Heather Keeler-Hurshman - Director, IR Paul Jewer - EVP and CFO Keith Decker - President and CEO

George Doumet - Scotiabank Sabah Khan - RBC Mark Robinson - Cormark Michael Mills - Beacon Securities Bob Gibson - Octagon

Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to the High Liner Foods Incorporated Conference Call for the Results of the Third Quarter of 2015. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. [Operator Instructions]. This conference call is being recorded today, Wednesday, November 4, 2015 at 3:30 PM Eastern Time for replay purposes. I would now like to turn the call over to Heather Keeler-Hurshman, Director of Investor Relations for High Liner Foods. Ms. Keeler-Hurshman, please go ahead. Heather Keeler-Hurshman: Thank you and good afternoon everyone. Thank you for joining High Liner Foods conference call to discuss our financial results for the third quarter of 2015. On the call today from High Liner Foods are Keith Decker, President and Chief Executive Officer; and Paul Jewer, Executive Vice President and Chief Financial Officer. Today's call will start with Paul reviewing the company's financial performance for the third quarter of 2015 followed by Keith, who will discuss key developments in the quarter and provide an update on our 2015 strategic goals, before opening the call up for questions. Before turning the call over to management, listeners are reminded that certain statements made in today's call may be forward-looking statements that are subject to risks and uncertainties. Management may use forward-looking statements as they discuss the company's strategy and business in the future. Actual operating or financial results could differ materially from those anticipated in these forward-looking statements. High Liner Foods includes a thorough discussion of the risk factors that can cause its anticipated outcomes to differ from actual outcome and its publicly available disclosure documents, particularly in its annual MD&A and annual information forms. Please note that High Liner Foods is under no obligation to update any forward-looking statements discussed today. Earlier today, High Liner Foods reported its financial results for the third quarter of 2015. That news release along with the company's MD&A and unaudited condensed interim consolidated financial statements for the third quarter of 2015 have been filed on SEDAR and can also be found in the investor information section of High Liner Foods' web site. If you would like to receive our news releases in the future, please visit the company's web site to register. Lastly, please note that the company reports its financial information in U.S. dollars and the results to be discussed today are stated in U.S. dollars unless otherwise noted. High Liner Foods common shares trade on the Toronto Stock Exchange and are quoted in Canadian dollars. I will now turn the call over to Paul. Paul, please go ahead.

Thank you, Heather and good afternoon everyone. Before beginning my financial review of the third quarter, I'd like to remind listeners that we use certain non-IFRS measures and ratios when discussing our results, as we believe these are useful in assessing the company's financial performance. These measures are fully described and reconciled to IFRS measures in our MD&A. Please note that all comparisons provided during my financial review of the third quarter of 2015, are relative to the third quarter of 2014, unless otherwise noted. I'd also like to remind listeners that we acquired Atlantic Trading Company in October 2014, and therefore the comparative results did not include the impact of this acquisition. Sales volume decreased overall in the third quarter by 1.7 million pounds or 2.4% to 67.4 million pounds. In Canada, volume increased by 0.2 million pounds, and in the U.S. volumes declined by 1.9 million pounds, reflecting that the impact of the Atlantic Trading acquisition only served to partially offset volume declines experienced in the rest of our U.S. business. As explained in last quarter's call, over the past year, significant price increases have been passed on to customers to cover increased raw material costs, including higher foreign exchange in our Canadian business, and management believes cumulative price increases had adversely impacted sales volume. The organization was very focused in the third quarter on improving sales volume, and through more effective and increased promotional activity, we did see an improvement in year-over-year sales volume trends, compared to those experienced in the second quarter. Specifically, the U.S. experienced less of a decline in volume in the third quarter compared to last quarter, minus 3.6% compared to minus 8.9%, and volume in Canada increased by 1.2% in the third quarter, compared to an 11.4% decrease last quarter. Sales in U.S. dollars decreased in the third quarter by C$6.5 million or 2.6% to C$240.1 million. The weaker Canadian dollar in 2015 decreased the value of reported sales in the quarter by approximately C$13.3 million, relative to the conversion impact in the same period last year. Domestic currency, which is before the impact of converting our Canadian dollar denominated operations to U.S. dollars, sales increased by C$7 million or 2.8% to C$260.3 million, reflecting the impact of price increases net of increased promotional spending and partially offset by lower sales volume in the U.S. Gross profit decreased in the third quarter by C$7.1 million to C$43.9 million, reflecting lower overall sales volume, a decrease in gross profit as a percentage of sales, and an unfavorable change in the U.S. dollar Canadian dollar exchange rate. The weaker Canadian dollar had the effect of decreasing the value of reported U.S. dollar gross profit from our Canadian operations by C$2.7 million, relative to the conversion impact last year. Gross profit as a percentage of sales was 18.3% compared to 20.7% last year, reflecting price increases that did not fully recover cost increases, increased promotional spending, an unfavorable change in product mix, and lower gross margins on Atlantic Trading sales compared to the overall average margin on the remainder of the company sales. Adjusted EBITDA decreased in the third quarter by C$1.9 million or 10.1% to C$17.1 million, and was 7.1% of sales compared to 7.7% last year. Approximately C$1 million of this decline reflects in unfavorable change in the U.S. dollar-Canadian dollar exchange rate, and the remaining decrease reflects lower overall sales volume and lower gross profit as a percentage of sales, partially offset by lower distribution costs, and lower SG&A expenses. Lower distribution costs, reflect the impact of supply chain optimization savings and lower SG&A expenses reflect lower sales commission and incentives, and savings related to the restructuring activities, which Keith will elaborate on in a few moments. Reported net income decreased in the third quarter by C$1.5 million or 19.8% to C$6.1 million with diluted earnings per share of C$0.19. This decrease primarily reflects lower adjusted EBITDA, as I just discussed, and higher non-routine and one time costs, partially offset by lower income tax expense. Excluding the impact of non-routine and one time costs, which are explained in our MD&A, adjusted net income decreased in the third quarter by C$1.3 million or 15.6% to C$7.1 million, and correspondingly, adjusted diluted earnings per share decreased by C$0.04 to C$0.23. Turning now to the balance sheet; the net working capital balance was C$227.2 million at the end of the third quarter. This was C$30.3 million better than the balance a year ago, due to the higher payables and lower receivables, partially offset by the impact of the Atlantic Trading acquisition. Net interest bearing debt was C$319.1 million at the end of the third quarter, which was C$24.2 million lower than the balance at the end of the same period last year. This decrease reflects improved cash flow provided by operating activities, partially offset by the use of debt last October to acquire Atlantic Trading, and for a C$5.7 million to close operating leases relating to the American Pride business. For the rolling 12 month period ended October 3, 2015, cash flow from operating activities was C$71.1 million, of which C$39.5 million was generated in this third quarter. Our net interest bearing debt to adjusted EBITDA ratio also calculated on a rolling 12 month basis, improved to 3.9 times at the end of the third quarter. This was an improvement compared to 4.4 times at the end of fiscal 2014 and 4.2 times at the end of the second quarter of 2015. Cash flow from operations generated during the fourth quarter will be used to reduce debt. However to the extent, seasonal working capital requirements increased by more than free cash flow, debt will increase and so will our net interest bearing debt to adjusted EBITDA ratio. That concludes my financial review for the third quarter of 2015, and I would now like to turn the call over to Keith, to discuss key developments in the quarter and provide an update on our 2015 strategic goals.

Thank you, Paul, and good afternoon everyone. The third quarter's financial results were improved compared to those reported for the second quarter. And while we are not satisfied with the results, we do believe we saw sizable improvement across the business, including in sales volume trends. As expected, we have not realized the benefit of raw material cost savings, so previous raw material cost increases, along with the weaker Canadian dollar, continued to negatively impact sales volume and margins in the third quarter. Adjusted EBITDA however, on a domestic dollar basis, was relatively flat in the quarter, compared to the same period last year, reflecting the achievement of cost savings and efficiencies in certain areas of our business. Expressed as a percentage of sales, distribution costs and SG&A both decreased on a year-over-year basis. Lower distribution costs reflect savings in storage costs, resulting from supply chain optimization activities. Lower SG&A expenses reflect the impact of restructuring activities, which were undertaken in certain areas to achieve efficiencies, identified through our supply chain optimization project, and in other areas, changes were made to address certain internal sales execution and promotional challenges, that management believes contributed to the company's underperformance in the second quarter. New talent has also been recruited to key leadership positions, and following these restructuring activities, the organization will not only be more efficient, but also better positioned to achieve sales growth moving forward. Our strategic goal to optimize our supply chain, continues to be a top priority for the organization. Activities related to this goal continued, as planned, during the third quarter, and most of the activities for which we were utilizing outside expertise, are now completed. While we believe we have achieved most of the cost savings expected, related to completed activities, their impact on product margins continues to be delayed, as a result of increased production costs associated with lower volumes being produced at our plants. We expect to continue, realizing some net cost savings relating to this project, in the fourth quarter, and that by the end of 2016, we can achieve annual cost savings of C$20 million to C$25 million. Continued improvement of sales volume trends in the remainder of 2015 and into next year, will help to realize the full benefits related to our supply chain optimization activities. In regards to raw material costs, we expect to start realizing cost savings on certain key species late this year and into next year. In the third quarter, promotional spending was increase to help improve sales volume trends, and serve to help lower the price of our products to customers, in advance of the company starting to realize expected lower raw material costs. Improving sales volume trends remains our number one priority for the remainder of 2015, and these efforts will continue to be supported by increased promotional spending, and will be further assisted to the extent we start to realize lower seafood raw material prices. I want to recognize the last few months have been challenging for our shareholders, as High Liner Food shares have traded down significantly since our second quarter results were released. However, I believe continued commitment to our strategic goals, specifically, focusing on supply chain optimization in organic growth, is how we can continue to best deliver improved performance in 2016. Before opening up the call for questions, I'd like to share with you that earlier today, the company's Board of Directors approved a quarterly dividend of C$0.12 per share on the company's common shares payable on December 15, 2015 to holders of record on December 1, 2015. Operator, I would now like to open the call for questions. Thank you.

[Operator Instructions]. Your first question comes from George Doumet from Scotiabank. Your line is open.

Hi. Good afternoon.

Hi George.

Can you guys just provide some color on the expectations for the timing on the lower fish prices to flow-through the P&L? I guess how big is the impact expected in Q4, any sense of magnitude you can provide on average for Q1 in 2016? And last part of that question is, how much do you guys foresee that we will need to give up in terms of promotions?

So in Q4 of this current year, we should start to see that benefit, as we exit the quarter. It will be later this quarter, where we really start to see some of that benefit. There was really nothing to speak of in our Q3 results. That benefit will then be fully realized, as we go into 2016. Nothing that I can quantify, in terms of dollar impact at this time. We would intend to invest some of that improved pricing back into promotional activity, and in fact, we invested in promotional activity in advance of benefiting from that lower cost, in order to get volume growth going to provide additional benefit, when the lower cost product does become available. The one thing I do need to highlight, however, which is important to consider, is the lower cost will be primarily realized in our U.S. business, in our Canadian business for the first part of 2016. Certainly, that lower cost will be offset by the negative change in the Canadian dollar-U.S. dollar exchange rate.

I appreciate the color. I guess just to be clear here, the C$20 million to C$25 million cost takeout objective is still on for 2016. Are there any contingent volume assumptions to get there, or can current level of volumes support that cost takeout target?

We believe we have things that we can do, that even if we were only to maintain flat volumes or frankly the level of volume decline that we experienced this quarter, that we would be able to achieve that benefit. Obviously, I don't know I think we said this in our Q2 call, if we were to have minus 9% volumes like we did in Q2, that would become a challenge. But at current levels, we believe that benefit is fully achievable. And we did actually have some of that benefit be realized in Q3 of this year, despite some of the volume challenges.

Can you quantify the amount that was achieved this quarter?

Yeah there'd be a couple of million dollars of benefit that we were able to achieve in the third quarter.

Okay. One last one if I may -- so obviously been some significantly lower SG&A in the quarter, is that a sustainable run rate moving forward? Do we expect further improvements, as we enter 2016?

I think it’s a sustainable run rate moving forward. We have identified areas in the business, where we have the opportunity to cut costs, and those are not onetime cost cuts, those are cost cuts that should continue to benefit us, as we move into 2016.

All right. I appreciate it.

It’s a function, George, of identifying areas where we could tighten up the operation and we have done that, and I believe, we should continue to move forward at that level.

Okay. Thanks so much.

Your next question comes from Sabah Khan from RBC Capital Markets. Your line is open.

Thanks. Can you really comment on the overall trends in both retail and U.S. foodservice for your seafood cost carrier, which you are seeing, versus the last quarter?

Well I think, we can kind of segment it by Canadian versus the U.S. business. So the Canadian business, we saw a nicely bouncing Canadian business; Canadian retail in particular, with better promotional activity. I think we signaled during the second quarter call, that we had some promotional activity, which wasn't resulting in the desired outcome, and when you subsequently make some changes during the second quarter to address that. And I think that we did see the rebound in sales volume and sales dollar in our retail business in Canada. We have got a lot of [indiscernible] from currency, so obviously that increased promotional activity had some impact on a profit perspective. But that being said, we did feel good about. On the food service side of the business, it was another one of those where we put a lot of activity against it. From an execution standpoint, we saw that the business rebounded nicely. I would say that, if you look at the U.S. side of the business, foodservice, we had better performance than we had during the second quarter, and the same thing with our retail business. And I would say that, given that we have got some new sales leadership in place in that business, I would expect that that performance should continue to improve, as that team comes up to speed.

Okay. And how would you say the overall -- I guess your primary customers across foodservice are performing? In terms of just the overall demand for seafood, how are you comping, I guess, versus the industry?

Well on foodservice, we don't see the comps, because there really is no general data associated either -- first of all, the large customers like Cisco and U.S. Foods and GFS as ever, they don't disclose their percentage of seafood business. So you don't really know how big their total seafood business is. And then we will break it out in terms of what their category performance is doing. But I would say in general, if you follow the industry trends of their results, you will see that Cisco had a better quarter. U.S. Foods is working on their exit strategy from the Cisco-U.S. deal, and I think Gordon Food Service continues to do well, given that they have been relatively focused on taking share from Cisco in the U.S.

I think the trend we referred to the second quarter is still relevant, that the high prices on seafood have caused some operators to ship many [indiscernible], particularly to chicken. So that is something that we are working to change the tide on and lower seafood raw material costs should help us with that. The other thing I would say, while the industry overall has shown some signs of improvement from a menu occasion perspective, its primarily in breakfast and lunch as opposed to dinner, and it hasn't been fully at the full service restaurant piece of the business. So again, those are areas where we are focused on, helping to show some signs of seafood growth, in which -- our key customers.

What I would also add to that, Sabah, is that as prices have come down and are starting to be realized into the marketplace, I think that you are going to see promotional activities start to increase, not just with ourselves, but with all of the seafood industry in general, when you start to see the benefit of short promotions and salmon promotions and haddock and cod promotions, I think that that will start to have an impact on better velocity through the system.

Okay. Thanks. And on the supply chain initiatives, I just want to get a understanding of where you stand in terms of the actual kind of execution at the initiatives, or is it just how you are largely through that, and is it just a matter of getting the volumes through the plant to get the savings?

So we are largely through the plant-based portion of the supply chain optimization initiative. We are the third party consultant, that was helping us with that, is now down. So on the plant side, I would say it is about continuing to execute on those tactics that we have introduced at plant level and getting some volume back through the plants, to allow that benefit to materialize through the bottom line, and the benefit would be sufficient enough to offset, what has been lower absorption in the last couple of quarters. On the broader supply chain side, we are still doing some work on improved planning in the business, and we believe that there is still some opportunity ahead of us in 2016, in that broader supply chain planning area.

All right. Thank you.

Your next question comes from Mark Robinson from Cormark. Your line is open.

Thanks. Good afternoon.

Hi Mark.

Hey guys. Just C$2.4 million of non-recurring costs, can you just provide a little bit more clarity on what exactly that is? I would have thought that the M&A and consulting related costs would have been over within the quarter?

Yeah. There was very little in the way of M&A related costs. Obviously, there were some consulting costs, as I mentioned, the third party supply chain consultants finished in the quarter, so there were some costs for them. You will not see that continue to occur. We did have some restructuring costs that we referred to, in the material, related to some of the changes that Keith identified that allowed us to get some of the SG&A benefit that we realized. And there were a couple of small asset write-offs related to prior acquisitions that impacted that line as well, which we would not expect to continue to occur.

Okay. There is some commentary around lower sales commissions. Just wondering if you can provide some clarity on what exactly that's about -- just anything you can offer on that?

Sure. Well unfortunately, when you have the sales decline, it means you actually pay less incentives to salespeople. We'd rather be in a position where we are paying more incentives, because their sales dollars are better. But that is one of the factors that does provide some of the SG&A benefit.

IT wasn't a function of us cutting our commission rates or cutting our sales representation.

Okay. That's what I was after. Can you -- we know -- I think you gave some clarity on the percent sales related to retail; but anything you can offer, and what percentage of your EBITDAs related to your retail business? On a run rate basis?

That's something that we have broken out historically in terms of differential profitability between retail and foodservice.

So you're saying that's something that you had in the past?

We have not.

So, okay. That would mean it would be more profitable than your foodservice business and would be about 30% of your top line?

Nothing that I can identify specifically, and it does vary between Canada and the U.S. as well obviously, given that retail is 50% of their business in Canada and less than 30% of our business in the U.S.

Okay. Anything you can offer around Atlantic Trading? There is disclosure, they have done C$47.5 million year-to-date and I think when you bought them, you were talking about C$75 million to C$80 million. So any commentary on how Atlantic Trading is doing and how its tracking relative to your original plan?

As far as tracking to the original plan, they are doing what we expected from them. I think that the effect that you are talking about with regards to sales is really a function of the deflation of the salmon complex. And so I would say, that if you look at an average price in Chile or Norway, when we started the year, the price was roughly $6.50 to $6.75 a pound for portions, and that price today is $5. And so, you have seen obviously a decrease in both cost and selling price.

So if you look at volume and profitability, its exactly in line with our expectations on the business.

Okay. That's it for me. Thank you.

Thanks Mark.

Your next question comes from Michael Mills from Beacon Securities. Your line is open.

Hi. Good afternoon guys. Just one or two follow-on, in terms of the volume situation, certainly positive to see a bit of volume growth in Canada. Beyond price, what will it take to see High Liner kind of get back to a positive volume situation in the U.S.?

I think that -- there is a couple of things here. One is, its really sitting around the -- I think pricing has to come down, and clearly, that's going to be a key function -- and its not our pricing, it’s the seafood complex pricing, I think that the lower prices coming through will definitely help to spur additional promotions and additional volume through the system, I think that's part one. I think the second part that we are clearly focused upon, is the right price points and the right species. And so, if you think about the customers, they have the ability to interplay multiple species in terms of how they are going to promote them, to hit ideal price points, and a lot of our focus has been in the last quarter on working within those species to position them at the correct, hot buttons if you will, for the customers. I had made some comments earlier about -- when you sell a three pound bag of salmon for C$24.99 and you are able to sell the same bag for C$19.99, there is an expectation that you are going to get a 20% or a 30% lift in sale. That's the type of benefit that we need to be able to take advantage of.

The other item I'd add to that, Mike, is clearly innovation will need to be part of that sales growth, as we move forward. And that's something that we continue to focus on and look at delivering as we move into 2016.

So that leads to my next question, I think the last kind of major product launch was the barbequed pulled salmon products, correct me if I am wrong. I am wondering if that's available in all channels, and what the reception has been like? And if -- I know you guys can't tip your hat too much, but in terms of, over the next six-nine months, if there are some -- what you might describe as significant product launches planned?

So I would say that the barbecued salmon was -- I wouldn't classify that as a major launch, but I would -- as I characterized it, it was the first initiative of ours to move into the prepared or fully cooked arena, where we think there is opportunity. I think that the bigger opportunities will start to arrive -- starting in the late first quarter and then going from there, we have started then to roll out, some additional offerings along that convenience platform, and really it’s a function of trying to get at the fast casual sector, but also a convenience factor for not only the restaurant chain environment, but also for the retail environment I think that -- the work that we are doing from an innovation perspective, you will start to realize that, in the first quarter and after that.

Okay. And then Paul, circling back around on the C$20 million and C$25 million supply chain goal; I guess if we were in a, what you might describe as a normalized volume environment, how much of that C$20 million to C$25 million has been achieved through the end of Q3?

Well, I identify it despite the volume declines, we achieved C$2 million in Q3, and so, obviously, you can extrapolate that on a run-rate basis in order to get an annual benefit associated with that. And it would have been higher, if it were not for the volume declines. I can't give you a specific number, but --

More than half way there?

No. We didn't expect to be more than halfway at the end of 2015, because it is a bit back end loaded. But without the volume declines, we would have been much closer to our expectations on savings in 2015.

Okay, that's it for me. Thanks.

[Operator Instructions]. Your next question comes from Bob Gibson from Octagon. Your line is open.

Good afternoon.

Hi Bob.

I might have missed it, but did you give us some color on the overall retail industry volume in The States?

We did not. They continue to be under pressure. So the category is in decline, not just our business in U.S. retail.

Okay. Because last quarter, you said it was -- I think down double digits. Is it down that much or --

It was better in Q3 than it was in Q2.

Okay. And you typically put through price increases at the end of lent. Have you given any thought to, what next year is going to look like, as far as price increases?

Well we put price increases typically through in foodservice on the 1st of January, and then we put price increases for retail through post lent, which would be some time in the April timeframe. So at this point, we are still in our finding stage, but we have not mapped out yet what price increases we would or would not take at this point.

Okay, great. Thanks very much.

[Operator Instructions]. We do not have any questions at this time. I turn the call over to the presenters.

Thank you everyone for your participation in today's call. Our next conference call is planned for February 17, 2016, during which we will update you with the results for the fourth quarter of 2015, for the 13 weeks ended January 2, 2016. Please note that the fourth quarter of 2014 was for 14 weeks ended January 3, 2015. Thank you and have a good day.

This concludes today's conference call. You may now disconnect.