HLF High Liner Foods Inc

LUNENBURG, NS, Aug. 9, 2023 /CNW/ - High Liner Foods Incorporated (TSX: HLF) ("High Liner Foods" or "the Company"), a leading North American value-added frozen seafood company, today announced financial results for the thirteen and twenty-six weeks ended July 1, 2023.

"During the second quarter we once again delivered sales volume and dollar growth. Our foodservice business continued to perform well and outpace the category in terms of growth," said High Liner Foods President and CEO Rod Hepponstall. "However, softer consumer demand in the retail category and higher inventory levels across the frozen seafood industry continued in the quarter. This had an impact on our profitability during the quarter and together with higher inventory costs, led to a decline in Adjusted EBITDA, compared to a period of markedly different market conditions a year ago."

Mr. Hepponstall added, "For the first half of the year, we generated in excess of $50 million in cash flow from operations and improved our leverage ratio to 3.3x. With our stronger balance sheet and diversified portfolio and customer base, I am confident that we are well positioned to navigate headwinds, that will likely persist through the second half of the year. We continue to believe in the growth potential of our business and the category."

Mr. Hepponstall concluded, "At a challenging time globally for the category, as a market leader, we are continuing to invest and innovate despite market headwinds, and we are coupling these efforts with targeted and strategic promotions to support our customers and help us return to normalized inventory levels by the end of the year."

Key financial results, reported in U.S. dollars ("USD"), for the thirteen weeks ended July 1, 2023, or the second quarter of 2023, are as follows (unless otherwise noted, all comparisons are relative to the second quarter of 2022):

• Sales increased by $0.8 million, or 0.3%, to $254.3 million compared to $253.5 million and sales volume increased by 0.6 million pounds, or 1.0%, to 59.4 million pounds compared to 58.8 million pounds;
• Gross profit decreased by $4.3 million, or 7.6%, to $52.0 million compared to $56.3 million, and gross profit as a percentage of sales decreased to 20.4% compared to 22.2%;
• Adjusted EBITDA⁽¹⁾ decreased by $3.3 million, or 13.0%, to $22.0 million compared to $25.3 million, and Adjusted EBITDA as a percentage of sales decreased to 8.7% compared to 10.0%;
• Net income decreased by $13.1 million, or 68.9%, to $5.9 million compared to $19.0 million and diluted earnings per share ("EPS") decreased to $0.17 per share, compared to $0.54 per share;
• Adjusted Net Income^([1]) in the second quarter of 2023 and 2022 was $10.0 million and Adjusted Diluted EPS⁽¹⁾ in the second quarter of 2023 and 2022 was $0.29 per share; and
• Net Debt⁽¹⁾ to Rolling Twelve-Month Adjusted EBITDA⁽¹⁾ was 3.3x at July 1, 2023 compared to 3.7x at the end of Fiscal 2022 and 3.0x at July 2, 2022. This ratio increased during the second half of Fiscal 2022 due to increased investment in inventory.

Key financial results, reported in U.S. dollars ("USD"), for the twenty-six weeks ended July 1, 2023, or Fiscal 2023, are as follows (unless otherwise noted, all comparisons are relative to the twenty-six weeks ended July 2, 2022, or "Fiscal 2022"):

• Sales increased by $35.3 million, or 6.4%, to $583.5 million compared to $548.2 million and sales volume increased by 4.3 million pounds, or 3.3%, to 136.4 million pounds compared to 132.1 million pounds;
• Gross profit increased by $2.1 million, or 1.8%, to $120.4 million compared to $118.3 million, while gross profit as a percentage of sales decreased to 20.6% compared to 21.6%;
• Adjusted EBITDA^([2]) decreased by $0.5 million, or 0.9%, to $53.2 million compared to $53.7 million, and Adjusted EBITDA as a percentage of sales⁽¹⁾ decreased to 9.1% compared to 9.8%;
• Net income decreased by $13.8 million, or 41.1%, to $19.8 million compared to $33.6 million and diluted earnings per share ("EPS") decreased to $0.57 per share compared to $0.96 per share; and
• Adjusted Net Income⁽¹⁾ increased by $1.4 million, or 5.6%, to $26.5 million compared to $25.1 million and Adjusted Diluted EPS⁽¹⁾ increased to $0.77 per share compared to $0.72 per share.

Q2 Operational Update

In the Company's foodservice business, High Liner delivered its ninth consecutive quarter of growth despite a slowdown within the category overall. The performance of High Liner Foods' foodservice business during the second quarter was anchored by the relative stability of non-commercial customers and increased contract manufacturing business. The Company also performed well in casual dining and quick service restaurants and grew volumes as a result of newer product lines, new business and improved customer service levels.

High Liner Foods' retail business continues to be impacted by softer demand for protein, including seafood products as consumers switch to lower cost meal solutions. The Company is focused on targeted promotions to drive sales and demonstrate value of seafood as a healthy, affordable protein.

Demand in both businesses was also impacted by the earlier timing of lent compared to the prior year.

Financial Results 

For the purpose of presenting the Consolidated Financial Statements in USD, CAD-denominated assets and liabilities in the Company'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, EPS and financial statements are reported in USD.

The financial results in USD for the thirteen and twenty-six weeks ended July 1, 2023 and July 2, 2022 are summarized in the following table:

Sales volume for the thirteen weeks ended July 1, 2023, or the second quarter of 2023, increased by 0.6 million pounds, or 1.0%, to 59.4 million pounds compared to 58.8 million pounds in the thirteen weeks ended July 2, 2022, or the second quarter of 2022 due to higher volume in our foodservice business, partially offset by lower volume in our retail business. In our foodservice business, sales volume was higher 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 second quarter of 2023, as compared to the second quarter of 2022 due to the increased investment in working capital in the latter part of Fiscal 2022 to mitigate the impact of the global supply chain challenges. This was partially offset by lower sales volume in our retail business due to the impact of inflation. This resulted from softer demand for protein, including seafood product as consumers switch to lower cost alternatives. In addition, Easter occurring 8 days earlier in 2023 compared to 2022 resulted in lower sales volume in the second quarter of 2023 compared to the same period last year.

Sales in the second quarter of 2023 increased by $0.8 million, or 0.3%, to $254.3 million compared to $253.5 million in the same period in 2022, reflecting higher sales volumes mentioned previously and pricing actions implemented during Fiscal 2022 and the first quarter of 2023 to mitigate inflationary increases on input costs, partially offset by changes in sales mix. The weaker Canadian dollar in the first half of 2023 compared to the same quarter of 2022 decreased the value of reported USD sales from our CAD-denominated operations by approximately $3.2 million relative to the conversion impact last year.

Gross profit in the second quarter of 2023 decreased by $4.3 million to $52.0 million compared to $56.3 million in the same period in 2022 and gross profit as a percentage of sales decreased by 180 basis points to 20.4% compared to 22.2%. The decrease in gross profit reflects changes in product mix, higher carrying costs associated with higher inventory and some inefficiencies at our plants as a result of the Company slowing down production due to higher inventory levels and softer consumer demand, discussed previously. The decrease in gross profit was partially offset by the inflationary-pricing actions and the increase in sales volume. In addition, the weaker Canadian dollar decreased the value of reported USD gross profit from our CAD-denominated operations by approximately $0.7 million relative to the conversion impact last year.

Adjusted EBITDA in the second quarter of 2023 decreased by $3.3 million to $22.0 million compared to $25.3 million in the same period in 2022 and Adjusted EBITDA as a percentage of sales decreased to 8.7% compared to 10.0%. The decrease reflects the decrease in gross profit, partially offset by the decrease in net SG&A expenses.

Reported net income in the second quarter of 2023 decreased by $13.1 million to net income of $5.9 million (diluted EPS of $0.17) compared to $19.0 million (diluted EPS of $0.54) in the same period in 2022 due to the inclusion of $10.0 million of insurance proceeds in business acquisition, integration and other expense (income) during the second quarter of 2022. The decrease in net income was also due to the decrease in Adjusted EBITDA, and an increase in finance costs in the second quarter of 2023 compared to the same period last year, partially offset by lower income taxes.

Reported net income in the second quarter of 2023 and 2022 included certain non-routine expenses classified as "business acquisition, integration and other expense (income)." Excluding the impact of these non-routine items or other non-cash expenses, share-based compensation, and the insurance proceeds Adjusted Net Income in the second quarter of 2023 and 2022 was $10.0 million and Adjusted Diluted EPS in the second quarter of 2023 and 2022 was $0.29 per share.

Net cash flows provided by (used in) operating activities in the second quarter of 2023 increased by $36.1 million to an inflow of $45.4 million compared to an inflow of $9.3 million in the same period in 2022 due to favourable changes in non-cash working capital balances, partially offset by lower cash flows provided by operations primarily due to the $10.0 million of insurance proceeds received in the second quarter of 2022, and higher interest paid during the second quarter of 2023. Capital expenditures were $9.1 million in the first half of 2023 compared to $5.1 million in the prior year reflecting the continued investment in the business.

Net Debt decreased by $41.4 million to $344.1 million at July 1, 2023 as compared to $385.5 million at December 31, 2022, reflecting lower bank loans, lower long-term debt and lower lease liabilities as at July 1, 2023, as compared to December 31, 2022.

Net Debt to Rolling Twelve-Month Adjusted EBITDA was 3.3x at July 1, 2023 compared to 3.7x at the end of Fiscal 2022 and 3.0x at July 2, 2022.  Net Debt to Rolling Twelve-Months Adjusted EBITDA increased during the second half of Fiscal 2022 primarily as a result of increased investment in seasonal working capital in Fiscal 2022 and inflation in raw materials. 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 of 3.0x at the end of Fiscal 2023.

Outlook

"We remain confident in the outlook for our business," said Rod Hepponstall. "While we can expect that current headwinds will put pressure on our business through the second half of the year, we continue to believe that we will end the year with year over year Adjusted EBITDA growth, while generating significant cash flow from operations and improving our leverage ratio to our long-term target of 3.0x."

The Company has a strong balance sheet and is well equipped to invest in organic growth, explore opportunities for transformative growth through potential M&A activities to build shareholder value and continue to grow the dividend over time.

Dividend

Today, the Company's Board of Directors approved a quarterly dividend of CAD$0.13 per share on the Company's common shares, payable on September 15, 2023 to holders of record on September 1, 2023. These dividends are considered "eligible dividends" for Canadian income tax purposes.

Conference Call

The Company will host a conference call on Thursday, August 10, 2023, at 9:00 a.m. ET (10:00 a.m. AT) during which Rod Hepponstall, President & Chief Executive Officer, Paul Jewer, Executive Vice President & Chief Financial Officer and Anthony Rasetta, Chief Commercial Officer, will discuss the financial results for the second quarter of 2023. To access the conference call by telephone, dial 416-764-8659 or 1-888-664-6392. 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 Sunday, September 10, 2023 at midnight (ET). To access the archived conference call, dial 1-888-390-0541 and enter the replay entry code 804727#.

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 Company's Unaudited Condensed Interim Consolidated Financial Statements and MD&A as at and for the thirteen and twenty-six weeks ended July 1, 2023 were filed concurrently on SEDAR Plus with this news release and are also available at www.highlinerfoods.com.

Non-IFRS Measures

The Company reports its financial results in accordance with International Financial Reporting Standards ("IFRS"). Included in this media release are the following non-IFRS financial measures: Adjusted EBITDA, Adjusted EBITDA as a Percentage of Net Sales, Adjusted Net Income, Adjusted Diluted EPS, Net Debt and Net Debt to Rolling Twelve-Month Adjusted EBITDA.

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 for the reasons outlined below. These measures do not have any standardized meaning as 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. 

Adjusted EBITDA and Adjusted EBITDA as a Percentage of Sales

Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization adjusted for items that are not considered representative of ongoing operational activities of the business. The related margin, Adjusted EBITDA as a Percentage of Sales, is defined as Adjusted EBITDA divided by net sales, where net sales is defined as "Sales" on the consolidated statements of income.

We use Adjusted EBITDA (and Adjusted EBITDA as a percentage of sales) as a performance measure as it approximates cash generated from operations before capital expenditures and changes in working capital, and it excludes the impact of expenses and recoveries associated with certain non-routine items that are not considered representative of the ongoing operational activities, as discussed above, and share-based compensation expense related to the Company's share price. For the thirteen and twenty-six weeks ended ended July 2, 2022, Adjusted EBITDA also excludes the $10.0 million in insurance proceeds. We believe investors and analysts also use Adjusted EBITDA (and Adjusted EBITDA as a percentage of sales) to evaluate the performance of our business. The most directly comparable IFRS measure to Adjusted EBITDA is "Net income" on the consolidated statements of income. Adjusted EBITDA is also useful when comparing to other companies, as it eliminates the differences in earnings that are due to how a company is financed. Also, for the purpose of certain covenants on our credit facilities, "EBITDA" is based on Adjusted EBITDA, with further adjustments as defined in the Company's credit agreements.

The following table reconciles Adjusted EBITDA with measures that are found in our Consolidated Financial Statements, and calculates Adjusted EBITDA as a Percentage of Sales.

Rolling Twelve-Month Adjusted EBITDA

Adjusted Net Income and Adjusted Diluted EPS

Adjusted Net Income is net income adjusted for the after-tax impact of items which are not representative of ongoing operational activities of the business and certain non-cash expenses or income. Adjusted Diluted EPS is Adjusted Net Income divided by the average diluted number of shares outstanding.

We use Adjusted Net Income and Adjusted Diluted EPS to assess the performance of our business without the effects of the above-mentioned items, and we believe our investors and analysts also use these measures. We exclude these items because they affect the comparability of our financial results and could potentially distort the analysis of trends in business performance. For the thirteen and twenty-six weeks ended July 2, 2022, Adjusted Net

Income also excludes the $10.0 million in insurance proceeds. The most comparable IFRS financial measures are net income and EPS.

The table below reconciles our Adjusted Net Income with measures that are found in our Consolidated Financial Statements and calculates Adjusted Diluted EPS.

Net Debt and Net Debt to Rolling Twelve-Month Adjusted EBITDA

Net Debt is calculated as the sum of bank loans, long-term debt (excluding deferred finance costs and modification gains/losses) and lease liabilities, less cash.

We consider Net Debt to be an important indicator of our Company's financial leverage because it represents the amount of debt that is not covered by available cash. We believe investors and analysts use Net Debt to determine the Company's financial leverage. Net Debt has no comparable IFRS financial measure, but rather is calculated using several asset and liability items in the consolidated statements of financial position.

Net Debt to Rolling Twelve-Month Adjusted EBITDA is calculated as Net Debt divided by Rolling Twelve-Month Adjusted EBITDA (see above). We consider Net Debt to Rolling Twelve-Month Adjusted EBITDA to be an important indicator of our ability to generate earnings sufficient to service our debt, that enhances understanding of our financial performance and highlights operational trends. This measure is widely used by investors and rating agencies in the valuation, comparison, rating and investment recommendations of companies; however, the calculations of Adjusted EBITDA may not be comparable to those of other companies, which limits their usefulness as comparative measures.

The following table reconciles Net Debt to IFRS measures reported as at the end of the indicated periods in the consolidated statements of financial position and calculates Net Debt to Rolling Twelve-Month Adjusted EBITDA.

Forward Looking Statements

Forward-looking statements can generally be identified by the use of the conditional tense, the words "may", "should", "would", "could", "believe", "plan", "expect", "intend", "anticipate", "estimate", "foresee", "objective", "goal", "remain" or "continue" or the negative of these terms or variations of them or words and expressions of similar nature. Actual results could differ materially from the conclusion, forecast or projection stated in such forward-looking information. As a result, we cannot guarantee that any forward-looking statements will materialize. Assumptions, expectations and estimates made in the preparation of forward-looking statements and risks that could cause our actual results to differ materially from our current expectations are discussed in detail in the Company's materials filed with the Canadian securities regulatory authorities from time to time, including the Risk Factors section of our MD&A for the thirteen and twenty-six weeks ended July 1, 2023, the Risk Factors section of our 2022 MD&A and the Risk Factors section of our 2022 Annual Information Form. The risks and uncertainties that may affect the operations, performance, development and results of High Liner Foods' business include, but are not limited to, the following factors: compliance with food safety laws and regulations; timely identification of and response to events that could lead to a product recall; volatility in the CAD/USD exchange rate; competitive developments including increases in overseas seafood production and industry consolidation; availability and price of seafood raw materials and finished goods and the impact of geopolitical events (and related economic sanctions) on the same; the impact of the U.S. Trade Representative's tariffs on certain seafood products; costs of commodity products, freight, storage and other production inputs, and the ability to pass cost increases on to customers; successful integration of acquired operations; potential increases in maintenance and operating costs; shifts in market demands for seafood; performance of new products launched and existing products in the market place; changes in laws and regulations, including environmental, taxation and regulatory requirements; technology changes with respect to production and other equipment and software programs; enterprise resource planning system risk; adverse impacts of cybersecurity attacks or breach of sensitive information; supplier fulfillment of contractual agreements and obligations; competitor reactions; completion and/or advancement of sustainability initiatives, including, without limitation, initiatives relating to the carbon work plan, waste reduction and/or seafood sustainability and traceability initiatives; High Liner Foods' ability to generate adequate cash flow or to finance its future business requirements through outside sources; credit risk associated with receivables from customers; volatility associated with the funding status of the Company's post-retirement pension benefits; adverse weather conditions and natural disasters; the availability of adequate levels of insurance; management retention and development; economic and geopolitical conditions such as Russia's invasion of Ukraine and the implementation and/or expansion of related sanctions policies; and the potential impact of a pandemic outbreak of a contagious illness, such as COVID-19 pandemic, on general economic and business conditions and therefore the Company's operations and financial performance. Forward-looking information is based on management's current estimates, expectations and assumptions, which we believe are reasonable as of the current date. You should not place undue importance on forward-looking information and should not rely upon this information as of any other date. Except as required under applicable securities laws, we do not undertake to update these 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. 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.

High Liner Foods Incorporated is a leading North American processor and marketer of value-added frozen seafood. High Liner Foods' retail branded products are sold throughout the United States and Canada under the High Liner, Fisher Boy, Mirabel, Sea Cuisine, and Catch of the Day labels, and are available in most grocery and club stores. The Company also sells branded products to restaurants and institutions under the High Liner, Mirabel, Icelandic Seafood and FPI labels and is a 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.

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