Clearwater Reports Strong Third Quarter Results and Positive Outlook for 2016

Thu, 10 Nov 2016

/Not for distribution to United States or for dissemination in the United States/

HALIFAX, Nov. 10, 2016 CNW/ - (TSX: CLR):

Today Clearwater Seafoods Incorporated reported its third quarter results for the period ended October 1, 2016:

Third quarter sales and adjusted EBITDA of $189.5 million and $45.2 million representing growth rates of 29% and 16% respectively. 

  • Year to date sales and adjusted EBITDA of $445.9 million and $91.5 million representing growth rates of 31% and 30% respectively.
  • Growth in sales and adjusted EBITDA were mainly due to higher selling prices and volumes across multiple species as well as favourable exchange rates.
  • Overall margin percentages were lower as Macduff's sales mix includes a greater percentage of procured raw material with higher associated input costs.
  • Operating cash flows were lower due to increases in working capital resulting from better than expected catch rates and production results in certain species.
  • Harvest of annual total allowable catch ("TAC") for several species is ahead of schedule, positioning inventories to support fourth quarter 2016 and first quarter 2017 sales.

On November 10, 2016 Ian Smith, Chief Executive Officer, commented "Sales and adjusted EBITDA continue to grow as Clearwater reported another solid quarterly performance that met management's expectations. The combination of our investments in harvesting, R&D and the addition of a third clam vessel has led directly to significant increases in catch rates and corresponding inventories. We've never been in a stronger position to actively market and promote surf clams. Previous investments in clam brand development combined with our Global Markets organization, will allow us to greatly expand consumption for this high value protein globally and especially in Asia."

Mr. Smith continued "It's now been a full year since we acquired Macduff, the integration has gone very smoothly and we are very pleased with the continued strong performance of the business."

Mr. Smith concluded "In August of 2016 Clearwater celebrated its 40th anniversary and also began implementation of our next five year plan to 2020. In this plan, we will continue to focus on executing with excellence against our six core strategies, see many attractive opportunities for future growth in wild caught, sustainably harvested seafood and perform in the top quartile of our peer group." 

Third Quarter Results

Clearwater reported sales and adjusted EBITDA1 of $189.5 million and $45.2 million for the third quarter of 2016 versus 2015 comparative figures of $147.3 million and $38.8 million, respectively, representing growth of 29% in sales and 16% in adjusted EBITDA. 

The growth in sales and adjusted EBITDA were due primarily to higher selling prices particularly for Canadian sea and Argentine scallops, lobster and snow crab and volume growth primarily related to Argentine scallops, UK King scallops, langoustine and whelk. At the end of the quarter, inventories in certain species were higher than expected, due to higher catch rates and production levels as increased supply of procured species was available. Management expects that inventory levels for these species will be drawn down in the normal course of business.

Sales and gross margin were positively impacted by strong market demand in all regions. Higher average exchange rates positively impacted selling prices.

Gross margin as a percentage of sales declined to 27.4% versus 31.8% in 2015 due to the addition of Macduff's sales mix which includes a greater percentage of procured raw material with higher associated input costs. Clam margins were also lower in the period. As a result of increased harvest of clam species, selling prices have been adjusted to expand consumer demand. Selling prices remain healthy for the majority of species. Selling prices were also positively impacted due to the strengthening US dollar and Yen against the Canadian dollar which had a $1.2 million net positive impact on sales and margins.

Adjusted earnings attributable to shareholders for the third quarter of 2016 remained consistent at $19 million as higher sales volumes were offset by higher administrative expenses.

Refer to the Management Discussion and Analysis for a breakdown of the non-IFRS measure and the related earnings attributable to shareholders. 

Operating cash flows were below the prior year's comparable period due to the start of construction and conversion of a new clam vessel that was announced on September 6, 2016. Free cash flows were $6.3 million in the third quarter of 2016 as compared to $4.8 million in the third quarter of 2015 as increased adjusted EBITDA offset changes in working capital.

Year to Date Results

Clearwater reported sales and adjusted EBITDA1 of $445.9 million and $91.5 million for the first nine months of 2016 versus 2015 comparative figures of $339.4 million and $70.7 million, respectively, representing growth of 31% in sales and 30% in adjusted EBITDA. 

The growth in sales and adjusted EBITDA were due primarily to higher selling prices, sales volumes, consistent and improved margins in several species and favorable exchange rates.

Volume growth was primarily attributable to langoustine, whelk, clam and scallops partially offset by shrimp and lobster.

Gross margin as a percentage of sales was steady at 26% as strong sales prices for the majority of species, and higher foreign exchange rates, were offset by Macduff's sales mix of more procured species at lower margins that increased procurement costs. A strengthening US dollar and Yen against the Canadian dollar had an $9.2 million net positive impact on sales and margins.

Adjusted earnings attributable to shareholders1 for the first nine months of 2016 decreased $1.2 million to $23.5 million.

Operating cash flows declined against the prior year due to investments in working capital caused by increases in inventory. The increase in inventory is the result of the Macduff species, higher catch rates in the clam and scallop species and higher availability of certain procured species. Inventory will be reduced in the fourth quarter as certain quotas have been fully harvested and procurement plans are adjusted to match sales expectations. Free cash flows were ($55.2) million in the first nine months of 2016 as compared to ($25.3) million in the first nine months of 2015. This decline can be attributed to increased inventory levels that have offset improvements in adjusted EBITDA. 

Dividends

The Board of Directors approved and declared a dividend of $0.05 per share payable on December 2, 2016 to shareholders of record as of November 22, 2016.

The Board reviews dividends quarterly with a view to setting the appropriate dividend amount annually.

The Board will continue to review the policy on a regular basis to ensure the dividend level remains consistent with Clearwater's dividend policy. 

These dividends are eligible dividends as defined for the purposes of the Income Tax Act (Canada) and applicable provincial legislation and, therefore, qualify for the favorable tax treatment applicable to such dividends.

Seasonality

Clearwater's business experiences a seasonal pattern in which sales, margins and adjusted EBITDA are higher in the second half of the year while investments in capital expenditures and working capital are typically lower resulting in higher cash flows in the in the second half of the year.

Results for both the third quarter and year to date period of 2016 are consistent with Management's expectations. 

Outlook 
Global demand for seafood is outpacing supply, creating favorable market dynamics for vertically integrated producers such as Clearwater which have strong resource access.

Demand has been driven by growing worldwide population, shifting consumer tastes towards healthier diets, and rising purchasing power of middle class consumers in emerging economies.

The supply of wild seafood is limited and is expected to continue to lag behind the growing global demand. This supply-demand imbalance has created a marketplace in which purchasers of seafood are increasingly willing to pay a premium to suppliers that can provide consistent quality and food safety, wide diversity and reliable delivery of premium, wild, sustainably harvested seafood.

As a vertically integrated seafood company, Clearwater is well positioned to take advantage of this opportunity because of its licenses, premium product quality, diversity of species, global sales footprint, and year-round harvest and delivery capability.

Core Strategies

Expanding Access to Supply - We will continue to actively invest in access to supply of core species and other complementary, high demand, premium, wild and sustainably harvested seafood through improved utilization and productivity of core licenses as well as acquisitions, partnerships, joint ventures and commercial agreements.

On September 6, 2016 Clearwater announced the replacement of an existing clam vessel with a state-of-the-art factory vessel that will employ advanced proprietary technology delivering significant productivity and efficiency improvements. This investment, estimated at $70 million, follows the launch of the Belle Carnell in the fourth quarter of 2015. The combined investments complete Clearwater's plan to harvest 100% of its Canadian Surf Clam quota in this Marine Stewardship Council (MSC) certified sustainable fishery.

Clearwater's investment in Macduff in 2015, provides access to an incremental 15 million pounds of premium, wild caught, safe, traceable and complementary shellfish species. 

Target Profitable & Growing Markets, Channels & Customers Clearwater benefits from strong and growing global demand for sustainably harvested, safe, traceable and premium wild seafood. In 2016, we will continue to segment and target markets, consumers, channels and customers on the basis of size, profitability, demand for eco-label seafood and ability to win. Our focus is to win in key channels and with customers that are winning with consumers. With the acquisition of Macduff, Clearwater has enhanced access to key distribution channels including food service and grocery retail in multiple markets including the UK, France, Italy, Spain and Portugal.

Innovate and Position Products to Deliver Superior Customer Satisfaction and Value – We continue to work with customers on new products and formats as we innovate and position our premium seafood to deliver superior satisfaction and value that's relevantly differentiated on the dimensions of taste, quality, safety, sustainability, wellness, convenience and fair labour practices.

The acquisition of Macduff has expanded the product range Clearwater can make available to its large and growing core customer base – especially in Asia and the Americas. We see tremendous opportunity to the utilize the sales and marketing strength of the Clearwater brand and organization to provide expanded market and customer service/access to Macduff's four major species – Scallops, Langoustines, Whelk and Crab.

The expansion of our clam fleet has provided us with capacity to harvest and market Northern Propeller Clam, a species with historically limited market appeal. This product has been transformed through new product development ("NPD") into a source of incremental revenue and profit in both the Japanese and North American Sushi markets. 

Clearwater's NPD efforts have also resulted in the significant growth, geographic and channel distribution expansion of our high pressure-processed frozen raw lobster including major air and cruise lines as well major retailers in the EU and Asia.

Increase Margins by Improving Price Realization and Cost Management - In 2016 we are continuing the implementation of our "ocean to shelf" global supply chain with a focus on capturing cost savings through greater efficiency and improved productivity of our global operations. This includes leveraging the scarcity of seafood supply versus increasing global demand to continuously improve price realization, revenue and margins. It also includes investing in innovative state-of-the-art technology, systems and processes that maximize value, minimize cost, reduce waste, increase yield and improve quality, reliability and safety of our products and people.

We see opportunities to drive value in utilizing Macduff's North Atlantic harvesting operations, integrated UK-based primary and secondary processing capabilities and expertise with land-based processing facilities in Scotland. In addition, our patented next generation live lobster storage and distribution system promises to improve quality, reduce waste and significantly lower the operating costs in our lobster business. Early tests have already yielded a significant reduction in mortality in storage and distribution, the single largest industry cost driver.  

Pursue and Preserve the Long Term Sustainability of Resources on Land and Sea - As a leading global supplier of wild-harvested seafood, sustainability remains at the core of our business and our mission. Investing in the long-term health and the responsible harvesting of the oceans and the bounty is every harvester's responsibility and the only proven way to ensure access to a reliable, stable, renewable and long-term supply of seafood. Sustainability is not just good business, like innovation it's in our DNA. That's why Clearwater has been recognized by the Marine Stewardship Council ("MSC") as a leader in sustainable harvesting for wild fisheries and how Clearwater can offer the widest selection of sustainably-certified species of any seafood harvester worldwide.

Clearwater will continue to invest in science and sustainable harvesting technology and practices to add value to all fisheries in which we participate in Canada, Argentina and the United Kingdom. 

Build Organizational Capability, Capacity & Engagement - A high level of performance can only be achieved by a talented and engaged global workforce at sea and on land, employing well communicated strategies and plans with measurable objectives. It also requires an enduring commitment to invest in our people.      

Management is evaluating multiple opportunities to fuel additional growth which will provide opportunities to continue to invest in, develop and engage our entire workforce in Canada and abroad.

Other financial information

To assist readers in understanding the share of adjusted EBITDA attributable to shareholders of Clearwater and to assist users in understanding earnings, we have included two additional measures – adjusted EBITDA attributable to shareholders of Clearwater and adjusted earnings attributable to shareholders of Clearwater. 

Adjusted EBITDA attributable to shareholders of Clearwater

Adjusted EBITDA attributable to shareholders increased by $5.5 million to $36.7 million in the third quarter of 2016 and by $19.9 million to $73.4 million year to date primarily as a result of higher volumes, strong sales prices for the majority of core species and higher average foreign exchange rates as the US dollar strengthened against the Canadian dollar. 

For those readers who would like to understand the calculation of adjusted EBITDA please refer to the reconciliation of adjusted EBITDA within the non-IFRS measures, definitions and reconciliations section of the MD&A.

Adjusted earnings attributable to shareholders of Clearwater

__________________________

1 – Refer to discussion on non-IFRS measures within the Management Discussion and Analysis  

 





13 weeks ended

39 weeks ended

Rolling 12 months ended




October 1

October 3

October 1

October 3

October 1

October 3





2016


2015


2016


2015


2016


2015
















Reconciliation of earnings to adjusted earnings














Earnings (loss)

$

17,858

$

1,717

$

47,185

$

(16,879)

$

43,392

$

(16,750)


Add (subtract)















Restructuring and refinancing costs


(284)


2,163


(1,132)


4,270


419


4,400



Acqusition related costs


-


1,065


1,159


1,065


3,497


1,065



Fair value impact on purchase price allocation


-


-


-


-


2,166


-



Stock based compensation (recovery) expense


3,455


(1,255)


5,205


2,265


8,209


5,194



Loss on insurance claim


-


-


-


300


-


300



Unrealized foreign exchange and derivative loss


5,382


20,093


(25,150)


46,446


(9,543)


56,968



Devaluation of peso on working capital


-


-


5,199


-


10,543


-



Fair value on long-term debt


(832)


1,378


3,099


642


338


192





7,721


23,444


(11,620)


54,988


15,629


68,119
















Adjusted earnings

$

25,579

$

25,161

$

35,565

$

38,109

$

59,021

$

51,369
















Adjusted earnings attributable to:














Non-controlling interests


6,717


6,480


12,081


13,428


16,567


17,074


Shareholders


18,862


18,681


23,484


24,681


42,454


34,295




$

25,579

$

25,161

$

35,565

$

38,109

$

59,021

$

51,369

 

For those readers who would like to understand the calculation of adjusted earnings please refer to the reconciliation of adjusted earnings at the end of this release as well as in the definitions and reconciliations section of the MD&A.  

One of the largest items that we adjust for in calculating adjusted earnings are foreign exchange gains and losses.

Clearwater is primarily an export company with greater than 85% of our sales taking place outside Canada and in foreign currencies. It has a business model built on access to a limited resource and diversity of species, markets and customers and has operated successfully in a variety of exchange rate environments. However, accounting standards require that we assume the settlement of foreign exchange hedging and debt instruments prior to their maturity at each period end. This results in non-cash gains or losses that are included in earnings for the period.  We exclude these gains and losses when calculating Adjusted EBITDA, Adjusted Earnings Attributable to Shareholders of Clearwater and Free Cash Flows. 

 

Key Performance Indicators

Key Performance Indicators





In 000's of Canadian dollars

(unless otherwise indicated)


October 1


October 3

Rolling twelve months ended


2016


2015

Profitability





Adjusted EBITDA

$

130,477

$

96,594






Adjusted EBITDA (as a % of sales)


21.3%


21.0%






Sales


611,365


458,940

Sales growth


33.2%


5.2%






Financial Performance





Free cash flows


9,209


11,908






Leverage (adjusted EBITDA multiple)


4.2


3.3






Returns





Return on assets


12.3%


13.7%






 

Financial Statements and Management's Discussion and Analysis Documents

For a detailed analysis of Clearwater's 2016 third quarter results please see Clearwater's Third Quarter Report for 2016, which includes Management's Discussion and Analysis and the related financial statements. These documents can be found in the disclosure documents filed by the Corporation with the securities regulatory authorities available at www.sedar.com or on Clearwater's website at www.clearwater.ca.

 




13 weeks ended


39 weeks ended

Rolling twelve months ended



October 1, 2016

October 3, 2015

October 1, 2016

October 3, 2015

October 1, 2016

October 3, 2015


Sales

$

189,457

$

147,332

$

445,862

$

339,442

$

611,365

$

458,940


Earnings (loss)


17,859


1,717


47,185


(16,879)


43,392


(16,750)


Basic earnings (loss) per share


0.17


(0.08)


0.57


(0.54)


N/A


N/A


Diluted earnings (loss) per share1


0.17


(0.09)


0.57


(0.54)


N/A


N/A
















Adjusted earnings2 attributable to shareholders

$

18,862

$

18,681

$

23,483

$

24,484

$

42,453

$

34,295


Adjusted earnings per share2


0.30


0.31


0.38


0.43


N/A


N/A
















Adjusted EBITDA2

$

45,158

$

38,810

$

91,477

$

70,732

$

130,477

$

96,594


Adjusted EBITDA attributable to shareholders2


36,795


31,251


73,368


53,479


106,792


74,578
















Shares outstanding, at period-end3

63,934,698

59,958,998

63,934,698

59,958,998


N/A


N/A


Basic and diluted weighted average shares

63,934,698

59,958,998

61,433,621

56,692,538


N/A


N/A


1. Diluted earnings (loss) per share for the 26 weeks ended October 1, 2016 and October 3, 2015 were anti-dilutive.


2. Please see the Management's Discussion and Analysis for a reconciliation of adjusted EBITDA to the financial statements.




3. On June 21, 2016 Clearwater completed the issuance of 3,975,700 common shares at $13.90 per common share for net proceeds of $53.0 million. Transaction costs associated with the equity issue were $2.2 million and have been deducted, net of deferred taxes of $0.7 million, from the recorded amount for the common shares.




On June 30, 2015, Clearwater completed the issuance of 4,980,900 common shares at $12.25 per share, for net proceeds of $59.9 million. Transaction costs were $2.4 million and have been deducted, net of deferred taxes of $1.2 million, from the recorded amount.


 

NON-IFRS MEASURES

This news release makes reference to several non-IFRS measures to supplement the analysis of Clearwater's results. These measures are provided to enhance the reader's understanding of our current financial performance. They are included to provide investors and management with an alternative method for assessing our operating results in a manner that is focused on the performance of our ongoing operations and to provide a consistent basis for comparison between periods. These non-IFRS measures are not recognized measures under IFRS, and therefore they are unlikely to be comparable to similar measures presented by other companies. 

Management believes that in addition to sales, earnings and cash provided by operating activities, non-IFRS measures are useful terms from which to determine Clearwater's ability to generate cash for investment in working capital, capital expenditures, debt service, income tax and dividends.

These non-IFRS measures can include gross margin, adjusted EBITDA, free cash flow, leverage, adjusted earnings and return on assets. Refer to non-IFRS measures, definitions and reconciliations in the Management Discussion and Analysis ("MD&A") for further information.

Adjusted EBITDA is defined as EBITDA excluding items such as severance charges, gains or losses on property, plant and equipment, gains or losses on quota sales, refinancing and reorganization costs. In addition recurring accounting gains and losses on foreign exchange (other than realized gains and losses on forward exchange contracts), have been excluded from the calculation of adjusted EBITDA. Unrealized gains and losses on forward exchange contracts relate to economic hedging on future operational transactions and by adjusting for them, the results more closely reflect the economic effect of the hedging relationships in the period to which they relate. In addition adjustments to stock based compensation have been excluded from adjusted EBITDA as they do not relate to the operations of the business.

Adjusted Earnings is defined as earnings excluding items such as refinancing and reorganization costs, stock based compensation and recurring accounting gains and losses on unrealized foreign exchange. 

Leverage is defined as adjusted EBITDA less minority share of adjusted EBITDA divided by debt (less Clearwater's share of cash).

Free cash flow is defined as cash flows from operating activities, less capital expenditures (net of any borrowings of debt designated to fund such expenditures), scheduled payments on long term debt and distributions to non-controlling interests. Items excluded from free cash flow include discretionary items such as debt refinancing and repayments, changes in the revolving loan and discretionary financing, investing activities and cash settled stock based compensation.

COMMENTARY REGARDING FORWARD-LOOKING STATEMENTS

This report may contain "forward-looking information" as defined in applicable Canadian securities legislation. All statements other than statements of historical fact, including, without limitation, statements regarding future plans and objectives of Clearwater, constitute forward-looking information that involve various known and unknown risks, uncertainties, and other factors outside management's control.  

Forward-looking information is based on a number of factors and assumptions which have been used to develop such information but which may prove to be incorrect including, but not limited to, total allowable catch levels, selling prices, weather, exchange rates, fuel and other input costs. 

There can be no assurance that such information will prove to be accurate and actual results and future events could differ materially from those anticipated in such forward-looking information.

In addition, this report contains forward-looking information relating to Clearwater's acquisition of Macduff Shellfish Group Limited ("Macduff"), financing of the acquisition, enhancement of Clearwater's scale of operations and accelerated growth, as well as expectations regarding sales, adjusted EBITDA, adjusted earnings and leverage. This forward-looking information is based on a number of factors and assumptions which have been used to develop such information but which may prove to be incorrect including, but not limited to, Clearwater's ability to successfully integrate or grow the business of Macduff as planned, total allowable catch levels, selling prices, weather, exchange rates, fuel and other input costs. There can be no assurance that such information will prove to be accurate and actual results and future events could differ materially from those anticipated in such forward-looking information. Risk factors that could cause actual results to differ materially from those indicated by forward-looking information contained in this press release include risks and uncertainties related to: (i) diversion of management time and attention on the acquisition, (ii) any disruption from the acquisition affecting relationships with customers, employees or suppliers, (iii) the timing and extent of changes in interest rates, prices and demand, and (iv) economic conditions and related uncertainties. 

For additional information with respect to risk factors applicable to Clearwater, reference should be made to Clearwater's continuous disclosure materials filed from time to time with securities regulators, including, but not limited to, Clearwater's Annual Information Form.

The forward-looking information contained in this report is made as of the date of this release and Clearwater does not undertake to update publicly or revise the forward-looking information contained in this report, whether as a result of new information, future events or otherwise, except as required by applicable securities laws.

No regulatory authority has approved or disapproved the adequacy or accuracy of this report.

About Clearwater

Clearwater is one of North America's largest vertically integrated seafood companies and the largest holder of shellfish licenses and quotas in Canada. It is recognized globally for its superior quality, food safety, diversity of species and reliable worldwide delivery of premium wild, eco-certified seafood, including scallops, lobster, clams, coldwater shrimp, langoustines, crab, whelk and groundfish. 

Since its founding in 1976, Clearwater has invested in science, people and technological innovation as well as resource ownership and management to sustain and grow its seafood resource. This commitment has allowed it to remain a leader in the global seafood market and in sustainable seafood excellence.

 

SOURCE Clearwater Seafoods Incorporated