods conference call to discuss our financial results for the first 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 over to Paul who will review the company's financial performance for the first quarter. Rob will then wrap up the call with a brief update on the company's progress against its 5 critical initiatives. We will then open the call up to 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 first quarter ended March 30, 2019. That news release, along with the company's MD&A and unaudited condensed interim consolidated financial statements for the first 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 Toronto Stock Exchange and are quoted in Canadian dollars.I will now turn the call to Rod. Rod, please go ahead.

[Rodney W. Hepponstall, President, CEO & Director]

Thanks, Heather, and good afternoon, everyone. As you know, we're executing against 5 critical initiatives to address the challenges facing our business and return High Liner Foods to profitable organic growth. In the first quarter, we are more profitable as a result of eliminating lower-margin products and are seeing significant improvements in our cash flow, adjusted EBITDA and net debt-to-adjusted EBITDA because of efficiencies we are driving across the business. Paul will provide a detailed review of the numbers but the key takeaway is that while market challenges still persist, we're executing against our critical initiative plan and it's delivering the results we hope for at this stage in the process.I'm especially pleased with the progress we've made on our supply chain excellence initiative. We've identified the opportunity to expand the scope of this initiative and other cost savings activities to deliver significantly greater net annual run rate cost savings than the $10 million we originally estimated were associated with our critical initiative plan. We engaged consulting firm, AlixPartners, to accelerate delivering the increased cost savings associated with our expanded scope.The cost savings that we are driving from our critical initiative plan will play -- will be key in helping us offset headwinds in our business, namely ongoing volume declines. Cost savings, however, only one side of our plan -- are only one side of our plan and we're focused on investing in the right people, processes and products to capitalize on opportunities to further leverage our scale, increase demand for our value-added products and return to profitable organic growth.In the meantime, you will have seen our news release this morning. The board concluded its capital allocation review and has revised the quarterly dividend to CAD 0.05 per common share or CAD 0.20 on an annual basis, in line with our previously disclosed dividend guidance. This will free up approximately $10 million in annual cash flow that will support the reduction and refinancing of debt to create a stronger balance sheet. The board will continue to review capital allocation priorities throughout the course of our turnaround plan, and expects to revisit the dividend level once we have returned to profitable organic growth.Finally, you are likely aware that U.S. tariffs on certain products imported from China, including seafood, will increase from 10% to 25% effective May 10, 2019. As currently drafted, these tariffs apply only to a limited species sold by High Liner Foods and, as a result of our mitigation activities, are not expected to have a significant financial impact.Paul will now take you through our financial performance in more detail. After which, I'll share further updates on our critical initiative plan. Paul, please go ahead.

[Paul A. Jewer, Executive VP & CFO]

Thank you, Rod, and good afternoon, everyone. Please note that all comparisons provided during my financial review of the first quarter of 2019 are relative to the first quarter of 2018, unless otherwise noted. Before getting into the first quarter financial results, I'd like to update listeners on the recovery of losses related to the company's 2017 product recall. An $8.5 million recovery from the ingredient supplier was recognized during the first quarter of 2019, of which $5.5 million was included in adjusted EBITDA. The remaining recovery of $3 million and the $8.5 million recovery received in the third quarter of 2018 were excluded from adjusted EBITDA, consistent with the treatment in fiscal 2017 when the related $11.5 million in product recall costs were excluded for the purpose of adjusted EBITDA.The company's total recovery related to the product recall was $17 million, reflecting a full recovery of the $13.5 million in losses recognized during fiscal 2017 related to the recall and an additional $3.5 million related to business disruption. No further recoveries are expected.I want to highlight the company's adoption of the new lease standard, IFRS 16, Leases, effective December 30, 2018. The implementation of IFRS 16 has resulted in additional assets and liabilities on the consolidated statements of financial position of approximately $14.6 million, 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 the full year of 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 first quarter by 9.6 million pounds to 78.5 million pounds compared to 88.1 million pounds in the same period in 2018. The decrease reflects lower sales volume in our foodservice and retail businesses, including lower sales volume as a result of a major customer loss in the latter half of fiscal 2018, and the exit of low-margin business. Also Easter was later in 2019 compared to 2018, shifting some sales volume to the second quarter of 2019 compared to the same period last year.Sales in U.S. dollars decreased in the first quarter by $41.8 million to $277.4 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.Gross profit decreased in the first quarter by $4.5 million to $56.1 million due to lower sales volume and raw material cost increases, including tariffs on certain species imported into the U.S. from China. This decrease was partially offset by price increases, favorable product mix related to the exit of low-margin business and improved plant efficiencies, partially related to the 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 $600,000 relative to the conversion impact last year.Adjusted EBITDA increased in the first quarter of 2019 by $8 million to $32.2 million and was 11.6% of sales compared to 7.6% of sales in the prior quarter. This increase reflects $5.5 million of the product recall recovery, the impact of adopting IFRS 16, Leases, and a decrease in distribution and SG&A expenses, 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 $2.1 million in the first quarter of 2019 compared to $1.1 million in 2018.Reported net income increased in the first quarter of 2019 by $4.5 million to $14.8 million with diluted earnings per share of $0.43 compared to $0.31. The increase in net income reflects the increase in adjusted EBITDA and the additional $3 million of product recall recovery from the ingredient supplier that was excluded from adjusted EBITDA in the first quarter of 2019. This increase was partially offset by increased termination benefits related to the organizational realignment announced in November 2018, higher income tax expense and increased finance cost and depreciation and amortization expense, partially related to the new lease standard.Excluding the impact of certain nonroutine and noncash items, which are explained in our MD&A, including the $3 million product recall recovery excluded from adjusted EBITDA, adjusted net income increased in the first quarter by $4.2 million to $14.9 million and correspondingly, adjusted diluted earnings per share increased by $0.12 to $0.44.Turning now to cash flows from operations and the balance sheet. Net cash flows from operating activities increased by $18 million to $27 million in the first quarter 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 $7.2 million to $353.4 million at the end of the first quarter of 2019 compared to $360.6 million of fiscal 2018.Net debt to rolling 12-month adjusted EBITDA was 5x at the end of the first quarter of 2019 or 4.8x when calculated with trailing 12-month adjusted EBITDA for the new lease standard, compared to 5.8x at the end of fiscal 2018. We expect this ratio will improve throughout the remainder of this year due in part to the reduction of the quarterly dividend rate on the company's common shares, improved cash flow management and the acceleration of cost-saving activities.That concludes my financial review, and I will now turn the call back to Rod for some additional color on our critical initiatives.

[Rodney W. Hepponstall, President, CEO & Director]

Thanks, Paul. I'll now briefly touch on each critical initiative and highlight some of our key actions over the last few months. In terms of our organizational realignment, I'm really proud of how well our team is performing within the new structure we put in place at the end of last year. We've rightsized our resources and are demonstrated -- demonstrating a collaborative, supportive One High Liner Foods culture that I believe has broken down silos and significantly improved our processes. This was key to leveraging the advantages of our scale, and I'm pleased with the progress, teamwork and commitment I'm seeing across our network.Regarding business simplification, we've developed a plan to streamline our portfolio and drive profitability. We've identified species and SKUs we intend to exit by the end of 2019, and we're also looking at opportunities to simplify raw materials, packaging and ingredients. We expect this activity will ramp up in Q2 and continue through the rest of the year and we'll be able to provide more details once we've finalized the process with our customers and suppliers.We are also fully prepared to exit product lines that are not delivering the margins we need. In fact, we've already eliminated a number of products for this reason. As we saw in the first quarter, taking action on costs will impact sales volume in the short term, but I'm confident that we will -- it will ultimately strengthen the overall profitability of our business.Work in our supply chain excellence initiative is advancing well and is being aided by the cross-border integration driven by our structural alignment initiative. During the first quarter of the year, supply chain improvements positively impacted EBITDA by approximately $1 million. We're casting a wide net and examining all critical supply chain connections. As I already mentioned earlier in the call, we've engaged AlixPartners and are expanding the scope of our supply excellence work to now include improvements from the plant level through to purchasing and logistics, along with further reductions in SG&A expenses. In doing so, we now expect to deliver significantly higher net annualized run rate cost savings than the $10 million target we've previously communicated.Rubicon is another example of work underway to extract more value from our existing business. We are implementing our collaborative go-to-market strategy and seeking to leverage opportunities to put Rubicon in front of new customer segments across our North American network. As you know, our first 4 critical initiatives set the foundation for our most important one, profitable organic growth. Cost savings are important in helping to offset the headwinds, pressuring our top line results. But they're only one side of the equation. Success there, along with strengthening our balance sheet, will allow us to reinvest in areas of our business and support throughout moving forward.Importantly, we're taking swift action to help prevent further customer losses. This includes a number of changes to our sales and marketing team to ensure we have the right mix of talent and expertise as we start to ramp up our marketing efforts to fuel growth. We've updated our customer engagement models so that we're now more collaborative. My leadership team and I are engaging more closely than ever before and in many cases, directly with customers and suppliers. At the same time, we are actively advancing plans to develop a strong portfolio of profitable value-added 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 and we're developing and rolling our products for fast-growing nontraditional areas like snacking. An example would be our haddock bites new product.Early results are promising, service and quality levels are as good as they've been in recent history based on fill rates and customer feedback, sales of our latest product innovation, haddock bites and everything bagel-crusted cod has been extremely encouraging.And the rebrand of our iconic Captain High Liner launched in April was very well received by customers who appreciate this modern take on a classic branding. In summary, we're seeing progress. Our balance sheet is getting stronger, our product mix, more profitable and our supply chain, more efficient. But there is more work to do. We must continue to address volume declines and prepare for further pressure in this regard, including increased tariffs just put into effect by the U.S. administration. We recognize the significant task ahead of us, but I'm confident based on the work done today and the early results we're seeing, we're building the foundation we need to return to profitable organic growth.Operator, I'd like to now open the call for questions. Thank you.

[Operator]

[Operator Instructions] The first question comes from George Doumet of Scotiabank.

[George Doumet, Analyst]

I'd like to focus a little bit on volumes. They were down 11% in the quarter. Just wondering how much of that is deliberate exits of certain product categories? And maybe how much of that do you estimate was the industry down as a whole in the quarter?

[Rodney W. Hepponstall, President, CEO & Director]

So George, I would say, without getting into specifics, over half of that was deliberate decisions on customers or products that were not as profitable as we need moving forward, and we'll continue to take actions to improve our overall product and customer mix.

[George Doumet, Analyst]

Okay. That's helpful. And maybe on the topic of volumes. I guess, given that we would expect this quarter to probably mark kind of the low point in terms of growth given the Easter shift, the Easter shift and the improved operations in the back half, right?

[Rodney W. Hepponstall, President, CEO & Director]

Yes. That's accurate.

[George Doumet, Analyst]

Okay. Paul, how much price did we take in the quarter?

[Rodney W. Hepponstall, President, CEO & Director]

Sorry, can you repeat that?

[George Doumet, Analyst]

Yes, just wondering how much pricing we took in the quarter, please?

[Paul A. Jewer, Executive VP & CFO]

Obviously, it varies across channel and species, but there was quite a bit of raw material cost increases in the latter part of 2018 that the we had to pass through, and we did have to pass through the increase associated with the tariff when it got implemented at 10%. So there was quite a bit of pricing that we had to take that positively impacted the quarter. And you see that reflected in the fact that the sales dollar decline is not as significant as the sales volume decline.

[George Doumet, Analyst]

Okay. And how long is that going to -- how long is that, kind of, those higher prices going to go on for? Is it for another couple of quarters into Q2, Q3?

[Paul A. Jewer, Executive VP & CFO]

Why, it'll firstly depend on what continues to happen on the tariff front. Obviously, because as we do see further tariff action, we will have to increase prices there. In terms of raw material costs, that has largely stabilized and in fact, we're starting to see a little bit of a decline in one of the species. So we're not anticipating significant raw material cost increases in the balance of the year, again, other than subject to what may happen as a result of tariffs.

[George Doumet, Analyst]

That's really helpful. And just one last one, if I may. The improved plant efficiencies that you guys called out for -- contributing to gross margins. Can you maybe talk about what we're doing there and what still needs to be done?

[Rodney W. Hepponstall, President, CEO & Director]

Well, I think it directly speaks to one of the 5 critical initiatives we have, and that is a comprehensive review, candidly, of our supplier -- our entire supply chain from end to end, we're seeing plant run rates improve. The simplification of our business is certainly supporting those initiatives. And just quite frankly, better all operations in totality are driving better results for us.

[Paul A. Jewer, Executive VP & CFO]

And the other item I would highlight -- to add to that, George, is we've been successful -- you'll recall a year ago, we had to have some third-party co-packing done, which obviously comes at an increased cost to us. We've been successful at essentially moving all of that back into our plants.

[Operator]

Your next question comes from the line of Sabahat Khan of RBC Capital Markets.

[Sabahat Khan, Analyst]

Just one on the volumes. I think you indicated in the outlook that you're continuing to face ongoing volume declines. And then I think earlier, there's some conversation about this being sort of maybe the bottom quarter in volume decline. I guess, should we expect less of a decline for the rest of the year beyond Q2? Because I just want to get an idea of how you're thinking about volumes for the full year.

[Rodney W. Hepponstall, President, CEO & Director]

Yes. I would say that's probably an accurate picture. This certainly is a very dynamic marketplace for us. We have a number of initiatives underway to certainly bolster volumes, some of those are new product introductions into the marketplace we've talked about before, haddock bites, everything bagel-crusted cod product, which are performing better than expectation. We've done things like certainly refreshing packaging, which you're going to begin seeing in the marketplace very soon. Certainly, a much more contemporary Captain as well as securing roughly 14 new SKUs at 3 major retailers in the U.S. that we'll begin seeing in the fall during normal reset process. And not to mention a repositioning of High Liner's product portfolio at a major Canadian retailer, which gives us significantly more presence in the aisle, more door space and so on. So we have a number of initiatives underway that are creating momentum, not only from an innovation perspective but in addition to momentum with our customers as they see that product come into market.

[Sabahat Khan, Analyst]

Okay. And then just maybe one on broader industry. How are you seeing the volumes for the overall processed seafood market trending over the next, call it, 12 to 24 months? And just related to that, is there any substitution benefit as African swine fever affects the pork population and there's some inflation there? Is there any maybe substitution benefit to the seafood category that you're expecting at all?

[Rodney W. Hepponstall, President, CEO & Director]

Yes. I would say, we -- our view on the category itself is much more stable than it maybe has been in the past. So we're not expecting any significant shifts in consumer demand or consumption. Quite frankly, we're going to be erring on the side -- we're going to create opportunity. I would say, as it relates to the swine flu and the impact there, we have no -- I guess no perspective on at this point as we're monitoring what could potentially happen there as well.

[Sabahat Khan, Analyst]

Okay. And then as you sort of rationalize the lower-margin products, would you say you're largely through that process? Or is there still somewhat those sales to cycle through for the rest of the year?

[Rodney W. Hepponstall, President, CEO & Director]

So I think we are going to continue to raise the bar. As we increase efficiency, innovation and bring new products to market, we're going to be in a continuous process to ensure that we have the right focus on margin improvement and products that contribute to the overall profitable growth of the organization.

[Sabahat Khan, Analyst]

Okay. Then one last one for me, more on the capital investment side. I guess following the dividend reduction, how should we think about the capital expenditures, call it, over the next 12 to 24 months, once you get past the realignment initiatives?

[Paul A. Jewer, Executive VP & CFO]

Yes. So our CapEx expectations for this year are about $10 million, which is a little less than what we spent on average over the last few years. I would expect that would potentially go up a little in 2020, back closer to the average but nothing significant that we're expecting on the capital front at this time. Obviously, as we have opportunities to invest and get a good return, we will continue to do that. And we are, in the meantime, going to continue on reducing the leverage and reducing debt.

[Operator]

Your next question comes from the line of Kyle McPhee of Cormark Securities.

[Kyle McPhee, Analyst of Institutional Equity Research]

On your cost-cutting program, can you confirm how much of the previously announced $10 million a year cost cutting would have been reflected in your Q1? Is it still just the $7 million you had already realized exiting last year or did you squeeze out more?

[Paul A. Jewer, Executive VP & CFO]

There's more than that reflected. We've exceeded on a run rate basis in excess of the $10 million that we had targeted. Obviously, that hits the bottom line through the year. But on a run rate basis, have certainly exceeded our original expectation.

[Kyle McPhee, Analyst of Institutional Equity Research]

Got it. Okay. And then on the commentary about your customer losses in the back half of 2018, is that the Rubicon-related stuff we know about or was there more loss that you got hit by?

[Paul A. Jewer, Executive VP & CFO]

No. There was also a loss at the High Liner level as well and as well as the losses, as we've referred to earlier, that were planned as we took pricing action to improve margins.

[Kyle McPhee, Analyst of Institutional Equity Research]

Got it. Okay. And then you mentioned over half of your volume decline was stuff like cutting out products. You also said you have more products to cut out. Like order of magnitude, how much of this is left? I guess, in Q1, you've cut out 5% of your top line, how much of this should we expect going through the rest of the year?

[Paul A. Jewer, Executive VP & CFO]

Yes. Q1, as we said earlier, Q1 was the most significant impact in terms of our expectations on volume in the year. That's partially driven by timing, right? The reality is, we have a lot more volume in Lent that falls in the first quarter. So as we're working on margining up that business, there's a more dramatic impact in that Lenten period if some of it declines. And I think our focus through the balance of the year is we will continue to take out low-margin business or margin it up through pricing activity. But as Rod identified, we've got a number of activities underway to offset some of those losses with new profitable organic growth initiatives.

[Kyle McPhee, Analyst of Institutional Equity Research]

Okay. And then just on the additional cost cutting that you're going to be looking for beyond the $10 million that you've hired a consultant, any kind of order of magnitude guidance you can offer there? Like is this squeezing out another 20% or are you doubling this cost-saving program?

[Rodney W. Hepponstall, President, CEO & Director]

Probably a bit early to comment on that. What I can say is that through the early initiatives by the High Liner team, we did recognize further opportunities, which is why we engaged AlixPartners. They certainly have expertise in driving out costs and creating efficiency within the organization. So bringing them in helps us not only accelerate the opportunities to capture that, but to ensure that we are leaving the proverbial no stone unturned.

[Paul A. Jewer, Executive VP & CFO]

But it's definitely not only 10% as you identified. There's significant more opportunity than that.

[Operator]

[Operator Instructions] The next question comes from Jonathan Lamers of BMO Capital Markets.

[Jonathan Lamers, Analyst]

If I could ask the AlixPartners question a different way, when did you formally engage with them?

[Rodney W. Hepponstall, President, CEO & Director]

Yes. So AlixPartners' engagement started roughly, call it, 5 weeks ago. So they have been in for a relatively short period of time and quite frankly, we're very, very pleased with the outcome already.

[Jonathan Lamers, Analyst]

And when do you expect we might see some actions taken?

[Rodney W. Hepponstall, President, CEO & Director]

Actions taken in what sense? Just a little bit clarity on that.

[Jonathan Lamers, Analyst]

Well, I understand you're still developing a plan with Alix, I'm just asking when we might start to see some actions taken by management to execute on whatever plan you end up coming up with, if you have a thought as to timing there?

[Rodney W. Hepponstall, President, CEO & Director]

Well, I would say that we've already been taking significant action in the organization to optimize opportunities available. And again, AlixPartners will be coming in to help us expedite that, certainty in areas broader across our complete supply chain network. That action will be taken immediately.

[Jonathan Lamers, Analyst]

Do you have any examples to date of an area where you think that there could be meaningful opportunity just at a high level?

[Rodney W. Hepponstall, President, CEO & Director]

Yes. I think there's some examples where there's opportunities, certainly, across our indirect spends, further opportunities across our transportation and warehousing. As I mentioned earlier, we are absolutely looking at every spend component within this organization to deliver on the right opportunities to deleverage and reduce debt as well as create the right opportunities from an innovation and market introduction and customer engagement process to drive top line growth.

[Jonathan Lamers, Analyst]

And the new products introduced this year, Rod, I believe that your commentary with respect to the haddock bites as kind of that the product's doing a bit better than when we first -- than when we discussed it a few months ago. Are these products tracking to material impact at this point on full year results?

[Rodney W. Hepponstall, President, CEO & Director]

Yes, Jonathan, probably a bit early to say as we are, number one, very pleased with the -- certainly, customer feedback as well as consumer feedback on those products. But these are some of the first products that we have actually developed for complete North American product portfolio. So as customers have different opportunities to sell in or launch product, it will be more of the rolling effect. But we fully anticipate with the feedback we're getting at this point on the product that we're going to certainly have success. The other thing is, if you think about haddock bites, this is a real opportunity for High Liner to quite frankly, carve out an opportunity within a category that is not traditionally associated with seafood. We are leaning into the snacking and appetizer type category, but specifically this product is a great multiplatform opportunity, in snacking, appetizer, main meal components and so on. So a little bit different for the category as well.

[Jonathan Lamers, Analyst]

And Rod, you mentioned the need to hire more heads to the marketing staff, is the product development team where it needs to be? And do you have any visibility to products coming down the pipe?

[Rodney W. Hepponstall, President, CEO & Director]

So my apologies, I don't think I -- like, I don't recall making a comment regarding hiring more staff. We have recently hired -- oh, the changes in our sales and marketing area, we recently hired a new VP of Marketing who joined us in December. She has hit the ground running and engaging and showing immediate results. And we're very, very pleased with the talent we've brought there. We have some opportunities to enhance our senior leadership level at the sales -- North American sales level, so we're in the process of recruiting for some new talent at that level. But overall, I would say I'm very pleased with the alignment and the output of both our marketing and sales organizations again to enhance our customer engagement process and bring the innovation to market.

[Jonathan Lamers, Analyst]

And are you able to provide us with a sense -- of the volume decline that we saw in Q1, you broke out that maybe half of it was due to the culled products. Is the remaining decline sort of representative of organic decline for the rest of the product portfolio? And maybe within the product portfolio, are there any bright spots that are growing and others that are sort of experiencing -- suffering more from the customer loss?

[Paul A. Jewer, Executive VP & CFO]

Yes, so I'd say there are 3 other components of the volume decline beyond what was in excess -- the half or the majority of it that was related to improving profitability. There was the fact, and it was mentioned earlier on the call, that it was a later Lent this year. So there were some shift between Q1 and Q2. So that had some impact on volume. There was the lost customer that we talked about which had an impact on volume. And then there was some just decline in the base business. I would say, it was actually more significant in this quarter in the unprocessed side rather than the processed side, and that was beneficial to margins. So as you saw that although the volume declined, we did see improvement in certainly gross margin as a percentage of sales but even more significantly, EBITDA as a percentage of sales. And in terms of the channels, the decline was in both retail and foodservice, so I wouldn't highlight anything specific in terms of the channels.

[Jonathan Lamers, Analyst]

And I know you're not providing segmented disclosure for the U.S. and Canada any longer, but are you able to comment on how the trends compare between the 2 markets?

[Paul A. Jewer, Executive VP & CFO]

Again, nothing that I'd highlight as being significantly different between the 2 markets.

[Jonathan Lamers, Analyst]

And following the product eliminations, do you have an estimate for what share of the overall product portfolio breaded and battered products would represent now versus what they would have represented in the last year?

[Paul A. Jewer, Executive VP & CFO]

I don't have the number in front of me but in terms of a percentage, it's essentially a consistent percentage with where we were a year ago. We didn't see further declines in processed in the first quarter of this year as a percentage.

[Jonathan Lamers, Analyst]

The last estimate I recall seeing was close to half of the overall portfolio, does that -- would that be a...

[Paul A. Jewer, Executive VP & CFO]

It would be higher than that. Processed as a percentage of the overall portfolio would be probably closer to 60%.

[Jonathan Lamers, Analyst]

Sorry, that processed would include the -- things like barbecue salmon strips that are not technically breaded and battered?

[Paul A. Jewer, Executive VP & CFO]

Correct. That definition would include anything that essentially runs through our plants rather than just being a pure commodity product.

[Jonathan Lamers, Analyst]

And would you happen to have the industry IRI data for the breaded and battered decline to U.S. retail for Q1?

[Paul A. Jewer, Executive VP & CFO]

I don't have it. I actually don't have it on a quarterly basis any longer, but we don't think that there were significant either increases or declines in the category from the industry perspective overall.

[Operator]

There are no further questions at this time. I'd now like to turn the call over to management for closing remarks.

[Rodney W. Hepponstall, President, CEO & Director]

Thank you. To close, I want to thank you for joining our call today and thank you for your patience as we work to strengthen the foundation of our business in order to create long-term shareholder value. Thank you.

[Operator]

This concludes today's conference call. You may now disconnect.