HighLiner Foods
Stock Update: $14.21 Change: -0.24 Vol: 38,265

High Liner Foods Reports Operating Results for the Second Quarter of 2017

- Improved year-over-year performance trends offset by impact of product recall -

LUNENBURG, NS, Aug. 14, 2017 /CNW/ - High Liner Foods Incorporated (TSX: HLF) ("High Liner Foods", "High Liner" or "the Company"), the leading North American value-added frozen seafood company, today reported financial results for the thirteen and twenty-six weeks ended July 1, 2017. 

The Company reports its financial results in USD and all amounts are reported in U.S. dollars ("USD") unless otherwise noted.  High Liner Foods' common shares trade on the Toronto Stock Exchange (TSX: HLF) and are quoted in Canadian dollars ("CAD").  HLF shares closed today at CAD$15.551.

Today, the Board of Directors of the Company approved a quarterly dividend of CAD$0.14 per share on the Company's common shares payable on September 15, 2017 to holders of record on September 1, 2017.

"As expected, year-over-year sales volume improved in the second quarter, bolstered further by the acquisition of Rubicon on May 30, 2017, however, the impact of a product recall served to offset a portion of this improvement and contributed to inefficiencies at our manufacturing facilities," explained Henry Demone, Chairman and CEO of High Liner Foods.  "Recovery from the product recall and improvements in plant performance are expected to return us to year-over-year earnings growth in the back-half of this year."

Financial and operational highlights for the thirteen weeks ended July 1, 2017, or the second quarter of 2017, include (unless otherwise noted, all comparisons are relative to the second quarter of 2016):

  • Sales as reported increased by $8.0 million to $232.4 million compared to $224.4 million;
  • Sales in domestic currency increased by $12.2 million to $254.9 million compared to $242.7 million;
  • Gross profit decreased by $8.9 million to $37.8 million compared to $46.7 million;
  • Adjusted EBITDA2 decreased by $4.0 million to $13.4 million compared to $17.4 million in 2016;
  • Adjusted EBITDA in domestic currency decreased by $4.5 million to $14.4 million compared to $18.9 million;
  • Reported net income decreased by $4.5 million to $0.6 million and diluted earnings per share ("EPS") decreased by $0.14 to $0.02 compared to $0.16;
  • Adjusted Net Income2 decreased by $2.4 million to $6.1 million compared to $8.5 million and Adjusted Diluted EPS2 decreased by $0.08 to $0.19 compared to $0.27;
  • CAD-Equivalent Adjusted Diluted EPS2 decreased by CAD$0.09 to CAD$0.26 compared to CAD$0.35; and
  • Including trailing twelve-month Adjusted EBITDA for the acquisition of Rubicon, net interest-bearing debt2 to rolling twelve-month Adjusted EBITDA was 4.3x at July 1, 2017 compared to 3.1x at the end of Fiscal 2016.

____________________

1 Source: TSX August 14, 2017.

2 Please refer to High Liner Foods' MD&A for the thirteen and twenty-six weeks ended July 1, 2017 for definitions of the non-IFRS financial measures used by the Company, including "Adjusted EBITDA", "Adjusted Net Income", "Adjusted Diluted EPS", "CAD-Equivalent Adjusted Diluted EPS" and "Net Interest-Bearing Debt".

 

The acquisition of Rubicon on May 30, 2017 had the impact of increasing sales volume by 3.3 million pounds, sales as reported by $17.7 million and Adjusted EBITDA by $0.5 million in the second quarter of 2017 compared to the second quarter of 2016.

The product recall explained below had the impact of lowering sales volume by 2.5 million pounds, sales as reported by $8.5 million ($9.1 million in domestic currency) and Adjusted EBITDA by $1.9 million ($2.0 million in domestic currency) in the second quarter of 2017 compared to the second quarter of 2016.

The sale of our New Bedford scallop business on September 7, 2016 had the impact of lowering sales volume by 0.8 million pounds, sales as reported by $10.7 million and a nominal impact on Adjusted EBITDA in the second quarter of 2017 compared to the second quarter of 2016.

Product Recall

Subsequent to the first quarter of 2017, the Company announced a voluntary recall of certain of its value-added seafood products sold in Canada that may contain a milk allergen that was not declared on the ingredient label and allergen statement ("the product recall" or "the recall").  The Company identified that the allergen had originated from ingredients supplied by one of the Company's U.S.-based ingredient suppliers ("the ingredient supplier").  During the thirteen weeks ended April 1, 2017, the Company recognized $0.7 million in estimated losses associated with the product recall related to the return and destruction or rework of product, consumer refunds and customer fines. 

Subsequently, during the second quarter of 2017, the Company was notified by the ingredient supplier that several additional ingredients were being recalled due to the potential presence of undeclared milk, which necessitated an expansion of the Company's initial product recall to include additional value-added seafood products sold in the U.S. and Canada.  As a result, during the thirteen weeks ended July 1, 2017, the Company recognized $8.6 million in further estimated losses associated with the product recall, comprised of $1.9 million related to the return of product to be reworked and $6.7 million related to the return of destroyed product and direct incremental costs incurred by the Company related to the rework of product, consumer refunds and customer fines.

In total, $9.3 million in estimated losses associated with the product recall have been recognized during the first half of 2017.  These estimated losses do not include any estimate of the reduction in earnings associated with the product recall as a result of lost sales opportunities due to limited product availability and customer shortages, or increased production costs related to the interruption of production at the Company's facilities. The majority of the disruption to the Company's business associated with the product recall has subsided. We are receiving regular ingredient shipments from the ingredient supplier, rebuilding inventory of recalled products and have resumed shipment of these products to customers.

The Company expects to recover substantially all of the estimated losses associated with the recall from the ingredient supplier, and will record these recoveries in the period in which they occur or are virtually certain to occur, in accordance with IFRS.

The Company's estimates related to the recall are provisional and were determined based on an assessment of the information available up to the date of filing of the Consolidated Financial Statements, including a review of customer claims received as of that date and consideration of the extent of potential additional claims that have yet to be received.  The Company's estimates reflect the losses determined as at July 1, 2017 to be both probable and reasonably estimable, and therefore the Company may need to revise these estimates in subsequent periods as it continues to work with its customers to substantiate the claims received to date and any additional claims that may be received. These revisions may occur at any time and may be material.

Financial Results

For the purpose of presenting the Consolidated Financial Statements in USD, CAD-denominated assets and liabilities in the Parent's operations are converted using the exchange rate at the reporting date, and revenue and expenses are converted at the average exchange rate of the month in which the transaction occurs.  As such, foreign currency fluctuations affect the reported values of individual lines on our balance sheet and income statement.  When the USD strengthens (weakening CAD), the reported USD values of the Parent's CAD-denominated items decrease in the Consolidated Financial Statements, and the opposite occurs when the USD weakens (strengthening CAD).  The average USD/CAD exchange rates for the thirteen and twenty-six weeks ended July 1, 2017 were 1.3448 and 1.3343, respectively (1.2883 and 1.3302 for the thirteen and twenty-six weeks ended July 2, 2016, respectively.)

Investors are reminded for purposes of calculating financial ratios, including dividend payout and share price-to-earnings ratios, to take into consideration that the Company's share price and dividend rate are reported in CAD and its earnings and financial position are reported in USD.

The financial results for the thirteen and twenty-six weeks ended July 1, 2017 and July 2, 20163 are summarized in the following table:


Thirteen weeks ended

Twenty-six weeks ended

(Amounts in 000s, except per share amounts, unless
otherwise noted)

July 1,
2017

July 2,
2016

July 1,
2017

July 2,
2016

Sales volume (millions of lbs)

63.4

62.3

146.6

150.5

Sales in domestic currency

$

254,890

$

242,701

$

550,997

$

556,004

Foreign exchange impact on sales

$

(22,505)

$

(18,313)

$

(42,877)

$

(40,177)

Sales in USD

$

232,385

$

224,388

$

508,120

$

515,827

Gross profit

$

37,807

$

46,711

$

93,315

$

112,140

Gross profit as a percentage of sales

16.3%

20.8%

18.4%

21.7%

Adjusted EBITDA in domestic currency

$

14,440

$

18,873

$

37,500

$

51,224

Foreign exchange impact on Adjusted EBITDA

$

(1,023)

$

(1,425)

$

(1,747)

$

(3,469)

Adjusted EBITDA

$

13,417

$

17,448

$

35,753

$

47,755

Adjusted EBITDA as a percentage of sales

5.8%

7.8%

7.0%

9.3%

Net income

$

644

$

5,129

$

11,386

$

19,309

Diluted EPS

$

0.02

$

0.16

$

0.36

$

0.62

Adjusted Net Income

$

6,054

$

8,524

$

16,869

$

24,355

Adjusted Diluted EPS

$

0.19

$

0.27

$

0.53

$

0.27

Diluted weighted average number of shares outstanding

32,017

31,105

31,594

31,068

_____________________

3 The operating results for the thirteen and twenty-six weeks ended July 2, 2016 contain certain corrections of errors identified in previously reported amounts. Please refer to High Liner Foods' Unaudited Condensed Interim Consolidated Financial Statements for the thirteen and twenty-six weeks ended July 1, 2017 for further discussion.

 

Sales volume increased in the second quarter of 2017 by 1.1 million pounds to 63.4 million pounds, compared to 62.3 million pounds in same period in 2016 due to higher sales volume, in both our Canadian and U.S. businesses, reflecting the following:

  • Addition of sales volume from Rubicon since the date of acquisition (3.3 million lbs); offset by
  • Reduced sales volume related to the actual or anticipated return of various products associated with the product recall (2.5 million pounds); and
  • Lower scallop sales as a result of the sale of the New Bedford facility in the third quarter of 2016 (0.8 million pounds).

Excluding the impact of these items, sales volume for the second quarter of 2017 increased by 1.1 million pounds, reflecting higher sales volume in our Canadian retail and foodservice businesses, and in our U.S. foodservice business.  A later Easter in 2017 (April 16, 2017) compared to 2016 (March 27, 2016) shifted a portion of the benefit associated with Lent into the second quarter of this year compared to the full benefit being realized in the first quarter of 2016, however, this was offset by lost sales opportunities associated with limited product availability and customer shortages as a result of the recall.

Sales increased in the second quarter of 2017 by $8.0 million to $232.4 million compared to $224.4 million in the same period in 2016.  Approximately 69% of the Company's operations, including sales, are denominated in USD.  The slightly weaker Canadian dollar in the second quarter of 2017 compared to the second quarter of 2016 decreased the value of USD sales from the Company's CAD-denominated operations by approximately $2.9 million relative to the conversion impact last year.

In domestic currency, sales increased in the second quarter of 2017 by $12.2 million to $254.9 million compared to $242.7 million in the same period in 2016.  Excluding the addition of sales from Rubicon ($17.7 million), the decrease in sales due to the product recall returns ($9.1 million), and reduced sales due to the sale of New Bedford ($10.7 million), sales increased by $14.3 million mainly due to the increased volume mentioned previously.

Gross profit decreased in the second quarter of 2017 by $8.9 million to $37.8 million compared to $46.7 million in the same period in 2016 reflecting higher sales volumes and a decrease in gross profit as a percentage of sales to 16.3% compared to 20.8%.  This decrease reflects the $8.6 million in estimated losses associated with the product recall recognized in the second quarter of 2017, partially offset by gross profit from Rubicon since the date of acquisition ($2.1 million).

Excluding the impact of the recall and the acquisition of Rubicon, gross profit decreased by $2.4 million to $44.3 million (19.8% as a percentage of sales) due to the impact of product mix changes and continued plant inefficiencies that were worsened by production interruptions at the Company's facilities as a result of the product recall.  In addition, the weaker Canadian dollar had the effect of decreasing the value of reported USD gross profit from our Canadian operations in 2017 by approximately $0.5 million relative to the conversion impact last year.

Adjusted EBITDA decreased in the second quarter of 2017 by $4.0 million to $13.4 million compared to $17.4 million in the same period in 2016.  The impact of converting our CAD-denominated operations and corporate activities to our USD presentation currency decreased the value of reported Adjusted EBITDA in USD by $1.0 million in the second quarter of 2017 compared to $1.4 million in the same period in 2016.

In domestic currency, Adjusted EBITDA decreased in the second quarter of 2017 by $4.5 million to $14.4 million (5.7% of sales) compared to $18.9 million (7.8% of sales) in the same period in 2016.  The decrease in Adjusted EBITDA reflects the lower gross profit mentioned previously, with the exception of $6.7 million in estimated losses associated with the product recall which are added back for the purpose of Adjusted EBITDA as they relate to destroyed product and direct incremental costs incurred by the Company related to reworking product, consumer refunds and customer fines (the remaining $1.9 million of the total $8.6 million in estimated losses recognized in the second quarter has not been added back for the purpose of Adjusted EBITDA as it relates to returned product that is expected to be reworked and resold).  The decrease in Adjusted EBITDA also reflects the increases in distribution and SG&A expenses discussed previously, offset by the acquisition of Rubicon, which contributed $0.5 million to Adjusted EBITDA since the date of acquisition.

Net income decreased in the second quarter of 2017 by $4.5 million to $0.6 million (diluted EPS of $0.02) compared to $5.1 million (diluted EPS of $0.16) in the same period in 2016.  The decrease in net income reflects the decrease in Adjusted EBITDA mentioned previously, a decrease in depreciation and a decrease in income tax expense.

Net income included "business acquisition, integration and other expenses" and other non-cash expenses. In 2017, net income included "business acquisition, integration and other expenses" related to the acquisition of Rubicon.  In addition, related to the product recall, net income included a reduction in sales associated with destroyed product and direct incremental costs related to reworking product, consumer refunds and customer fines, and other non-cash expenses.  In 2016, net income included "business acquisition, integration and other expenses" related to accelerated depreciation on equipment and impairment of property, plant and equipment as part of the cessation of New Bedford plant operations, and other non-cash expenses.  Excluding the impact of these non-routine or non-cash expenses, Adjusted Net Income for the second quarter of 2017 decreased by $2.4 million to $6.1 million (Adjusted Diluted EPS of $0.19) compared to $8.5 million (Adjusted Diluted EPS of $0.27) in the same period last year.

Net cash flows provided by (used in) operating activities decreased in the second quarter of 2017 by $8.4 million to an inflow of $9.7 million compared to an inflow of $18.1 million in the same period in 2016, due to less favourable results from operations, higher income tax payments and a less favourable change in inventories, partially offset by a more favourable change in accounts receivable.

Including trailing twelve-month Adjusted EBITDA for the acquisition of Rubicon, net interest-bearing debt to rolling twelve-month Adjusted EBITDA was 4.3x at July 1, 2017 compared to 3.1x at the end of Fiscal 2016.  In the absence of any major acquisitions or strategic initiatives requiring capital expenditures in 2017, we expect this ratio to approximate 4.0x by the end of 2017.

Outlook

"Having returned to year-over-year organic sales volume growth, we believe continued improvement in our manufacturing operations will return the Company to year-over-year earnings growth in the third and fourth quarter of 2017," concluded Mr. Demone.  "A full recovery from the product recall and the acquisition of Rubicon are expected to further strengthen our financial performance in the back half of 2017."

Conference Call

The Company's Consolidated Financial Statements and MD&A as at and for the thirteen and twenty-six weeks ended July 1, 2017 were filed concurrently on SEDAR with this news release and are also available at www.highlinerfoods.com.

The Company will host a conference call on Tuesday, August 15, 2017, at 2:00 p.m. ET (3:00 p.m. AT) during which Henry Demone, Chairman and CEO and Paul Jewer, Executive Vice President and CFO will discuss the financial results for the second quarter of 2017.  To access the conference call by telephone, dial 647-427-7450 or 1-888-231-8191.  Please connect approximately 10 minutes prior to the beginning of the call to ensure participation.  The conference call will be archived for replay by telephone until Tuesday, August 22, 2017 at midnight (ET).  To access the archived conference call, dial 1-855-859-2056 and enter the reservation number 54717301.

A live audio webcast of the conference call will be available at www.highlinerfoods.com.  Please connect at least 15 minutes prior to the conference call to ensure adequate time for any software download that may be required to join the webcast.  The webcast will be archived at the above website for one year.

About High Liner Foods Incorporated

High Liner Foods Incorporated is the leading North American processor and marketer of value-added frozen seafood.  High Liner Foods' retail branded products are sold throughout the United States, Canada and Mexico under the High Liner, Fisher Boy, Mirabel, Sea Cuisine and C. Wirthy labels, and are available in most grocery and club stores.  The Company also sells branded products to restaurants and institutions under the High Liner, Icelandic Seafood and FPI labels and is the major supplier of private label value-added seafood products to North American food retailers and foodservice distributors.  High Liner Foods is a publicly traded Canadian company, trading under the symbol HLF on the Toronto Stock Exchange.

This document contains forward-looking statements. Forward-looking statements can generally be identified by the use of the conditional tense, the words "may", "should", "estimate", "will", believe", "plan", "expect", "goal", "remain" or "continue", or the negative of these terms or variations of them or words and expressions of similar nature.  Specific forward-looking statements in this document include, but are not limited to expectations with respect to: anticipated financial performance including earning trends and growth; changes to sales volume, margins and input costs, including raw material prices; achievement, and timing of achievement, of strategic goals and publicly stated financial targets, including to increase our market share, acquire and integrate other businesses and reduce our operating and supply chain costs including, without limitation, related to the cessation of value- added fish processing operations at our New Bedford facility and the related one-time costs and balance sheet implications of same; the expected timing and amount of costs associated with product recalls and the expected recovery thereof; our ability to close and successfully integrate the proposed acquisition of Rubicon Resources, LLC; our ability to develop new and innovative products that result in increased sales and market share; expected leverage levels and expected net interest-bearing debt to Adjusted EBITDA; and statements under the "outlook" heading including expected demand, sales of new product and plant production.  These statements are based on a number of factors and assumptions including, but not limited to: seafood availability, demand and pricing; product pricing, including the cost of raw materials, energy and supplies; operating costs; plant performance; the condition of the Canadian and U.S. economies; our ability to attract and retain customers; required level of bank loans and interest rates; income tax rates; and our ability to attract and retain experienced and skilled employees.  The statements are not a guarantee of future performance.  By their nature, forward-looking statements involve uncertainties and risks that could result in the forecasts and targets not being achieved.  Readers are cautioned not to place undue reliance on forward-looking statements, as actual results may differ materially from those expressed in such forward-looking statements.  We include in publicly available documents filed from time to time with securities commissions and The Toronto Stock Exchange, a discussion of the risk factors that can cause anticipated outcomes to differ from actual outcomes.  Except as required under applicable securities legislation, we do not undertake to update forward-looking statements, whether written or oral, that may be made from time to time by us or on our behalf, whether as a result of new information, future events or otherwise.

The Company reports its financial results in accordance with International Financial Reporting Standards ("IFRS").  Included in this media release are certain non-IFRS financial measures as supplemental indicators of operating performance.  These non-IFRS measures are Adjusted EBITDA, Adjusted Net Income, Adjusted Diluted EPS, CAD-Equivalent Adjusted Diluted EPS, and Net Interest-Bearing Debt.  Please refer to the Company's MD&A for the thirteen and twenty-six weeks ended July 1, 2017 for definitions of non-IFRS financial measures used by the Company and reconciliation of these non-IFRS measures to measures that are found in our consolidated financial statements.

The Company believes these non-IFRS financial measures provide useful information to both management and investors in measuring the financial performance and financial condition of the Company.  These measures do not have a standardized meaning prescribed by IFRS and, therefore, may not be comparable to similarly titled measures presented by other publicly traded companies, nor should they be construed as an alternative to other financial measures determined in accordance with IFRS.

For further information about the Company, please visit our website at www.highlinerfoods.com or send an e-mail to investor@highlinerfoods.com.

SOURCE High Liner Foods Incorporated

Back