FINAL TRANSCRIPT - High Liner Foods Liner...FINAL TRANSCRIPT August 15, 2017 — 2:00 p.m. E.T. High...

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FINAL TRANSCRIPT

High Liner Foods Incorporated

Second Quarter Results Conference Call

Event Date/Time: August 15, 2017 — 2:00 p.m. E.T.

Length: 43 minutes

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High Liner Foods Incorporated Second Quarter Results Conference

Call

CORPORATE PARTICIPANTS Heather Keeler-Hurshman High Liner Foods Incorporated — Vice President, Investor Relations Paul Jewer High Liner Foods Incorporated — Executive Vice President, Chief Financial Officer Henry Demone High Liner Foods Incorporated — Chairman and Chief Executive Officer CONFERENCE CALL PARTICIPANTS George Doumet Scotiabank — Analyst Sabahat Khan RBC Capital Markets — Analyst Doug Cooper Beacon Securities — Analyst Bob Gibson PI Financial — Analyst Jonathan Lamers BMO Capital Markets — Analyst

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PRESENTATION

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the High

Liner Foods Incorporated Conference Call for results of the second quarter of 2017. At this time, all

participants are in a listen-only mode.

Following management’s prepared remarks, we will conduct a question-and-answer

session. Instructions will be provided at that time for you to queue up for questions.

If anyone has any difficulties hearing the conference, please press the * key, followed 0 for

Operator assistance at any time.

This conference call is being recorded today, Tuesday, August 15, 2017, 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 for High Liner Foods.

Ms. Keeler-Hurshman, please go ahead.

Heather Keeler-Hurshman — Vice President, Investor Relations, High Liner Foods Incorporated

Thank you, and good afternoon, everyone. Thank you for joining High Liner Foods

conference call to discuss our financial results for the second quarter of 2017. On the call today from

High Liner Foods are Henry Demone, Chairman and Chief Executive Officer, and Paul Jewer, Executive

Vice President and Chief Financial Officer.

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Today’s call will start with Paul reviewing the Company’s financial performance for the

second quarter of 2017, followed by Henry, who will discuss yesterday’s announcement from the

Company’s Board of Directors that he’s been reappointed CEO of High Liner Foods before he opens

the call up for questions.

Before turning the call over to management, listeners are reminded that certain statements

made in today’s call may be forward-looking statements that are subject to risks and uncertainties.

Management may use forward-looking statements as they discuss the Company’s strategy and

business in the future.

Actual operating or financial results could differ materially from those anticipated in this

forward-looking statement. High Liner Foods includes a thorough discussion of the risk factors that

can cause its anticipated outcome to differ from actual outcomes in its publicly available disclosure

document, particularly in its annual report and Annual Information Form.

Please note that High Liner Foods is under no obligation to update any forward-looking

statements discussed today.

Yesterday, High Liner Foods reported its financial results for the second quarter ended July

1, 2017, in a news release. Along with the Company’s MD&A, an unaudited condensed interim

consolidated financial statement for the second quarter of 2017 have been filed on SEDAR, and can

also be found in the Investor Information section of High Liner Foods’ website.

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If you would 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 information in US dollars, and the

results to be discussed today are stated in US 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 Paul. Paul, please go ahead.

Paul Jewer — Executive Vice President, Chief Financial Officer, High Liner Foods Incorporated

Thank you, Heather, and good afternoon, everyone. Before beginning my financial review,

I’d like to remind listeners that we use certain non-IFRS measures and ratios when discussing our

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.

Please note that all comparisons provided during my financial review of the second quarter

of 2017 are relative to the second quarter of 2016.

There were three nonroutine or unusual items impacting the second quarter’s financial

results that you should be aware of for purpose of comparing these results to the same period last

year. The first of these items is the acquisition of Rubicon completed on May 30, 2017, which had the

impact of increasing sales volume by 3.3 million pounds, sales as reported by 17.7 million, and

adjusted EBITDA by $500,000 in the second quarter of 2017 compared to the same period last year.

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The second of these items is the sale of our New Bedford scallop business on September 7,

2016, which had the impact of lowering sales volume by 800,000 pounds, sales as reported by $10.7

million, and had a nominal impact on adjusted EBITDA in the second quarter of 2017 compared to the

same period last year.

The third item to be aware of is the expanded voluntary product recall activities in the

second quarter. On last quarter’s conference call, we disclosed that $700,000 in estimated losses

were recognized in the first quarter’s results related to the voluntary recall of product due to the

potential presence of undeclared milk.

We also disclosed that we had identified that the allergen originated from ingredients

supplied by one of our ingredient suppliers. Subsequent to releasing the first quarter’s results, we

were notified by this ingredient supplier that it was recalling several additional ingredients due the

potential presence of undeclared milk. This in turn necessitated that we expand our initial product

recall, and resulted in the recognition of $8.6 million in further estimated losses being recognized

related to the product recall in the second quarter.

This amount is comprised of two components, the first being $6.7 million of losses related

to the return of destroyed product, along with direct incremental costs we incurred related to the

rework of product, consumer refunds, and customer fines. Please note that this amount, $6.7 million,

has been added back for the purpose of calculating adjusted EBITDA for the second quarter.

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The second component of the $8.6 million in total estimated losses is $1.9 million related to

the return of product to be reworked, which has not been added back for the purpose of calculating

adjusted EBITDA, as the product is expected to be resold.

These estimated losses do not include any estimate of the reduction in earnings associated

with the product recall as a result of lost sales opportunities due to limited product availability and

customer shortages, or increased production costs related to the interruption of production at our

facilities.

The majority of the disruption to our business associated with the recall has subsided. We

are receiving regular ingredient shipments from the ingredient supplier, rebuilding inventory of

recalled products, and have resumed shipment of these products to customers.

We expect to recover substantially all of the estimated losses associated with the recall from

the ingredient supplier, and will record these recoveries in the period in which they occur or are

virtually certain to occur, in accordance with IFRS.

In summary, the product recall had the impact of lowering sales volume by 2.5 million

pounds, sales as reported by $8.5 million, and adjusted EBITDA by $1.9 million in the second quarter

of 2017 compared to the same period last year.

Sales volume increased in the second quarter of 2017 by 1.1 million pounds to 63.4 million

pounds due to higher sales volume reflecting the following: the addition of sales volume from Rubicon

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offset by reduced sales volume related to the return of recalled product, and lower scallop sales as a

result of the sale of the New Bedford facility in the third quarter of 2016.

Excluding the impact of these items, sales volume for the second quarter of 2017 increased

by 1.1 million pounds, reflecting higher sales volume in our Canadian retail and foodservices business

and in our US foodservice business.

A later Easter in 2017 compared to 2016 shifted a portion of the benefit associated with

Lent into April compared to the full benefit being realized in the first quarter last year. This benefit,

however, was partially offset by lost sales opportunities associated with the product recall.

Sales in US dollars increased in the second quarter of 2017 by $8 million to $232.4 million.

The weaker Canadian dollar had the effect of decreasing the value of reported sales by approximately

$2.9 million relative to the conversion impact in the same period last year.

In domestic currency, which is before the impact of converting our Canadian operations to

the US-dollar presentation currency, sales increased by $12.2 million to $254.9 million. Excluding the

addition of sales from Rubicon, the decrease in sales due to the product recall returns, and reduced

scallop sales due to the sale of New Bedford, sales decreased by $14.3 million, mainly due to the

increase—sales increased, sorry, by $14.3 million, mainly due to the increase in sales volume

mentioned previously.

Gross profit decreased in the second quarter by $8.9 million to $37.8 million, reflecting

higher volumes and a decrease in gross profit as a percentage of sales to 16.3 percent compared to

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20.8 percent. This decrease reflects $8.6 million in estimated losses recognized in the second quarter

related to the product recall, partially offset by $2.1 million in gross profit from Rubicon.

Excluding these two items, gross profit decreased by $2.4 million to $44.3 million, or 19.8

percent of sales, due to the impact of product mix changes and residual plant inefficiencies since

closing our New Bedford facility that were worsened by production interruptions at our facilities as a

result of the product recall.

Adjusted EBITDA decreased in the second quarter of 2017 by $4 million to $13.4 million. The

impact of converting our Canadian-dollar denominated operations and corporate activities to our US-

dollar presentation currency decreased the value of reported adjusted EBITDA in the US … in US

dollars by $1 million in the second quarter of 2017 compared to $1.4 million in the same period in

2016.

In domestic currency, adjusted EBITDA decreased in the second quarter by $4.5 million to

$14.4 million, and was 5.7 percent of sales compared to 7.8 percent in the same period last year. The

$4.5 million decrease in domestic currency adjusted EBITDA still reflects 1.9 million of estimated

losses associated with the recall related to the returned product that will be reworked and resold that

I mentioned previously.

The remaining $2.6 million decrease in domestic currency adjusted EBITDA, which I will refer

to as the residual decrease, reflects a number of factors already discussed, such as changes in product

mix, continued plant inefficiencies that were worsened by production interruptions related to the

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recall, lost sales opportunities also related to the recall, all partially offset by $500,000 in adjusted

EBITDA from Rubicon.

We estimate that the impact of the product recall on plant efficiency and lost sales

opportunities was responsible for at least half of the $2.6 million residual decrease.

Reported net income decreased in the second quarter of 2017 by $4.5 million to $600,000,

with diluted earnings per share of $0.02. The decrease in net income reflects the decrease in adjusted

EBITDA mentioned previously, along with decreases in depreciation and income tax expense.

Excluding the impact of certain nonroutine and noncash items, which are explained in our

MD&A, adjusted net income decreased in the second quarter of 2017 by $2.4 million to $6.1 million,

and correspondingly, adjusted diluted earnings per share decreased by $0.08 to $0.19.

Turning now to the balance sheet. Net interest-bearing debt increased by $97.8 million to

$349.8 million at the end of the first half of 2017 compared to $252.1 million at the end of 2016,

primarily reflecting the acquisition of Rubicon. Including trailing 12-month adjusted EBITDA for

Rubicon, net interest-bearing debt to rolling 12-month adjusted EBITDA was 4.3 times at July 1, 2017,

compared to 3.1 times at the end of fiscal 2016. In the absence of any major acquisitions or strategic

initiatives requiring capital expenditures in 2017, we expect this ratio to improve to approximately 4

times by the end of 2017.

That concludes my financial review for the second quarter of 2017. I will now turn the call

over to Henry.

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Henry Demone — Chairman and Chief Executive Officer, High Liner Foods Incorporated

Thank you, Paul. Good afternoon, everyone. As Heather mentioned at the beginning of

today’s call, the Board of Directors of High Liner Foods announced yesterday my appointment as the

Company’s CEO, effective immediately.

For any listeners not already aware, I was previously the Company’s CEO from 1992 to 2015,

prior to the appointment of Keith Decker to this position in May of 2015, at which time I assumed the

position of Board Chairman.

The Board and I are very confident in the strategy the Company is pursuing to grow our

business and to create long-term shareholder value. We are progressing against this strategy, but our

belief that more progress can be made more quickly supported this change.

Like many of you, I am a significant shareholder of High Liner Foods, and I’m focused on

creating value for shareholders beyond what has been achieved to date. The Company has strong

leadership and talent, and I’m looking forward to working more closely with the team at High Liner

Foods to expedite progress on our strategic objectives and to pursue new growth opportunities.

On behalf of the Board, I would like to thank Keith for his contribution to High Liner, and

wish him all the best with his future endeavours.

Turning back to performance in the second quarter, year-over-year performance trends, in

particular sales volume, improved as expected and were further bolstered by the acquisition of

Rubicon, which was successfully completed in the quarter. Unfortunately, the impact of the product

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recall served to offset a portion of this improvement and contributed to inefficiencies at our

manufacturing facilities.

The product recall was a disruption to the business in the second quarter, but I believe that

it has been handled efficiently. And as Paul stated earlier, we believe the majority of the disruption is

behind us, and we expect to recover substantially all of the estimated losses associated with the recall

from our ingredient supplier. This recovery will be recorded in future periods.

Having returned to year-over-year sales volume growth in the second quarter, we expect

this to continue for the rest of the year. And combined with continued improvements at our

manufacturing facilities, we expect to deliver year-over-year earnings growth in the back half of 2017.

This is before considering any benefit from the Rubicon acquisition, which will further strengthen our

financial performance going forward.

I’m also pleased to share with you that yesterday the Company’s Board of Directors

approved a quarterly dividend of $0.14 per share on the Company’s common shares, payable on

September 15, 2017, to holders of record on September 1, 2017.

Operator, I would now like to open the call for questions.

Q&A

Operator

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Certainly. At this time, if you would like to ask a question, please press *, then the number

1 on your telephone keypad. Again, that is *, 1 on your telephone keypad.

Your first question comes from the line of George Doumet with Scotiabank. Your line is now

open.

George Doumet — Scotiabank

Good afternoon, guys.

Paul Jewer

Hi, George.

Henry Demone

Hi, George.

George Doumet

Just wanted to clarify a little bit; I mean appreciate you, Paul, all the numbers you provided

in terms of the impacts for the recall. But maybe give us a little bit more in terms of the loss of the

sale opportunity and the increased production costs if you expect them to persist in the next couple

of quarters?

Paul Jewer

Yeah. We don’t expect them to persist in the next couple of quarters. As I said, most of that

recall impact is now behind us; now is August. So there was a little bit of an impact in July, but that is

behind us.

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As Henry and I spoke of, the key to the performance improvement in the back half of the

year is the sales trend that we’ve already experienced, and a return to the production efficiency in

our plants that we believe is achievable.

George Doumet

Okay. Great. And just to clarify, I think, Henry, in your prepared remarks you mentioned the

comment year-over-year earnings growth. That’s purely organic, right?

Paul Jewer

That’s correct.

Henry Demone

Yes. Yes. That does not include Rubicon.

George Doumet

Okay. Okay. Perfect. And just looking at the Rubicon acquisition itself, it seems like the

contribution for the quarter was a little bit less than expected on our end. Just wondering if there’s

any seasonality you can maybe point to or any reduction in sales there that we’ve seen? And also

maybe you can just provide us with a bit of an update on the legal disputes that are currently

underway over there?

Paul Jewer

Yeah. Sure. So on the impact on the quarter, just as a reminder, there’s only one month in

there because we didn’t acquire it—didn’t close the deal until the end of May. The one month if you

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annualize it over the year obviously would be below what you would expect. But there is seasonality

in that business, particularly as you go into the December period and also through Lent. So there was

not an expectation internally that there would be significant impact from Rubicon in the second

quarter as a result.

Sales are absolutely in line with expectation. There has been some increase in shrimp prices

that, frankly, Rubicon has 17 years of experience in business figuring out how to manage, and we’re

confident that they will be able to do that as we go forward. So that’s where—that’s the financial

impact of Rubicon.

Going to the second part of your question, which is the legal update, there really isn’t much

more to update on that front. At this point, we continue to believe that the suit is without merit.

We’re deeply committed to sustainable practices in buying and labour practices in the High Liner

organization and we know in the Rubicon organization in its supply chain. So we will continue to

vigorously defend the lawsuit as we go forward.

George Doumet

Great. That’s helpful. And just one last point, if I may. I guess just looking at High Liner from

a strategic standpoint, would you guys consider adding a non-frozen maybe shelf-stable products to

your suite if that kind of satisfies your overall goal of species diversification?

Paul Jewer

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Yeah. I mean species diversification obviously is a goal of ours. And we’ve said before we

would always look at any opportunity that we thought was a good strategic fit. Clearly seafood is our

focus, and I believe seafood will continue to remain our focus. And other than that we won’t comment

specifically on any specific targets that we might have.

George Doumet

Okay. That’s helpful. Thanks, guys.

Henry Demone

Thank you.

Operator

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

is now open.

Sabahat Khan — RBC Capital Markets

All right. Thanks, and good afternoon. Can you maybe give us some indication of you said

you expect earnings growth in the back half of the year, maybe what are you seeing across your US

foodservice customers and even in retail in Canada that’s giving you maybe some confidence for the

back half?

Paul Jewer

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Well, I think there’s a couple of things. As we talked about in the call, we did see sales

improvement in the second quarter even in Canadian and US foodservice and Canadian retail. So we

expect that to continue as we go through Q3 and Q4.

We obviously have a little bit of Q3 already behind us and are comfortable with that start

that it is in line with our expectations for growth for the balance of Q3 and into Q4.

Sabahat Khan

All right. Thanks. And then just one follow-up on the product recall; was it—it seemed like

from the recall that it was very broad-based, but was it concentrated maybe in Canada versus US or

with any particular customers at all? Or was it widespread?

Paul Jewer

No, it was very broad-based across both Canada and the US. Initially it started in Canada.

When we talked about it in Q1, it was in Canada. But as it spread it was across Canadian and US

customers in both retail and foodservice. In our case obviously it was limited to seafood because

that’s what we do, but it impacted people that produce other proteins as well. It was not just a

seafood issue, or not just a High Liner issue.

Sabahat Khan

All right. Thanks. And then just one follow-up on your earlier commentary on potential M&A;

you provided some colour on what may interest you, but can you comment maybe on the capacity

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on your balance sheet and just willingness to do another acquisition on the back of Rubicon? Would

you be comfortable with another one in the next 6 to 12 months of similar size?

Paul Jewer

Yeah. I think our ability to … we’re very comfortable with our ability to execute on a deal if

a deal is the right deal to do. We are comfortable with our ability to manage and, where necessary,

integrate an acquisition if an opportunity presents itself in that time frame.

From a balance sheet perspective, I would say what we’ve said before is we believe that we

can finance acquisitions, some on our balance sheet. And if necessary, we would look at supporting

that with other securities issuances in order to make sure that we were comfortable that the risk

profile of the transaction was appropriate for the business.

And what we know of our own business is we generate significant free cash flow, and we

believe if we were accepting more leverage it would be temporary and we would be working hard to

get back down to our stated targets of leverage for the business over the long term.

So we're willing to accept some increase in leverage for the right strategic acquisition that

makes financial sense. But we are certainly conscious of doing that in an appropriate risk managed

basis as we go forward.

Sabahat Khan

All right. Thank you.

Operator

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Your next question comes from the line of Doug Cooper with Beacon Securities. Your line is

now open.

Doug Cooper — Beacon Securities

Hi. Good afternoon. Thanks for the time here. First of all just on Rubicon, I just want to get

back to that for a second. When it was announced it was 16 million of EBITDA on 234 million of

revenue, which is about just under 7 percent margin. Obviously came in this quarter just under 3

percent. Is that a volume thing? And I guess in follow on to that, in the back half of the year, given the

seasonality, would that typically represent about 60 percent of the sales? Or is that a ballpark figure?

Paul Jewer

I don't have the exact number for the back half of the year in front of me in terms of sales,

and I think that may be a little high just because January, February, March are pretty good periods for

them as well.

Henry Demone

Christmas.

Paul Jewer

Yeah. And December, which would be in this year, would be a good month as well. In terms

of the profitability, yes, we would expect the profitability to improve in the back half of the year versus

what you saw in June. But I did mention June was also impacted, as were a couple of the months prior

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to the acquisition, impacted by increases in shrimp prices. So we do have the team focused on

managing that to get the profitability from the business that we expect, both in medium to long term.

Doug Cooper

So that means you're trying to pass along the price increases? Is that basically what you

mean?

Paul Jewer

Yeah. There absolutely is some of that. There has been two things. One, there were rising

prices in shrimp. Some of that has subsided, fortunately. But also there was some of that that similar

to our business, you can't pass on immediately.

Doug Cooper

Right. Can you just talk about maybe how the, excluding the recall issue, how the bread and

battered category did this quarter? I mean we've been in this sort of, I guess, decline for the past,

whatever, couple years. Is there any sign of that stabilizing? Or is it down another couple percent sort

of year over year?

Paul Jewer

I think it has … the decline has abated. I wouldn't say that the product category grew in the

quarter, but the decline did abate compared to what we saw in previous quarters; certainly excluding

the product recall, as you said.

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We'll give a bit more perspective on that in Q3 as well because it's a little hard to comment

on fully given there’s some shift in volume between Q1 and Q2 related to the change in Lent.

Doug Cooper

Right.

Paul Jewer

But we'll certainly give some more perspective in Q3. But I would say our general sense is it

has abated a little.

Doug Cooper

Okay. And two more quick ones. The new product CAN’T MESS IT UP out there in distribution

in Canada anyway, can you comment a little bit about how it's going? And how your distribution is

shaping up on that product?

Paul Jewer

Yeah. Sure. So we're quite pleased with how the launch went. Obviously, it's early days still.

It was launched in May. And the intent is that it will get featured and promoted a little more heavily

as we go into September and the back-to-school period.

The distribution that we got across retailers across the country on the launch we were very

pleased with, and we see that continuing to grow. And we have been able to—that is not one of the

products that was negatively impacted in terms of our ability to serve. So we still see good potential

for that product as we move forward.

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And I think the other thing that we're very pleased with is the consumer response that we’ve

had to the product has been very positive from the consumer groups that we expected would be

interested in the product.

Doug Cooper

Okay. And what about salmon pricing, how's that trending?

Paul Jewer

So salmon pricing is starting to normalize from what were pretty high levels last year

because of issues in Chile. So that did have a negative impact in our business, as we talked about in

Q1, in the latter part of 2016. But we do expect that to be a more positive trend as we look forward.

Doug Cooper

Okay. And just a final for me; when you’ve given guidance, a year-over-year increase in

earnings in the second half, is there anything built in there for the new product CAN’T MESS IT UP in

there? Or is that expected to be sort of a breakeven in the first—during this initial launch period? And

is there a quantum you want to give in terms of the year-over-year? Is it sort of 5 percent or under 10

percent? Or can you add any colour to the quantum?

Paul Jewer

Yeah. I don’t really want to give any quantum because it’s still early. And frankly, it’s one

product, right? In fact, it’s three SKUs, right? It’s not even—

Doug Cooper

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No, sorry, Paul. I’m sorry, I meant when you talk about—just in general the year-over-year

increased—

Paul Jewer

Oh, sorry. I thought you were referring to CAN’T MESS IT UP specifically. No, I mean in terms

of level of growth, what we are comfortable saying is in the back half of the year we will see growth

over Q3 and Q4. We obviously believe there will be more of that growth in Q4 than Q3 as we continue

to come out of the plant production challenges that we had. But that’s all that I’d …that’s all I’d

highlight (unintelligible).

Doug Cooper

Okay. And just on the CAN’T MESS IT UP, do you expect that product to be profitable in the

second half of the year? Or is that something that once you’re through the initial launch then it should

just start to gain profitability?

Paul Jewer

Yeah. There’s always some level of extra promotion that you do when you launch products,

obviously. So we don’t expect it to be a significant contributor to profitability in the back half of the

year, but we do expect it to be profitable.

Doug Cooper

Okay. And sorry, last one for me. Just on that product, do you expect US distribution for that

product?

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Paul Jewer

Yeah. We are actively pursuing that as we speak because we do believe there are

opportunities for that kind of product in the US market.

Doug Cooper

Great. Thanks very much.

Operator

And your next question comes from the line of Bob Gibson with PI Financial. Your line is now

open.

Bob Gibson — PI Financial

Thank you. Henry, nice to have you back.

Henry Demone

Thank you, Bob. Thank you, Bob. Just like old days, right?

Bob Gibson

Exactly. Exactly. Can you give me a little idea, you called out higher raw material cost. Was

that just shrimp? Or give me some colour there.

Paul Jewer

Shrimp is where it had an impact on Rubicon. We did see some higher raw material costs in

a few of our key species, haddock and cod, as an example. Salmon actually abated a little bit, as I had

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mentioned earlier. But I would say that’s more typical inflation rather than some of the acute cost

increases that we saw if you look back a few years ago.

So our focus is on managing margin and mix as we face what are more typical cyclical ups

and downs in species costs.

Bob Gibson

Okay. Rubicon, any … now that you’ve had it, any thoughts of where it might go?

Paul Jewer

Absolutely. I mean I think as we talked about when we announced that we were acquiring

it, we see great opportunity for us to grow our shrimp volume across the rest of our retail and

foodservice business, both in Canada and the US. Rubicon was primarily entirely focused on US retail,

so we see an opportunity in the other channel.

Bob Gibson

Okay. And just touching on the US retail, any particular reason why it didn’t perform the

same as the other sectors? Any colour would be appreciated.

Paul Jewer

Oh, yeah. So there the primary area of decline in that business continues to be Fisher Boy

and some of our legacy Sea Cuisine products. Where we are seeing growth is in things like the Sea

Cuisine skin-pack line. So our focus is on, like we’ve been focused on across the rest of our business,

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finding a way to mix out that so that we can have some level of growth in excess of what will continue

to be some level of product decline in traditional categories.

Bob Gibson

Great. Thanks very much.

Operator

And your next question comes from the line of Jonathan Lamers with BMO Capital Markets.

Your line is now open.

Jonathan Lamers — BMO Capital Markets

Good afternoon. Paul—

Paul Jewer

Hey, Jonathan.

Jonathan Lamers

—you made a comment in your prepared remarks that of the residual $2.6 million decrease,

about half was due to a specific issue. Sorry, could you just repeat that comment? I didn’t hear that.

Paul Jewer

Yeah. Sure. So it’s related to … the half is related to the recall, which is two things related to

the recall. One is the plant inefficiency associated with recovering from the recall, and the second is

there is some level of lost sales when you don’t have product to meet the demand that was associated

with the recall. That’s half of the residual decline.

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The other half is more operational in nature. We talked about margin, gross margin mix in

the business. We have seen some increase in commodity sales and some decline in value-added

products. So that has a slightly negative impact on gross margin.

And then the other piece that we’ve talked about as well is the plant inefficiency still relating

back to the New Bedford closure late last year. And it’s working through that. Now that the recall is

largely behind us, that gives us confidence in terms of performance in the back half of the year.

Jonathan Lamers

So I’m sorry, the $2.6 million was with respect to normalized EBITDA excluding the recall

effects? Or normalized gross margin?

Paul Jewer

Yeah. So the $2.6 million is normalized EBITDA. But included in that $2.6 million decline year

over year in adjusted EBITDA is half of it, we believe, was related to the recall, plant disruption, and

volume impact because of opportunity not to complete sales.

The other half is related to more regular operational issues, gross margin mix, and the plant

inefficiencies associated with still moving product around related to New Bedford.

Jonathan Lamers

Okay. So in the outlook comments when the Company says it believes that the plant

efficiencies will improve in the second half, is that referring to that half of the EBITDA decline specific

to the recall disruption? Or does that also refer—

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Paul Jewer

No, both.

Jonathan Lamers

Both.

Paul Jewer

Yeah. Absolutely both.

Jonathan Lamers

And this margin mix shift from the growth in uncoated products versus value-added

products, I mean will that not continue going forward, given the breaded and battered continued to

decline?

Paul Jewer

Yeah. We do believe that that will continue to as we move forward. But what we have been

able to do—frankly that gap in Q2 was less than it has been in previous quarters because we found

ways to mix it out in our business, and some of the new products that we launched are value-added

type products that help with that margin.

And the plant inefficiency piece is a negative impact on margin as well. So the improvements

there, we believe, will allow us to return to that level of growth in EBITDA in the back half of the year.

Jonathan Lamers

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Okay. And just on the sales volume growth, the sales volume growth in Q2 benefitted from

the calendar timing shift with the late Lent. And if I carve that out, it looks like organic volumes would

have been down year over year. So so far in July was there some improvement in demand that

improved the underlying volume trend relative to that looking through these calendar effects?

Paul Jewer

Yes. There—we did start the quarter, the third quarter as I mentioned earlier, with a better,

even a more improved trend on sales volume. That does give us some confidence in the growth as we

look at Q3 and Q4.

And I would say—I wouldn’t say that all of the remaining organic volume growth is

associated just with the Lent shift.

Jonathan Lamers

No, but I believe in Q1 you indicated that the Lent shift negatively impacted Q1 sales by 2.1

million pounds year over year. So was the contribution in Q2 less than 2.1 million pounds?

Paul Jewer

Yeah. The contribution in Q2 was likely a little less than 2.1 million pounds. I’m struggling to

remember the 2.1 million pound number because I didn’t think we had quantified it that specifically.

But if we did, then you’re right. It would be slightly less of a positive impact in Q2.

The reason I’m surprised that we quantified it that specifically is because, frankly, it’s a little

hard to do in terms of quantifying exactly what business we could have happened in March that ended

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up happening in April. But suffice it to say that we feel quite comfortable that even without the shift

in Lent, our sales volume trend was much better in Q2 than it was in Q1, and we expect that to

continue to improve as we move forward.

Jonathan Lamers

You’re right. I’m just checking my numbers; the 2.1 million was my interpretation.

Paul Jewer

Okay.

Jonathan Lamers

One more question on the product recall. The $1.9 million loss that is included in adjusted

EBITDA for returned product to be reworked, can you just explain how you developed that estimate

and what is included in that?

Paul Jewer

Sure. Yeah. So as we get product—as we got product back from primarily retailers in this

case that was product that could not be sold, the accounting rules require you to reverse the sales

that you initially booked for those product and reverse the margin associated with those sales. And

the reason they do that is because if you can rework the product, then you should book the sale after

the reworking occurs.

And so that reworking has occurred, and those sales will be recorded in Q3.

Jonathan Lamers

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Okay. And when you say you expect to recover substantially all of the estimated losses, that

refers to the entire 9.3 million recognized over the first half?

Paul Jewer

Yes. It does.

Jonathan Lamers

Is there litigation needed for this? And where is the Company in the process of recovering

these losses?

Paul Jewer

We certainly hope there’s no litigation needed for this. We know that our supplier continues

to be an important supplier for us. We continue to receive product from them. They are a big, strong

company who are also insured. So we’re confident that we can resolve this with our supplier. And

that is what we will continue to do.

And we are still, as I say, buying product from that supplier and managing how we pay for

those products. So the supplier has been supportive.

Jonathan Lamers

Okay. Great. And have the customers changed their orders or volumes following the recall?

Paul Jewer

No. Thankfully what we have seen at this stage is customers refilling their stock levels, and

that was what we were working hard to get through.

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Jonathan Lamers

Okay. And just on Henry resuming the CEO position, has the Board considered conducting a

search for a new CEO?

Henry Demone

Yeah. Look, what I can tell you about that is I’m here full time with all my energy and all my

talent to do the job as well as I can. I can promise you I won’t be here as long as I was the first time.

But more seriously, we will be looking for a new CEO and obviously the Board makes that

decision. But in the meantime, I’m here doing the job on a full-time basis, not on an interim basis.

Jonathan Lamers

Okay. Thanks for your comments.

Henry Demone

Okay. Thank you.

Operator

And there are no further questions. I’ll turn the call back over to the presenters.

Henry Demone

Okay. I’d like to thank everyone for participating in today’s call. We look forward to updating

you with our third quarter results on our next conference call in November.

Thank you very much.

Paul Jewer

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Thank you.

Operator

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

*****

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