High Liner Foods

- Company Reduces Dividend and Increases Cost Savings Target to Reduce Debt -

LUNENBURG, NS, May 14, 2019 /CNW/ - High Liner Foods Incorporated (TSX: HLF) ("High Liner Foods" or "the Company"), the leading North American value-added frozen seafood company, today reported financial results for the thirteen weeks ended March 30, 2019. The Company also disclosed that it anticipates significant further net annualized run-rate cost savings from an acceleration of the critical initiative plan underway and that, further to a review of the Company's capital structure, the Board has elected to reduce the quarterly dividend to CAD$0.05 per common share or CAD$0.20 on an annual basis. The increased cost savings and reduced dividend will improve cash flow and allow the Company to continue to reduce its debt in 2019.

Key financial results, reported in U.S. dollars, for the thirteen weeks ended March 30, 2019 or the first quarter of 2019 are as follows (unless otherwise noted, all comparisons are relative to the first quarter of 2018):

• Sales decreased by $41.8 million to $277.4 million compared to $319.2 million;
  
  
• Gross profit decreased by $4.5 million to $56.1 million (20.2% of sales) compared to $60.6 million (19.0% of sales);
  
  
• Adjusted EBITDA^[1] increased by $8.0 million to $32.2 million (11.6% of sales) compared to $24.2 million (7.6% of sales);
  
  
• Net income increased by $4.5 million to $14.8 million compared to $10.3 million and diluted earnings per share (EPS) increased to $0.43 compared to $0.31.
  
  
• Adjusted Net Income¹ increased by $4.2 million to $14.9 million compared to $10.7 million and Adjusted Diluted EPS increased to $0.44 compared to $0.32;
  
  
• Net cash flows provided by operating activities increased by $18.0 million to $27.0 million compared to $9.0 million; and
  
  
• Including trailing twelve-month Adjusted EBITDA for the new lease standard^[2], net debt¹ to rolling twelve-month Adjusted EBITDA was 4.8x at March 30, 2019 compared to 5.8x at the end of Fiscal 2018. Including the impact of the new lease standard since adoption only (December 30, 2018), net debt to rolling twelve-month Adjusted EBITDA was 5.0x at March 30, 2019.

 

"As we move towards our goal of returning to profitable organic growth, we are starting to see the impact of our critical initiative plan on our financial performance. As reflected in the financial results for the first quarter of 2019, 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," said Rod Hepponstall, President and CEO of High Liner Foods. "To further strengthen our balance sheet and resilience we are expanding the scope of our supply chain improvement and cost saving activities. We have engaged consultant AlixPartners to accelerate progress on our supply chain excellence initiative and now foresee a significant increase in the total net annualized run-rate cost savings that can be achieved as we leverage the scale and potential of a truly integrated North American organization. These expanded cost savings will help to offset ongoing sales volume declines and pivot back the Company to profitable organic growth."

Expanded Critical Initiatives & Increased Cost Savings Target

High Liner Foods' turnaround plan, comprised of five critical initiatives, is working to stabilize the business and create optimal conditions for innovation, industry leadership and growth in support of long-term value creation for stakeholders.

To complement existing work and address anticipated headwinds facing the business, High Liner Foods has engaged the consulting firm AlixPartners to help further analyze and identify improvements associated with the Company's supply chain and other cost savings opportunities related to selling, general and administrative expenses. By expanding the scope of the supply chain excellence critical initiative, the Company expects a significant increase in the net annualized run-rate cost savings associated with its critical initiative plan as compared to the $10 million savings target previously disclosed.

As previously disclosed, cost savings resulting from the critical initiatives, while integral to the turnaround of the Company, may not necessarily fall to the bottom line as High Liner Foods continues to face significant headwinds on sales and margin, including ongoing volume loss that will continue to affect top line results as High Liner Foods continues to execute its turnaround plan.

Dividend and Capital Structure

After an extensive review of its capital allocation strategy, the Board of Directors (the "Board") elected to revise the quarterly dividend to CAD$0.05 per common share from CAD$0.145 per common share. The revised dividend will free up approximately $10 million annually in cash flow that will support the reduction and refinancing of debt to create a stronger balance sheet. It also brings the dividend back in line with the Company's previously disclosed guidance for the dividend to provide a payout of 30 - 35% of trailing Adjusted Diluted EPS relative to 2018 and Q1 2019 financial results.

"The Board has already reduced its size and cut its compensation. In addition, following a careful consideration of our capital allocation priorities, the Board has taken the step to right size the dividend to support our de-leveraging objectives," said incoming Chair of the Board Robert Pace.

Today, the Board of Directors of the Company approved a quarterly dividend of CAD$0.05 per share on the Company's common shares payable on June 15, 2019 to holders of record on June 1, 2019. The Board will continue to review capital allocation priorities through the course of the turnaround plan and expects to revisit the dividend level once the Company has returned to profitable organic growth.

Product Recall Recovery

In the first quarter of 2019, the Company received an $8.5 million recovery of losses from an ingredient supplier related to the Company's product recall announced in April 2017. Total recoveries to date are $17.0 million. As a result, the Company has fully recovered the $13.5 million in losses recognized during the fifty-two weeks ended December 30, 2017 and an additional $3.5 million related to business disruption. This recovery was recognized as business acquisition, integration and other (income) expense in the consolidated statements of income and $5.5 million of the total recovery has been included for the purposes of Adjusted EBITDA and Adjusted Net Income. No further expenses or recoveries are expected.

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).

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 statements are reported in USD.

The financial results for the thirteen weeks ended March 30, 2019 and March 31, 2018 are summarized in the following table:

 

Sales volume for the first quarter of 2019 decreased by 9.6 million pounds, or 10.9%, to 78.5 million pounds compared to 88.1 million pounds in same period in 2018. The decrease in sales volume reflects lower sales volumes in our food service and retail businesses, including lower sales volume as a result of a significant customer loss in the latter half of Fiscal 2018 and the exit of low margin business. A later Easter in 2019 (April 21, 2019) compared to 2018 (April 1, 2018) also shifted some sales volume to the second quarter of 2019 compared to the same period last year. 

Sales in the first quarter of 2019 decreased by $41.8 million to $277.4 million, or 13.1%, compared to $319.2 million in the same period in 2018 due to the lower sales volumes mentioned above and unfavorable changes in sales mix, partially offset by price increases related to raw material cost increases. In addition, the weaker Canadian dollar in the first quarter of 2019 compared to the first quarter of 2018 decreased the value of reported USD sales from our CAD-denominated operations by approximately $2.8 million relative to the conversion impact last year.

Gross profit in the first quarter of 2019 decreased by $4.5 million to $56.1 million compared to $60.6 million in the same period in 2018, while gross profit as a percentage of sales increased to 20.2% compared to 19.0%. The decrease in gross profit reflects the lower sales volume discussed above 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, favourable product mix related to the exit of the 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 USD gross profit from our Canadian operations in 2019 by approximately $0.6 million relative to the conversion impact last year.

Adjusted EBITDA in the first quarter of 2019 increased by $8.0 million, or 33.0%, to $32.2 million (11.6% of sales) compared to $24.2 million (7.6% of sales) in the same period in 2018. The increase in Adjusted EBITDA reflects the inclusion of $5.5 million of the $8.5 million recovery received from the ingredient supplier in the first quarter of 2019 associated with the 2017 product recall, the impact of the new lease standard adopted at the beginning of Fiscal 2019², and the decrease in distribution and selling, general and administrative expenses, partially offset by the lower gross profit discussed previously. The remaining recovery from the ingredient supplier of $3.0 million (of the total $8.5 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 added back or excluded for the purpose of Adjusted EBITDA. 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 $2.1 million in the first quarter of 2019 compared to $1.1 million in 2018.

Reported net income in the first quarter of 2019 increased by $4.5 million, or 44.0%, to $14.8 million (diluted EPS of $0.43) compared to $10.3 million (diluted EPS of $0.31) in the same period last year. The increase in net income reflects the increase in Adjusted EBITDA and the additional $3.0 million product recall recovery from the ingredient supplier that was excluded from Adjusted EBITDA in the first quarter of 2019 as discussed above. This increase was partially offset by an increase in termination benefits as a result of the organizational realignment announced in November 2018, and an increase in finance costs, income tax expense and depreciation and amortization expense.

In the first quarter of 2019, net loss included "business acquisition, integration and other (income) expense" related to the product recall recovery and termination benefits as a result of the organizational realignment announced in November 2018, and other non-cash expenses. In 2018, net income included "business acquisition, integration and other (income) expense" related to the termination benefits as a result of restructuring activities and other non-cash expenses. Excluding the impact of these non-routine and other non-cash expenses, including the $3.0 million product recall recovery excluded from Adjusted EBITDA, Adjusted Net Income in the first quarter of 2019 increased by $4.2 million, or 39.4%, to $14.9 million (Adjusted Diluted EPS of $0.44) compared to $10.7 million (Adjusted Diluted EPS of $0.32) in the same period last year.

Net cash flows provided by operating activities in the first quarter of 2019 increased by $18.0 million to $27.0 million compared to $9.0 million in the same period in 2018 primarily reflecting more favourable results from operations and favourable changes in net non-cash working capital, partially offset by higher interest and income tax payments.

Including trailing twelve-month Adjusted EBITDA for the new lease standard, net debt to rolling twelve-month Adjusted EBITDA was 4.8x at March 30, 2019 compared to 5.8x at the end of Fiscal 2018. Including the impact of the new lease standard since adoption only (December 30, 2018), net debt to rolling twelve-month Adjusted EBITDA was 5.0x at March 30, 2019.

Outlook

We expect net debt to rolling twelve-month Adjusted EBITDA will continue to improve throughout 2019 due in part to the reduction of the dividend rate on the Company's common shares, improved cash flow management, and the acceleration of cost saving activities. As we execute our critical initiative plan, we continue to face ongoing volume declines. Also, U.S. import tariffs were increased from 10% to 25% effective May 10, 2019. As currently drafted, these tariffs apply only to limited species sold by High Liner Foods and as a result of our mitigation activities, are not expected to have a significant financial impact.

Conference Call

The Company will host a conference call on Tuesday, May 14, 2019, at 2:00 p.m. ET (3:00 p.m. AT) during which Rod Hepponstall, President & Chief Executive Officer and Paul Jewer, Executive Vice President & Chief Financial Officer, will discuss the financial results for the first quarter of 2019. 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, May 21, 2019 at midnight (ET). To access the archived conference call, dial 1-855-859-2056 and enter the reservation number 1789885.

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.

The Company's Unaudited Condensed Interim Consolidated Financial Statements and MD&A as at and for the thirteen weeks ended March 30, 2019 were filed concurrently on SEDAR with this news release and are also available at www.highlinerfoods.com.

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, and Sea Cuisine 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: future growth strategies and their impact on the Company's market share and shareholder value; anticipated financial performance including earning trends and growth; 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;  our ability to develop new and innovative products that result in increased sales and market share; increased demand for our products whether due to the recognition of health benefits of seafood or otherwise; changes in costs for seafood and other raw materials; any proposed disposal of assets and/or operations; increases or decreases in processing costs; the USD/CAD exchange rate; percentage of sales from our brands; expectations with regards to sales volume, earnings, product margins, product innovations, brand development and anticipated financial performance; competitor reactions to Company strategies and actions; impact of price increases or decreases on future profitability; sufficiency of working capital facilities; future income tax rates; the expected timing and amount of recovery associated with product recall costs; our ability to  successfully integrate the acquisition of Rubicon Resources, LLC; levels of accretion and synergy and earnings growth related to Rubicon; the expected amount and timing of integration activities related to acquisitions; expected and improved leverage levels, and expected net interest-bearing debt to Adjusted EBITDA; and statements under the heading "Outlook" including expected demand, sales of new product, the efficiency of our plant production, U.S. tariffs on certain seafood products imported from China, and expected amount and timing of cost savings related to the Company's critical initiatives. These statements are based on a number of factors and assumptions including, but not limited to: seafood and other ingredient 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 the interpretation of the U.S. Tax Reform by tax authorities; the impact of the U.S. Administration's tariffs on certain seafood products; 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, and Net Debt. Please refer to the Company's MD&A for the thirteen weeks ended March 30, 2019 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@highlinerfoodinc.com.

SOURCE High Liner Foods Incorporated

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