Lunenburg Aug 12, 2020 (Thomson StreetEvents) — Edited Transcript of High Liner Foods Inc earnings conference call or presentation Tuesday, August 11, 2020 at 6:00:00pm GMT

* Paul A. Jewer

* Rodney W. Hepponstall

Cormark Securities Inc., Research Division – Analyst of Institutional Equity Research

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the High Liner Foods Incorporated Conference Call for Results of the Second Quarter of 2020. (Operator Instructions) This conference call is being recorded today day, August 11, 2020, at 2:00 p.m. Eastern Time for replay purposes.

I would now like to turn the call over to Heather Keeler-Hurshman, Vice President of Investor Relations and Communications for High Liner Foods. Ms. Keeler-Hurshman, you may begin.

Heather Keeler-Hurshman, High Liner Foods Incorporated – VP of IR & Communications [2]

Thank you. Good afternoon, everyone. Thanks for joining High Liner Foods conference call today to discuss our financial results for the second quarter of 2020. On the call from High Liner Foods are Rod Hepponstall, President and Chief Executive Officer; and Paul Jewer, Executive Vice President and Chief Financial Officer.

In a moment, I’ll pass the call over to Rod for some remarks on our performance in the second quarter and the ongoing impact of COVID-19 on our business before handing over to Paul, who will review the financial performance for the second quarter. Bob will then make some final remarks before opening the call up to questions.

I’d like to remind listeners that we use certain non-IFRS measures and ratios when discussing our financial 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. Listeners are also reminded that certain statements made on today’s call may be forward-looking statements that are subject to risks and uncertainties. Management may use forward-looking statements by discussing 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 a publicly available disclosure documents, particularly in its annual report and its 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 second quarter ended June 27, 2020. That news release, along with the company’s MD&A and unaudited condensed interim consolidated financial statements for the second quarter of 2020 have been filed on SEDAR and can also be found in the Investor Information section of the High Liner Foods website. If you’d 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 results 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 Rod. Rod, please go ahead.

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Rodney W. Hepponstall, High Liner Foods Incorporated – President, CEO & Director [3]

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Thanks, Heather, and good afternoon, everyone. Thanks for joining us today to discuss our financial results for the second quarter of 2020. Our business continues to perform extremely well. Despite the challenges presented by COVID-19, our transformative efforts last year have allowed us to continue delivering improved performance and position us for future profitable growth. We’ve been able to pivot quickly and effectively to meet new customer realities during this unprecedented time while also seizing on new opportunities created by the current environment. For the first time in a long time, we are now playing offense backed with the confidence of knowing our integrated North American business and efficient supply chain is set up to support strong performance and growth.

I’ll briefly summarize the key takeaways from the quarter and then hand the call over to Paul for a detailed financial review. I’ll wrap up the call by sharing some more color on our momentum and the opportunities we are seeing for our business.

Our retail business continues to perform well based on strong demand for higher-margin value-added branded seafood products. We are rolling out further innovation. Our foodservice business is rebounding much faster than we anticipated, and our value-added products are well suited to help solve challenges currently facing foodservice operators. Our flexible and efficient supply chain continues to perform under pressure, allowing us to deliver industry-leading fill rates when our customers are needing them most.

We are continuing to strengthen the overall financial health of our business by improving margins, managing costs and reducing debt. It’s clear that we’ll be navigating the uncertainties and challenges of COVID-19 for the foreseeable future, but we believe we are well positioned to do this while also continuing to advance our growth strategy.

We have a diversified business in retail and foodservice, providing relative stability overall. We have the integrated North American operation supply chain needed to effectively manage increased and evolving demand for value-added products. Our recently simplified and focused portfolio of higher-margin value-added products and ongoing product innovation are aligned with this [rolling] desire for convenient and easy-to-prepare seafood options. All of this, combined with strong financial performance in Q2 provides us with increased confidence that we can deliver adjusted EBITDA growth for 2020.

I’d like to now hand the call over to Paul. Paul, please go ahead.

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Paul A. Jewer, High Liner Foods Incorporated – Executive VP & CFO [4]

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Thank you, Rod, and good afternoon, everyone. Please note that all comparisons provided during my financial review of the second quarter of 2020 are relative to the second quarter of 2019, unless otherwise noted. Sales volume decreased in the second quarter by GBP 11.1 million to GBP 49.3 million. In our foodservice business, sales volume continued to be lower due to the impact of COVID-19 on our foodservice customers. In our retail business, sales volume increased due to a surge in demand also related to COVID-19, partially offset by lost business in the fourth quarter of fiscal 2019 that continued to impact volume year-over-year. Sales volume also reflects the favorable impact of new business and new product sales in the quarter.

Sales in U.S. dollars decreased from the second quarter by $57.2 million to $165.8 million due to lower volume and changes in sales mix. In addition, the weaker Canadian dollar in the second quarter of 2020 compared to the same quarter in 2019 decreased the value of U.S. dollar sales from our Canadian dollar-denominated operations by approximately $1.6 million relative to the conversion impact last year.

Gross profit decreased in the second quarter by $6.1 to $36.7 million. However, gross profit as a percentage of sales increased by 300 basis points to 22.2% compared to 19.2%. Gross profit reflects the lower sales volume discussed previously, and incremental costs associated with COVID-19, partially offset by favorable changes in product mix, improved supply chain efficiencies related to the critical initiatives completed in fiscal 2019 and reduced labor costs due to receiving the Canadian emergency weight subsidy during the second quarter.

Adjusted EBITDA decreased in the second quarter by $800,000 to $17.1 million. Adjusted EBITDA as a percentage of sales, however, increased by 230 basis points to 10.3% compared to 8%. Adjusted EBITDA reflects the decrease in gross profit and increase in distribution expenses, partially offset by a decrease in net SG&A expenses. In addition, the weaker Canadian dollar decreased the value of reported adjusted EBITDA in U.S. dollars by approximately $200,000 relative to the conversion impact last year.

Reported net income increased in the second quarter by $2.5 million to $3.4 million, and diluted earnings per share increased by $0.07 to $0.10. The increase in net income reflects the decrease in share-based compensation expense, a decrease in business acquisition integration and other expense and a decrease in finance costs partially offset by the decrease in adjusted EBITDA and an increase in income tax expense. Excluding the impact of certain nonroutine or noncash expenses and share-based compensation, which are explained in our MD&A, adjusted net income in the second quarter of 2020 remained consistent with the same period last year at $4.7 million, and correspondingly, adjusted diluted earnings per share increased by $0.01 to $0.14.

Turning now to cash flow from operations in the balance sheet. Net cash flows provided by operating activities in the second quarter of 2020 decreased by $900,000 to $32.3 million, compared to $33.2 million in the same period in 2019 primarily reflecting changes in net noncash working capital and higher income taxes paid partially offset by higher cash flows from operations and lower interest payments. The unfavorable changes in net noncash working capital as a result of unfavorable changes in inventories and accounts payable and accrued liabilities partially offset by favorable changes in accounts receivable and provisions.

Net debt at June 27, 2020, decreased by $28 million to $327.7 million compared to $355.7 million at March 28, 2020, reflecting a decrease in short-term borrowings, a decrease in lease liabilities and a higher cash on hand balance. Net debt to adjusted EBITDA was 3.9x at June 27, 2020, compared to 4.2x at March 28, 2020, and 4.1x at the end of fiscal 2019. In the absence of any significant changes in the current trends related to COVID-19, we expect that at the end of fiscal 2020, this ratio will remain consistent with the ratio as at June 27, 2020, despite increased working capital requirements in advance of the Lenten period. We remain very confident in our liquidity position as a result of prudent cash management and the early refinancing of our debt in Q4 of 2019. We do not have any impending debt maturities and will continue to utilize our $150 million working capital credit facility, if required. Borrowings on this facility, net of cash on hand, are currently approximately nil.

That concludes my financial review, and I will now turn the call back over to Rod for some final remarks before opening up the call to questions.

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Rodney W. Hepponstall, High Liner Foods Incorporated – President, CEO & Director [5]

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Thanks, Paul. Now for some key highlights from our retail operations. The overall impact of COVID-19 on our retail business continues to be positive. We achieved double-digit volume growth in the second quarter, by continuing to maximize sales and satisfy increased demand for our branded value-added products and customer branded offerings. We continue to focus on selling our top priority value-added items and delivering excellent fill rates. There’s very much — this is very much appreciated by our customers that have told us that High Liner Foods is leading the industry in terms of being a consistent and reliable supplier of frozen seafood. Recently, 1 of our major retail customers shared the Hilar Foods has delivered 1 of the best fill rates in the frozen seafood business since March. At a time when we know this it’s important — more important than ever to ensure the continuity of our supply chain, this is exactly what we wanted to hear. And we believe this type of performance in challenging times will create significant customer loyalty and opportunity for future growth. Consistent product availability today may secure future sales tomorrow as more than 0.5 million new customers have entered the frozen seafood category since the onset of the pandemic.

A recent customer poll revealed that seafood ranked #2 in terms of what people miss eating the most at restaurants. This presents us with an opportunity to demonstrate how easy our products make it to prepare delicious seafood at home. We are seizing on this opportunity to grow the category through targeted marketing and sales campaign using social and digital platforms and by ensuring prominent presence on our retailers’ online shopping sites and integration with loyalty programs. Due to retailer demand, we accelerated go-to-market timing for the new High Liner branded value-added shrimp innovation that started to ship in early July. We are extremely excited about this product because they align with consumer trends and checks all of our innovation boxes. They are branded and value-added. Shrimps are the key growth species, and they target the popular advertising and snacking category.

Consistent with our successful product launches last year, we will leverage our North American scale to maximize the market potential of this new product by rolling out a cross-border and multichannel basis. We see a lot more opportunity ahead of us to innovate in value-added shrimp products.

Our recently launched Power Pack Burgers that I shared with you last quarter have been successful for the grilling season. In addition to demonstrating to retailers and consumers that we are leading the market in innovation, new products like these are helping to grow volume outside of traditional seafood consumption period. The combination of industry-leading fill rates, consumer and customer demand for our existing products and new innovation gives us confidence that we will have a strong second half of the year in our retail business, especially because September traditionally marks an increase in sales as families get back to routine after the summer. And should North America unfortunately be hit with the second wave of COVID-19, we’ll be ready to respond to further peaks in demand to ensure a steady supply of frozen seafood for our customers and consumers.

The foodservice side of our business has been improving at a steady rate since the sharp decline experienced at the end of March when COVID-19 first hit. Fortunately, the diversification of our foodservice business and the steady demand for our institutional customers helped offset the negative impact of restaurant shutdown. We recognize this is an extremely challenging time for many of our food service customers, and we are working hard to support them as they pivot their business to address new operating realities and constraints. We are strategically repositioning our foodservice offerings such that we can help our customers [solve] for the new challenges. We know that food service operators need to have less people working in the kitchen and that they need products that are practical and appealing for takeout and delivery. We also know that operators are having a hard time forecasting demand, which makes frozen options more appealing and fresh to help reduce waste. Our frozen value-added product offer solutions that are relevant, aligned with customer trends and deliver significant operator value in terms of overall efficiency. This is helping to ensure that our value-added products are featured on revamped menus.

The success of our foodservice reemergence plan can also be attributed to successful virtual selling and a very detailed forecasting to ensure that we have our finger on the pulse of regional reopening and COVID-19 hotspots as the situation unfolds across the United States, in particular.

Overall, organic growth from new product sales and new business wins increasingly offset the impact of losses — lost business in Q4 last year. We expect this trend to continue as we roll out additional innovation and further enhance our sales and marketing execution. As we strengthen our operations, we continue to drive ahead with our continuous improvement initiatives to build on last year’s transformation of our business. I strongly believe that there is more gains to be made, both in terms of overall profitability of our portfolio and the efficiency of our supply chain. We intend to continue optimizing the business while keeping a careful eye on cost and capital expenditures.

We have the right team and talent within the company to execute on these plans. And as our numbers show, we are selling more of the right product to the right customers at the right price in these unprecedented circumstances. I continue to be impressed by the hard work and dedication of our High Liner Foods team during this challenging time. Employee safety will always be our top priority, and we will continue to implement measures to protect the health and safety of our people and to ensure the continuity of our supply chain through the duration of this pandemic.

During the second quarter, we were proud to be recognized by Corporate Knights as 1 of Canada’s top 50 corporate citizens, which, among other things, speaks to the high degree of integrity and commitment to responsible and sustainable business practices within our culture. I look forward with confidence to the second half of the year as we move forward from a position of strength, and we build on our successes to date to unlock value for our shareholders. I’m increasingly confident that we can deliver adjusted EBITDA growth in 2020. I look forward to your questions. Operator, please start the Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of George Doumet from Scotiabank.

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George Doumet, Scotiabank Global Banking and Markets, Research Division – Analyst [2]

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Rod, you quantified the retail growth in kind of the quarter. Can you maybe do the same for foodservice declines? Can you give us a sense of where that number is — in the quarter where that number is, I guess, in early August?

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Rodney W. Hepponstall, High Liner Foods Incorporated – President, CEO & Director [3]

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Yes. I would say, our performance in foodservice was commensurate with industry performance. A couple of key points there, though, I would say our value-added business, as we’ve talked about for some time, is really the emphasis as we see the impact of that product running through our facilities. We actually took share, about 1.3 points of share in the quarter in our value-added business. And as we’ve talked about other — additionally earlier in previous calls on segment focus, we also took share in business and industry, from lodging and casino and recreation. So our segmented approach to the marketplace is working. Our maniacal focus on value-added sales is definitely working. So I was very pleased with the overall performance of the foodservice group. Again, on par with total industry performance, but in our key categories and segments we did exceptionally well.

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George Doumet, Scotiabank Global Banking and Markets, Research Division – Analyst [4]

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Okay. What is total industry performance?

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Paul A. Jewer, High Liner Foods Incorporated – Executive VP & CFO [5]

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Yes. And so…

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Rodney W. Hepponstall, High Liner Foods Incorporated – President, CEO & Director [6]

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Go ahead, Paul. Go ahead.

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Paul A. Jewer, High Liner Foods Incorporated – Executive VP & CFO [7]

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Yes. So George, in — just to give you a sense, in April, which was our worst month in foodservice, our sales were down approximately 70%. But in June, our sales were only down less than 20%. So a significant change in trend through the 3 months of the quarter. And as Rod said, if you do the math on that in terms of the overall quarter, our foodservice sales would outperform what you would see from other public food service companies in terms of what their trend looks like for the quarter as a whole.

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George Doumet, Scotiabank Global Banking and Markets, Research Division – Analyst [8]

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Okay. That’s helpful, Paul. And can you maybe talk a little bit about the wage subsidy, I think you guys called out that number, but is that supposed to — to what extent does that go away, I guess, in the second half? First part of that question. The second part is, even after accounting for these subsidies, do you still expect EBITDA to be up compared to next year — last year?

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Paul A. Jewer, High Liner Foods Incorporated – Executive VP & CFO [9]

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Yes. So on the first part, we qualified for the wage subsidy in April and May based on our sales decline in those 2 months. We did not qualify for the wage subsidy in June because our wage — our sales decline is not sufficient to qualify. However, the rules for the wage subsidy have changed for July onwards. So we expect we will qualify, but to a lesser degree than what we received in April and May because our sales decline is significantly less at this stage than it was in those 2 months. And if you look at the quarter, then the wage subsidy would have been sufficient to offset some of the onetime costs we had associated with COVID, including what we did for employee health and safety in our plants. So there was really no meaningful positive — net positive impact on the quarter associated with the weight subsidy compared to the COVID cost.

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George Doumet, Scotiabank Global Banking and Markets, Research Division – Analyst [10]

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All right. That’s helpful. And just 1 last one, if I may on. If you look at your input costs as a basket, all the various species in there, can you maybe talk a little bit about how do you expect the second — a lot of moving parts, but obviously, how do you expect the second half to look like? Is it — are you seeing very muted inflation? Can you possibly see some deflation? Just your views in general on your input basket heading into the second half?

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Rodney W. Hepponstall, High Liner Foods Incorporated – President, CEO & Director [11]

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Yes. George, maybe I can take that for you. I would say we feel very good about the input cost in the second half as we’re seeing some, I would say, stability now. We did see some softening over the last couple of months, as you would expect, given demand. But we don’t expect any significant inflation in the back half of the year on our primary species.

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Operator [12]

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Your next question comes from the line of Sabahat Khan from RBC.

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Sabahat Khan, RBC Capital Markets, Research Division – Analyst [13]

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Just wanted to get a little bit more color on the margin profile. Quite a bit of improvement, but I just want to get an understanding of how the food service margin trended versus the retail side? And is this more of the cost-cutting during — over the recent, I guess, quarters? Or is this more kind of the product mix shift that you’ve been talking about for a while and just a little bit more color there.

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Rodney W. Hepponstall, High Liner Foods Incorporated – President, CEO & Director [14]

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I would say there’s a number of factors that have come into play regarding margin expansion. Certainly, first and foremost, is the work that we have done over the last 12 to 18 months to position ourselves for growth opportunities and certainly to pivot quickly in a new environment. I would say, though, that it’s really mix driven. So not only do we have a more efficient operation, but we’re also selling a mix that is of higher-margin for us traditionally, and that is our value-added products. Again, those are the products that go through our facility versus our own process. So again, throughout focus, it’s around certainly the execution as well as cost containment within our organization that’s driving margin expansion.

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Sabahat Khan, RBC Capital Markets, Research Division – Analyst [15]

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Okay. And then in terms of the, I guess, the increase on the retail side and the moderation on the foodservice side, I think you called out that in 2019, the sales mix was 65% foodservice, 35% retail, how do you expect that to shake out for 2020?

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Rodney W. Hepponstall, High Liner Foods Incorporated – President, CEO & Director [16]

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Paul, I don’t have the specific on that work as maybe do you have a?…

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Paul A. Jewer, High Liner Foods Incorporated – Executive VP & CFO [17]

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Yes. I think at this stage, probably a little too early to tell what the balance of the year will look like. But given the shift in the second quarter, certainly, retail was 35% previously or 40 — it’s been north of 40% in the current quarter. We would expect to see that to continue to some degree with elevated retail sales and some of the challenges in foodservice. But over time, we would expect to see that mix start to rebalance back to more typical levels.

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Sabahat Khan, RBC Capital Markets, Research Division – Analyst [18]

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All right. And then just on the improvement that you’re seeing on foodservice, can you maybe give a little bit of color across some of the subcategories within foodservice, institutions versus restaurants, where are you seeing that accelerated demand? Or where are you seeing less of it?

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Rodney W. Hepponstall, High Liner Foods Incorporated – President, CEO & Director [19]

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Yes, absolutely. We have a very good position in the foodservice industry. We have a fantastic position, quite frankly, in health care and long-term care, which has helped us rebound and manage through the quarter, I think a bit more effectively than some of our competitors may have. In addition, we’re not predominant in areas like white table cloth, which have seen 70%, 80% declines in the industry. So between health care, and the other segments that we participate in a significant basis, we feel very good about our ongoing and forward-looking trends.

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Sabahat Khan, RBC Capital Markets, Research Division – Analyst [20]

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Okay. And then just 1 last one for me as, I guess, within the retail environment, some of the fresh counters by food retailers have been closed to some extent. Does — do you see that as sort of a short term issue? Or does that make you maybe rethink your frozen versus fresh mix, particularly in the retail channel?

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Rodney W. Hepponstall, High Liner Foods Incorporated – President, CEO & Director [21]

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No, we see that as a significant opportunity. As mentioned earlier, we had over 0.5 million new consumers come into the category. We’re seeing some other really interesting trends that the repeat in the seafood arena. Frozen seafood is the second fastest among proteins. Certainly, the gap is narrowing between purchase intent. Household penetration is up. So we’ve got a lot of very good indicators for our business moving forward. And as mentioned earlier, we are taking advantage of that and we’ll be directly targeting those new consumers as well as existing consumers that have continued to purchase more High Liner through social media, digital and other platforms to ensure that we retain those consumers that came into the frozen item.

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Operator [22]

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Your next question comes from the line of Kyle McPhee from Cormark Securities.

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Kyle McPhee, Cormark Securities Inc., Research Division – Analyst of Institutional Equity Research [23]

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On the sales to new customers and sales from these new products, can you provide any color on how much growth came from those initiatives in Q2? I know in the last couple of quarters, I think it was about 2% year-over-year contributor to sales growth. Was that kind of still the case in Q3?

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Rodney W. Hepponstall, High Liner Foods Incorporated – President, CEO & Director [24]

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Yes. I think…

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Paul A. Jewer, High Liner Foods Incorporated – Executive VP & CFO [25]

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Yes. It has been actually a similar percentage in the second quarter in terms of the growth that we’ve received from our new and innovative products. And we believe that, that will be a trend that we see continue at a growing rate as we move forward as the success of that innovation builds on itself in terms of getting more distribution. And more frequency with customers on repeat purchase.

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Kyle McPhee, Cormark Securities Inc., Research Division – Analyst of Institutional Equity Research [26]

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Got it. Okay. And then on some of the contract losses and the purposeful contract eliminations you experienced last year in 2019, which you’re now getting close to lapping year-over-year. I’m wondering if we should expect any new losses on this front. Any material contract at risk or contract do you still have a view to eliminating kind of lower margin? Or should I expect kind of High Liner to be largely back to year-over-year stability or even growth on the top line towards the end of the year when you’re done lapping all that stuff from 2019.

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Rodney W. Hepponstall, High Liner Foods Incorporated – President, CEO & Director [27]

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Yes, Kyle, we don’t have any visibility to any significant losses [that are] coming up. But I do feel very, very confident regarding, again, the innovation we’re bringing to market. The enhanced levels of customer engagement, our excellent fill rates and the recognition of our customers that we have opportunity for growth, and we’re going to continue to exercise every one of those options and — through innovation as well as continued household penetration and the list goes on and on.

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Kyle McPhee, Cormark Securities Inc., Research Division – Analyst of Institutional Equity Research [28]

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Got it. Okay. So — but on the side of you guys purposefully cutting out contracts, lower margin stuff, is that process large to be done that?

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Rodney W. Hepponstall, High Liner Foods Incorporated – President, CEO & Director [29]

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Well, I would say, we will always evaluate our book of business to ensure that we have the opportunity to margin up and replace potentially pieces of business that may not meet our new thresholds. But that’s an ongoing basis for any business, certainly that I’ve been in historically and we anticipate that project — that process to continue for us in the future.

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Kyle McPhee, Cormark Securities Inc., Research Division – Analyst of Institutional Equity Research [30]

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Got it. Okay. And then last 1 for me, kind of on the same topic. Are you able to quantify for us what the annual revenue value of that contract was that you lost in Q4 that you’re still lapping? Or at the very least, maybe just quantify how much of your Q2 revenue loss came from that contract?

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Paul A. Jewer, High Liner Foods Incorporated – Executive VP & CFO [31]

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Yes. I would say that it’s a small percentage of our Q2 revenue loss. Obviously, the most significant Q2 revenue loss is related to COVID. And we haven’t quantified a specific impact for an individual contract. But it will, as you pointed out, decrease as we continue to move through the balance of the year. It’s in the neighborhood of 1 million to 2 million pounds a quarter at its peak. And so you’ll start to see that decline as we move forward.

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Operator [32]

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(Operator Instructions) Your next question comes from the line of Jonathan Lamers from BMO.

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Jonathan Lamers, BMO Capital Markets Equity Research – Analyst [33]

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Paul, sir. Paul, circling up on the COVID impact in the quarter and in Q3, it wasn’t quite clear to me. Are you able to break out the incremental costs for extra employee PP&E and the other COVID-related costs that offset the wage subsidies?

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Paul A. Jewer, High Liner Foods Incorporated – Executive VP & CFO [34]

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Yes. So in total, the incremental costs that we incurred were just over $2 million. In addition to that, we would have had some impact associated with lower absorption in our plants as a result of the volume decline. That would have been a negative impact on our performance in the quarter as well. But from a pure cost perspective, it would have been just over that $2 million number and the wage subsidy largely offset most of that.

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Jonathan Lamers, BMO Capital Markets Equity Research – Analyst [35]

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And just to clarify, for Q3, assuming that demand trends at recent weekly levels, how do you expect those costs and subsidy receipts to play out?

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Paul A. Jewer, High Liner Foods Incorporated – Executive VP & CFO [36]

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Yes. So the subsidy would be smaller for sure because our volume decline is lower. And the costs, I would expect to be a bit smaller as well as we look forward. Some of those costs were a bit more onetime in nature as we incurred them in the early part of the first quarter — sorry, in the second quarter in our response to COVID. So at this point, we’re not identifying anything significant in terms of net COVID cost impact in Q3 or Q4. Of course, there’ll still be whatever the volume impact is associated with COVID as we look forward.

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Jonathan Lamers, BMO Capital Markets Equity Research – Analyst [37]

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And for Q4, will we see a 14th week this year? And does that comment that you’re expecting EBITDA growth? Is that — does that include the benefit of the 14th week?

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Paul A. Jewer, High Liner Foods Incorporated – Executive VP & CFO [38]

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Yes. There would be some benefit associated with the 14th week. It’s not significant on the EBITDA line as much as it is on some sales volume impact.

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Jonathan Lamers, BMO Capital Markets Equity Research – Analyst [39]

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Okay. And Rod, can you just tell us more about how you’re on offense? I mean you’ve done a good job of going through everything you’ve done that’s benefited margins this year, and that’s driven the outperformance in volumes versus the industry. But like where is the next leg? Like at some point, you’ll lap the benefits of this — the cost cuts in the maniacal focus on driving value add?

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Rodney W. Hepponstall, High Liner Foods Incorporated – President, CEO & Director [40]

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Well, Jonathan, I think we’ve got a lot of opportunity as it relates to continued efficiency within the organization, and we’re focused on that. So there’s opportunity there. But it’s the work, quite frankly, that we put in over the last 12 to 18 months, everything from organizational alignment, 1 HLP, simplification of our business, the restructuring of our sales force, the changing of our sales compensation structure, the list goes on and on that has positioned us to bring the continued innovation we have in the marketplace, much more in-depth targeted operator segment focus on the foodservice side. We certainly have significant opportunity for growth in certainly U.S. retail. As we know, we have a relatively small share. And then certainly, if we look at the Canadian marketplace, our brand strength in the Canadian marketplace is allowing us actually to take share even today. So with innovation, with execution, a portfolio that has products on north and south of the border that we have talked about, we haven’t brought to market. As an example, Pan Seared in Canada, which is a tremendously successful product is really just getting its legs in here in the States. So we think there’s ample opportunity for continued efficiency as well as organic growth as well as the innovation side of our business, which we know we are just ramping up, and we’ve got a stable fold of products waiting to come to market, and we’re really excited about that opportunity.

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Jonathan Lamers, BMO Capital Markets Equity Research – Analyst [41]

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Are you able to elaborate at all in terms of the customer discussions you’re having early order sizes? Or like how we should think about that percentage of sales ramping up?

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Rodney W. Hepponstall, High Liner Foods Incorporated – President, CEO & Director [42]

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Well, I would say this, our value-added shrimp offering, as I mentioned in the earlier remarks, were actually brought to market earlier at the request of our customers. So as you know, there’s a sell-in cycle, customers saw those products and (inaudible) we actually launched them earlier, particularly in the Canadian marketplace. And so we’re seeing similar response to that in the States. I would say as it relates to customer discussions, our customers are absolutely recognizing the different value, the enhanced volume proposition we’re bringing. Hence why we’re getting responses such as we’re leading as it relates to industry fill rates. And the list goes on and on. So while we had some work to do over the last period of time to mend some fences, we have done a, I would say, an admirable job of that. And I’m very, very confident in not only the marketing leadership, but our sales leadership to continue to drive further customer engagement.

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Jonathan Lamers, BMO Capital Markets Equity Research – Analyst [43]

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Okay. Paul, just a quick question. Would you happen to have mix of value-add this year versus last year?

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Paul A. Jewer, High Liner Foods Incorporated – Executive VP & CFO [44]

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Yes. For this year, value-added was 66% of our sales and last year, it was 56%. So you’ll see the significant change we referred to in terms of mix in the business.

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Operator [45]

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

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Rodney W. Hepponstall, High Liner Foods Incorporated – President, CEO & Director [46]

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Thank you. To close, I want to thank you for joining our call today, and we look forward to updating you with results from the second quarter of 2020 on our next conference call in August. I’m sorry, coming up here. So appreciate it. Thank you, and have a great day.

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Operator [47]

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