Lunenburg, Nova Scotia-headquartered High Liner Foods, North America’s leading frozen seafood company with production facilities in Canada and the United States, on November 7 reported that third quarter sales value declined by $21.1 million to $220.1 million, compared to $241.2 million generated during the same period in 2018.
However, on a positive note, earnings before interest, taxes, depreciation and amortization rose 16% to $16.5 million. That was good enough for the board of directors to approve a quarterly dividend of CAD$0.05 per share on the company’s common shares, payable on December 15, 2019 to holders of record on December 1, 2019.
The 8.7% sales downturn during Q3 was attributed to the lower volumes and changes in sales mix, partially offset by price increases related to raw material cost increases.
Volume decreased by 4.0 million pounds, or 6.2%, to 60.2 million pounds compared to 64.2 million pounds during the same three-month period in 2018.
Gross profit in Q3 fell by $1.6 million to $42.4 million compared to $44.0 million in the same period in 2018, while gross profit as a percentage of sales increased by 110 basis points to 19.3% compared to 18.2%. The decrease in gross profit reflects sales volume and raw material cost increases, including tariffs on certain species imported into the USA from China.
This was partially offset by sales price increases, favorable product mix related to the exit of low margin business and improved plant efficiencies partially related to supply chain excellence initiatives. In addition, a weaker Canadian dollar had the effect of decreasing the value of reported US dollar gross profit from Canadian operations in 2019 by approximately $0.1 million relative to the conversion impact last year.
In a conference call with financial analysts, shareholders and other interested parties on November 7, CEO Rod Hepponstall and CFO Paul Jewer confirmed that the loss of a major shrimp buyer was the reason for a significant reduction in overall volume, and that impact from this setback will continue to be felt in the fourth quarter. The plan now is to steer away from low margin, high volume segments of the market and focus more sharply on value-added segments where better gross margins are achievable.
The customer whose business was not renewed, though not specified by name during the conference call, is Cincinnati, Ohio-headquartered Kroger, the largest supermarket chain in the United States. High Liner alleges in a lawsuit filed on June 11 that former executives from Rubicon Resources, a company it acquired in 2017, stole trade secrets and poached its private label shrimp business with Kroger. A federal judge recently ordered that the case of High Liner Foods vs. Haven Foods go to private mediation, with a deadline for completion set for June 24, 2020.
Meanwhile, Back to Q3 Results
“Our business today is significantly stronger than this time last year,” said Hepponstall. “In the past quarter, we delivered Adjusted EBITDA growth [up 16% to $16.5 million compared to $14.2 million], rolled out new product innovations and secured an important vote of confidence from our investors as we completed debt refinancing ahead of schedule. With fewer SKUs and more emphasis on value-added products we are driving efficiency, increasing margins and delivering innovative and high-quality seafood to our customers. We are moving closer to a more optimal portfolio mix.”
Indeed, the company has eliminated over 200 SKUs, which amounts to approximately 10% of its former stock keeping unit base. Additional eliminations are coming, as the shift is made toward a more value-added product line featuring innovations such as Fish Wings and Haddock Bites, which have now been listed by three major customers in the USA.
In addition to having a positive outlook in the retail sector where, Hepponstall observed, “more shoppers are returning to the frozen food aisle,” on the foodservice front High Liner believes it is well positioned to take advantage of come what may in the way of economic swings, as it is active in all areas and has limited exposure in the upscale, fresh-oriented white tablecloth restaurant segment.
“We are confident that execution against our critical initiative plan will continue to deliver year-over-year Adjusted EBITDA improvement in 2019 and 2020,” said Hepponstall. “This Adjusted EBITDA growth will continue despite further anticipated sales volume decline which we are focused on replacing with increased sales of higher margin value-added products.”
High Liner Foods also expects net debt to rolling twelve month Adjusted EBITDA will continue to improve in 2020 as a result of growth in Adjusted EBITDA, improved cash flow management and the dividend reduction announced in May of this year on the Company’s common shares.
In regard to the 25% import tariffs (including “List 4B” tariffs) put forth by the US Administration in May 2019 on additional Chinese imports, President Donald J. Trump proposed on August 23, 2019, that the List 4B tariffs be decreased to 15% with an effective date of December 15, 2019, pending further negotiations between officials in Washington and Beijing.
As currently drafted, the List 4B tariffs apply to only limited products sold by High Liner Foods and as a result of its mitigation activities, are not expected to have a significant financial impact. Excluding any impact related to US import tariffs, the pricing and supply of seafood raw material for products sold by High Liner are expected to remain relatively stable throughout the remainder of 2019 and 2020.