High Liner Foods Incorporated ("High Liner Foods" or "the Company"), the leading North American value-added frozen seafood company, today reported financial results for the thirteen and thirty-nine weeks ended September 28, 2013. All amounts are reported in U.S. dollars ("USD") unless otherwise noted.
"We are pleased to report High Liner Foods' Adjusted Net Income was $10.4 million for the third quarter of 2013, which represents a $2.4 million, or 30%, increase over the third quarter of 2012," said Henry Demone, CEO. "Profitability improved in the third quarter, despite continued pressure on sales in certain segments of our business, and our operating cash flow was strong, as evidenced by Standardized Free Cash Flow of $64.7 million for the fifty-two week period ended September 28, 2013, compared to $41.1 million for the same period ended September 29, 2012. Strong cash flows from operating activities allowed us to reduce our net interest-bearing debt to Adjusted EBITDA ratio, also calculated on a rolling fifty-two week basis, from 3.40x at the end of fiscal 2012 to 3.16x at the end of the third quarter."
"Consistent with the first half of this year, in the third quarter we experienced sale declines compared to last year in our U.S. food service business and our U.S. and Canadian retail private label businesses. The decline in U.S. food service sales reflected continued soft restaurant sales related to a sluggish economic recovery in the U.S. and the decline in retail private label sales reflects the trend being experienced in the seafood marketplace overall of decreased demand for retail private label seafood products," explained Mr. Demone. "However, the impact of these sales declines in the third quarter was partially offset by sales growth in our branded retail business on both sides of the border and our Canadian food service business, when compared to the same period last year."
"The $2.4 million increase in Adjusted Net Income in the third quarter also reflects lower overall raw material costs, significant savings in financing costs resulting from amendments made to our term loan in the first quarter of this year, realization of synergies resulting from integrating the Icelandic USA acquisition and a lower effective income tax rate," said Mr. Demone. "In the first quarter of this year, we expedited the closure of our plant in Danvers, Massachusetts, and as a result, incurred incremental operating costs related to reduced plant throughput rates as our U.S. plants integrated new products into their respective production facilities. The extent of these incremental costs, incurred in part to ensure minimal disruption to our customers, was not fully anticipated, and while we have been successful in increasing plant throughput rates from those experienced in the first quarter, these rates have not been fully restored to optimal levels. As a result, the Company continued to incur additional operating costs in the third quarter related to the reduced throughput rates and the full impact of the synergies related to closing the Danvers plant have not yet been fully realized. Maximizing throughput rates and reducing operating costs associated with our U.S. manufacturing facilities is currently a top priority."
Sales for the third quarter were $216.5 million, a decrease of $3.4 million or 1.5%, from $219.9 million for the same period last year. Approximately one-third of the Company's sales are denominated in Canadian dollars ("CAD") and the effect of translating CAD denominated sales to USD decreased the value of reported sales relative to the comparable period in 2012 by approximately $3.4 million.
Adjusted EBITDA was $22.1 million, or 10.2% of sales, in the third quarter of 2013, consistent with Adjusted EBITDA of $21.8 million, or 9.9% of sales, for the same period in 2012. While Adjusted EBITDA in the third quarter of 2013 reflects realization of synergies resulting from integrating the Icelandic USA acquisition and lower overall raw material costs, the favourable impact of these items was offset by the impact of lower sales and increased operating costs associated with the reduced plant throughput rates experienced at our U.S. manufacturing facilities since the closure of our Danvers plant in the first quarter of 2013.
Net income was $7.4 million (diluted EPS of $0.48) in the third quarter of 2013, compared with net income of $2.2 million (diluted EPS of $0.14) for the third quarter of 2012. In addition to the items cited in the preceding paragraph, the $5.2 million increase in net income in the third quarter also reflects: significantly reduced financing costs in 2013 resulting from amendments made to our term loan in the first quarter of this year; a non-cash recovery related to revaluing an embedded derivative associated with the long-term debt LIBOR floor on our term loan; a mark-to-market gain on an interest rate swap related to the embedded derivative; a lower stock-based compensation expense; and a lower effective income tax rate. In addition, net income for the third quarter of 2012 was negatively impacted by one-time integration costs related to the Icelandic USA acquisition expensed during that quarter.
Excluding the after-tax impact of certain items, including one-time costs related to acquiring American Pride Seafoods (discussed below), Icelandic USA integration costs, stock-based compensation expense, the revaluation of the embedded derivative associated with the long-term debt LIBOR floor, the mark-to-market gain on the interest rate swap related to the embedded derivative and certain other non-recurring expenses, Adjusted Net Income was $10.4 million (Adjusted Diluted EPS of $0.66) compared with $8.0 million (Adjusted Diluted EPS of $0.52) for the third quarter of 2012.
Standardized Free Cash Flow was $64.7 million for the fifty-two week period ended September 28, 2013 compared with $41.1 million for the same period ended September 29, 2012. Cash flow generated from operations and decreased non-cash working capital allowed the Company to reduce: net interest-bearing debt by $57.2 million, bringing net interest-bearing debt to $267.6 million at September 28, 2013 from $324.8 million at September 29, 2012; and the interest-bearing debt to Adjusted EBITDA ratio, calculated on a rolling fifty-two week basis, to 3.16x at the end of the third quarter of 2013, compared to 3.40x at the end of fiscal 2012.
Dividends
Today, the Board of Directors of the Company approved a quarterly dividend of CAD$0.19 per Common Share payable on December 16, 2013 to shareholders of record on December 2, 2013. This represents a CAD$0.01 increase in the quarterly dividend per Common Share, or a CAD$0.04 increase in the dividend per Common Share on an annualized basis, reflecting the Board's continued confidence in the Company's operations.
Outlook
"The first quarter of this year was challenging for several reasons, however, with the exception of the lingering plant throughput issues associated with the closure of our Danvers plant, and despite continued headwinds on food service sales in the U.S. and retail private label sales across the board, results have improved on a year-to-date basis. Adjusted Net Income for the first three quarters of 2013 increased by $1.9 million to $29.3 million, compared to $27.4 million for the same period last year," remarked Mr. Demone. "In addition, we are making progress on our strategic goals, including profitable growth, and were pleased to announce our acquisition of American Pride Seafoods ("American Pride") on October 1, 20132. American Pride's business compliments ours and will strengthen our leadership position in the seafood industry."
"We plan to delay the integration of this acquisition and to operate American Pride without any substantial changes to its existing operations until post-Lent 2014. This will delay realization of the full synergies expected from this acquisition until 2015, but will allow us to remain focused on our current efforts aimed at increasing plant throughputs in the U.S. to fully realize the synergies related to closing the Danvers plant," explained Mr. Demone.
"Looking forward, continued cost increases for shrimp and haddock may adversely affect volumes as well as margins for certain products during the balance of 2013 and into next year. The decline in our U.S. food service sales compared to 2012 continues to be disappointing, but to the extent there are improvements in this sector of the U.S. economy, we believe the Company is well positioned for its sales volumes to improve," concluded Mr. Demone.
