First Quarter Report to Shareholders

Transcription

1 First Quarter Report to Shareholders Thirteen Weeks Ended March 31, 2012 Fellow Shareholders: We are pleased to report strong results in the first quarter of 2012, our first full quarter that includes Icelandic USA operations. Our operating strength in both the U.S. and Canada combined to deliver strong sales of $287.7 million for the quarter, a 62.4% increase from $177.1 million for the same quarter of While the increase was largely due to the addition of Icelandic USA, our pre-icelandic businesses were equally strong. On a pro forma basis that assumes Icelandic USA had been part of our operations for the same period in 2011, our U.S. operations experienced solid growth of 9.5% on sales. Likewise, we are particularly pleased with the turnaround in our Canadian retail business, which recorded an 18.7% growth in sales volume. We launched Flame Savours, our Canadian retail equivalent of the highly successful FireRoasters product in the U.S., and with very favourable early market response, it has the potential to be our best retail launch ever. Adjusted EBITDA 1 increased by 72.0% to $31.5 million, or 11.0% of sales, from $18.3 million, or 10.4% of sales, for the same period in Please note that we have revised the definition of Adjusted EBITDA to also exclude stock compensation expense, and restated Adjusted EBITDA for the prior period to conform to this new definition. The addition of Icelandic USA and higher selling prices, partially offset by higher seafood and other input costs compared with last year, resulted in the significant EBITDA increase. As we mentioned last quarter, prices for several key raw materials have recently decreased but we do not expect to see cost improvements until the second half of 2012 due to inventory and purchase contracts in place. However, our enhanced purchasing power, expanded distribution, and cost-reduction efforts should deliver further operating improvements this year. Net income for the quarter was $1.8 million, diluted EPS of $0.12, compared with net income of $9.7 million, diluted EPS of $0.63, for the first quarter of Net income was primarily negatively impacted by the write down of assets as part of the announcement on May 3, 2012 regarding supply chain consolidation and also by one-time integration costs related to the Icelandic USA acquisition expensed during the quarter. Adjusted net 1 Adjusted EBITDA is earnings before interest, taxes, depreciation and amortization, excluding impairment of property, plant and equipment, business acquisition and integration expenses, stock compensation expense, gains or losses on disposal of assets, and the increase in cost of goods sold relating to inventory acquired from the Icelandic USA and Viking Acquisitions, above its historical cost, as part of the fair value requirements of purchase price accounting.

2 income 2, which now also excludes stock compensation expense, increased by 38.8% to $13.9 million, Adjusted diluted EPS of $0.90, from $10.0 million, Adjusted diluted EPS of $0.65, in the previous year. The quarter was not only successful operationally, but was also an achievement in terms of integrating Icelandic USA into High Liner s operations. We are proud to say that we are ahead of schedule in this undertaking, as over the last four months, we have integrated our broker network, reorganized staffing, streamlined the procurement process, repositioned our brands, and announced the consolidation of our supply chain that will result in the closure of two plants. We are deeply saddened to close these plants in Burin, Newfoundland and Danvers, Massachusetts, that will result in approximately 300 people leaving the High Liner family, but it is a business decision driven by a very competitive marketplace with highly price-sensitive consumers. We will honour all our commitments made as part of the purchase of FPI in 2007 to the Government of Newfoundland and Labrador. As we move forward in 2012, we look to continuing with our initiatives to sustain growth in Canada while pursuing the complete integration of Icelandic USA. We are on track to realizing near-term synergies of approximately $12 million and ongoing annual synergies of $16-18 million from this acquisition. I am pleased to announce that because of our continued financial strength, our Board of Directors approved a quarterly dividend in the amount of $0.10 per common and non-voting equity share payable on June 15, 2012 to shareholders of record on June 1, Looking ahead, we reiterate our three strategic goals for this year. The first is profitable growth, which we plan to achieve through acquisition synergies and organic growth driven by product development, enhanced distribution, and procurement efficiencies. Second is sustainability, as we continue our efforts to deliver on our promise of buying only sustainable seafood by And lastly, system improvements, to better manage our supply chain and keep track of our over 2,000 products. I look forward to reporting our continued progress in achieving these goals throughout the remainder of the year. On behalf of the Board, Henry E. Demone President and Chief Executive Officer 2 Adjusted net income is net income excluding impairment of property, plant and equipment, business acquisition and integration expenses, stock compensation expense, the increase in cost of goods sold relating to inventory acquired from the Icelandic USA and Viking Acquisitions, and withholding tax related inter-company dividends. 2

3 Financial Results and Management Discussion & Analysis (MD&A) Thirteen Weeks Ended March 31, 2012 Introduction This MD&A includes High Liner s operating and financial results for the first quarter of It provides management s perspective on our performance and strategy for the future. This document should be read in conjunction with our Condensed Interim Consolidated Financial Statements for the period ended March 31, 2012, as well as our 2011 Annual Report, which is available on High Liner s website at and SEDAR s website at This MD&A provides an update from the annual MD&A included in the 2011 Annual Report; since many factors described in those documents remain substantially unchanged, readers should refer to them as well. Important Notes We, us, our, Company, High Liner In this MD&A, these terms all refer to High Liner Foods Incorporated, and its businesses and subsidiaries. Review and approval by the Board of Directors The Board of Directors, on recommendation of the Audit Committee, approved the content of this MD&A on May 10, Disclosure contained in this document is current to this date, unless otherwise stated. Quarterly comparisons in this MD&A Unless otherwise indicated, all comparisons of results for the first quarter of 2012 are against results for the first quarter of Currency All dollar amounts are in Canadian dollars unless otherwise noted. Approximately 70% of our operations, assets, and liabilities are denominated in U.S. dollars or are impacted by the Canadian/U.S. exchange rate. Generally, a stronger Canadian dollar is beneficial to earnings. Foreign currency fluctuations affect the reported values of individual lines on our balance sheet and income statement. When the Canadian dollar strengthens, the reported values decrease and the opposite occurs when the Canadian dollar weakens. As our Canadian operations are an importer of seafood and other products, a stronger Canadian dollar reduces costs and a weaker dollar increases costs. 3

4 In some parts of this document, we discuss balance sheet and operating items in domestic currency. This effectively means that the self-sustaining U.S. operations are converted to Canadian dollars at par. We have done this to show the true changes in domestic currency, eliminating the effect of fluctuating foreign exchange rates on the translation of our U.S. subsidiary. U.S.-dollar denominated items in the Canadian operations continue to be converted to Canadian dollars at the balance sheet date for balance sheet items and at the average daily rate for the income statement. Other important documents High Liner also publishes year-end documents that include additional information of interest to investors, such as our 2011 annual MD&A and Annual Information Form. These documents are available on SEDAR s website at and in the Investor Information section of High Liner s website at Non-IFRS financial measures The Company reports its financial results in accordance with International Financial Reporting Standards ( IFRS ). We have included in our Quarterly and Annual Reports certain non-ifrs financial measures and ratios. These non-ifrs/ financial measures are Adjusted EBITDA, Standardized Free Cash Flow, Adjusted Net Income, and Adjusted Earnings Per Share. Our definition of Standardized Free Cash Flow and Adjusted EBITDA follows the October 2008 General Principles and Guidance for Reporting EBITDA and Free Cash Flow issued by the Canadian Institute of Chartered Accountants. These measures are defined in more detail later in this document. The Company believes these non-ifrs financial measures provide useful information to both management and investors in measuring the financial performance and financial condition of the Company. These measures do not have a standardized meaning prescribed by IFRS and, therefore, may not be comparable to similarly titled measures presented by other publicly traded companies, nor should they be construed as an alternative to other financial measures determined in accordance with IFRS. Forward-looking statements This MD&A contains forward-looking statements within the meaning of securities laws. In particular, these forward-looking statements are based on a variety of factors and assumptions that are discussed throughout this document. Specific forward-looking statements in this document include, but are not limited to: statements with respect to future growth strategies and its impact on shareholder value; increased demand for our products due to the recognition of the health benefits of seafood, increases in the disposable incomes of consumers, and economic recovery in both Canada and the U.S. markets; increasing costs for seafood and other raw materials; increasing processing costs in China, the exchange rate for the Canadian dollar relative to the U.S. dollar compared to previous years; percentage of sales from our brands; operating cost savings 4

5 expected in 2012; expectations with regards to sales volumes, product innovations, brand development and anticipated financial performance; impact of price increases on future profitability; sufficiency of working capital facilities; future income tax rates; the anticipated efficient integration of the operations of Icelandic USA with High Liner operations; the increased market share anticipated due to the addition of Viking and Icelandic USA value-added seafood products; increased leverage attributable to the acquisitions of Viking and Icelandic USA; estimated capital spending; future inventory trends and seasonality; market forces and the maintenance of existing customer relationships; expected changes in seafood costs; financial performance from the Viking and Icelandic USA Acquisitions; improved U.S. food service position from the Icelandic USA Acquisition; and availability of credit facilities; our projection of excess cash flow and minimum repayments under the Term Loan; expected synergies from acquisitions; expected decreases in debt to capitalization ratio; dividend payments; timing of plant closures and the amount and timing of the related one-time cash expense; amount and timing of the write-down of plant and equipment; amount and timing of the annual ongoing reduction in operating costs resulting from the plant consolidation; and amount and timing of the capital expenditures in excess of normal requirements to allow the movement of production between plants. Forward-looking statements can generally be identified by the use of the conditional tense, the words may, should, would, believe, plan, expect, intend, anticipate, estimate, foresee, objective or continue or the negative of these terms or variations of them or words and expressions of similar nature. Actual results could differ materially from the conclusion, forecast or projection stated in such forwardlooking information. As a result, we cannot guarantee that any forward-looking statements will materialize. Assumptions, expectations and estimates made in the preparation of forward-looking statements and risks that could cause our actual results to differ materially from our current expectations are discussed in detail in the Company s materials filed with the Canadian securities regulatory authorities from time to time, including the Risk Management section of our 2011 MD&A and the Risk Factors section of our 2011 Annual Information Form. The risks and uncertainties that may affect the operations, performance, development and results of High Liner Foods business include, but are not limited to, the following factors: volatility in the U.S. / Canadian exchange rate; competitive developments including increases in overseas seafood production and industry consolidation; availability and price of seafood raw materials and finished goods; costs of commodity products and other production inputs; successful integration of the operations of Icelandic with High Liner Foods operations; potential increases in maintenance and operating costs; shifts in market demands for seafood; performance of new products launched and existing products in the market place; changes in laws and regulations, including environmental, taxation and regulatory requirements; technology changes with respect to production and other equipment and software programs; supplier fulfillment of contractual agreements and obligations; High Liner Foods ability to generate adequate cash flow or to finance its future business requirements through outside sources; compliance with debt covenants; the availability of adequate levels of insurance; management retention and development; and timing and final number of layoffs from plant closures. 5

6 Forward-looking information is based on management s current estimates, expectations and assumptions, which we believe are reasonable as of the current date. You should not place undue importance on forward-looking information and should not rely upon this information as of any other date. Except as required under applicable securities legislation, we do not undertake to update these forward-looking statements, whether written or oral, that may be made from time to time by us or on our behalf, whether as a result of new information, future events or otherwise. Overview of the Company High Liner has been in business since Our name has been a fixture in Canadian grocery retailing for more than eighty years and today Captain High Liner is one of the most highly-recognized consumer brand icons in Canada. We are leveraging our Canadian strength to build upon our established retail presence in the United States and Mexico by introducing more of North America to the High Liner brand. In late 2007, High Liner acquired the North American manufacturing and marketing business of FPI Limited, including FPI s prominent food service business headquartered in Danvers, Massachusetts. At the end of 2010, High Liner acquired the business of Viking Seafoods, Inc. (the Viking Acquisition or Viking ). Viking is a value-added business serving the U.S. food service seafood market from Malden, Massachusetts. At the end of 2011, High Liner acquired the U.S. subsidiary and Asian procurement operations of Icelandic Group h.f., one of the largest suppliers of value-added seafood to the U.S. food service market. See Section 5.1 of this document and the Business Acquisition Report filed on SEDAR on March 16, 2012 for more details on this important acquisition (the Icelandic USA Acquisition ). Although, our roots are in the Atlantic Canada fishery, we now purchase all our seafood raw material and some finished goods from around the world. From our headquarters in Lunenburg, Nova Scotia, we have transformed our long and proud heritage into worldwide seafood expertise. We deliver on the expectations of the modern consumer by selling seafood products that respond to their demands for convenient, tasty, and nutritional food at good value. Vision, Core Business, Strategic Measures At High Liner, our reputation for delivering outstanding seafood products is an advantage in the competitive North American market. Our business strategy is to provide frozen packaged seafood that satisfies the preferences of North American consumers. We believe that focusing on product development, processing and marketing will increase the likelihood of achieving our strategy. 6

7 As a consumer-driven sales and marketing company, we focus on matching supply to demand. Buying seafood on global markets allows us to provide products based on consumer preferences at reasonable cost. The eating preferences of North Americans are based on taste, value, quality, health and convenience. They also want a variety of premium, restaurant quality food at home. Our strategic advantage comes from existing strengths in each of the following aspect of our business model. Broadest reach in the industry High Liner is the only company in North America with a strong presence in all market segments in both Canada and the USA, as well as a presence in retail in Mexico. Market leading brands The High Liner brand is the leading seafood brand in Canada and FPI and Icelandic Seafood are leading brands to restaurants and institutions in the USA. Fisher Boy and Sea Cuisine are important brands in the USA retail and club channels. Diversified global procurement High Liner s state of the art procurement systems and long standing customer relationships help us buy 30 species from 30 countries around the world at reasonable cost. Frozen food logistics expertise Due to our broad industry reach we have trucks calling on all majors customers throughout North America on regular schedule that reduces logistics costs and makes it convenient for our customers to buy from us. Innovative product development From product development kitchens in Canada and the U.S., our chefs and food technologists continually develop differentiated seafood products in demand by consumers and operators, such as the recently introduced Flame Savours and Fire Roasters. See the MD&A in our 2011 Annual Report for more details on our vision, core businesses and strategy. The following are some of the highlights, achievements and other developments during the first quarter compared to the same period in the previous year: We began the integration of the Icelandic USA Acquisition in the first quarter of 2012 by consolidating our U.S. sales force. This was done without any disruption to our customers. In fact, sales increased in Q relative to the prior year, both including and excluding the Icelandic USA Acquisition. As well, in early April 2012, we announced the elimination of duplicate roles and functions 7

8 between Icelandic and High Liner by finalizing the organization for our U.S. operations. Having one combined organization will ensure that we realize the synergies that were expected to be achieved from this transaction. Sales increased by 62.4% to $287.7 million from $177.1 million; Adjusted EBITDA increased by 72.0% to $31.5 million from $18.3 million; Reported net income of $1.8 million, diluted earnings per share ( EPS ) of $0.12, compared with $9.7 million, diluted EPS of $0.63, in the first quarter of 2011; and Adjusted net income increased by 38.8% to $13.9 million, adjusted diluted EPS of $0.90, from $10.0 million, adjusted diluted EPS of $0.65, in the first quarter of Capability: Resources and Core Competencies High Liner has both the financial and operational resources to achieve our objectives. Liquidity and Capital Resources Our balance sheet is affected by foreign currency fluctuations. The affect of foreign currency is discussed in this section and under the heading Risk Management of this report. Net Working Capital Net working capital balances, consisting of accounts receivable, inventory, prepaid expenses less accounts payable and provisions, are higher at March 31, 2012 than they were a year ago primarily due to the Icelandic USA Acquisition. The Icelandic USA Acquisition added approximately $91 million to our net working capital balances as of the end of the first quarter of Accounts receivables are higher at the end of the first quarter of 2012 compared to 2011 as sales have increased, particularly in the U.S., as a result of the Icelandic USA Acquisition (addition of $39.4 million) and organic growth. Our inventories increased at the end of the first quarter of 2012 due to the Icelandic USA Acquisition that added approximately $55.4 million to the balance on March 31, 2012, plus an additional $16.5 of raw material outside of North America. As well, the average cost of inventory has increased relative to the previous year as a result of an increase in demand for seafood following very low prices during the recent economic downturn. The company is also buying more raw material for primary processing overseas and this accounted for an increase of $18.5 million. The company believes that controlling the purchase of its raw material earlier in the supply chain allows it better control over the quality of the finished goods, higher continuity of supply and lower costs. The Company had 86.5 million pounds of product inventory at the end of the first quarter of 2012, 8

9 excluding inventory at our joint venture, compared with 54.3 million pounds at the end of the first quarter of Accounts payable balances at the end of the first quarter of 2012 are higher than the same period last year, primarily resulting from the Icelandic USA Acquisition. Equity During the first quarter of 2011, we repurchased 50,000 non-voting equity shares for cancelation under our normal course issuer bid that began in December We also purchased 25,000 non-voting equity shares under the same bid for the Company s defined benefit pension plan. The repurchase of 50,000 non-voting equity shares has resulted in a decrease of $0.3 million to contributed surplus. As the cost of the repurchase was more than the assigned value of the shares, and as a company cannot incur a profit or loss from a transaction of its own shares, the difference was included in contributed surplus.. The amount charged to retained earnings is equal to the difference between the cost to repurchase the shares and their assigned value. We filed a new normal course issuer bid in January 2012 to purchase up to 100,000 common shares, and up to 100,000 non-voting equity shares. Any shares purchased under the normal course issuer bid will be cancelled. The bid will terminate no later than January 30, We did not repurchase any share in the first quarter under this new normal course issuer bid. Debt Our net cash position (cash and cash equivalents less current bank loans, net of deferred financing charges) on March 31, 2012 was a liability of $126.2 million, compared with a liability of $72.8 million (domestic currency $74.5 million) on April 2, Our bank loans increased by approximately US$60 million at the end of December 2011 due to the purchase of Icelandic USA that was paid for through our pre-arranged working capital credit facility. In addition, bank loans also increased to finance the increase in inventory described above. Of our working capital credit facility of US$180.0 million, US$55 million is allocated to our Canadian operations and US$125 million is allocated to our U.S. operations. At quarter end, the Company had approximately USD$38 million of unused borrowing capacity taking into account both margin calculations and the total line availability. Excluding any additional new acquisitions, the existing credit facility will be sufficient to fund all of the Company s current cash requirements for the next 12 months or more. At the end of the period, letters of credit were outstanding in the amount of US$0.8 million (April 2, 2011; US$0.9 million) to support raw material purchases. There were 9

10 also standby letters of credit in the amount of $9.6 million (April 2, 2011; $7.5 million) to secure obligations under the Company s supplemental executive retirement plan and lease obligations. We obtained a new US$250.0 million senior secured term loan facility ( Term Loan ) in December 2011 to finance the Icelandic USA Acquisition. Minimum repayments of US$2.5 million are required on an annual basis, plus 50% of defined excess cash flow beginning in 2013, based on the previous year s results. We have estimated the current portion of this term loan to be US$22 million, based on our projection of excess cash flow for fiscal The terms of the new long-term debt facility required us to swap 50% of the variable interest rate for a fixed rate for the first two years. Swaps were put in place in the first quarter of 2012, and result in 50% of the US$250.0 million facility bearing a fixed effective interest rate of 7.0%, with the other 50% at variable rates. Additionally, we entered into interest rate swaps to hedge a portion of our working capital loans. The swaps are for a notional US$50 million for the period of May 4, 2012 to March 4, 2014, and then for US$30 million for the period March 5, 2014 to March 4, 2013, at an average LIBOR rate of 0.719% and 0.726%, respectively. These swaps effectively fix the interest rate on a portion of our working capital loans. On May 3, 2012, we entered into an interest rate swap to exchange floating 3-month LIBOR for a fixed rate on our term loan credit facility, with an embedded floor of 1.5%. This was on a notional amount of US$100.0 million for the period of April 4, 2014 until April 4, On a quarterly basis starting in 2014, we will pay the fixed swap rate and receive the floating 3-month LIBOR rate (but no less than 1.5%), effectively fixing the rate at 1.997%. Cash Flow Cash flow from operating activities, excluding the change in non-cash working capital balances, improved from the first quarter of last year mainly due to improved results from operations and lower requirements for working capital as in 2011 we needed to increase inventories from a lower than optimum level in Standardized Free Cash Flow 1 was $17.0 million for the rolling four quarters ended March 31, 2012, up from a negative $1.6 million in the same period the previous year. Cash flow from operations before changes in working capital, decreased slightly, but non-cash working capital decreased relative to the previous rolling four quarters, increasing free cash flow by approximately $22.4 million. The table below reconciles our Standardized Free Cash Flow for the rolling four quarters with measures that are in accordance with generally accepted accounting principles. 1 See Important Notes Non-IFRS Financial Measures. 10

11 Amounts in ($000's) Rolling fifty-two weeks ended March 31, April 2, Cash flow from operating activities $ 24,924 $ 2,925 Less: total capital expenditures, net of investment tax credits (7,921) (4,497) Standardized Free Cash Flow $ 17,003 $ (1,572) Non-Current Assets and Liabilities, and Capital Expenditures Gross capital additions were $1.7 million for the quarter. Estimated capital spending for all of 2012 will be in the range of $9 million to $13 million compared to $7.8 million in Approximately $3.8 million of our capital expenditures in 2012 are expected to be for strategic initiatives or related to the achievement of synergies on the Icelandic USA Acquisition and a further $1.8 million for projects that will reduce the ongoing cost of our operations. The remainder of the capital budget is for projects that will ensure that we continue to be in compliance with regulatory and other requirements, and for replacement of equipment that is at the end of its useful life. Cash generated from operations and short-term borrowings will fund capital additions in As a result of the announcement we made on May 3, 2012 optimization of our supply chain announced we will also be spending more capital in 2013 in order to achieve the targeted cost savings. Capital expenditures in 2013 are estimated to be as much as $22 million of which as much as $10 will be related to the movement of production from closed plants. Capital Structure Our capital structure continues to be strong. Net interest bearing debt at March 31, 2012 is 70% of total capitalization, unchanged from the end of fiscal This compares to 44.3% at the end of April 2, The increase of debt to capitalization at March 31, 2012 compared to the same period last year is due to the Icelandic USA Acquisition which increased the amount of debt. As we achieve synergies from the Icelandic USA Acquisition, the net interest bearing debt to capitalization ratio will decrease. We define capitalization as interest bearing debt plus shareholders equity, excluding foreign currency hedging gains and losses included in Accumulated Other Comprehensive Loss (AOCI), less cash balances, and excludes deferred financing charges, as they are not interest bearing. Dividends The Company paid a $0.10 per share quarterly dividend on March 15, 2012 to common and non-voting equity shareholders of record on March 2,

12 Subsequent to the end of the quarter, the Board of Directors of the Company approved a quarterly dividend in the amount of $0.10 per common and non-voting equity share payable on June 15, 2012 to shareholders of record on June 1, Dividends are subject to restrictions in our credit agreements. Availability under the working capital facilities needs to be US$22.5 million or higher (actual at year end $55.0 million). Under the term loan capital distributions, including both normal course issuer bids and dividends, cannot exceed the greater of US$8 million per year or a percentage of defined excess cash flow. Current annual dividends are less than $6.2 million. Governance In accordance with Multilateral Instrument Certification of Disclosure in Issuers Annual and Interim Filings, our certifying officers have limited the scope of their design of disclosure controls and procedures, and our Company s internal control over financial reporting to exclude controls, policies and procedures relating to the Icelandic USA Acquisition (as it arose in late 2011) and they have not yet performed sufficient procedures to include it in our certifications. Multilateral Instrument permits a business that an issuer acquires not more than 365 days before the issuer's financial year end be excluded from the scope of the certifications to allow it sufficient time to perform adequate procedures to ensure controls, policies and procedures are effective. Icelandic USA will be transitioned to High Liner systems in the fall of 2012 and the scope limitation for it will be removed for the year end certificates. Summary financial information for the Icelandic USA Acquisition for the first quarter of 2012 includes sales of US$97.2 million and income before interest and taxes of US$7.1 million. Information concerning assets and liabilities acquired is provided in note 4 to our condensed interim consolidated financial statements and did not materially change from the end of fiscal There has been no change in the Company s internal control over financial reporting during the period beginning on January 1, 2012 and ended March 31, 2012 that has materially affected, or is reasonably likely to materially affect, the Company s internal control over financial reporting. Other Items Important to Understanding our Results Accounting Standards During the first quarter of 2012 we did not change or adopt new accounting standards. New Accounting Standards and Interpretations Issued But Not Yet Effective The International Accounting Standards Board (IASB) and the IFRS Interpretations Committee (IFRIC) have issued additional standards and interpretations with an effective date applicable for High Liner in reporting periods subsequent to the first quarter of 2012 as follows: 12

13 IFRS 10 Consolidated Financial Statements; IFRS 12 Disclosure of Interests in Other Entities; IFRS 11 Joint Arrangements; IFRS 13 Fair Value Measurement; IAS 19 Post-employment Benefits (Including Pensions); and IAS 1 Presentation of Financial Statements (IAS 1) and the presentation of Items in Other Comprehensive Income (OCI). Additional details relating to the new standards and amendments are included in our condensed interim consolidated financial statements for the thirteen weeks ended March 31, 2012 in note 2 d) New standards and interpretations issued but not effective. Our current evaluation is that the effect, if any, that these new standards and amendments will have on our financial results is minimal as the changes applicable to the Company primarily relate to disclosure requirements, or were previously anticipated and options were chosen on transition to IFRS to minimize their impact on future reporting periods. Announced Plant Consolidation As part of an optimization of its supply chain after the addition of additional production capacity upon the Icelandic USA Acquisition, High Liner announced on May 3, 2012, that it will be closing two of its production facilities within the next year. The consolidation of High Liner s North American supply chain is expected to result in an estimated pre tax one-time cash expense of $4 million ($2.7 million after tax). The cash costs are expected to be expensed starting in the second quarter of 2012 and will be completely expensed upon the final closure of the plants. In addition, a pre tax writedown of $15.3 million ($9.9 million after tax) for plant and equipment to estimated net realizable value will be recorded in Under IFRS, $13.4 million ($8.7 million after tax) of this was reflected in the financial statements for the first quarter of 2012, with the remainder being expensed as additional depreciation between the announcement and closure of the facilities. The annual ongoing pretax reduction in operating costs (increase in EBITDA) resulting from this consolidation, once all the affected plants are closed, is estimated to be approximately $9.6 million, with savings scheduled to begin in January Approximately $7.5 million of these savings were included in the previously announced $16-$18 million in efficiencies estimated to result from the Icelandic USA acquisition concluded in December An additional $2 million of savings are also expected from the increased scope of the project, bringing the total to $9.6 million. As part of the FPI acquisition in 2007, the Company entered into an agreement with the Province of Newfoundland and Labrador with respect to its operations in Burin, Newfoundland, and relating to its U.S. operations. The Company has agreed to maintain specified volumes of production in the plant until December Failure to maintain these volumes will result in a payment to the Province of Newfoundland and Labrador of $0.07 per pound for each pound of volume shortfall. In addition, over the period ending in December 2012, the Company has committed to spend $3 million, in product 13

14 development activities in the Province of Newfoundland and Labrador and new equipment for Burin. Of these expenditures, 60% must be product development expenditures. In fiscal 2011 and 2010, the Company paid $0.7 million in each year (relating to the production shortfall). The Company will continue to pay the volume penalty for the full term. This penalty is included as regular costs of goods sold. Any amount not expended as required under the product development activities or equipment purchases will be paid to the Province at the end of the contract. Amounts are not expected to be material and an estimate is included in the one-time cash costs noted above. Impairment of Property, Plant and Equipment In connection with the announcement in early May of the impending closure of our Burin and Danvers processing facilities, we wrote down these assets to their fair value less cost to sell. The impairment was $13.4 million ($8.7 million after tax). In addition, another $1.9 million ($1.2 million after tax) will be added to depreciation over the period between announcement and the final closure of the plants. Financing Costs Interest expense in 2012 is higher than in 2011 as a result of higher average short-term and long-term debt levels due principally to the Icelandic USA Acquisition. Business Acquisition, Integration and other Expenses During the first quarter of 2012, we incurred $2.3 million of business integration costs, primarily severance, retention costs and marketing-related costs in connection with the Icelandic USA Acquisition. This compares to $0.3 million in the prior year in connection with the Viking Acquisition. Amortization of Intangible Assets This consists of amortization of intangible assets, brands, and customer relationships over their estimated useful lives. Amortization was $1.9 million in the first quarter of 2012 compared to $0.4 million in the comparative period. The increase is due to the Icelandic USA Acquisition, where management has estimated the amortization, as the purchase price allocation has not yet been finalized. Amortization of intangible assets is recorded on the income statement in Selling, general and administrative expenses. Income Taxes Our effective income tax rate for the first quarter of 2012 was a recovery of income taxes compared to the applicable statutory rate in Canada of approximately 28%. The effective tax rate in the first quarter of 2011 was 31.9% compared to the applicable statutory rate in Canada of approximately 29%. The recovery in 2012 is due primarily to the benefit of acquisition financing deductions in connection with the Viking and Icelandic USA 14

15 Acquisitions. In addition, the Company s statutory and effective income tax rates are lower in 2012 compared to 2011 as a result of lower statutory rates in Canada in 2012 which decreased by 1.5%. Performance Overview The table below summarizes key financial information. Selected Consolidated Financial Information (All amounts in thousand, except per share amounts) Thirteen Weeks Ended March 31, April 2, Sales Canada $ 77,609 $ 70,210 United States 210, ,898 Total 287, ,108 Net income: Total $ 1,778 9,729 Basic earnings per common share $ Adjusted Net income * Total $ 13,863 9,986 Basic earnings per common share $ Total assets $ 676, ,294 Total long-term financial liabilites $ 216,594 44,650 Cash dividends per share: Common shares $ Non-voting equity shares $ Total capital expenditures financed by operations $ 1, Average foreign exchange spot rate (USD/CAD) * Adjusted Net Income is net income excluding business acquisition and integration costs, other income or expense, stock-based compensation, the increase in cost of goods sold relating to inventory acquired from the Icelandic USA and Viking Acquisitions, above its historical cost, as part of the fair value requirements of purchase price accounting and other income or expense, and withholding tax related to the financing of the Viking acquisition. See page 21 for calculation. 15

16 Seasonality The first quarter of the year is historically stronger than the other three quarters for both sales and profits, depending on the timing of Lent. The Lenten period was earlier in 2012 than in 2011 with Good Friday falling on April 6, 2012 compared to April 22, Our U.S. retail business and, to a lesser degree, our U.S. food service business traditionally experiences a strong first quarter as retailers and restaurants promote seafood during the Lenten period. For retail sales the second and third quarters are more challenging during the warmer months as consumers spend more time outdoors, travel, and use ovens less often, resulting in a decreased demand for our products. However, for the food service business, activities are usually elevated in the second and first quarters as consumers are on vacation and travel more than during other times of the year. The fourth quarter includes several festive occasions that increase demand for our products in both retail and food service. In our retail businesses, we spend significant amounts on consumer advertising and new product launches. Although the related activities benefit more than one period, the related costs must be expensed when the initial promotional activity takes place. The accounting periods during which we choose to incur these expenditures may change from year to year. Therefore, there may be fluctuations in income relating to these activities. A significant percentage of advertising is done in either the first or fourth quarters. Inventory levels fluctuate throughout the year, being higher to support strong sales periods, especially in the first quarter of the year. Inventories are seasonally high at the end of the year and throughout the first quarter. In addition to the sales demands we must take early delivery of a quantity of seafood prior to the seasonal closure of plants in Asia during the Lunar New Year period, which results in significantly higher inventories in December, January, February and March than during the rest of the year. The following table provides summarized information for our nine most recently completed quarters. The financial results for the first quarter of 2012 included the operations of Icelandic USA for the first full quarter since it was acquired. The fourth quarter of 2011 includes the acquisition from December 19 to the end of the year. 16

17 (in thousands of Canadian dollars, except per share amounts) Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Sales $ 287,699 $ 176,479 $ 161, , , , , , ,113 Adjusted EBITDA $ 31,545 $ 14,638 $ 12,120 10,876 18,336 12,814 13,068 9,668 15,423 Net income $ 1,778 $ (3,020) $ 6,695 4,776 9,729 1,686 6,122 4,414 7,763 Adjusted Net Income * $ 13,863 $ 6,892 $ 6,261 5,461 9,980 5,325 6,893 4,445 8,739 Earnings Per Common Share Based on Net Income Basic $ 0.12 $ (0.20) $ Diluted $ 0.12 $ (0.20) $ Earnings Per Common Share Based on Adjusetd Net Income Basic $ 0.92 $ 0.46 $ Diluted $ 0.90 $ 0.45 $ Net Working Capital (Accounts receivable and inventory, less accounts payables and provisions) $ 259,812 $ 237,448 $ 140, , , , , , ,507 * Adjusted net income is net income excluding business acquisition and integration costs, stock-based compensation expenses, the increase in cost of goods sold relating to inventory acquired from the Icelandic USA and Viking Acquisitions, above its historical cost, as part of the fair value requirements of purchase price accounting, and withholding tax related to an inter-company dividend. Sales Sales for the first quarter of fiscal 2012 increased 62.4% to $287.7 million from $177.1 million for the same quarter in fiscal 2011 resulting from an increase in sales volume from our base business as well as from the Icelandic USA Acquisition. The weaker Canadian dollar relative to the U.S. dollar also increased sales in Canadian dollars. For the quarter, sales volume measured in pounds increased by 52.6% to 86.8 million compared to 56.8 million the previous year. Our base business decreased by 0.9% in volume and Icelandic USA Acquisition sales increased our total sales volume by an additional 53.5%. Sales in domestic currency were $287.6 million compared to $178.8 million for the previous year, representing an increase of 60.8%, due to the increase in sales volume from the Icelandic USA Acquisition. More than 70% of the Company s sales were denominated in U.S. dollars. The weaker Canadian dollar increased the value of reported sales by approximately $3.9 million, or 2.8%, relative to the prior year. 17

18 Gross profit Consolidated gross profit in the first quarter of 2012 was $66.5 million compared to $45.2 million in Gross profit as a percentage of sales was 23.1% in the quarter compared to 25.5% the prior year. Gross profit increased by $21.3 million in the quarter due to an increase in sales, primarily due to the Icelandic USA Acquisition, but declined as a percentage of sales due to an increase in seafood input costs. Included in the first quarter of 2012 is a charge of $1.2 million, compared with $0.3 million in the comparative period last year, relating to an increase in the cost of the finished goods inventory on the Icelandic USA and Viking Acquisitions, above its historical cost, as part of the fair value requirements of purchase price accounting. It should be noted that this adjustment could change once we finalize the Icelandic USA purchase price allocation. Distribution expenses Distribution expenses, consisting of freight and storage, for the first quarter of 2012 increased by $3.9 million to $13.5 million compared to $9.6 million for the prior year, due to an increase in sales volume primarily due to the Icelandic USA Acquisition. Distribution expenses for the first quarter were 4.7% of sales, down from the 5.4% in the prior year. Distribution expenses decreased as a percentage of sales due to lower fuel surcharges as well as a higher percentage of customer pickups. Selling, general and administrative expense (SG&A) SG&A expense for the first quarter of 2012 increased by $9.3 million, or 47.6%, to $28.9 million, compared to $19.6 million for the same period in fiscal SG&A expenses for 2012 were 10.0% of sales, compared to 11.1% for the previous year. During the current quarter, we recorded a stock-based compensation expense of $1.6 million compared to the same quarter last year when we recorded an insignificant recovery. The increase in the stock-based compensation expense was due to an increase in our stock price. Excluding stock-based compensation expense, SG&A in the first quarter of 2012 was 9.5% of sales, compared to 11.1% for the comparative period. Higher amortization of intangibles assets from the Icelandic USA Acquisition in the amount of $1.4 million was partially offset by the achievement of approximately $1.0 million of synergies realized. Adjusted EBITDA 2 Consolidated Adjusted EBITDA 2 in the first quarter of 2012 was $31.5 million compared to $18.3 million in In domestic currency, Adjusted EBITDA 2 in the first quarter of 2012 was $31.0 million compared to $18.4 million in Adjusted EBITDA 2 increased as a result of higher sales volumes, primarily from the Icelandic USA Acquisition, partially offset by higher seafood and other input costs. In domestic currency, Adjusted EBITDA 2 as a percentage of sales for the first quarter was 11.0% 2 See Important Notes Non-IFRS Financial Measures. 18

19 compared to 10.4% in the previous year. Note we changed our definition of Adjusted EBITDA is 2012 to exclude the non-cash stock-based compensation expense, and the increase in cost of goods sold relating to inventory acquired from the Icelandic USA and Viking Acquisitions, above its historical cost, as part of the fair value requirements of purchase price accounting. Adjusted EBITDA for prior periods was restated to conform to the changes made in The following tables show the impact of foreign currency on the conversion of our U.S. operations into Canadian dollars. For the Thirteen Weeks Ended March 31, 2012 Change over Amounts in ($000s) Canadian $ Canadian $ Domestic $ Domestic $ Domestic $ External Sales Canada $ 77,609 $ 70,210 $ 77,609 $ 70, % USA $ 210,090 $ 106,898 $ 210,009 $ 108, % $ 287,699 $ 177,108 $ 287,618 $ 178, % Conversion $ - $ - $ 81 $ (1,725) $ 287,699 $ 177,108 $ 287,699 $ 177, % Adjusted EBITDA Canada $ 7,631 $ 7,345 $ 7,631 $ 7, % USA $ 23,914 $ 10,991 $ 23,925 $ 11, % $ 31,545 $ 18,336 $ 31,556 $ 18, % Conversion $ - $ - $ (11) $ (173) $ 31,545 $ 18,336 $ 31,545 $ 18, % Adjusted EBITDA as % of sales In Canadian dollars 11.0% 10.4% In domestic dollars 11.0% 10.3% Adjusted EBITDA 2 for our Canadian and U.S. operations are calculated in the same manner as described above and can be reconciled to our segment disclosure in note 7 to the condensed interim consolidated financial statements as follows: 19

20 Thirteen weeks ended Thirteen weeks ended March 31, 2012 April 2, 2011 Amounts in ($000s) Canada U.S. Total Canada U.S. Total Net income (4,000) 5,778 1,778 4,578 5,151 9,729 Add back: Depreciation 946 1,895 2, ,016 1,927 Amortization 54 1,799 1, Financing costs 5, , ,076 1,297 Income taxes (1,226) 1,163 (63) 1,681 2,879 4,560 Standardized EBITDA 1,582 11,496 13,078 7,444 10,457 17,901 Add back (deduct): Business acquisition, integration and other expenses (income) 178 2,168 2, Impairment of property, plant and equipment 4,600 8,768 13, Increase in cost of sales * - 1,153 1, Loss (gain) on disposal of assets (103) (25) - (25) Adjusted EBITDA, including stock compensation expense 6,257 23,698 29,955 7,468 10,942 18,410 Non-cash stock option expense 1, ,590 (123) 49 (74) Adjusted EBITDA 7,631 23,914 31,545 7,345 10,991 18,336 * The increase in cost of goods sold relating to inventory acquired from the Icelandic USA and Viking Acquisitions, above its historical cost, as part of the fair value requirements of purchase price accounting. The table which follows shows the results on a pro-forma basis, which is including in the first quarter of 2011 the Icelandic USA sales as though they had been part of High Liner s results for all of Synergies of US$1.0 million were realized in the 2012 first quarter results. In $000s Sales $CAD Pounds Sold Adjusted EBITDA $CAD Actuals, Q1 2012, Excluding Icelandic USA 190,474 56,322 19,092 Actuals, Q1 2012, Icelandic USA 97,225 30,464 12,453 Actuals, Q1 2012, Including Icelandic USA 287,699 86,786 31,545 Actuals, Q ,108 56,839 18,336 Icelandic USA - Q ,985 27,440 10,887 Actuals, Q Pro forma 259,093 84,279 29,223 Increase Q vs Pro forma Q % 3.0% 7.9% 20