Heather Keeler-Hurshman - VP of IR Paul Jewer - EVP and CFO Keith Decker - President and CEO

George Doumet - Scotiabank Sabahat Khan - RBC Capital Markets Doug Cooper - Beacon Securities Jonathan Lamers - BMO Capital Markets

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the High Liner Foods Incorporated conference call for results of the first quarter of fiscal 2017. At this time, all participants are in a listen-only mode. Following the 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, May 10, 2017 at 2 o'clock PM Eastern Standard Time for replay purposes. I would now like to turn the call over to Heather Keeler-Hurshman, Vice President of Investor Relations for High Liner Foods. Ms. Keeler-Hurshman, you may begin. 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 first quarter of 2017. 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 first quarter 2017, followed by Keith, who will discuss key developments in the business and provide an update on our strategies 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 outcomes in its publicly available disclosure documents, particularly in its Annual Report and annual information form. 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 first quarter ended April 1, 2017. That news release along with the company's MD&A and unaudited condensed interim consolidated financial statements for the first quarter of 2017 have been filed on SEDAR and can also be found in the investor information section of High Liner Foods' website. If you would like to receive our news releases in the future, please visit the company's website to register. Lastly, please note that the company reports its financial information in US dollars and the results to be discussed today are stated in US 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 first quarter of 2017, I would like to remind listeners that we use certain non-IFRS measures and ratios in 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 first quarter of 2017 are relative to the fourth quarter of 2016 and comparisons of fiscal 2017 are to fiscal 2016. Our New Bedford scallop business was sold on September 7, 2016 and to assist listeners with assessing the company's year-over-year performance, the sale had the impact of lowering sales volume by 700,000 pounds, sales by $89 million and a nominal impact on adjusted EBITDA in the fourth quarter of 2017 compared to the fourth quarter of 2015. Sales volume decreased in the first quarter of 2017 by 5 million pounds or 5.7% to 83.2 million pounds. Excluding the impact of selling the scallop business, the sales volume decrease was 4.3 million pounds or 4.8% and was due to lower sales volume in the US retail and foodservice businesses. There were several factors contributing to lower volume. Continued lower demand for traditional breaded and battered frozen seafood products, a later Easter in 2017 compared to 2016. Easter was on April 16 this year compared to March 17 last year. The later Easter didn't extend the commercial period associated with Lent as anticipated but instead shifted a portion of the benefit associated with this period into April compared to the full benefit being realized in the first quarter last year. Residual manufacturing challenges associated with production transferred from our previously-owned New Bedford facility resulted in an inability to meet this heightened demand in March related to a late Lent; and as already mentioned, 700,000 pounds of the decrease in sales volume is due to lower scallop sales. Sales in US dollars decreased in the first quarter of 2017 by $15.7 million or 5.4% to $275.7 million. The Canadian dollar was slightly stronger in the quarter on a year-over-year basis increasing the value of reported sales by approximately $2 million relative to the conversion impact in the same period last year. In domestic currency, which is before the impact of converting our Canadian operation to the US dollar presentation currency, sales decreased by $17.2 million, or 5.5%, to $296.1 million. This decrease reflected lower US sales volumes and changes to product mix, including lower demand for traditional breaded and battered frozen seafood products. Gross profit decreased in the first quarter of 2017 by $9.9 million, or 15.1%, to $55.5 million reflecting a decrease in gross profit as a percentage of sales and lower volumes. Gross profit as a percentage of sales decreased by 240 basis points to 20.1% primarily due to the impact of the product mix changes and plant inefficiencies already discussed and the recognition of more than $2 million of foreign exchange gains in 2016, that did not reoccur in 2017. Gross profit also decreased by $700,000 as a result of a voluntary product recall in Canada that occurred after the reporting period which Keith will discuss as part of his business update. Adjusted EBITDA decreased in the first quarter of 2017 by $8.0 million, or 26.4%, to $22.3 million. The impact of converting our Canadian dollar denominated operations and corporate activities to our US dollar presentation currency decreased the value of reported adjusted EBITDA in US dollars by $700,000 in the first quarter of 2017 compared to $2 million in the same period in 2016. In domestic currency, Adjusted EBITDA decreased in the first quarter of 2017 by $9.3 million to $23.1 million reflecting the lower gross profit, partially offset by a reduction in distribution and US marketing expenses. Reported net income decreased in the first quarter of 2017 by $3.5 million, or 24.6%, to $10.7 million with diluted earnings per share of $0.34. This decrease reflects the lower adjusted EBITDA mentioned previously partially offset by lower income tax expense. Excluding the impact of certain non-routine and non-cash items which are explained in our MD&A, adjusted net income decreased in the first quarter of 2017 by $5.0 million, or 31.6%, to $10.8 million and correspondingly adjusted diluted earnings per share decreased $0.16 to $0.35. Turning now to the balance sheet, net interest bearing debt increased by $20.4 million to $272.5 million at the end of first quarter 2017 compared to $252.1 million at the end of 2016 primarily as a result of increased net non-working capital associated with late Lent. Net interest bearing debt to adjusted EBITDA calculated on a rolling 12-month basis increased to 3.7 times at the end of the first quarter of 2017, compared to 3.1 times at the end of fiscal 2016 reflecting the increase in net interest bearing debt combined with the $8 million year-over-year decreased in adjusted EBITDA for the first quarter of 2017. In the absence of any acquisitions or strategic initiatives requiring capital expenditures in 2017, beyond the proposed acquisition of Rubicon Resources which Keith will describe in just a minute, we expect our debt leverage ratio will approximate 3 times by the end of 2017. That concludes my financial review for the first quarter of 2017 and I will now turn the call over to Keith.

Thank you, Paul, and good afternoon, everyone. The production challenges experienced in the first quarter were disappointing as was realizing less sales benefit that expected related to Lent. However, as Paul explained, the late Easter did shift some of the benefit associated with Lent to the second quarter whereas in 2016 all of the benefit was realized in the first quarter. As a result of this shift, our results for April this year reflects stronger sales and earnings compared to the same month last year. Combined with some improved plant efficiency as our production returns to more typical levels, we expect year-over-year sales volume and earnings trends to be greatly improved in the second quarter compared to those experienced in the first quarter. As shared on our last call, we are focused on production innovation in two key areas. The first is to improve and expand our core product offerings, meeting the types of products that already exist in our portfolio today. The second is on creating and delivering new products to the market that align with emerging consumer trends and preferences. This is about growing sales from products that do not currently exist in our portfolio or the marketplace but we believe will appeal to today's seafood consumer. Ideally, the types of new products we introduce to the market will also expand and diversify our portfolio to include more of the aquaculture species like shrimp that are experiencing the greatest growth rates in the marketplace yet represent only a relatively small percentage of our current business. And part of executing on this strategy we are pleased to share that we have signed a definitive agreement to acquire Rubicon Resources LLC. Rubicon is a privately held company and based in California. They are a significant player in the US shrimp market specializing in important and distributing frozen shrimp products in the private label US retail market. In addition to providing immediate sales and earnings growth, Rubicon will expedite the expansion of our product portfolio to include more key aquaculture species like shrimp. Currently shrimp represents less than 10% of our product portfolio based on sales dollars and approximately 6.4% by pound. Rubicon's business is built on a commitment to bring US consumers high quality sustainable seafood products. At the heart of their success, our long term strategic partnerships with a network of trusted suppliers in Southeast Asia one of the world's largest seafood footprints. Rubicon's shares I believe that sustainable aquaculture is key to feeding future generations. They have played a key role in hundreds of aquaculture improvement projects mentoring and supporting hundreds of farms to achieve best aquaculture practices. They have built longstanding relationships with their suppliers and a supply chain that delivers quality products from only sustainable, ethical and responsible resources. Rubicon's sales in 2016 were approximately $234 million with pro forma EBITDA of $16 million. The purchase price for Rubicon before transaction fees is $107 million which will be settled 70% in cash and 30% in Higher Liner Foods' common shares. The share consideration is subject to a three year standstill agreement during which time the sellers are not permitted to sell the shares expect in limited circumstances. The agreement includes a five year supply agreement with Rubicon's supply partners based on mutually acceptable terms and a three year employment contract Brian Wynn the Founder of Rubicon who will continue as Rubicon's President. We don't expect material synergies related to this acquisition but it will be meaningfully accretive in 2017 after considering the impact of incremental interest cost relating to financing the transaction and excluding the impact of associated one-time cost which will be expensed in the period they are incurred. The acquisition will be financed using our existing credit facilities and is subject to approval from our lenders in the Toronto Stock Exchange. We expect this transaction will close in the second quarters of 2017. As Paul mentioned, our results from the first quarter included $700,000 in estimated costs associated with the product recall that occurred in April. On April 14 and April 21, we issued a voluntary product recall of certain brands of breaded fish and seafood products sold in Canada that may contain a milk allergen that was not declared on the ingredient label and allergen statement. Our investigation into how this occurred identified that certain ingredients used in the formulation of the recalled products contained an undeclared milk allergen. We don't anticipate any additional material costs will be incurred in the second quarter related to the product recall and any reimbursement of these costs will be reflected in our financial results in the period they are received. Returning to our strategy, we are looking forward to Rubicon joining High Liner Foods, but I want to reconfirm our primary focus for 2017 is returning to organic sales volume and earnings growth. We expect the industry-wide trend of low demand for frozen breaded and battered seafood products will continue in 2017. Our ability to achieve sustainable organic sales growth will depend on the pace with which our new and improved product offering can offset this decline, but we are optimistic this will occur by the end of this year. With expected improvements in sales trends and a return to more typical production level, we expect to return to year-over-year earnings growth in the second half of 2017. This is before considering any benefit from the Rubicon acquisition. Before opening up the call for questions, I would like share with you that earlier today the company's board of directors approved a quarterly dividend of CAD0.14 per share from the company's common shares payable on June 15, 2017 to holders of records on June 1, 2017. Operator, I would now like to open the call for questions. Thank you.

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

Good afternoon, guys.

Hey, George.

Can you please quantify the impact of the later Lent maybe in terms of volumes or in selling days?

Yeah, so approximately - and so the sales volume decline was about 5 million pounds or 4.3 million pounds and excludes scallops. Probably about half of that volume was related to the shift from March to April in terms of volume and in terms of EBITDA impact, when you back out the couple million dollars currency gain we had last year, about half of the remaining difference in terms of EBITDA between the first quarter this year and the first quarter last year is related to that shift and that's both related to the volume shift but also we mentioned the impact on gross margin because some of that shift volume was higher margin product into the month of April from the month of March.

Yes, very helpful. Thanks. [indiscernible] the gross margins, maybe some commentary you can provide there on the mix shift that happened in the quarter and how long should we expect this to be transitory?

So we do expect improvement as we mentioned in gross margin and EBITDA and sales trend in the second quarter. We say that with visibly obviously into the month of April at this stage. And so quite a bit of it was related to this shift in volume. We had a number of lower margin, a bunch of lower margin business that we filled in March and unfortunately some of the shorts that we experienced that we ended up servicing in April were the higher margin products. So that's part of it. The other piece as we talked about is the plant inefficiency, so obviously when you're running your plants less efficiently than you had planned that involves cost including overtime and those kinds of things so that contributed to the lower gross margin as well.

And then shifting gears to Rubicon, I think Keith mentioned this in the prepared remarks, but can you help me give us a sense of the overview of the volume growth experience of the business in the last few years?

I would say it's been relatively stable you know low-single digit volume growth. And we would anticipate that can continue as we go forward. Although obviously part of the interest in this acquisition for us is the ability to leverage their capacity and capability on shrimp across some of the High Liner business, any of that would be incremental to what I just talked about.

And just one last one if I may on the business acquired. Can you maybe talk a little bit to the gross margin volatility experienced I guess given the volatility in the shrimp prices in the last couple of years?

Yeah I would say that it's remarkably stable margin business, their ability to flow through raw material increases up or down. Given the type of volume businesses that they're in with customers they have, they are quite successful in doing that.

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

And just following up on acquisition, can you talk what their infrastructure is in terms of production if they have any facilities and if you'll be taking those on as well?

So they have no production facilities, the two other partners have vertical operations in Thailand. And as such we will be partnering with them when it comes to that. But as far as actual infrastructure, it's very capital light business and essentially it's a sales and marketing operation in California.

I guess with their business added, what would your shrimp exposure become as a proportion of your overall portfolio?

It's still a relatively low percentage of our overall portfolio compared to obviously white fish business. In terms of volume of the shrimp business it's in the order of magnitude of 29 to 30 million pounds.

That's what they bring to the table.

And then just one last one on that, I guess can you maybe talk, we said there's no synergies expected here but I guess are you just talking cost synergies, will there be opportunity. I think you alluded to a bit earlier maybe cross-pollinate some products or levers a customer relationship to any extent?

So we model it, but there is clearly great opportunities we see for pollinating our innovation both in packaging and in product form between the companies. Also their expertise in sourcing and securing products for the remainder of the organization, they're strong in US retail, clearly the opportunity for us on that business is US food service and of course our Canadian business.

So just to add to, Sabahat, the numbers we disclosed in terms of pro forma sales and EBITDA do not include any cost or revenue synergies.

And then maybe just on the quarter results, can you maybe talk a little bit more about the Canada segment and then when you talk about improvement in the back half of the year. Where you expecting that across both Canada and the US or I just want to understand where those issues at the facility this quarter if that impact on one geography versus the other?

It's really improvement in both areas, both geographies where we expect that we expect to see in the back half of the year. in Canada, the first quarter margins were soft, but obviously as we talked about part of the reason for that was the currency impact. Volumes were actually okay, where we experienced the most significant impact in terms of the short and the margin shift associated with that was in the US food service business. In terms of the plant impact, the majority of the volume from New Bedford when they closed it was transferred to both Newport News in the US and [indiscernible] in Canada. So it really is both of those plans where we felt the impact of the inefficiency on the cost side.

And then just one last one from me, can you maybe talk about the overall environment you're seeing I guess from your food service customers in the US. Are you seeing - is that give us some indication of improvement there that make you confident about the back half of the year?

Yeah, so we do see the demand is there, we believe that that inflexion has been reached in that food service business and what we see today is improved food service sales particularly in our US segment moving forward.

And as we mentioned, we saw some of that demand in March unfortunately we weren't able to service it, so we've seen that flow through into April.

Your next question comes from Doug Cooper with Beacon Securities. Your line is open.

Back on the acquisition, the 30% stock that you're giving the company, my calculation is they would own about 7% of that consolidated company now, is that approximately in the ballpark?

Yeah, so 2.4 million shares what would now be a share base of close to 33 million.

And is that - who are the owners of that, is that one owner or is that spread amongst a bunch of people?

So there's three owners, one is the principal and founder of the company, president, he will continue to be an employee of High Liner as [indiscernible] we identified in the news release. The other two are significant suppliers to that business and they took High Liner shares as part of their consideration as well. We were very pleased that both Brian and the suppliers had the confidence in High Liner's growth potential from a share perspective and also this ties them importantly to the future success of the entire organization.

So those two suppliers would be - those are the agriculture guys in Thailand?

Yeah that's two, two of the larger suppliers that they do business within Southeast Asia, correct.

And how many suppliers would they utilize?

Oh they would have many suppliers, the two principal ones are in Thailand are two of the largest vertically integrated group producers in Thailand.

I guess I'm just trying to get a feel for the two suppliers who are now shareholders of High Liner, what percentage of the Rubicon business today is supplied.

It would be a significant portion of the business, but as Keith said there is a good base of supply diversity across others in Thailand and also in some other countries as well.

So less than 50%?

No, I wouldn't say it depends year to year, right I mean, we have a supply agreement that we put in place with them to ensure that continuity supply going forward, but that supply agreement recognizes that depending on shrimp prices and shrimp volume produced by both them and others in the industry that will fluctuate year-over-year.

I guess I'm just trying to get to the point that they're pretty much incentivized for HLF…

They are incentivized to continue to be continued partners and suppliers to Rubicon and High Liner as we move forward.

Probably confirm, you said debt equity would be sort of three times by the end of the year that's not including this transaction, correct?

No that is including this transaction, and the reason for that is that with the equity that's being issued, the EBITDA that we've disclosed and the cash that's required, it largely allows this to be leverage - largely leverage neutral.

Okay. Because I'm just backing the envelope, your debt would go to about 340 million after this transaction?

Yeah. But that's, as we mentioned - as I mentioned earlier, that's somewhat temporary because it includes the seasonal working capital piece. So obviously we would expect that debt to go down through free cash flow generation over the balance of the year and just the improvement in the working capital trend as we come out of the busy wet season.

Okay. And finally just to confirm, you said that you expect earnings growth in the second half of the year, year-over-year earnings growth in the second half of the year, excluding Rubicon?

That's excluding Rubicon. That's correct.

Your next question comes from Jonathan Lamers with BMO Capital Markets. Your line is open.

In the release and in the AGM today, there were a number of statements that results would improve going forward. That's including that by the end of this year, sales from new and improved product offerings can offset the declines for breaded and battered. Can you talk a little bit about what gives you the confidence to make that statement and the progress growing the new product offerings?

As I mentioned in the last settlement, we see that the demand was there in the first quarter, but some of it fell through into the second quarter. We've obviously seen our April results, but we see that we've spent the last 18 months working to turnaround our US foodservice business, our Canadian service business. We see both of those as performing better on a year-over-year basis from now through the end of the year. And then from a new products and retail, we've got a couple of product launches that are going to be put out into the market, starting at the end of this month, there will be a soft launch and following that, there will be a larger push when we get into September. But just some of the product innovations we've been working on is now starting to make its way into the marketplace and we see that that will give us some lift beyond where we have traditionally been.

So the improved earnings year-over-year in the second half would be largely from the existing products sold to foodservice?

Yeah. The majority of it was coming from an improvement in the base plus some level of innovation and an improvement in the plant performance on what we've seen in the report.

Okay. And this morning, Keith, you mentioned the level of decline in bread and battered sales in 2016 year-over-year. Are you able to provide that number for Q1?

I do not have that number on hand right now, but -

It would be a similar, obviously, it's a quarter instead of a year, but in terms of the trend, it would be a similar pattern in Q1, both because of the overall decline in the category, but also some of our shorts in Q1 were in that area as well.

Do you have the IRI number for the industry decline to retail in Q1?

We don't have it handy, but what we're continuing to see is a decline, [indiscernible] we're continuing to see a decline in the category overall. IRI, that applies to retail just as a reminder, right, that's not foodservice.

Understood. And in the past, you provided the benefit from past supply chain optimization activities to EBITDA. Do you have that number for this quarter to date on incremental?

Yes. Well, this quarter, there was no incremental benefit associated with the supply chain optimization obviously and in fact unfortunately because of the inefficiency and the overtime that I talked about earlier, we gave some of it back. So at this point, the focus is on getting back to that level of efficiency coming off the closure and sale of the plant in September and the transfer of the product into our other two plants and that's one of the areas as we mentioned that we expect to see some improvement in the back half the year.

Okay. And switching to Rubicon. It seems that the company paid a higher valuation for this deal versus Atlantic Trading. What strategic benefits does the Rubicon offer that justify the higher purchase valuation? You mentioned the opportunity to leverage the term supply to grow those sales. Could you talk a little bit more about that?

Sure. Clearly, each deal has its own merits and the scale of Rubicon is significantly larger than the ATC business which was effectively small company with one primary customer that came with a base of a procurement that we needed to leverage scale with the salmon industry. Rubicon is significantly larger, has significant scale when it comes to volume of purchasing activity in our business. It's important from a scale perspective, we needed that scale, both from an importance to the supply base, but also for credibility with our customers. We think that it's ideal in being able to leverage their purchasing power and sourcing strength across the High Liner portfolio. And as I mentioned earlier, the ability to take innovation from our company and utilize it in that organization, I think is also going to be very powerful as we move forward.

Okay. And is there any seasonality in this business?

I would say, yes, there is some seasonality. Their business tends to lever more into a Q3, Q4 business because of promotions on shrimp tend to run during the holiday period, starting around Thanksgiving and so that volume would tend to be more pronounced starting in the third quarter. So the benefit of it is, it's a little bit better for us in terms of smoothing out some of our volume, because we tend to have lower volumes during that third quarter. So this will actually be beneficial for that.

And who were the customers for this business?

They have a number of customers, but they're all US retail customers because that's their forte.

And just from an accounting perspective, are there any assets to be written up? And what level of purchase amortization do you expect?

Yeah. So there are very, very few assets in this deal, it's an asset light deal. We haven't completely the formal valuation yet and so until we know the allocation between goodwill and identifiable intangibles, I don't have a specific number for you there. I suspect obviously when there are things like supply agreements, there will be some value attributed to that. But it's largely an asset light deal.

Okay. And lastly, the tax rate seems to have crept up in the last two quarters. Paul, do you have updated tax rate guidance for us for 2017 assuming no changes to policy?

Yeah. So nothing that we would, it has crept up, but frankly it's crept up to more typical levels that as we've talked about before, it has been somewhat artificially low. So I think we've said before, we expected on an annual basis to be at the low-20s and we don't see any change to that at this stage. Obviously as we integrate Rubicon and other things, we'll continue to give you any update that caused that to change and if any impacts associated with tax reform as you prefer to.

You have a question from the line of Doug Cooper from Beacon Securities. Your line is open.

Paul, just a quick one. My back of the envelope has this deal accretive by about $0.20 a share, is that the ballpark?

How much sorry?

$0.20.

Yeah. Actually, I couldn't see if I have the cents number. I've got the percentage number is about 12% to 13% accretion. So just let me double check the cent number, yeah. It is, yeah, that's pretty close actually, Doug.

There are no further questions at this time. I will turn the call back over to the presenters.

Thank you everyone for your participation in today's call. We look forward to updating you with results for the second quarter of 2017 on our next conference call in August.

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