High Liner Foods Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 10, 2023

There are 6 speakers on the call.

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the High Liner Foods Incorporated Conference Call for the Results of the 2nd Quarter of 2023. At this time, all participants are in a listen only mode. Following management's prepared remarks, so we will conduct a question and answer session.

Operator

Instructions will be provided at that time for you to queue up for questions. Call. This conference is being recorded today, Thursday, August 10, 2023 at 9 am Eastern Time for replay purposes. Call. I would now like to turn the call over to Kimberly Stephens, Vice President of Finance for High Liner Foods.

Operator

Please go ahead.

Speaker 1

Quarter. Good morning, everyone. Thank you for joining the High Liner Foods conference call today to discuss our financial results for the Q2 of 2023. Call. On the call from High Liner Foods are Rod Hebenstahl, President and Chief Executive Officer Anthony Rosetta, Chief Commercial Officer and Paul Jewer, Executive Vice President and Chief Financial Officer.

Speaker 1

I would like to remind listeners that we use certain non IFRS measures and ratios quarter. We believe that these are useful in assessing the company's financial performance. These measures are fully described and reconciled call to IFRS measures in our MD and A. Listeners are also reminded that certain statements made on today's call may be forward looking statements

Speaker 2

quarter that are subject to risks and uncertainties.

Speaker 1

Management may use forward looking statements when discussing the company's strategy and business in the future. Quarter. Actual operating or financial results could differ materially from those anticipated in these forward looking statements. Quarter. 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 MD and A and Annual Information Form.

Speaker 1

Please note that High Liner Foods is under no obligation to update any forward looking statements discussed today. Quarter. After the markets closed yesterday, August 9, High Liner Foods recorded its financial results for the Q2 ended July 1, 2023. At news release, along with the company's MD and A and unaudited condensed quarter. Interim consolidated financial statements for the Q2 of 2023 have been filed on SEDAR Plus call and can be found on the Investor Center section of the High Liner Foods website.

Speaker 1

If you're interested to receive our news release in the future, quarter. Please visit the company's website to register. Lastly, please note that the company reports its financial results in U. S. Dollars, quarter.

Speaker 1

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 quarter and are quoted in Canadian dollars. I will now turn the call over to Rod for his opening remarks.

Speaker 1

Quarter.

Speaker 2

Thank you, Kimberly, and hello, everyone. Thank you for joining us today. For the Q2 of 2023, we once again reported strong results quarter. For our foodservice business sales volume and dollar growth overall and continue to improve our balance sheet. The strength of our foodservice business is helping to offset closeness that we continue to experience in our retail business.

Speaker 2

Given the impact of industry headwinds on our business this quarter, I will start by sharing our perspective on changes to our macro environment. I will then discuss highlights from the quarter from an operational and strategic perspective before handing the call over to Anthony Hall for a more detailed review of our business and financial results. At the macro level, shifting supply and demand dynamics are quarter impacting many industries and frozen seafood is no exception. This led to markedly different operating conditions during the Q2 of this year compared to 2022. Q2 last year was characterized by high demand and relatively low inventory levels.

Speaker 2

In response, we successfully leveraged our supply chain quarter. This enabled us to capitalize on market conditions to strengthen profitability and drive growth. Quarter. In contrast, Q2 this year was characterized by softer demand for protein in retail and elevated levels of inventory for customers across retail and foodservice quarter. In retail, the impact of prolonged inflation on consumers became more pronounced and is broad based across all categories.

Speaker 2

Within the overall category slowdown, the demand for protein, including frozen seafood, were medium soft. As consumers cut back, they are seeking ways to stretch their budget, including eating food stored in their own freezers and finding alternatives to proteins for mealtime solutions. Despite these operating conditions, we still grew the top line of our business year over year. Sales increased by quarter. £800,000 to £254,300,000 and sales volume increased by £600,000 or 1% to £59,400,000 However, the higher carrying cost of inventory and the Charter pricing required to move inventory and compete in the market put pressure on our profitability.

Speaker 2

Adjusted EBITDA decreased by $3,300,000 or 13% $22,000,000 While higher inventory costs are impacting margins this quarter, it also means we need to invest less in inventory in the second half of the year compared to the same time period prior year, which will improve non cash working capital and therefore cash flow from operations. We will direct this incremental free cash flow from operations towards paying down debt. As a result, we are moving closer to our target leverage ratio, While also lowering our annualized cost of capital, strengthening our balance sheet overall, paying down debt remains a focus for us in the current high interest rate environment. Quarter. Operationally, we are leveraging the benefits of the diversification of our business, supply chain and portfolio.

Speaker 2

The continued strength of Foodservice during the second quarter helped to drive growth this quarter. Similarly, the diversification within our foodservice business allowed us to grow in non commercial casual dining and QSI. With a broad portfolio of products, we are well positioned to focus on product offerings that are best suited to the evolving customer and consumer needs in both channels. In today's market that means a combination of value, private label and value add. These are the strategies we are deploying to mitigate the impact quarter.

Speaker 2

We are prepared that it will likely take a couple of quarters For inventory levels to return to historic levels from a volume perspective. In light of macroeconomic conditions, we expect that the grocery sector remain value driven in the back half of the year. Nonetheless, I believe that we will end the year with adjusted EBITDA growth and a much stronger balance sheet. Quarter. I'm confident that the long term outlook for High Liner and the seafood category overall remains positive.

Speaker 2

I will now turn the call over to Anthony quarter. For more details on how we are delivering value to our customers and consumers and executing against our plans to strengthen our market position and lead in branded value added seats. With

Speaker 3

quarter. Thanks, Rod, and hello, everyone. Our growth this quarter was driven by the foodservice business, Which is performing well. We saw broad based gains across the category with particularly strong performance in non commercial, casual dining and quick service restaurants. It was our 9th consecutive quarter of growth and our foodservice business continues to grow at a faster pace than the category.

Speaker 3

That's not to say Foodservice was immune to the impact of shifting macro conditions Rod spoke to. A year ago, supply dynamics quarter. While this is no longer the case in today's market, we are fortunate that we can lean on the areas of our portfolio quarter, where we are differentiated in terms of the value add we offer to customers and consumers. Our volumes grew progressively stronger throughout the second quarter, quarter. We are encouraged by this trend as well as the gains we made in market share, especially in our targeted growth categories of casual dining and QSR.

Speaker 3

Aligned with our growth strategy, we also increased volume in our priority species of salmon and shrimp. Growth in shrimp in particular is outpacing the category, quarter, supported by our new value added innovations, which led to new business and expanded distribution during the quarter. Quarter. As we grew our own market share in foodservice, we also benefited from the market share gains of distributors selling our private label products. Quarter.

Speaker 3

These relationships are strategically very important to us, especially given the emphasis on value in current market conditions. Quarter. We're pleased to expand distribution with a leading distributor during the Q2, and we will continue to invest in these relationships. Alongside private label, the demand for value added offerings remains strong. Even though the constraints of a tight labor market and COVID restrictions are easing and allowing for people work more people working in the kitchen.

Speaker 3

Operators continue to be drawn to the simplicity and efficiency of our value added products. Value added remains a significant opportunity for us within foodservice, especially in a deflationary environment. And we continue to engage quarter. Overall, our strategy of focusing on growth segments and species is working well in foodservice, and our strength in private label and value added is well suited to current environment. We continue to see significant development opportunities within casual dining and quick service restaurants and remain focused on differentiating ourselves in the market with data informed expertise to engage operators quarter in the potential for seafood and the value and versatility of our products.

Speaker 3

Turning to our retail business, operating conditions in retail remain challenging quarter. With softer demand from price sensitive consumers and shifts to value alternatives. To support our business and drive volumes, We are applying data analytics and a detailed understanding of the consumer to formulate strategic promotional offerings call to help draw consumers back to the category and help demonstrate value across our brands. For example, we saw market share gains in the U. S.

Speaker 3

On our SeaQuisine brand quarter by partnering with 1 of the largest retailers on impactful promotional activities. We also saw market share gains in Q2 in Canada, quarter. Driven by our mainstream offerings with the right marketing and promotional focus. Bright spots in an increasingly competitive space quarter. Unsurprisingly relate to private label and value offerings, which were the strongest performers for us during the Q2.

Speaker 3

Quarter. We will remain focused on leveraging the breadth of our portfolio and investing in marketing and strategic promotional activities to support our business, the category quarter and drive the return to normalized inventory levels. I'll now pass the call over to Paul to discuss our financial performance.

Speaker 4

Quarter. Thank you, Anthony, and good morning, everyone. Please note that all comparisons provided during my financial review of the Q2 of 2023 quarter relative to the Q2 of 2022, unless otherwise noted. Sales volume increased in the Q2 by £600,000 or 1 percent to £59,400,000 In our foodservice business, sales volume was high due to increased contract manufacturing business, increased sales in newer product lines and improved customer service levels. The company achieved strong service levels during the Q2 of 2023 quarter as compared to the Q2 of 2022 due to the increased investment in working capital in the latter part of fiscal 2022 quarter to mitigate the impact of the global supply chain challenges.

Speaker 4

This was partially offset by lower sales volume in our retail business due to the impact of inflation. Quarter. This resulted from softer demand for protein, including seafood products, as consumers switched to lower cost alternatives. Quarter. In addition, Easter occurring 8 days earlier in 2023 compared to 2022 resulted in lower sales volume in the Q2 of quarter compared to the same period last year.

Speaker 4

Sales increased in the Q2 by $800,000 or 0.3 percent quarter to $254,300,000 due to higher sales volumes mentioned previously and pricing actions implemented during fiscal 2022 and the Q1 of 2023 to mitigate inflationary increases on input costs, partially offset by changes in sales mix. The weaker Canadian dollar in the Q2 of 2023 compared to the same quarter of 2022 decreased the value of reported U. S. Dollar sales quarter from our Canadian dollar denominated operations by approximately $3,200,000 relative to the conversion impact last year. Quarter.

Speaker 4

Gross profit decreased in the 2nd quarter by $4,300,000 or 7.6 percent to $52,000,000 quarter. And gross profit as a percentage of sales decreased by 180 basis points to 20.4% quarter as compared to 22.2% in the Q2 of 2022. The decrease in gross profit reflects changes in product mix, quarter. Higher carrying costs associated with higher inventory and some inefficiencies at our plants as a result of the company slowing down production

Speaker 2

quarter due to higher

Speaker 4

inventory levels and softer consumer demand discussed previously. The decrease in gross profit was partially offset by the inflationary pricing actions and quarter. The weaker Canadian dollar decreased the value of reported U. S. Dollar gross profit from our Canadian operations in 2023 by approximately $700,000 relative to the conversion impact last year.

Speaker 4

Adjusted EBITDA decreased in the 2nd quarter by $3,300,000 or 13% to $22,000,000 quarter. And adjusted EBITDA as a percentage of sales decreased to 8.7% compared to 10%. The decrease quarter. Adjusted EBITDA reflects the decrease in gross profit, partially offset by the decrease in net SG and A expenses. The weaker Canadian dollar decreased the value of reported adjusted EBITDA in U.

Speaker 4

S. Dollars from our Canadian operations in 2023 quarter by approximately $200,000 relative to the conversion impact last year. Reported net income decreased in the quarter by $13,100,000 or 68.9 percent to $5,900,000 and diluted earnings per share decreased by 0.37 quarter. The decrease in net income reflects the $10,000,000 in insurance proceeds received during the Q2 of 2022, quarter, which was classified as business acquisition, integration and other expense, a decrease in adjusted EBITDA and an increase in finance costs, quarter, partially offset by lower income taxes. Excluding the impact of the $10,000,000 in insurance proceeds quarter and certain non routine or non cash expenses that are explained in our MD and A, adjusted net income in the Q2 of 2023 quarter and 2022 was $10,000,000 and correspondingly adjusted diluted earnings per share was $0.29 in the Q2 of 2023 2022.

Speaker 4

Turning now to cash flows from operations and the balance sheet. Quarter. Net cash flows from operating activities in the Q2 of 2023 increased by $36,100,000 quarter to an inflow of $45,400,000 compared to an inflow of $9,300,000 in the same period in 2022, quarter due to continued improvements in non cash working capital after significant investment in inventory during fiscal 2022. Quarter. We remain focused on continuing to make improvements in working capital in the back half of fiscal twenty twenty three, which will result in higher cash flows from operations.

Speaker 4

Quarter. Capital expenditures were $9,100,000 in the first half of twenty twenty three compared to $5,100,000 in the prior year, quarter reflecting the continued investment in our business. Net debt at the end of the Q2 of 2023 decreased by $41,400,000 call to $344,100,000 compared to $385,500,000 at the end of fiscal 2022, quarter reflecting lower bank loans and long term debt as we direct higher cash flows from operation towards net debt. Quarter. Net debt to adjusted EBITDA was 3.3 times at July 1, 2023 compared to 3.7 times at the end of fiscal 2022 and three times at July 2, 2022.

Speaker 4

Net debt to rolling 12 months adjusted EBITDA increased during fiscal 2022

Speaker 2

quarter due

Speaker 4

to increased investment in inventory. However, we made great progress this quarter in reducing the ratio and getting us closer to our long term target. Quarter. In the absence of any major acquisitions or unplanned capital expenditures in 2023, we expect this ratio to be in line with the company's long term target call of 3 times at the end of fiscal 2023. I will now turn the call over to Rod for some final remarks before opening up the call to questions.

Speaker 4

Rod?

Speaker 2

Thanks, Paul. As we've heard on the call today, while shifting market dynamics are impacting our business, We are employing a very targeted approach to our portfolio pricing and customers, which is helping to mitigate the impact. We know how to deliver the right product to the right customer at the right price and we remain focused on this we're very focused and staying through this proven strategy. As I said at the beginning of the call, we are prepared as quarter. Current headwinds will continue throughout the year and operating conditions into Q3 and Q4 will remain challenging and different from the environment of the prior year.

Speaker 2

Quarter. While this will mean that pressure on profitability will continue in the near term, I am confident that we'll be able to drive top and bottom line growth in the midterm quarter. And in the long term, the growth opportunity for our business and the seafood category remains significant. I'm confident in the business and our prospects is quarter. In part by the significant progress we have made over the past 4 years, we are in a fundamentally different place because of the work we've been undertaking to optimize our portfolio, quarter.

Speaker 2

I believe that once we approach historic inventory levels at the end of the year As the market rebounds, we'll be ready with product innovation and data informed growth strategies to support our customers, grow the categories and create value for all stakeholders. Quarter. With that said, I will end the call by reiterating my confidence that our business is well positioned despite current headwinds. Assuming market conditions do not deteriorate, quarter. We believe that we will end the year with year over year adjusted EBITDA growth and a stronger balance sheet.

Speaker 2

And I remain confident that the long term outlook for High Liner quarter. And the seafood category overall remains positive. With that, I will open the line to questions. Operator, please go ahead.

Operator

Quarter. Thank you. Ladies and gentlemen, we will now conduct a question and answer session. Key followed by the 1 on your touchtone phone. You will hear a tone prompt acknowledging your request.

Operator

Question. Question in the queue comes from Kyle McPhee from Cormark Securities. Your line is open. Please proceed.

Speaker 5

Hi, everyone. To start digging into the retail channel trend a bit, can you provide some color on which of your brands or categories are growing and declining or is the demand softness you're seeing in retail pretty broad based right now?

Speaker 3

Hey, Kyle. Thanks for the question. It's Anthony. Yes, the retail category overall is seeing pretty consistent declines across brands. The growth the only growth that we're seeing in the category is actually in private label right now.

Speaker 3

And the good news for us is that we are a major flyer of private label across a number of retailers in both Canada and the U. S. We are seeing market share gains on our brands And our branded value added business both in Canada and the U. S. As we're partnering with our retailers on the right promotional and marketing activities.

Speaker 5

Got it. Okay. And then as we move into Q3 here, are you seeing any changes in the Stent of the demand softness in retail channel or the kind of status quo type headwinds you're seeing?

Speaker 3

I think we'll continue to see The trends continue in the Q3, Kyle, and expect some improvement in stabilization coming later in the year.

Speaker 4

And Kyle, I would add, it's Paul. We have found some opportunities more recently where promotional activity has helped to drive volume, particularly in Some of our brands. So we'll certainly continue with that as we look through the back half of the year.

Speaker 5

Got it. Okay. And then regarding service levels, the client shorting issues in the past, was that fully gone In Q2 or is there still some minor drag there left from that?

Speaker 4

Yes. No, that's really fully gone. There were about 600 £1,000 we shorted in Q2, and we always have a similar level of shorting in any quarter compared to £4,000,000 a year ago. So The work that we did, the investment we made in inventory really has resolved the supply chain challenges we faced last year.

Speaker 5

Got it. Okay. And then on pricing, can you tell us what the price gain was in Q2? I know we can look at the gap between Revenue and volume, but you also mentioned mix impacts in there. So what was that pure price component in Q2?

Speaker 4

Yes. So you're right. There was certainly some mix as we saw some shifts across channels and across product lines. From a pricing perspective, most of the inflationary pricing is behind us. We had to cover inflationary costs in 2022, a little bit in the Q1.

Speaker 4

So now, as we look forward, we actually expect we'll see a little bit of deflation impact in pricing in the back half of the year Because we're also seeing a little bit of benefit in terms of deflationary costs as we look forward as well.

Speaker 5

Okay. Are you able to give us a feel for the extent of that price depletion in the back half of the year?

Speaker 4

I don't expect it to be significant at this stage, But it certainly won't be the significant inflation we saw a year ago.

Speaker 5

Got it. Okay. In addition to your inputs coming down and you may be passing on some of that price deflation To your customers, are you also looking at bringing down pricing eventually just to stimulate more demand given the consumer Response to pricing levels that we're seeing right

Speaker 4

now? Yes, I think it depends on the category. So certainly in our commodity business, there are As costs come down, there will be the opportunity for us to pass that through. And we believe that can be helpful to demand. In other parts of our business, as I mentioned earlier, we're taking the advantage to do some promotional activity to drive volume because we believe That can get the consumer and customer to respond and can support demand.

Speaker 3

Yes. I think the build, Kyle, is Like Paul said, certainly partnering on the promotional activity that is going to be focused on stimulating growth for the overall category. We certainly invested in data and analytics to allow us to partner with our customers on what's best for the category and driving category growth as well as managing the appropriate level of profitability. And then the other piece we'll use is our mix because we supply and support private label because we have the breadth of the portfolio between value and premium And consumers are still looking for the convenience at the right price. We'll leverage the breadth of the portfolio to both marketing and promotional activities to drive growth.

Speaker 5

Okay. Got it. And then last one for me. In this demand environment we're in now, The things you can do with OpEx expenses to help offset the EBITDA level impact of the softer top line outlook? And if so, what are some of those things and maybe help quantify it for us?

Speaker 4

Yes, sure. I mean, some of those Areas on SG and A costs. We've certainly taken some action in the second quarter and you'll see the benefit of some of that in the back half of the year. We're also very carefully managing our costs associated with our supply chain. So both in production facilities and in terms of transportation and logistics.

Speaker 4

So we feel good about our ability to manage costs quarter. As we look through the back half of the year and really our focus is going to be on driving the right demand for our products, Getting the right pricing and therefore improving our margins.

Speaker 5

Okay. What about like specifically marketing type spend? I know you ramped that in recent years. It sounds like you're going to do targeted promotion, but do you dial back So part of that marketing budget given the demand environment, is that one of the moving parts?

Speaker 4

Yes. In some places, we may make that decision where it just The marketing dollars aren't getting the benefit that we're looking for, but we're also continuing to be supportive of our brands. So in some cases, We'll certainly continue with that spend because we see an opportunity to support the brands and drive more demand for the products.

Speaker 3

Yes. The only build I'd have Kyle, it's Anthony, is that we're continuing we will absolutely continue to invest in our brands and we'll put it towards the highest return item. So we're also investing in our capabilities to measure ROI and to make sure that we are 1st and foremost putting our dollars closest Consumer with our customer, largely in store and online and digital where we're seeing some really good returns and some really positive ROIs in the first half of the year.

Speaker 4

And Kyle, I think Rod said it well upfront. While there is some short term impact on demand, we still feel very strongly about The long term demand opportunities in our category. And so it's important for us to continue to invest in areas where we see those opportunities for growth.

Operator

Quarter. There are no further questions at this time. So I will turn the call over to Rod Hebenstad for any closing remarks.

Speaker 2

Call. Also, I want to thank you for joining our call today. We look forward to updating you with our results for the Q3 of 2023 on our next conference call in November.

Operator

Thank you. Ladies and gentlemen, this will conclude today's conference. Please disconnect your lines.

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Key Takeaways

  • Despite softer retail demand and elevated inventory, Q2 2023 sales rose to $254.3 M (+0.3%) with volumes up 1%, but adjusted EBITDA declined 13% to $22 M due to higher inventory costs and margin pressure.
  • The foodservice segment grew for the ninth consecutive quarter, outpacing the category with gains in non-commercial, casual dining and QSR, and strong momentum in value-added shrimp and private-label offerings.
  • Retail faced broad-based declines across brands, though private-label products performed best and targeted promotions—such as SeaCuisine campaigns—drove market share gains in the U.S. and Canada.
  • Improved working capital drove free cash flow from operations to $45.4 M in Q2, enabling a $41.4 M reduction in net debt to $344.1 M, with net debt/EBITDA down to 3.3× and on track for a 3× target by year-end.
  • Management expects a value-driven grocery environment in H2, anticipates full-year EBITDA growth and a stronger balance sheet, and plans to leverage data-informed strategies, portfolio diversification and operational efficiencies.
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Earnings Conference Call
High Liner Foods Q2 2023
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