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 Inc. conference call for results of the first quarter of 2021. [Operator Instructions] This conference call is being recorded today, Tuesday, May 18, 2021, at 2:00 p.m. Eastern Time for replay purposes. I would now like to turn the call over to Charlene Milner, Vice President of Finance for High Liner Foods. Ms. Milner, please go ahead.

[Charlene Kristen Milner, Vice President of Finance]

Good afternoon, everyone. Thank you for joining the High Liner Foods conference call today to discuss our financial results for the first quarter of 2021. On the call from High Liner Foods are Rod Hepponstall, President and Chief Executive Officer from our office in Portsmouth, New Hampshire; and Paul Jewer, Executive Vice President and Chief Financial Officer from our office in Halifax, Nova Scotia. In a moment, I'll pass the call over to Rod for some remarks on our performance in the first quarter and the ongoing impact of COVID-19 on our business before handing over to Paul who will review the financial performance for the first quarter. Rod will then make some final remarks before opening the call up for questions. I would like to remind listeners that we use certain non-IFRS measures and ratios when discussing our financial results as we believe these are useful in assessing the company's financial performance. These measures are fully described and reconciled to IFRS measures in our MD&A. Listeners are also reminded that certain statements made on today's call may be forward-looking statements that are subject to risks and uncertainties. Management may use forward-looking statements when discussing the company's strategy and business in the future. Actual operating or financial results could differ materially from those anticipated in these forward-looking statements. High Liner Foods includes a thorough discussion of the risk factors that can cause its anticipated outcomes to differ from actual outcomes in its publicly available disclosure documents, particularly in its annual report and annual information form. Please note that High Liner Foods is under no obligation to update any forward-looking statements discussed today. Earlier today, High Liner Foods reported its financial results for the first quarter ended April 3, 2021. That news release, along with the company's MD&A and unaudited condensed interim consolidated financial statements for the first quarter of 2021, have been filed on SEDAR and can also be found in the Investor Center section of the High Liner Foods website. If you'd like to register to receive our news releases in the future, please visit the company's website to register. Lastly, please note that the company reports its financial results in U.S. dollars, and therefore, the results to be discussed today are also stated in U.S. dollars, unless otherwise noted. High Liner Foods' common shares trade on the Toronto Stock Exchange and are quoted in Canadian dollars. I will now turn the call over to Rod for his opening remarks.

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

Hello, and thank you for joining us today to discuss our results for the first quarter of 2021. I'd like to start the call today by reiterating our ongoing commitment to the health and safety of all our employee, our people during the ongoing COVID-19 pandemic. This absolutely remains our top priority, especially across our plants and warehouses, which operated without interruption this quarter. As we continue to safeguard our people, we are collectively doing our part to bring the pandemic to an end. To further this cause, last month, we hosted our first on-site vaccination clinic at one of our facilities. We will continue to work with public health authorities to host on-site vaccination clinics while also supporting local clinics within the communities in which we operate. We will also provide paid time off for employees to get vaccinated to support the overall effort to stop the spread of COVID-19. Turning now to our performance in the first quarter. Overall, despite the ongoing uncertainty and volatility of the global supply chain, our business remains resilient. Like other operators in the retail and foodservice space, our performance metrics are clouded by year-over-year comparisons. Market conditions in the first quarter of 2021 were significantly different than the first quarter of 2020, which only contained a few weeks of COVID-19 impact. Despite the seasonality of our business peaking in Q1, we are encouraged to see quarter-to-quarter volume growth over the past 12 months of the pandemic. As we drive towards our goal of North American leadership in value-added seafood, we are focused on long-term performance and value creation for our shareholders. We advanced these objectives in the first quarter by increasing gross profit as a percentage of sales, selling more of our most profitable branded value-added products, winning targeted business, expanding our retail distribution in the U.S., investing in marketing and innovation and improving our cash flow. As a result, we remain confident in both the resilience of our business and our potential to continue to drive adjusted EBITDA growth over the course of the year. But first, I will hand the call over to Paul to walk us through our financial performance for the first quarter. Paul, over to you.

[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 2021 are relative to the first quarter of 2020, unless otherwise noted. Before getting into the financial results, I'd like to remind listeners that in March of 2021, the company repriced its term loan facility to decrease the applicable interest rates for loans under the facility with all other material terms remaining unchanged. As a result of this amendment, the company expects to save approximately $2 million in annual cash interest expense at current borrowings and LIBOR rates. The amendment to the facility was not assessed as a substantial modification for accounting purposes, and as a result, the deferred finance costs related to the original facility continued to be amortized over the remaining term. In addition, the company incurred finance costs of $900,000. As the net present value of the cash flows of the modified debt was lower than the carrying value of the original facility before the amendment, a modification gain of $7.8 million was recorded in finance costs on the consolidated statements of income during the 13 weeks ended April 3, 2021. The modification gain has been excluded from adjusted net income and adjusted diluted earnings per share and is a noncash item. Sales volume decreased in the first quarter by 7.5 million pounds to 69.8 million pounds. In our foodservice business sales volume was lower due to the impact of COVID-19 on our foodservice customers for the entire first quarter of 2021, whereas COVID-19 only impacted the first quarter of 2020 beginning in late March. In our retail business, sales volume was lower due to the surge in demand related to COVID-19 in the last 2 weeks of March 2020 that did not repeat during the first quarter of 2021. The decline in sales volume was partially offset by new business and new product sales. Sales in U.S. dollars decreased in the first quarter by $25.2 million to $243.4 million due to lower volume already discussed, partially offset by a change in sales mix. In addition, the stronger Canadian dollar in the first quarter of 2021 compared to the same quarter in 2020 increased the value of reported U.S. dollar sales from our Canadian dollar-denominated operations by approximately $3.2 million relative to the conversion impact last year. Gross profit decreased in the first quarter by $1.1 million to $57.7 million. However, gross profit as a percentage of sales increased by 180 basis points to 23.7% as compared to 21.9% in the first quarter of 2020. Gross profit reflects the lower sales volume previously discussed, partially offset by favorable changes in product mix, leading to the improved gross profit as a percentage of sales. In addition, the stronger Canadian dollar increased the value of reported U.S. dollar gross profit from our Canadian operations in 2021 by approximately $900,000 relative to the conversion impact last year. Adjusted EBITDA decreased in the first quarter by $2.9 million to $27.8 million, and adjusted EBITDA as a percentage of sales remained consistent with the prior year at 11.4%. The decrease in adjusted EBITDA is a result of the decrease in gross profit and an increase in distribution and net SG&A expenses. In addition, the stronger Canadian dollar increased the value of reported adjusted EBITDA in U.S. dollars from our Canadian operations in 2021 by approximately $500,000 relative to the conversion impact last year. Reported net income increased in the first quarter by $3.6 million to $17.8 million, and diluted earnings per share increased by $0.10 to $0.51. The increase in net income reflects a decrease in finance costs related to the gain on modification of debt previously mentioned and a decrease in income tax expense, partially offset by the decrease in adjusted EBITDA and an increase in share-based compensation. Excluding the impact of certain nonroutine and noncash expenses, which are explained in our MD&A, adjusted net income in the first quarter of 2021 decreased by $200,000 or 1.4% to $14.1 million. And correspondingly, adjusted diluted earnings per share decreased by $0.01 to $0.40. Turning now to cash flows from operations in the balance sheet. Net cash flows provided by operating activities in the first quarter of 2021 increased by $24.6 million to an inflow of $26.6 million compared to an inflow of $2 million in the same period in 2020 due to favorable changes in net noncash working capital, partially offset by lower cash flows from operations. The favorable changes in net noncash working capital are the result of more favorable changes in accounts payable and accrued liabilities and accounts receivable, partially offset by less favorable changes in inventories. Net debt at the end of 2021 decreased by $23.2 million to $244.8 million compared to $268 million at the end of fiscal 2020, primarily reflecting repayments of long-term debt during the first quarter of 2021. Net debt to adjusted EBITDA was 2.9x at April 3, 2021, compared to 3x at the end of fiscal 2020. In the absence of any major acquisitions or unplanned capital expenditures in 2021, we expect this ratio to remain below the company's long-term target of 3x at the end of fiscal 2021. We remain confident in our liquidity position as a result of prudent cash management, the early refinancing of our debt in Q4 2019 and the term loan facility repricing in March 2021. We do not have any impending debt maturities, and we'll continue to utilize our $150 million working capital credit facility if required. The company currently has no borrowings on this facility. That concludes my financial review, and I will now turn the call back over to Rod for some final remarks before opening up the call to questions. Rod?

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

Thank you, Paul. Now for some color on our operations and strategic advancements during the quarter. As I've shared on previous calls, we are making significant incremental investments in marketing, and this is starting to show positive results. We've activated digital, TV and print media campaigns focusing on our chef-crafted Sea Cuisine and are continuing to drive traction with our Seafood is Better campaign for our High Liner brand in Canada. Aided by this marketing investment, we are particularly pleased with the performance of our U.S. Sea Cuisine brand and are adding packaging capability to support the growth of products that are performing exceptionally well. Looking ahead, we can expect more investments in both direct-to-consumer marketing and our plants, with anticipated capital expenditures of approximately $20 million. The increased investment in our business will help drive further profitability and top line growth. Once again, our miso-glazed cod was our standout this quarter. This product is seen -- is selling very well on both sides of the border and contributing to year-over-year branded value-added growth this quarter. We had continued new business wins this quarter for branded value-added products in major U.S. retailers. I'm always excited by distribution gains in the U.S. market as I see significant upside for us here in a category ripe for expansion. Turning to our foodservice business. We are thrilled to see signs of post-pandemic recovery this quarter. We know that consumers are keen to return to restaurant dining and that seafood is a sorely missed menu item in dining out, not surprisingly, in quick-service restaurants and casual dining establishments that are driving the reemergence of foodservice volume right now. We expect that to broaden across other areas of foodservice as the pandemic restrictions are lifted and we start the back-to-routine period. As a key supplier, we have a front row seat to the challenges operators are facing in the current environment, and they are significant. We are there to support our foodservice customers with quick pivots and well-suited product offerings. We also get to see firsthand the benefit that our branded value-added products are providing. I have no doubt that the opportunity for operators to reduce labor costs and spoilage risk with our products is a factor, alongside with taste and value that is helping us drive sales of our branded value-added products. We are also well positioned to capitalize on the surge in foodservice demand as a result of our strong relationships with leading distributors in the industry. As we discussed in our news release, our industry, along with many others, is currently being impacted by challenges in the global supply chain. We are prepared for these challenges in the macro trade environment to inevitably impact our near-term future performance. That said, we are also optimistic that our robust supply chain and diversified portfolio will help us mitigate any potential impact and potentially give us a competitive advantage over others in the industry at a time of supply constraints. There is no doubt that supply chain challenges not only issues -- not the only issue impacting our customers and suppliers as the pandemic drags on. We recognize that this is an extremely testing time for all of our stakeholders, and we are doing all we can to be adaptable to the evolving needs and ensure we are there to support them. We will continue to do so with a strong sense of purpose -- with our strong sense of our new purpose of reimagining seafood to nourish life. As we said at our Annual General Meeting of our Shareholders earlier this morning, we are committed to living our purpose and our values and in creating an inclusive, equitable and diverse workplace with a relentless focus on health, safety and well-being of our employees. Overall, I am pleased with the progress we are making against our goal to become the leader in branded value-added seafood in North America, and I'm confident that we will continue on this trajectory and deliver adjusted EBITDA growth in 2021. With that, I will hand the call over to the operator for a brief question-and-answer period. I look forward to your questions. Operator, please start the Q&A.

[Operator]

[Operator Instructions] And your first question comes from George Doumet with Scotiabank.

[George Doumet, Analyst]

I just wanted to talk a little bit about your global supply challenge that you called out. Can you maybe give us a little bit more color on that? And do you expect those to have an impact at all in terms of our ability to secure supply? If so, maybe what kind of supply?

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

Well, George, I have to say I've been very pleased with the work that we've done over the last, call it, 18 months to diversify our supply chain, and quite frankly, put us in a position where we have significant resilience. I would say that we're facing many of the same issues as other organizations as it relates to the logistics piece. But our scale, diversification not only in regions in which we procure but also species, I think has put us somewhat in an advantageous position as it relates to our competitors, and we fully intend on taking advantage of that.

[George Doumet, Analyst]

So does that mean you guys expect to have all the necessary supply to basically -- for the sales levels you're planning this year?

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

Yes. Without question, we'll have some short-term challenges that we'll have to manage through. But we don't anticipate any significant impact throughout the year.

[George Doumet, Analyst]

Okay. And can you talk to maybe the level of inflation that you're seeing within those inputs like this year versus last? Is it mid-single digits? Is it high single digits? Is it double digits?

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

Yes, Paul, I don't have that number right off hand. I know we have been -- I'm sorry. Go ahead, Paul.

[Paul A. Jewer, Executive VP & CFO]

Yes. So on seafood costs, George, there's really very little inflation. The supply is still good, and demand is down in many parts of the world. The issue on the supply chain side really is the logistical time it takes to get that product from market to North America because of some of the delays we've seen in international shipping in particular. Where we have seen inflation is on transportation costs. So international shipping and domestic transportation has been inflationary. Well, that's been inflationary across the industry, not just limited to us. And in those cases, we have been having to pass on price to our customers to cover those cost increases. So we don't see them having a negative impact on our margins as we move forward.

[George Doumet, Analyst]

Okay. That's great. And then we're halfway through Q2. Can you maybe talk about the resurgence that you guys are seeing in foodservice. Is it across the U.S.? Is it just in certain pockets? And maybe as a whole, would you see that -- kind of the higher foodservice volume starting to offset some of the retail volume declines that we're seeing, I guess, I imagine as we go through Q2?

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

Yes, George, I would tell you, there is certainly a rapidly changing consumer environment out there as we see consumers moving from retail back into foodservice and vice versa. And I would tell you, across the North American basis, there are varying degrees of certainly what is open. Certainly, in the Canadian market, we are seeing provinces having much more restriction than in other parts of North America. But even within the States, we are seeing restaurants and the full foodservice channel opening at different times. So there's been a lot written about restaurants reopening. But in many parts of the States, they are still at 25% or 50% capacity. But we have to think about the foodservice industry in its totality. One of the many strengths of High Liner, as we've talked about, through the pandemic is the diversification of the channels we sell. So as we see non-com or schools reemerge, we anticipate that being a significant lift for us as well as we do very well in those channels. But we're very optimistic about the reopening of restaurants and the foodservice channel in general given our scale in the category.

[George Doumet, Analyst]

Okay. Great. And last one for me, Rod. On the U.S. plants that we're currently operating, I'm just wondering, are you seeing any supply constraints on the labor side? Is that becoming more and more of an issue? Just your thoughts about this.

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

Yes. I wouldn't say we're having any significant issues, but we're certainly in tune with market conditions and the need to be a supply -- or employer of choice. So we are taking the necessary steps to ensure that we have the quality of labor, but also the quantity of labor.

[Operator]

And your next question comes from the line of Jonathan Lamers with BMO Capital Markets.

[Jonathan Lamers, Analyst]

On the U.S. marketing expense, maybe first for Paul. Can you break out how much of the growth in SG&A market -- the increased marketing expense represented this quarter? And how much of that you see continuing over the balance of the year?

[Paul A. Jewer, Executive VP & CFO]

Yes. So year-over-year, the growth in SG&A is related to marketing expense in the U.S. That is the primary driver. And you should expect to see that continue through the course of the year. We are investing to grow our business. And we did that in the first quarter, and we'll continue to do that.

[Jonathan Lamers, Analyst]

And Rod, are there any further indications you can share with us as to how this is driving higher sales? My impression is maybe we didn't see all the fruits of this in the volumes in Q1.

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

Yes. I think that's fair given my comments earlier regarding the real dynamic in Q1 is an over -- an overlap period as well as the channel shift. I think the most pertinent example would be the work that we've done specifically around our chef-crafted Sea Cuisine brand. As we've talked about several quarters ago, we invested in not only the digital resources, in other words, hired staff to support us in that area. We are more pointed in our digital marketing, direct-to-consumer and other forms of consumer insights to drive that. We've seen significant growth -- very pleased with the growth of our chef-crafted Sea Cuisine brand in the U.S. I think that would be a great example for us. And we continue -- we will continue on that path of investing in digital TV and other campaigns to drive consumer awareness.

[Jonathan Lamers, Analyst]

Okay. And the press release mentioned capacity investments you're making to support successful products. Could you maybe speak to an example or 2 of those and how you see those supporting the coming surge in demand from the foodservice channel?

[Paul A. Jewer, Executive VP & CFO]

Yes. In that case, it's actually less about supporting the oncoming foodservice demand. We're well positioned to meet the foodservice demand. In a couple of cases, it's actually creating even more resiliency in our supply chain, so ensuring that across all 3 plants we have what we need, particularly on the packaging end to meet what we believe are our volume opportunities going forward and investing in capability around packaging to do some packaging that we've really focused on for growth over the last few quarters, including our Sea Cuisine skin pack products and some smaller format sizes, 2 packs instead of 4 packs. So an investment that we are pursuing in order to support our growth.

[Jonathan Lamers, Analyst]

Okay. And Paul, over the balance of the year, like how much product mix do you see shifting back toward uncoated products from value-add as foodservice recovers? And what would you see happening as foodservice went all the way back to pre-pandemic levels?

[Paul A. Jewer, Executive VP & CFO]

Well, when foodservice goes back to pre-pandemic levels, which we believe it will, we don't anticipate that we will go back to the mix that we had previously because a lot of focus for our growth has been on branded value-added. So we see some of the mix shifts that we've seen being more permanent in nature. And that has been the case even as we've seen some recovery in foodservice as we talked about in Q1 and particularly as we moved into Q2. We will see some unprocessed business come back. We want to see some unprocessed business come back as the recovery in foodservice continues. But we're really very focused on growing brand and value-added. So we'll continue to benefit from that mix shift as we move forward.

[Jonathan Lamers, Analyst]

Couldn't happen now the mix of value-add in Q1 by any chance? What you -- I believe you previously shared with us that value-add was 70% of the mix for full year 2020.

[Paul A. Jewer, Executive VP & CFO]

Yes, I do have that number, and it's 70 -- it was actually 74% in Q1 of 2021. It was 68% in Q1 of 2020. So -- and we remained higher in value-added in the first quarter.

[Operator]

And your next question comes from the line of Kyle McPhee with Cormark Securities.

[Kyle McPhee, Analyst of Institutional Equity Research]

On the new product launches and clients that you delivered success with through all of last year, I'm hoping you can quantify how much year-over-year growth came from this type of stuff in the Q1 you just reported, if you kind of isolate it on a stand-alone basis? You've said throughout last year, you were delivering about 2% year-over-year from this stuff in 2020. So I'm wondering if you're still building on that 2%. And if so, by how much on a kind of ballpark basis?

[Paul A. Jewer, Executive VP & CFO]

Yes. It was higher in Q1 than the 2% driven partially by some growth in private label actually in Q1. If you exclude the private label piece, it was pretty consistent with prior quarters and just over 2%, and again, primarily in branded value-added innovation growth across a number of key categories for us. But would certainly continue to highlight skin pack and appetizers as being 2 important focus segments for us as well as value-added shrimp being another area that we're continuing to focus for innovative growth.

[Kyle McPhee, Analyst of Institutional Equity Research]

Got it. And a follow-up on just helping us quantify the U.S. foodservice rebound that's happening in the market right now. Can you -- we know what your U.S. sales are. Can you remind us what the foodservice exposure is in the U.S. in kind of a normalized non-COVID-type environment?

[Paul A. Jewer, Executive VP & CFO]

So foodservice in the U.S. in Q1 was about 60% of our -- let me just make sure I got that right. Yes, foodservice is about 60% of our total sales, 40% for retail.

[Kyle McPhee, Analyst of Institutional Equity Research]

Got it. So presumably, foodservice used to be much higher before COVID, is that right, in the U.S.?

[Paul A. Jewer, Executive VP & CFO]

That's correct. Yes. Foodservice would have been as high as 70% in -- for the company as a whole, even a little over 70% in the U.S. pre-COVID.

[Operator]

I'm showing no further questions at this time. I will now turn it back to Rod Hepponstall for closing remarks.

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

To close, I want to thank you for joining the call today, and we look forward to updating you with results from the second quarter of 2021 on our next conference call in August. Please stay safe and well.

[Operator]

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