CANADA: Charges, debt paydown hits Clearwater Seafoods H1
By Michelle Russell | 10 August 2012
- Net loss of C$5.4m (US$5.4m)
- EBITDA reaches C$27.5m
- Sales up 5.3%
Clearwater Seafoods has said large a debt settlement and refinancing charge helped sink earnings in its fiscal first-half.
In the six months to the end of June, the company made a net loss of C$5.4m (US$5.4m) compared to earnings of C$1.5m in the prior-year.
EBITDA climbed to C$27.5m from C$22m in the comparable period last year, driven by higher sales prices and higher sales volumes, partially offset by a shift to lower margin species and higher harvesting and procurement costs per pound in certain species.
Sales in the period amounted to C$155.8m, a 5.3% increase on last year.
Clearwater continues trend of strong results in the second quarter of 2012
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HALIFAX, Aug. 9, 2012 /CNW/ - (TSX: CLR, CLR.DB.A):
Clearwater continues to strengthen its financial position and create shareholder value
Delivering another quarter of strong sales and EBITDA growth following successful refinancing of debt facilities
Second quarter sales, gross margins and EBITDA
Sales grew by 7.8% to $85.0 million
Gross margins increased to 21.6% versus 16.0%
EBITDA grew by 37.1% to $16.5 million
First half of 2012 sales, gross margins and EBITDA
Sales grew by 5.3% to $155.9 million
Gross margin increased to 19.4% versus 16.1%
EBITDA grew by 24.7% to $27.5 million
Today, Clearwater Seafoods Incorporated ("Clearwater") reported its results for the second quarter of 2012.
Clearwater reported sales of $85.0 million and EBITDA of $16.5 million in the second quarter of 2012 versus 2011 comparative figures of $78.8 million and $12.0 million representing growth of 7.8% in sales and growth of 37.1% in EBITDA.
Clearwater reported year-to-date sales of $155.9 million and EBITDA of $27.5 million versus 2011 comparative figures of $148.1 million and $22.0 million representing growth of 5.3% in sales and growth of 24.7% in EBITDA.
The growth in EBITDA came as a result of higher sales prices and higher sales volumes, partially offset by a shift to lower margin species and higher harvesting and procurement costs per pound in certain species. This resulted in quarterly gross margins of 21.6% versus 16.0% percent and year to date gross margins of 19.4% versus 16.1%
Year to date Clearwater experienced higher sales volumes due mostly to the timing of offshore coldwater shrimp landings and strong market response in China.
On June 6, 2012 Clearwater reported that it had successfully completed a series of capital market transactions that will substantially improve its capital structure. These refinancings provide a number of benefits including:
1. Further strengthening of Clearwater's liquidity position - At closing there was in excess of $20 million in availability on the asset based revolving credit facility which, when combined with expected strong cash flows in the last half of the year, is expected to result in an ongoing strong liquidity position.
2. Reduction in Clearwater's cost of capital - Clearwater's weighted average cost of debt is expected to decrease by approximately 2% per annum yielding a reduction of annual interest costs that, based on the debt facilities outstanding at close, approximates $4.6 million per annum.
3. Provides a solid and more flexible capital structure to allow management to continue to build shareholder value.
The Company recorded a one-time charge of $5.9M to Q2 and 2012 YTD earnings due to break fees and financing fees that were expensed in relation to the refinancing and the paying out of existing debt facilities.
Management expects earnings to remain strong in the second half of the year as inventory levels decline and margin improvements from better catch rates are realized in gross margins.
Global demand for seafood is outstripping supply, creating favorable market dynamics for vertically integrated producers such as Clearwater with strong resource access.
Demand has been driven by growing worldwide population, shifting consumer tastes towards healthier diets, and rising incomes and purchasing power of middle class consumers in emerging economies.
The supply of wild seafood is limited and is expected to lag the growing global demand. This supply-demand imbalance has created a market place 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.
Vertically integrated seafood company's like Clearwater are 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.
Ian Smith, Chief Executive Officer, commented, "Management is satisfied with the progress made in the second quarter and year-to-date towards our 2012 long term financial targets."
Mr. Smith continued "The Company's continuing strong earnings momentum, the $450 million independent valuation of our quotas by TriNav Fisheries Consultants Inc. and the positive ratings issued by Moody's and Standard and Poors all contributed to Clearwater's ability to refinance its debt facilities on favourable terms in the second quarter, thereby providing the Company with the capital structure necessary to execute our growth plans while further reducing overall leverage."
Mr Smith expanded further "The MSC certification of our Arctic surf clams and Nova Scotia snow crab fisheries in July 2012 further supports our leadership position in sustainable seafood and our aspiration to be the world's most extraordinary, wild seafood company".
Mr. Smith concluded "We will continue to execute with excellence against our overall business strategy as well as key cost-saving and productivity initiatives and we have every expectation that our earnings momentum will continue through the balance of fiscal 2012."
Management's commitment to creating shareholder value
There are seven key initiatives that management is pursuing to create value for the shareholders. They include:
Growing EBITDA sustainably - Clearwater has demonstrated its ability to consistently grow EBITDA in a sustainable manner. As of the second quarter of 2012 the Company's rolling 4 quarter EBITDA grew by 23.5% to $65.7 million as compared to same period ended July 2, 2011. This is driven by growth in EBITDA in both the latter half of 2011 and the first half of 2012 which saw EBITDA grow by 24.7%. Management expects revenue growth to accelerate through the balance of the year as higher value fisheries like Canadian Sea Scallops move into peak harvest and demand season. In addition, Clearwater will continue to lever its strengths and its vertical integration to win in existing segments while capturing a growing share of the seafood value chain through the introduction of value-added new products in core species.
Generating strong free cash flows - Clearwater is focused on generating increasing free cash flows on an annualized basis and plans to accomplish this through generating strong cash earnings, managing its working capital and carefully planning and managing its capital expenditure program. It is important to understand that Clearwater's operations have a predictable seasonal pattern in which EBITDA is higher in the second half of the year and capital expenditures and inventories are higher in the first half of the year. This results in lower free cash flows, higher debt balances and higher leverage in the first half of the year. Free cash flows for the second quarter of 2012 decreased to a net investment of $26.9 million primarily as a result of the increased investment in inventory and higher accounts receivable, due to the timing of sales. The increase in inventory was due to strong catch rates which enabled Clearwater to catch product earlier and at a lower cost. Management will reduce the investment in working capital as the harvest is expected to wind up earlier due to the strong catch rates. This will result in strong positive free cash flow in the second half of 2012 in line with Clearwater's annual goals for 2012.
Improving leverage and committing to leverage targets - As of the second quarter of 2012 leverage increased to 4.07 versus 3.85 as at December 31, 2011. During the second half of the year Clearwater will make a meaningful reduction in working capital which in turn will reduce debt and leverage such that it is projected that the year-end leverage ratio will be lower than year-end 2011. Clearwater has committed to further leverage reductions to achieve a target of 3.0 by December 31, 2014 by increasing earnings and using its free cash flow to reduce debt.
Improving the capital structure - On June 6, 2012 Clearwater reported that it had successfully completed a series of capital market transactions that substantially improved its capital structure. These transactions included a new Canadian $65 million Asset Based Revolving Credit Facility ("ABL"), a Canadian $75 million Term Loan A facility and a US $125 million Term Loan B facility. The proceeds from these facilities were used to redeem $43.4 millon of 10.5% convertible debentures, US $54.5 million of 12% second lien debt and Canadian $74.2 million in existing senior term notes. These financings build on Clearwater's relationship with its lenders and will enable it to reduce projected interest costs by approximately $4.6 million annually, strengthens liquidity and provide the capital structure necessary to execute growth plans while further reducing overall leverage.
Focused management of foreign exchange - Clearwater has implemented a new focused and targeted foreign exchange hedging program to reduce the impact of volatility in exchange rates on earnings. This, combined with stronger processes for price management, reduces the impact of exchange rate volatility on the business. During the quarter Clearwater completed a refinancing of its facilities that allowed it to expand its coverage such that Clearwater has approximately 72% of its US Dollar, Euro and Yen exposures for the remainder of 2012 hedged at rates of 1.03, 1.30 and 0.0129 respectively.
Building world class leadership, management, sales and marketing capabilities - In the past quarter Clearwater hired Jeff Duffin as Vice-President of Marketing and Jim Dickson joined the Board of Directors. Jeff brings over 15 years of experience in marketing and innovation from the tier 1 global fast moving consumer goods (FMCG) companies including The Pillsbury Company Ltd. He has already begun to implement best in class programs for consumer and customer research, new product development and category management at Clearwater. Mr. Dickson is a partner with the Atlantic Canadian based law firm Stewart McKelvey where he practices Corporate and Commercial law including securities law, corporate finance, mergers and acquisitions, corporate governance; intellectual property and natural resources.
Communicating underlying asset values - Clearwater has an industry-leading portfolio of quotas that provide strong security of underlying value to lenders and investors. In April 2012 an independent appraisal of these quotas was completed by TriNav Fisheries Consultants which placed a value on the quotas of $453 million. Clearwater obtained further independent support for the value in these licenses on July 17, 2012 when it received the Marine Stewardship Council (MSC) certification for its Arctic surf clam fishery. In combination with the recent certification of the Nova Scotia snow crab fishery, Clearwater now boasts a total of seven species certified by the MSC, completing the certification of all its core products, and giving the Company the widest selection of MSC-certified species of any seafood harvester worldwide. These certifications represent a collection of significant milestones for Clearwater. The deep-water clam fishery is the first of its kind globally to obtain MSC certification, while the snow crab fishery certification is the first in North America. These species join the Clearwater family of MSC-certified offerings including Canadian sea scallops, Argentine scallops, Canadian coldwater shrimps and Eastern Canadian offshore lobster.
Clearwater's financial targets for creating shareholder value include:
Annual sales growth of 5% or greater
Annual EBITDA as a percentage of sales of 15% or greater
Return on assets of 12% or greater
Leverage (debt to EBITDA) of 3 times by December 31, 2014
The sales and EBITDA ratios are annual goals whereas the return on assets and leverage ratios will be accomplished over time.
Management is satisfied with Clearwater's progress towards achieving all of these goals in 2012.
Sales growth year-to-date was 5.3% in line with expectations and is expected to result in Clearwater hitting its 5% annual sales growth target.
Year-to-date EBITDA as expressed as a percentage of sales continues to be strong at 19.4% and is expected to remain strong in the latter half of the year resulting in an annual rate stronger than that realized in fiscal 2011.
Return on assets continues to show improvement and is in line with 2012 goals.
Finally, leverage increased in the first half of 2012 as compared to December 31, 2011 due to expected and planned seasonality. During the second half of the year Clearwater will record a meaningful reduction in working capital which in turn will reduce debt and leverage moving it towards the goal of achieving target leverage of 3.0 by 2014.
Management believes that it has the correct strategies and focus to enable improved results and provide a sustainable competitive advantage and long-term growth. These strategies include:
Expanding access to supply;
Targeting profitable and growing markets, channels and customers;
Innovating and positioning our products to deliver superior customer satisfaction and value;
Increasing margins by improving price realization and cost management;
Preserving the long-term sustainability of our resources; and
Improving our organizational capability and capacity, talent, diversity and engagement
Management also believes that it has the people, processes and financial resources to execute this strategy to create value for its shareholders including the five year plan it developed in early 2012 to support and give direction to these goals.
Financial Statements and Management's Discussion and Analysis Documents
For a detailed analysis of Clearwater's 2012 second quarter and year-to-date results, please see the Management's Discussion and Analysis and 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 at its website www.clearwater.ca.
The entity previously known as Clearwater Seafoods Income Fund was reorganized into a publicly traded corporation called "Clearwater Seafoods Incorporated" ("Clearwater") on October 2, 2011. The related share structure of Clearwater was reorganized such that Clearwater Seafoods Incorporated now consolidates the results of its wholly owned subsidiary, Clearwater Seafoods Limited Partnership.
To provide appropriate comparative information to investors all information prior to the conversion date of October 2, 2011 has been adjusted to reflect the transfer of control using continuity of interest accounting. As a result, the 2012 second quarter and year-to-date financial statements were prepared on a consolidated basis for both the current and comparative periods as if the conversion had occurred on January 1, 2011.
Original source: Clearwater Seafood
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