High Liner Foods' first quarter of 2020 got off to a positive start, but then the ongoing COVID-19 pandemic took a toll on the company's sales.
High Liner's Q1 earnings report, released by the company Tuesday, 12 May, indicates the firm's sales volume had increased at the start of Q1 2020 when compared to Q1 2019, prior to COVID-19 causing net unfavorable impacts on sales. Those gains were largely from new product sales and new customer acquisitions.
“We wanted to highlight that, because that’s the first quarter in some time where we’ve been able to get to that position," Paul Jewer, executive vice president and CFO of High Liner Foods, said during a conference call announcing the results.
While the company saw an “unprecedented” surge in demand for its retail products, a significant decline in foodservice business – which represented 65 percent of the company’s total business in 2019 – countered the surge.
Despite the negative impacts of the pandemic, High Liner CEO Rod Hepponstall said the improving financial performance of the company indicates the company’s long-term strategy is working.
"Our improving financial performance in Q1 reflects significant progress and momentum in our business," he said. "Our work to drive continuous improvement across our business has significantly enhanced our ability to respond to the extraordinary challenges posed by COVID-19. We enter this period as strong as we have ever been."
For the first quarter, sales volumes decreased by 1.2 million pounds, or 1.5 percent, to 77.3 million pounds. Overall sales value also decreased, dropping USD 8.8 million (EUR 8 million) to USD 268.6 million (EUR 247 million) compared to USD 277 million (EUR 254.8 million) in Q1 2019.
Despite those decreases, gross profit increased by USD 2.7 million (EUR 2.4 million) to USD 58.8 million (EUR 54 million).
“The increase in gross profit reflects favorable changes in product mix and improved supply chain efficiencies related to the critical initiatives completed in FY 2019,” the company’s earnings statement said.
Adjusted earnings before interest, taxes, debt, and amortization (EBITDA) decreased from USD 32.2 million (EUR 29.6 million) to USD 30.7 million (EUR 28.2 million). However, that takes into account the inclusion of a USD 5.5 million (EUR 5 million) recovery in the first quarter of 2019, stemming from a recall caused by an ingredient supplier. Minus that recovery, adjusted EBITDA increased by USD 4 million (EUR 3.6 million), or 14.9 percent.
According to Hepponstall, the company has been managing the shifts in demand caused by the COVID-19 pandemic well.
"Our fully integrated and flexible supply chain is allowing us to maximize supply to our retail customers who continue to have increased demand for our frozen seafood products at this unprecedented time,” he said. “We are able to deliver excellent fill rates to our retail customers by leveraging excess capacity in our foodservice business that surfaced due to COVID-19 restrictions."
He added that the company is “well-positioned” to continue through the ongoing pandemic.
"We are well-positioned to navigate through the current challenges including economic uncertainty and fluctuating customer demand for our products thanks to our integrated North American operations, solid balance sheet, prudent cost-management measures and significant liquidity,” Hepponstall said.
In addition, the company had strong inventories going into Chinese New Year, which allowed it to last through processing interruptions from suppliers. Since then, processing in many areas has resumed, and the company has adequate supplies, Jewer said.
“We are getting steady supply of product from our processors and remain in good position to meet our increasing demand, particularly on the retail side of the business, for our products," Jewer said.
In response to the COVID-19 issues, the company formed a COVID-19 task force, “focused on enhanced health and safety protocols for all employees,” High Liner said.
“The company will continue to adapt and adopt best practices that prioritize the health and safety of its employees and the stability of food supply from its facilities,” the company said.
It added that even with safety measures in place, the supply chain has remained consistent.
“The company's overall supply chain has operated with minimal disruption during COVID-19 despite operating fewer production lines overall and implementing social distancing measures,” High Liner said. “There have been limited interruptions in production, transportation and warehousing activities and no significant issues related to the procurement of raw materials and ingredients.”
The company was forced to suspend operations of its Portsmouth, New Hampshire, U.S.A. plant after a positive case of COVID-19 was confirmed in the facility. At the time, the company activated a response plan, which included deep-cleaning, contact tracing, and risk assessment. Production at that closed plant resumed on 27 April after the cleaning had been completed.
“I was very very pleased with the team’s reaction,” Hepponstall said of the plant’s actions during a 12 May conference call. “That plant is back up and running at full production, and we anticipate it remaining so with the extraordinary measures we’ve taken in that plant.”
Those measures, however, have resulted in increased costs.
“Like other food processors, High Liner Foods is experiencing increased costs associated with COVID-19, including extraordinary recognition pay for frontline employees, personal protective equipment, safety enhancements, and increased sanitation,” High Liner wrote.
As a result of those costs, the company is deferring USD 6 million (EUR 5.5 million) of a planned USD 15 million (EUR 13.7 million) in capital expenditures for 2020.
The company also withdrew all its outlooks for 2020, as the COVID-19 situation has made it difficult to predict the state of the market.
“High Liner Foods' outlook is directly impacted by the duration of government imposed social distancing measures related to COVID-19, specifically timing for reopening of currently shuttered segments of the foodservice industry and related consumer behavior, which at this point remain uncertain,” the company wrote. “High Liner Foods can also not estimate whether potential future production disruptions will occur and whether incremental costs associated with COVID-19 will extend beyond the second quarter.”
The company stated that the current situation may mean that it is unable to deliver year-over-year EBITDA growth.
“High Liner Foods will continue to offset the impact of this decline by strengthening its retail capacity and carefully managing costs,” High Liner wrote. “It is also working in partnership with its hospitality customers as they pivot to take out and delivery options and to ensure readiness for a quick ramp up as and when social distancing restrictions are lifted across North America and consumer demand returns.”
Photo courtesy of High Liner