Looking ahead, there’s a lot of potential for growth. But whether it can be realized will depend on the industry’s ability to expand overseas — both in terms of mergers and acquisitions and consumer markets — and whether the government will follow through with adopting a more predictable regulatory environment for aquaculture, which will attract investment.
“I think that, in general, the seafood industry in Canada is very good,” said Henry Demone, president and CEO of High Liner Foods, one of the country’s largest seafood companies, based in Nova Scotia. “You still have a cautious consumer who’s watching their dollars closely, in particular their food dollars, and it’s difficult to move pricing unless you have a strong brand and innovation that’s relevant to the consumer.”
High Liner has apparently found the right mix of brand recognition and innovation with its FireRoasters line of frozen, ready-to-heat finfish fillets. The line — which has grown to 10 products, including salmon, tilapia, pollock and cod, since its launch in 2010 — is performing well, said Demone.
Looking at the company’s bottom line, High Liner’s sales grew 14.3 percent to CAD 668.6 million in 2011, though its net income fell slightly to CAD 18.2 million due to one-time costs associated with the Icelandic acquisition.
“We have healthy organic growth, but without new products and without innovation that would be different,” said Demone. “The food business doesn’t have very high organic growth, but when you add innovation then you have reasonable organic growth.”
Clearwater Seafoods Ltd., one of the country’s largest seafood companies, is also focusing on organic growth, said Bob Wight, the Nova Scotia-based company’s CFO.
“We see many opportunities to continue the growth trend in our earnings through product development, increasing sales volumes of our current products lines, harvesting efficiency, implementing new harvesting and processing technologies and the like,” said Wight.
Clearwater’s sales increased 5.5 percent to CAD 332.8 million last year, while its net income increased from a loss of CAD 15.3 million in 2010 to a gain of almost CAD 23 million in 2011. The company attributed its results to higher sales prices and a shift to higher-margin species, partially offset by lower sales volumes, higher costs and a strong Canadian dollar.
M&As
Perhaps the biggest deal of 2011 came in November, when High Liner agreed to acquire the U.S. and Asian operations of Icelandic Group for about USD 230.6 million. That was the company’s third major acquisition in four years — Fishery Products International came in December 2007 and Viking Seafood followed in December 2010.
However, across Canada, there hasn’t been a lot of activity on the mergers-and-acquisitions front, and that’s not expected to change in 2012.
“It’s been a little slow on the Canadian side for the last few years,” admitted Demone. “I’m not exactly sure why that is, but it’s been slow since the economic crisis hit in 2008.”
Nicholas Ktorides, an advisor and founding member of Glacier Securities, a New York-based strategic and financial advisory firm that assisted in the High Liner-Icelandic deal, attributed the lack of M&A activity to a mature industry.
“I think that if you look at Canada’s seafood industry, it’s as consolidated as it’s going to get, based on current regulations,” said Ktorides. “We all know who the big players are on the resource side in Canada, so there’s not a lot of opportunities for any sort of consolidation on the supply or resource side from there.”
Ktorides said Canadian seafood companies will likely make acquisitions outside of the country, either on the resource side or on the processing/distribution side, due, in large part, to the fact that the Canadian dollar has been trading at a favorable rate compared to the U.S. dollar and other currencies.
For example, New Brunswick-based Cooke Aquaculture acquired Culmarex S.A., Spain’s largest sea bass- and sea bream-farming operation, from Poland-based salmon processor Morpol in July 2011.
That was the company’s first venture into Europe (it also owns a Chilean salmon farm), and it may not be done yet. Cooke, Atlantic Canada’s largest salmon producer, made a play for Clearwater last year, but the Clearwater board rejected Cooke’s bid to purchase the company.
“There has been a push by Canadian seafood companies to access the Asian market and to try and diversify out of the U.S. market as the Canadian dollar remains strong,” said Ktorides.
Greg Morency, chief commercial office for Clearwater, agreed. He said Clearwater will continue to target China and its emerging middle class with its rising per-capita incomes.
“Besides America and China,” added Ktorides, “other markets that Canadian companies might look to is South America. It’s extremely rich in natural seafood resources. Companies that are comfortable with the South American business market can do very well with acquiring resources in that market. There are already a few companies quite active in that market, and I think we’ll see more of that.”
One challenge hindering consolidation, according to Ktorides, is restrictions in terms of deal size. Private equity firms are looking for investments in excess of CAD 100 million, and there are not a lot of transactions in seafood of that size.
“If a fund was set up to handle smaller deals, it could do a lot. A lot of big deals have happened; they’re all sizable, and the industry is so fragmented that there aren’t a lot of CAD 300 million to CAD 400 million companies floating around,” said Ktorides. “That’s a major gap we’ve seen, and we’ve done work in the seafood space for a long time.
“There’s been a shift — and this is typical of the merger and acquisition industry,” he continued. “We go through periods where private equity dominates the market and go through periods where strategics dominate the market. Strategics are dominating the market now and so financing is generally available, but not at the rates of leverage that companies could apply for. Strategics can always look to extract returns versus the traditional private equity model to generate types of returns that they need. These are long-term trends in the next four to five years. As the economy recovers and leverage becomes more easily obtainable, that might shift and valuation will recover. Valuations aren’t where they were in 2007 or the first half of 2008.”
“Debt markets have been strong since the beginning of 2012, and we expect them to remain strong this year,” added Clearwater’s Wight. “Clearwater has been successful in reducing our leverage, which will give our business better access to debt markets. When we need to obtain financing, we would expect to get better terms and lower interest rates than we have in the last three years.”
“I think all industries are experiencing the same thing,” said Ktorides. “Broad themes are similar across industries, leverage isn’t as available as it used to be. Seafood is particularly challenging because there are so many risk variables, whereas other businesses like beef and poultry have substantially less risk or less volatile business cycles. Seafood still remains quite volatile, but it makes the industry substantially more profitable than other major industries. It’s not for the faint of heart.”
Aquaculture
While the financial situation may be uncertain, the growing demand for seafood worldwide is not. Ktorides said there is essentially a fixed supply in terms of wild fisheries production, and while aquaculture production is growing it’s not doing so at the rate that demand is increasing.
While Canada’s aquaculture industry has a lot of potential for growth, it’s being hampered by the lack of a predictable regulatory environment.
Ruth Salmon, director of the Canadian Aquaculture Industry Alliance, said Canada’s aquaculture production has been flat over the last decade while globally it has seen growth.
“Because we have so many competitive advantages, if we reduce the regulatory burden and work on national legislation, we can get back to an annual growth rate of about 1.3 percent. So that would get us back to where we were 10 years ago,” said Salmon. “We’re working closely with the government now, and we’re optimistic that everybody has the same focus and intention.”
While the government is working with the industry, discussions are still in the very early stages, said Salmon.
“What Canada’s seafood farmers are looking for is a predictable regulatory environment from the federal government that would permit new investment to take place,” she explained. “An example of one issue is that Canada’s regulatory environment for aquaculture fits within the Fisheries Act, which is a very outdated piece of legislation, never designed to address a modern, food-producing sector like aquaculture.”
Salmon said there is strong demand for all of the country’s farmed species. Production of Atlantic salmon, mussels, trout, oysters and clams remain strong, and there is diversification for niche markets.
One species with strong growth potential is farmed sablefish, which has a high export value, especially in emerging Asian markets.
“I think there’s a consensus among producers and buyers that there’s no long-term supply for wild fish, which will likely result in continued upward price trend of sablefish,” said Salmon.
Salmon also pointed to other potential growth areas, including mussels in Nova Scotia, New Brunswick and Quebec and Atlantic salmon and oysters in Newfoundland and Labrador. Success stories include Arctic char and sturgeon, which have carved a niche for themselves.
Sustainability
There’s no question that Canada’s seafood industry — from producers to buyers — have embraced sustainability in the past few years.
Take Loblaw, Canada’s largest supermarket company, which represents about 35 percent of Canada’s retail seafood business. Loblaw now carries roughly 50 seafood products from Marine Stewardship Council-certified fisheries, for example.
“A very key focus for us over the next year is how we engage the consumer. It’s disappointing, to what level we’ve engaged consumers so far. But we’re committed, and we hope consumers come along for the ride,” Paul Uys, VP of sustainable seafood for Loblaw, told participants at an MSC event during the International Boston Seafood Show in March.
“If you has asked me a year ago, I would have said it’s not a consumer issue, it wasn’t on consumers radar screens. I’m not sure that’s true anymore,” said High Liner’s Demone. “It’s in the earlier stages of becoming a consumer issue. A lot of retailers have promoted sustainability as part of their marketing plans.
“Sustainability is very important in Canada,” he added. “We’re somewhere in between Europe and the U.S. Big retailers in Canada are very committed to sustainability. Sustainability in Canada is a bigger customer requirement than in the U.S. market, particularly in foodservice.”
