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

21 EBIT (Earnings before interest and taxes) Earnings before interest and taxes, excluding one-time integration costs, gain/loss on disposal of assets, stock-based compensation expense and increase in cost of goods sold due to the purchase price allocation, was 9.3% of sales for the quarter compared to the same quarter last year at 9.1%. Net income and basic earnings per share Net income for the first quarter of 2012 was $1.8 million, or $0.12 per share, compared to $9.7 million, or $0.64 per share, for the same quarter last year. However, these metrics do not represent the true results of the company for the first quarter as they contain a number of unusual items. The table below shows the impact on our basic earnings per share for the first quarter of 2012 and 2011 of non-operating, one-time acquisition costs, stock-based compensation expense and increase in cost of sales from the purchase price allocation for acquisitions. $000 Q Q Diluted Earnings Per Share Based on Average Shares Outstanding $000 Diluted Earnings Per Share Based on Average Shares Outstanding Net Income $ 1,778 $ 0.12 $ 9,729 $ 0.63 Add back (deduct) Business acquisition, integration, and other costs $ 1,461 $ 0.10 $ 165 $ 0.01 Plant impairment $ 8,738 $ 0.57 $ - $ - Increase in cost of sales due to purchase price allocation to inventory $ 765 $ 0.05 $ 166 $ 0.01 Intercompany dividend withholding tax $ (400) $ (0.03) $ - $ - $ 12,342 $ 0.80 $ 10,060 $ 0.65 Stock Option Expense $ 1,521 $ 0.10 $ (74) $ (0.00) Adjusted Net Income $ 13,863 $ 0.90 $ 9,986 $ 0.65 Shares outstanding (000) 15,339 15,423 As can be seen, Adjusted Net Income increased by 38.8% to $13.9 million, or diluted EPS of $0.90, from $10.0 million, or diluted EPS of $0.65, in the first quarter of

22 Performance by segment Canadian Operations For the quarter, our Canadian operations had external sales of $77.6 million, compared to $70.2 million for the first quarter of last year, an increase of 10.5%. Sales volume increased 8.2% to 18.8 million pounds compared to the first quarter of last year. Canadian retail sales volume increased 18.7% in pounds. Food service sales pounds for the first quarter decreased by 2.1% relative to the same period last year, due to lower volume with a few customers, related in part to 2011 promotional activities not being repeated in Canadian retail had a strong quarter compared to weak results in We invested in marketing funds to drive more volume through our customers stores, launched new value-pack commodity items to better compete with trader labels, and reformulated some products to have more competitive price points. In addition, new products were launched in the first quarter of 2012 based on our successful U.S. products, FireRoasters. These strategies were successful in increasing sales volume in the first quarter of Adjusted EBITDA 2 for our Canadian operations for the first quarter of 2012 was $7.6 million compared to $7.3 million for the same period last year, an increase of 3.8%. This increase for the quarter was the result of an increase in sales volume, partially offset by higher input cost. U.S. Operations (All currency amounts in this section are in U.S. dollars, unless otherwise noted) Q was the first quarter where we had results for the full quarter for the Icelandic USA Acquisition. We began the integration of the Icelandic USA Acquisition in the first quarter of 2012 by consolidating our U.S. broker and sales forces. 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 between Icelandic and High Liner by finalizing the organization for our U.S. operations. Having one combined organization will ensure we realize the synergies that we expected to achieve. For the quarter, our U.S. operations had external sales of $210.0 million, compared to $108.6 million for the first quarter of 2011, an increase of 93.4%. Much of the increase in sales and profitability of our U.S. operations was due to the Icelandic USA Acquisition. To better understand the trends in this operation, the remainder of this section will be discussed on a pro-forma basis, which will include in the first quarter of 2011 the Icelandic USA operating results as though they had been part of High Liner s results for all of

23 The table below shows actual and pro-forma results for 2011, compared to actual results for 2012: In $000s Sales $US Pounds Sold Adjusted EBITDA $US Actuals, Q1 2012, Excluding Icelandic USA 112,842 37,485 11,228 Actuals, Q1 2012, Icelandic USA 97,165 30,464 12,697 Actuals, Q1 2012, Including Icelandic USA 210,007 67,949 23,925 Actuals, Q ,623 39,432 11,164 Icelandic USA - Q ,141 27,440 9,871 Actuals, Q Pro forma 191,764 66,872 21,035 Increase Q vs Pro forma Q % 1.6% 13.7% Sales volume for the quarter increased by 1.6% to 67.9 million pounds, compared to 66.9 million pounds in the first quarter of 2011 on a pro forma basis; sales value in dollars also increased 9.5%. Our U.S. food service operations, including Icelandic USA experienced an increase in sales volume of 2.5% for the first quarter of 2012, compared to the first quarter of 2011 on a pro forma basis. Sales to both distributors and national accounts increased during the quarter. U.S. retail operations experienced a 2.1% decrease in sales volume in the first quarter of 2012 compared to the first quarter of 2011 on a pro forma basis. Sales to traditional grocery stores decreased 11.1% due to lower Fisher Boy brand sales as we did not repeat a television and radio advertising campaign that we ran in the first quarter of fiscal 2011 that increased Fisher Boy brand awareness and sales in Sales volume for our private label products was down 8.2% in volume from the first quarter of 2011, in spite of new business gained, due to a decrease in private label seafood sales overall in the market place. Sales to club stores increased more than 28% in volume during the 2012 quarter as a result of new product launches, increased distribution for existing products, and strong sales for seasonal products. Adjusted EBITDA 2 for our U.S. operations in the first quarter increased to $23.9 million from $21.0 million for the same period in 2011 on a pro forma basis. Profitability improved as a result due to an increase in new product volume and an increase in volume from the Icelandic USA Acquisition, as well as realized synergies of $1.0 million. 23

24 Outlook We are proud to announce that all business purchased from Icelandic USA has been retained and has contributed to a strong start to Our ongoing focus is clearly to continue our early success in integrating Icelandic USA. We are on track to realizing near-term synergies of approximately $12 million and ongoing annual synergies of $16-18 million from combining the operations. We expect the addition of Icelandic USA to further support the operating strength of our High Liner, FPI, and Viking businesses in the U.S. Both our food service and retail operations are poised for growth in the U.S. In Canada, we are expecting our first quarter momentum to continue throughout Our strategy to rejuvenate our Canadian retail business after a challenging 2011 has shown positive results. We expect to continue implementing these strategic initiatives, which includes marketing programs to drive volume in stores, to support the retail business and increase overall sales volume in Canada. In particular, the launch of the Flame Savours product in Canadian retail during the first quarter has received very favourable market response. Also, 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 contracts in place. As such, we expect second quarter raw material costs to remain higher than the comparable period in Additionally, our enhanced purchasing power, expanded distribution, and cost-reduction efforts should deliver further operating improvements this year. Risk Management A number of risk factors are described in detail in the MD&A found in our 2011 Annual Report. These factors still exist at the end of this interim period and are substantially unchanged. Readers should refer to the Annual Report for more information. Foreign Currency Foreign currency values affect our operations in a number of ways. As we translate the results of our U.S. subsidiary to Canadian dollars, a fluctuating exchange rate affects the individual line items on our balance sheet and income statement. We have discussed the impact of foreign currency fluctuations on sales and earnings for the quarter in various sections of this document. The Canadian dollar weakened by almost 4% as at March 31, 2012, compared to April 2, 2011 relative to the U.S. dollar. On our balance sheet, this increases the carrying value of both assets and liabilities and increases the foreign exchange translation of our U.S. subsidiary included in accumulated other comprehensive income (AOCI) in shareholders equity. As our Canadian operations are a net importer of seafood and other products, a stronger Canadian dollar reduces costs and a weaker Canadian dollar increases costs. 24

25 In order to minimize foreign exchange risk, we undertake hedging activities using various derivative products in accordance with an internal policy on managing derivative usage and risk. We hedge a proportion of our raw material requirements and retail commodity products as price increases on these products take more time to implement. We do not hedge commodity food service products as the prices to our customers move in line with changes in the cost of these products in Canadian dollars. The policy is approved and monitored by the Audit Committee. During the quarter, our hedging activities resulted in an effective Canadian/U.S. exchange rate of for inventory purchased in U.S. dollars by our Canadian Operations of approximately $45.7 million, compared to for the first quarter of Our risk management strategy with respect to exposure to the U.S. dollar is fully explained in our Management Discussion and Analysis, available in our 2011 Annual Report. These documents are available at and at Economic Environment Uncertain economic conditions represent heightened potential risk to our operational results and our financial performance and resources. Our diverse product offering (including a full range of value and premium products), to multiple sales channels, helps mitigate the risk to our operational results and thus, our financial performance. Management regularly monitors economic conditions, including unemployment rates, interest rates, cash flow requirements, customer creditworthiness, and capital markets. Management believes the Company has sufficient financial resources to meet its ongoing business requirements. Product costs We buy as much as $600 million of seafood, packaging, flour or corn based coatings, and cooking oils. The seafood market is a global market place with values expressed in U.S. dollars. We buy 30 species of seafood from 30 countries around the world. There are no formal hedging mechanisms in the seafood market. Prices can change due to changes in the balance between supply and demand. Weather, quota changes, disease and other environmental impacts can affect supply. Changes in the relative values of currency can change the demand from a particular country whose currency has risen or fallen as compared to the U.S. dollar. The increasing middle class and government policies in emerging economies, as well as demand from health conscious consumers, affect the demand side as well. Costs in Canada are also affected by the Canadian / U.S. exchange rates. Our broad product line and customer base and geographically diverse procurement territory helps us mitigate changes in the cost of our raw materials. In addition specie substitution, changed product formulation, long term relationship with suppliers, and price changes to customers, are all important factors in our ability to manage margins to target. 25

26 Disclosure of Outstanding Share Data On May 10, ,344,506 common shares, 1,788,062 non-voting equity shares and 831,045 stock options were outstanding. The stock options are exercisable on a one-forone basis for common shares of the Company. Dated: May 10,

27 Q Condensed Interim Consolidated Financial Statements International Financial Reporting Standards As at and for the thirteen weeks ended March 31, 2012 With comparative periods as at and for the thirteen weeks ended April 2,

28 HIGH LINER FOODS INCORPORATED (Incorporated under the laws of the Province of Nova Scotia) CONSOLIDATED STATEMENT OF FINANCIAL POSITION (in thousands of Canadian dollars) ASSETS Current: March 31, 2012 April 2, 2011 December 31, 2011 Notes (unaudited) (unaudited) (audited) Cash and cash equivalents $ 1,308 $ 405 $ 3,260 Accounts receivable 103,817 64,254 84,587 Income taxes receivable 4,303 1,093 3,557 Other financial assets ,346 Inventories 243, , ,771 Prepaid expenses 3,357 2,120 3,019 Total current assets 356, , ,540 Non-current: Property, plant and equipment 84,089 64,766 99,778 Deferred income taxes 14 2,803 2,537 1,695 Other receivables and miscellaneous assets 1, ,210 Investment in equity accounted investee Other long-term financial assets Employee future benefits Intangible assets 4 117,608 29, ,564 Goodwill 4 113,328 38, , , , ,751 Total assets $ 676,072 $ 352,294 $ 697,291 LIABILITIES AND SHAREHOLDERS' EQUITY Current: Bank loans $ 127,539 $ 73,188 $ 120,980 Accounts payable and accrued liabilities 84,518 50, ,232 Provisions 6 2,570 1, Other current financial liabilities 16 1,091 2, Income taxes payable 1, ,990 Current portion of long-term debt 21,980 4,331 2,543 Current portion of finance lease obligations 1,071 1,041 1,064 Total current liabilities 240, , ,277 Non-current: Long-term debt 207,684 41, ,109 Other long-term financial liabilities 16 6,333-6,329 Long-term finance lease obligations 2,577 2,723 2,599 Deferred income taxes 14 47,133 12,123 48,176 Employee future benefits 10 11,244 9,609 11,274 Total liabilities 515, , ,764 Shareholders' Equity Common shares 11 78,920 78,163 78,067 Contributed surplus 8,406 8,627 8,406 Retained earnings 77,036 73,922 76,770 Accumulated other comprehensive loss (3,615) (8,518) (1,716) Total shareholders' equity 160, , ,527 Total liabilities and shareholders' equity $ 676,072 $ 352,294 $ 697,291 See accompanying notes 28

29 HIGH LINER FOODS INCORPORATED For the thirteen weeks ended March 31, 2012 (with comparative figures for the thirteen weeks ended April 2, 2011) CONSOLIDATED STATEMENT OF INCOME (in thousands of Canadian dollars, except per share information) Thirteen weeks ended, March 31, 2012 April 2, 2011 Notes (unaudited) (unaudited) Revenues $ 287,699 $ 177,108 Cost of sales 221, ,940 Gross profit 66,473 45,168 Distribution expenses 13,514 9,620 Selling, general and administrative expenses 28,945 19,607 Impairment of property, plant and equipment 5 13,368 - Business acquisition, integration and other expenses 2, Results from operating activities 8,300 15,678 Finance costs 6,669 1,297 Share of profit from equity accounted investee (net of income tax) 8 (84) 92 Income before income taxes 1,715 14,289 Income taxes Current 14 1,007 1,846 Deferred 14 (1,070) 2,714 Total income taxes (63) 4,560 Net income $ 1,778 $ 9,729 PER SHARE EARNINGS Earnings per common shares Basic Diluted Weighted average number of shares outstanding for the period Basic 15,104,110 15,154,493 Diluted 15,388,829 15,422,554 See accompanying notes 29

30 HIGH LINER FOODS INCORPORATED For the thirteen weeks ended March 31, 2012 (with comparative figures for the thirteen weeks ended April 2, 2011) CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (in thousands of Canadian dollars) March 31, 2012 April 2, 2011 Net income for the period $ 1,778 $ 9,729 Other comprehensive (loss) income, net of income taxes (note 14) Thirteen weeks ended, Gain on hedge of net investment in foreign operations 1, Loss on translation of net investment in foreign operations (2,759) (2,660) (1,221) (2,530) Effective portion of changes in fair value of cash flow hedges (376) (991) Net change in fair value of cash flow hedges transferred to income (302) 492 (678) (499) Other comprehensive loss, net of income tax (1,899) (3,029) Total comprehensive income $ (121) $ 6,700 CONSOLIDATED STATEMENT OF ACCUMULATED OTHER COMPREHENSIVE LOSS (in thousands of Canadian dollars) Foreign currency translation Net exchange (losses)/gains on cash Total acccumulated other comprehensive adjustments flow hedges loss Balance as at December 31, 2011 $ (1,606) $ (110) $ (1,716) For the thirteen weeks ended March 31, 2012: Exchange differences on translation of foreign operations (1,221) - (1,221) Cash flow hedges - (678) (678) Balance as at March 31, 2012 $ (2,827) $ (788) $ (3,615) Balance as at January 1, 2011 $ (3,821) $ (1,668) $ (5,489) For the thirteen weeks ended April 2, 2011: Exchange differences on translation of foreign operations (2,530) - (2,530) Cash flow hedges - (499) (499) Balance as at April 2, 2011 $ (6,351) $ (2,167) $ (8,518) See accompanying notes 30

31 HIGH LINER FOODS INCORPORATED For the thirteen weeks ended March 31, 2012 (with comparative figures for the thirteen weeks ended April 2, 2011) CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (in thousands of Canadian dollars) Non-voting equity Common shares Contributed surplus Retained Accumulated other earnings comprehensive loss Balance, December 31, 2011 $ 14,301 $ 63,766 $ 8,406 $ 76,770 $ (1,716) $ 161,527 Other comprehensive loss (1,899) (1,899) Net income for the period ,778-1,778 Non-voting share dividends (179) - (179) Common share dividends (1,333) - (1,333) Share-based payments Balance, March 31, 2012 $ 14,301 $ 64,619 $ 8,406 $ 77,036 $ (3,615) $ 160,747 Total Balance, January 1, 2011 $ 15,011 $ 63,315 $ 8,917 $ 65,557 $ (5,489) $ 147,311 Other comprehensive loss (3,029) (3,029) Net income for the period ,729-9,729 Non-voting share dividends (169) - (169) Common share dividends (1,195) - (1,195) Share based payments Shares repurchased (400) - (290) - - (690) Balance, April 2, 2011 $ 14,611 $ 63,552 $ 8,627 $ 73,922 $ (8,518) $ 152,194 See accompanying notes 31

32 HIGH LINER FOODS INCORPORATED For the thirteen weeks ended March 31, 2012 (with comparative figures for the thirteen weeks ended April 2, 2011) CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands of Canadian dollars) Cash provided by (used in) operations: March 31, 2012 April 2, 2011 Net income from operations for the period $ 1,778 $ 9,729 Charges (credits) to income not involving cash from operations: Depreciation and amortization 4,694 2,315 Share-based payments expense (recovery) 1,590 (95) Loss on disposal of assets and impairment 13, Payments of employee future benefits (in excess of) less than expense (20) (12) Interest expense 6,669 1,297 Income tax (recovery) expense (63) 4,560 Share of (income) loss of equity accounted investee (84) 92 Movements in provisions 1,892 1,969 Unrealized foreign exchange gain (loss) 61 (50) Cash flow from operations before changes in non-cash working capital 30,048 19,834 Net change in non-cash working capital balances (note 18) (30,027) (41,378) 21 (21,544) Interest paid (5,368) (1,134) Income taxes paid (1,634) (5,655) Cash provided by (used in) financing activities: (6,981) (28,333) Increase in current working capital facilities 8,635 32,149 Repayment of long-term debt (626) (1,120) Repayment of finance lease obligations (252) (185) Common share dividends paid (1,333) (1,195) Non-voting share dividends paid (179) (169) Share repurchase - (690) Stock options exercised Cash provided by (used in) investing activities: 6,663 28,936 Purchase of property, plant and equipment (net of investment tax credits) (1,728) (759) Net proceeds on disposal of assets Change in other receivables and miscellaneous assets - (64) (1,581) (759) Foreign exchange decrease on cash and cash equivalents (53) (37) Change in cash and cash equivalents during the period (1,952) (193) Cash and cash equivalents, beginning of period 3, Cash and cash equivalents, end of period $ 1,308 $ 405 See accompanying notes Thirteen weeks ended, 32

33 Condensed Notes to the Condensed Interim Consolidated Financial Statements 1. Reporting entity High Liner Foods Incorporated (the Company or High Liner ) is a company domiciled in Canada. The address of the Company s registered office is 100 Battery Point Road, P.O. Box 910, Lunenburg Nova Scotia, B0J 2C0. The interim consolidated financial statements of the Company as at and for the thirteen week period ended March 31, 2012 comprise the non-consolidated Parent and its subsidiaries (herein together referred to as the Company and individually as Company subsidiaries ) and the Company s interest in associates and jointly controlled entities. The Company is primarily involved in the manufacturing and marketing of prepared and packaged frozen seafood products. 2. Basis of preparation (a) Statement of compliance The Company s financial statements for the fifty-two week period ended December 31, 2011 were the first annual financial statements that comply with International Financial Reporting Standards ( IFRS ). High Liner s transition date to IFRS was January 3, 2010 ( Transition date ). The Company prepared its opening IFRS balance sheet as at that date. The Company s IFRS adoption date was January 2, 2011 ( changeover date or adoption date ). These interim consolidated financial statements are in compliance with International Accounting Standard 34, Interim Financial Reporting ( IAS 34 ). Accordingly, certain information and footnote disclosure normally included in annual financial statements prepared in accordance with International Financial Reporting Standards ( IFRS ), as issued by the International Accounting Standards Board ("IASB"), have been omitted or condensed. These interim consolidated financial statements should be read in conjunction with the Company s consolidated financial statements for the fifty-two weeks ended December 31, 2011 as set out in the 2011 Annual Report, available at These financial statements were authorized for issue in accordance with a resolution of the directors on May 10, (b) Functional and presentation currency Unless otherwise noted, all amounts in these consolidated financial statements are in Canadian dollars, which is the Company s presentation currency. Each of the Company s subsidiaries and its joint venture determines its own functional currency. The Company conducts its business in Canadian and U.S. dollars. The average U.S. to Canadian dollar exchange rate throughout the thirteen week period ended March 31, 2012 was (April 2, 2011: ) and throughout the fifty-two weeks ended December 31, 2011 was $ The March 31, 2012 period end exchange rate was , April 2, 2011 was , and December 31, 2011 was $ All financial information presented in Canadian dollars has been rounded to the nearest thousand. (c) Seasonality of operations Due to the seasonality of the Company s business, comparatives are presented on the consolidated balance sheet for the current and prior period quarter, in addition to the balances as of the Company s fiscal year end. Inventory levels fluctuate throughout the year. This is due 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. 3. Business combinations Acquisition of Icelandic Group s U.S. Subsidiary and Asian Procurement Operations (The Icelandic USA Acquisition) On December 19, 2011, the Company acquired Icelandic Group h.f. s U.S. subsidiary, Icelandic USA and 33

34 its Asian procurement operations. The Acquisition gives High Liner ownership of one of the largest suppliers of high-quality frozen value-added seafood to the U.S. food service market. The seafood product lines acquired include battered and breaded products as well as a full line of premium fillets. The Acquisition includes a modern processing plant in Newport News, Virginia, as well as subsidiaries that operate a processing plant in China and procure product from other Asian countries. High Liner acquired several brands in connection with the acquisition. In addition, High Liner entered into a seven-year royaltyfree licensing agreement with Icelandic Group for the use of the Icelandic Seafood brand in the United States, Canada, and Mexico. High Liner has also structured a long-term distribution agreement with Icelandic Group to ensure that High Liner can continue to procure fillets from producers in Iceland to be sold in the U.S. market. The Acquisition is expected to be a good fit with the Company s existing U.S. operations as it will allow the Company to address a larger consolidated customer base through stronger purchasing power. The Acquisition also provides the Company a more efficient supply chain with stronger product development capabilities. The fair value of the identifiable assets and liabilities of the Icelandic USA Acquisition as at the date of acquisition were: Adjustments to the provision recognized during the period Adjusted provisional fair value recognized on acquisition Provisional fair value recognised on Amounts in $000s acquisition Assets Property, plant and equipment $ 33,052 $ (158) $ 32,894 Trade receivables 29,767 (338) 29,429 Prepaid expenses Inventories 91, ,390 Intangible assets 74,189 18,736 92,925 $ 229,730 $ 18,688 $ 248,418 Liabilities Trade payables (31,186) 326 (30,860) Employee future benefit (296) - (296) Deferred income taxes (28,136) (7,185) (35,321) Total identifiable net assets at fair value $ 170,112 $ 11,829 $ 181,941 Goodwill arising on acquisition 87,666 (11,829) 75,837 Purchase consideration recorded $ 257,778 $ - $ 257,778 The amounts in the table below differ slightly from what was initially announced due to final adjustments for working capital and cash balances: Amounts in $000s Agreed upon purchase price based on average working capital (US$) $ 232,722 Seasonal working capital acquired at closing (US$) 18,436 Cash acquired (US$) (1,495) Net purchase price (US$) 249,663 Exchange rate Purchase consideration recorded $ 257,778 The transaction was financed with proceeds from a new long-term loan for US$250 million and an increase in the Company s existing asset-based loan facility. For further information see note 12 and note 13 in the Company s 2011 Annual Report. Proceeds from the new long-term loan were used to repay existing long- 34

35 term loan indebtedness of approximately US$47 million, with the remainder being used to fund the acquisition price and transaction costs of $26.0 million. During the thirteen weeks ended March 31, 2012 $2.2 million of transaction costs were expensed as business acquisition, integration and other expenses on the statement of income (fifty-two weeks ended December 31, 2011: $10.9 million). There were no amounts capitalized as deferred financing costs during the current period (fifty-two weeks ended December 31, 2011: $15.1 million were capitalized which reduced the value of debt on the statement of financial position to be amortized to interest expense). The initial net assets recognized in the December 31, 2011 financial statements, and as adjusted during the period, are based on a provisional assessment of fair value as the Company has sought an independent valuation for the equipment, real estate, intangible assets and residual goodwill acquired for which the accounting is incomplete. The results of the valuation have not been received as at the date these financial statements were approved for issue by management. As a result, the financial information disclosed is based on management s best estimate and are disclosed on a provisional basis. Pending the finalization of the valuation reports noted above and its impact of accounting for taxes which is incomplete at this time, the Company is only able to provide a provisional fair value for customer relationships and brands acquired as part of the acquisition based on preliminary information we have gathered during the due diligence phase of completing the acquisition and is subject to revisions in future periods resulting from the finalization of the purchase price accounting. Goodwill and intangible assets are allocated entirely to the U.S. cash-generating unit. The goodwill and intangibles recognized are not expected to be deductible for income tax purposes. From the date of acquisition to December 31, 2011, the Icelandic USA Acquisition contributed $9.0 million of revenue and $0.7 million of earnings before interest and taxes, excluding one-time business acquisition costs. During the thirteen weeks ended March 31, 2012, the Icelandic USA Acquisition contributed $97.2 million in net sales and $9.0 million to income before interest and taxes of the Company. 4. Goodwill and intangible assets Goodwill is tested for impairment annually (as at the first day of the Company s fourth quarter) and when circumstances indicate the carrying value may be impaired. The method used to determine the Company s fair value less costs to sell uses a discounted cash flow model. The key assumptions used to determine the recoverable amount for the different cash generating units is discussed in note 5 of the Company s 2011 Annual Report. The Company has not identified any indicators of impairment at any other date and as such has not completed an additional impairment calculation. 5. Property, plant and equipment For the thirteen weeks ended March 31, 2012 the Company recorded an impairment loss of $13.4 million representing the write-down of certain property, plant and equipment due to the announced closure of the Burin and Danvers plants (see note 20). This has been recognized in the consolidated statement of income, and operating segment information (note 7), line item Impairment of property, plant, and equipment. The recoverable amounts of these assets were based on fair value less costs to sell. The fair value for the Danvers plant was determined by a third-party market estimate, and the fair value for the Burin plant was based on the outcome of recent transactions for similar assets in the same industry. The impairment loss relating to the Burin closure of $4.6 million has been allocated to the Canadian reportable operating segment, and the impairment loss relating to the Danvers closure of $8.8 million has been allocated to the U.S. reportable operating segment. 35

36 6. Provisions All provisions are considered current. The carrying amounts are analysed as follows: Amounts in ($000s) Carrying amount, January 1, New provisions added 952 Provisions utilized (827) Carrying amount, December 31, New provisions added 2,121 Provisions utilized (226) Carrying amount, March 31, ,570 The amounts recognized include the Company s coupon redemption costs and miscellaneous other items. Employee incentives are included as other provisions in the first, second and third quarters of the year until the amounts can be estimated with certainty in the fourth quarter. Provision amounts are usually settled within eleven months from initiation, depending on the procedures used for negotiating the claims, and are not material to the Company on an individual basis. Management does not expect the outcome of any of the recorded amounts will give rise to any significant loss beyond the amounts recognized at March 31, The Company is not eligible for any reimbursement by third parties in this regard for these amounts. 7. Operating segment information The Company operates in one dominant industry segment, the manufacturing and marketing of prepared and packaged frozen seafood. The Company evaluates performance of the reportable segments on a geographical basis using net income before depreciation, amortization, financing and taxes from continuing operations. The Company s results of its equity accounted investee as disclosed in note 8 are allocated to the reportable segments based on purchases. Transfer prices between operating segments are on an arm s length basis in a manner similar to transactions with third parties. For the thirteen weeks ended March 31, 2012 the Company has recognized $47.6 million (thirteen weeks ended April 2, 2011: $26.6 million) of sales from one customer that represents more than 10% of the Company s total consolidated sales, which are equally split between the Canadian and U.S. reportable operating segments. Operations and identifiable assets and liabilities by reporting segment are as follows: 36

37 Thirteen weeks Thirteen weeks Fifty-two weeks March 31, 2012 April 2, 2011 December 31, 2011 Amounts in ($000s) Canada U.S. Total Canada U.S. Total Canada U.S. Total Sales within geographic region 77, , ,325 69, , , , , ,297 Sales outside of geographic region 1,984 4,351 6,335 2,512 3,459 5,971 7,930 17,600 25,530 79, , ,660 71, , , , , ,827 Intercompany sales outside of geographic region (1,984) (2,977) (4,961) (1,749) (1,919) (3,668) (7,160) (13,078) (20,238) Revenue (excluding intercompany sales) 77, , ,699 70, , , , , ,589 Cost of sales (excluding intercompany sales) (59,394) (161,832) (221,226) (51,621) (80,319) (131,940) (228,443) (288,216) (516,659) Gross profit 18,215 48,258 66,473 18,589 26,579 45,168 67,566 84, ,930 Distribution expenses (3,830) (9,684) (13,514) (3,706) (5,914) (9,620) (14,750) (20,271) (35,021) Selling, general and administrative expenses (9,068) (19,877) (28,945) (8,308) (11,299) (19,607) (31,260) (40,826) (72,086) Impairment of property, plant and equipment (4,600) (8,768) (13,368) Business acquisition, integration and other expenses (178) (2,168) (2,346) (49) (214) (263) (1,265) (10,010) (11,275) Financing costs (5,808) (861) (6,669) (221) (1,076) (1,297) (1,837) (4,146) (5,983) Gain (loss) from equity accounted investee (46) (46) (92) (27) (26) (53) Income before income tax (5,227) 6,942 1,715 6,259 8,030 14,289 18,427 9,085 27,512 Income taxes 1,226 (1,163) 63 (1,681) (2,879) (4,560) (5,379) (3,953) (9,332) Net income (4,001) 5,779 1,778 4,578 5,151 9,729 13,048 5,132 18,180 Add back: Depreciation included in: Cost of sales 585 1,430 2, ,497 2,315 3,811 6,126 Distribution Selling, general and administrative expenses , ,309 Total depreciation 946 1,895 2, ,016 1,927 3,642 4,259 7,901 Amortization included in: - Selling, general and administrative expenses 54 1,799 1, ,604 1,833 Total depreciation and amortization 1,000 3,694 4, ,351 2,315 3,871 5,863 9,734 Financing costs 5, , ,076 1,297 1,837 4,146 5,983 Income taxes (1,226) 1,163 (63) 1,681 2,879 4,560 5,379 3,953 9,332 Income before depreciation, amortization, financing and income taxes 1,581 11,497 13,078 7,444 10,457 17,901 24,135 19,094 43,229 37

38 Thirteen weeks Thirteen weeks Fifty-two weeks March 31, 2012 April 2, 2011 December 31, 2011 Amounts in ($000s) Canada U.S. Total Canada U.S. Total Canada U.S. Total Capital Expenditures Financed by operations , ,584 3,626 7,210 Financed by finance leases Total capital expenditures 1, , ,204 3,626 7,830 Total assets 158, , , , , , , , ,291 Goodwill 12, , ,328 12,474 26,474 38,948 12, , ,135 Liabilities 333, , ,325 67, , , , , , Equity accounted investee These unaudited interim consolidated financial statements include the Company s share of the income from its 50% interest in its joint venture, HighKan Holdings Limited ( HighKan ), using equity method accounting. HighKan is a holding company with an 80% controlling interest in Dencan Seafood Ltd., which operates in the business of processing frozen seafood products. The Company has not received a dividend from its investment in neither the current nor the prior thirteen and fifty-two week periods then ended. The Company has no share of any contingent liabilities or capital commitments as at March 31, 2012 nor did it as at April 2, 2011 or December 31, Summary financial information not adjusted for the ownership held by the Company is as follows: As at and for the thirteen weeks ended As at and for the thirteen weeks ended As at and for the fiftytwo weeks ended Amounts in (US$000s) March 31, 2012 April 2, 2011 December 31, 2011 Current assets $ 6,477 $ 5,632 $ 6,477 Non-current assets Current liabilities 6,047 5,555 6,047 Revenues 5,290 4,465 24,394 Expenses 5,448 4,547 24,101 Net (loss) income (158) (82) Long-term debt Long-term debt March 31, April 2, December 31, Amounts in ($000s) Term loan at 5.5% plus LIBOR (floor at 1.5%) 249, ,250 Notes payable Series A at 6.31% - 15,453 - Series B at 6.012% (US$27,823) - 26,791 - Series C at 6.012% (US$4,434) - 4,270 - Less: financing charges (13,569) (256) (14,269) Less: embedded derivative (5,918) - (6,329) 229,664 46, ,652 Less: current portion (21,980) (4,331) (2,543) $ 207,684 $ 41,927 $ 231,109 38

39 In 2011 the Company secured a US$250 million long-term loan, bearing interest at LIBOR plus 5.5%, with a LIBOR floor of 1.5%. This interest rate floor represents an embedded interest rate derivative that requires bifurcation. For the thirteen weeks ended March 31, 2012, this embedded interest rate derivative has been separated from long-term debt and carried at its fair value of $6.1 million, with changes going though profit or loss (December 31, 2011: $6.3 million fair value). 10. Employee future benefit expense Thirteen weeks ended March 31, April 2, Amounts in ($000s) Defined contribution expense Defined benefit expense Share capital A summary of the Company s non-voting equity share transactions is as follows: During the first quarter of 2011, the Company repurchased 50,000 non-voting equity shares for $13.80 per share for a total cost of $0.7 million resulting in a decrease to contributed surplus of $0.3 million. Thirteen weeks ended Thirteen weeks ended Fifty-two weeks ended March 31, 2012 April 2, 2011 December 31, 2011 Shares ($000s) Shares ($000s) Shares ($000s) Common shares: Balance, beginning of period 13,298,784 63,766 13,271,809 63,315 13,271,809 63,315 Stock options exercised 45, , , Balance, end of period 13,344,506 64,619 13,286,909 63,552 13,298,784 63,766 Non-voting equity shares: Balance, beginning of period 1,788,062 14,301 1,876,820 15,011 1,876,820 15,011 Shares repurchased - - (50,000) (400) (88,758) (710) Balance, end of period 1,788,062 14,301 1,826,820 14,611 1,788,062 14,301 15,132,568 78,920 15,113,729 78,163 15,086,846 78,067 The following dividends were declared and paid by the Company: Thirteen weeks ended: March 31, 2012 April 2, 2011 Amounts: per share ($000s) per share ($000s) Dividends on common and non-voting shares declared and paid during the period , ,364 Dividends on common and non-voting shares proposed for approval after the respective reporting period (not recognized as a liability during the period): , ,361 39

40 12. Earnings per share The following is the reconciliation of the numerators and the denominators of basic and diluted earnings per share computations: Thirteen weeks Thirteen weeks March 31, 2012 April 2, 2011 Weighted Weighted Income average shares Per share amount Income average shares ($000s) (000s) $ ($000s) (000s) $ Per share amount Basic Earnings per Share: Income available to common shareholders 1,778 15, ,729 15, Diluted Earnings per Share: Effect of dilutive securities: Stock options and performance share units Income available to common shareholders and assumed conversions 1,778 15, ,729 15, Options to purchase 233,793 common shares at an average price of $18.78 per share were outstanding at March 31, 2012 but were not included in the computation of diluted earnings per share because the options exercise price was greater than the average market price of the common shares year to date (April 2, ,750 common shares at an average price of $16.50 per share were outstanding but not included in the computation of diluted earnings per share). 13. Share-based payments The Company has a common share option plan for designated directors, officers and certain managers of the Company and of subsidiary companies. Stock options issued are awarded with Tandem Stock Appreciation Rights (SARs). The SARs have the same vesting, expiry and exercise terms and conditions as the underlying options. Please refer to note 18 of the Company s 2011 Annual Report for the details pertaining to the Company s share option plan. The carrying amount of the liability and related compensation (recovery) expense recognized relating to the options as at and for each of the reporting periods ended as noted below are: Thirteen weeks Thirteen weeks Fifty-two weeks March 31, April 2, December 31 Amounts in ($000s) Fair value of liability 4,962 3,885 4,202 Compensation expense recognized 1,511 (95) 651 The liability is included in accounts payable and accrued liabilities on the statement of financial positions and related expense is recognized in the following line items in the consolidated statement of income: 40

41 Amounts in ($000s) Cost of sales resulting from: Thirteen weeks ended, March 31, April 2, Cash-settled options Equity-settled options - 7 Changes in the the fair value of the liability 107 (124) Selling, general and administrative expenses resulting from: Cash-settled options Equity-settled options Changes in the the fair value of the liability 662 (518) Compensation expense (recovery) recognized 1,511 (95) The following inputs and assumptions were used in the binomial option pricing model in calculating the fair value of each grant of options as follows: February August February August February February May February December Share price at grant date $ $ $ $ $ $ $ 6.90 $ 9.00 $ 9.45 $ 9.64 Expected life of the option (years) Exercise price $ $ $ $ $ $ $ 6.90 $ 9.00 $ 9.45 $ 9.64 March 31, 2012 February August February August February February May February December Expected volatility % Risk free rate % Forfeiture rate % Dividend yield % April 2, 2011 February August February February May February December February February Expected volatility % Risk free rate % Forfeiture rate % Dividend yield % The expected life of the share options and SARs is based on historical data and current expectations and is not necessarily indicative of exercise patterns that may occur. The expected volatility reflects the assumption that the historical volatility over a period similar to the life of the options is indicative of future trends, which may also not necessarily be the actual outcome. The following table illustrates the number ( No. ) and weighted average exercise prices ( WAEP ) of, and movements in, share options during the year: 41

42 Thirteen weeks ended March 31, 2012 Thirteen weeks ended April 2, 2011 No. WAEP No. WAEP Outstanding, beginning of period 675, , Granted 233, , Exercised for shares (45,722) 9.14 (15,100) 9.67 Exercised for cash (32,278) 9.03 (67,400) 9.68 Outstanding, end of period 831, , Excercisable, end of period 507, , Weighted average fair value of options granted during the period 233, , Range of exercise prices outstanding at the end of the period $ $18.88 $ $16.50 Performance share units (PSU) The Company issued 16,459 performance share units to named executive officers during the first quarter of 2011 and an additional 38,040 during the first quarter of With re-invested dividends, the total performance share units outstanding at March 31, 2012 were 55,144 (16,459 at April 2, 2011). The carrying amount of the liability and the compensation expense recognized relating to the performance share units as at, and for, the reporting period ended were as follows: Thirteen weeks Thirteen weeks Fifty-two weeks March 31, April 2, December 31 Amounts in ($000s) Fair value of liability Compensation expense recognized The assumptions used in determining the fair value of the liability and related compensation expense for the performance share units were as follows: March 31, 2012 April 2, 2011 February March March Share price at reporting date $ Expected life of the PSU (years) Forfeiture rate % 0% 0% 0% Expected % vesting 110% 110% 100% Restricted share units (RSU) The Company issued 15,975 restricted share units to certain executive officers during the first quarter of With re-invested dividends, the total restricted share units outstanding at March 31, 2012 were 16,064. The carrying amount of the liability and the compensation expense recognized relating to the performance share units as at, and for, the reporting period ended were as follows: Thirteen weeks Thirteen weeks Fifty-two weeks March 31, April 2, December 31, Amounts in ($000s) Fair value of liability Compensation expense recognized

43 The assumptions used in determining the fair value of the liability and related compensation expense for the restricted share units were as follows: March 31, 2012 February 2012 Share price at reporting date $ Expected life of the PSU (years) 3.80 Forfeiture rate % 0% Expected % vesting 100% 14. Income tax expense The Company's statutory tax rate for the thirteen weeks ended March 31, 2012 is 27.1% (April 2, %). The statutory and effective 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%. The Company's effective tax rate was also lower than its statutory rate due to the benefit of acquisition financing deductions, which was partially offset by a higher statutory tax rate of 38.6% ( %) applicable to the Company's US operations and non-deductible stock based compensation expense. The major components of income tax expense (recovery) in the interim consolidated statement of other comprehensive loss for the thirteen week period ended March 31, 2012 and April 2, 2011 were as follows: Thirteen weeks ended, March 31, April 2, Amounts in ($000s) Deferred tax expense (recovery) related to items charged or credited directly to other comprehensive (loss) income during the period: Gain on hedge of net investment in foreign operations Effective portion of changes in fair value of cash flow hedges (173) (417) Net change in fair value of cash flow hedges tranferred to income (117) 167 Income tax expense directly to other comprehensive (loss) income (152) (198) 15. Related party transactions The Company had no sales to related parties throughout 2011 or 2012 nor did the Company have any transactions during 2011 or 2012 with entities who had significant influence over the Company or with members of key management personnel including the Company s Directors and their related interests. The aggregate value of transactions and outstanding balances with related parties were as follows: 43

44 Amounts in ($000s) Thirteen weeks ended, March 31, 2012 April 2, 2011 Associates to the Company: Maritime Paper Products Ltd. (2) Purchases from related party NA 1,402 Amounts owed to related party (1) NA 13 Clearwater Seafoods Limited Partnership (3) Purchases from related party NA 1,221 Amounts owed to related party (1) NA 212 Other Related Parties: Crystal Cold Storage & Warehousing Inc. Purchases from related party 268 NA Amounts owed to related party (1) 146 NA Pier 17 Realty Trust Inc. Purchases from related party 100 NA Amounts owed to related party (1) - NA Joint venture in which the Company is a venturer: Qingdao Dencan Seafoods Ltd. Purchases from related party 5,506 4,671 Amounts owed to related party (1) - - Total purchases from related parties 5,874 7,294 Total amounts owed to related parties (1) Amounts outstanding are classified as accounts receivable / accounts payables respectively. (2) Maritime Paper Products Ltd. ceased to be a related party to the Company effective May 17, (3) Clearwater Seafoods Limited Partnership ceased to be a related party to the Company effective June 16, All outstanding balances with these related parties are priced on an arm s length basis and are to be settled in cash within twelve months of the reporting date. None of the balances are secured. There have been no guarantees provided or received for any related party receivables or payables. As at March 31, 2012, the Company has not recorded any impairment of receivables for amounts owed by related parties. This assessment is undertaken each financial year through examining the financial position of the related party and the market in which the related party operates. 44

45 16. Financial instruments Other financial assets: Other financial liabilities: March 31, April 2, December 31, March 31, April 2, December 31, Amounts in ($000s) Financial instruments at fair value through other comprehensive income: Cash flow hedges Foreign exchange forward contracts ,346 1,091 2, Interest rate swap Financial instruments at fair value through profit and loss: Embedded derivative ,133-6, ,002 1,346 7,424 2,900 7,122 Hedging activities Foreign currency hedge At March 31, 2012 the Company held foreign currency forward contracts designated as hedges of expected future purchases from suppliers transacting in U.S. dollars which the Company has qualified as highly probable forecasted transactions. The foreign currency forward contracts are being used to hedge the foreign currency risk of the highly probable forecasted transactions. There were no highly probable transactions for which hedge accounting has been claimed that have not occurred and no significant element of hedge ineffectiveness requiring recognition in the income statement. Notional amounts are provided below. At the end of the thirteen week period ended March 31, 2012, the cash flow hedges of the expected future purchases in the future quarters of 2012 were assessed to be highly effective and an unrealized gain of $0.8 million with a deferred tax expense of $0.2 million, and an unrealized loss of $1.1 with a deferred tax recovery of $0.3 million were included in other comprehensive loss in respect of these contracts (April 2, 2011: unrealized gain of $0.7 million with a deferred tax expense of $0.2 million, and an unrealized loss of $2.9 with a deferred tax recovery of $0.8 million). Amounts recognized in income resulting from hedge ineffectiveness during the thirteen week period ended March 31, 2012 was $nil (April 2, 2011: $nil). The amount removed from other comprehensive loss during the thirteen week period ended March 31, 2012 and included in the carrying amount of the hedging items was $0.3 million gain net of tax (April 2, 2011; $0.5 million loss). Principal and interest payment swap On March 22, 2012 the Company entered into an interest rate swap to exchange floating 1-month LIBOR for a fixed rate on the revolving credit facility for a three-year period ending. Effective May 4, 2012 until March 4, 2015, the Company entered into a swap on floating 1-month LIBOR for a fixed rate of 0.763% on a notional amount of US$10.0 million. The Company s U.S. subsidiary also entered into a swap on floating 1-month LIBOR for a fixed rate of 0.708% on a notional amount of US$40.0 million reducing to US$20.0 million during the last twelve months of the tenure. On a monthly basis, the Company will pay the fixed swap rate and we will receive the floating 1-month LIBOR rate, effectively fixing the rate at 0.763% and 0.708% for the Canadian and U.S. borrowers, respectively. On March 12, 2012 the Company entered into an interest rate cap with a strike price of 1.5% on a notional amount of US$125.0 million of the term loan. Effective March 30, 2012 until April 4, 2014 the Company 45

46 will receive a payment from the seller at the end of each three month period in which the 3 month LIBOR rate exceeds the strike price, thus, effectively fixing the rate at 1.5%. The swaps are valued at rates prevailing at the balance sheet date. Gains and losses on the swap are included in other comprehensive income and are transferred to income to offset interest costs on the debt when recorded in income. Prior to November 30, 2011, the Company s U.S. subsidiary had an interest rate swap agreement in place that converted principal and interest payments from Canadian to U.S. dollars and was used to hedge the foreign exchange exposure on the Company s 6.31% Series A note. The note and interest rate swap had the same critical terms and the swap was valued at rates prevailing at the balance sheet date. Gains and losses on the swap were included in other comprehensive income and transferred to income to offset gains and losses on the debt when recorded in income. As of November 30, 2011 the Company divested itself of the swap. Hedge of net investment in foreign operations As at March 31, 2012, included in current bank loans was a borrowing of US$15.0 million (April 2, 2011; US$8.0 million) which has been designated as a hedge of the net investment in the U.S. subsidiary and is being used to hedge the Company s exposure to foreign exchange risk on this investment. Gains or losses on the retranslation of this borrowing are transferred to equity to offset any gains or losses on translation of the net investments in the subsidiaries. There is no ineffectiveness for the thirteen week periods ending March 31, 2012 or April 2, Embedded derivatives In 2011 the Company secured a US$250 million long-term loan, bearing interest at LIBOR plus 5.5%, with a LIBOR floor of 1.5%. This interest rate floor represents an embedded interest rate derivative that requires bifurcation. This embedded interest rate derivative has been separated and carried at fair value, with changes going though profit or loss. The carrying value of the embedded derivative at March 31, 2012 amounted to $6.1 million. The effect of profit or loss is reflected in finance costs. Classification of financial instruments The Company, in accordance with a written policy to manage its foreign currency, commodity and interest rate exposures, utilizes derivative financial instruments. The policy prohibits the use of derivative financial instruments for trading or speculative purposes. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the hedge s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are effective in offsetting changes in fair values or cash flows of hedged items. There were no highly probable transactions for which hedge accounting has been claimed that have not occurred. Any portion of hedge ineffectiveness has been recognized in the income statement as it occurs. The following table identifies all of the Company s financial instruments and their carrying values recorded at the balance sheet date and their fair values at the balance sheet. The carrying values of the Company s loans and receivables (which include trade receivables) approximate fair value due to the short-term to maturity of these financial instruments. Financial liabilities carried at amortized cost are shown using the effective interest rate method. Items accounted as hedges represent fair value of the Company s foreign exchange contracts as well as the fair value of its interest rate swap on its long-term debt. 46

47 Financial asset/liability at fair value through profit and loss As at March 31, 2012 Financial liabilities at amortized cost Items accounted for as hedges Total carrying amount Loans and Amounts in ($000s) receivables Cash and cash equivalents 1, ,308 Accounts receivable - 103, ,817 Other financial assets Other long-term financial assets Bank loans , ,539 Accounts payable and accrued liabilities ,518-84,518 Other financial liabilities ,091 1,091 Other long-term financial liabilities 6, ,333 Long-term debt , ,664 Financial asset at fair value through profit and loss As at April 2, 2011 Financial liabilities at Loans and amortized receivables cost Items accounted for as hedges Total carrying amount Amounts in ($000s) Cash and cash equivalents Accounts receivable - 64, ,254 Other financial assets Other long-term financial assets Bank loans ,188-73,188 Accounts payable and accrued liabilities ,284-50,284 Other financial liabilities ,900 2,900 Long-term debt ,258-46,258 Financial asset/liability at fair value through profit and loss As at December 31, 2011 Financial liabilities at amortized cost Items accounted for as hedges Total carrying amount Loans and Amounts in ($000s) receivables Cash and cash equivalents 3, ,260 Accounts receivable - 84, ,587 Other financial assets ,346 1,346 Bank loans , ,980 Accounts payable and accrued liabilities , ,232 Other financial liabilities Other long-term financial liabilities 6, ,329 Long-term debt , ,652 Interest rates used for determining fair value The interest rates used to discount the estimated cash flows, when applicable, are based on the government yield curve at the reporting date plus an adequate credit spread and were as follows: March 31, April 2, December 31, Bank loans 2.90% 2.68% 3.10% Long-term debt 5.50% 2.46% 7.00% Finance lease obligations 5.80% 5.11% 5.90% 47

48 Amortized cost impact on interest expense In the thirteen week period ended March 31, 2012, the Company expensed $76 thousand (April 2, 2011: $27 thousand) of short-term interest, and $857 thousand (April 2, 2011: $39 thousand) of long-term interest relating to interest that was calculated using the effective interest rate method relating to its transaction fees and its borrowings. Forward exchange contracts The Company systematically enters into foreign exchange contracts, with maturities of 15 months or less, to hedge future cash outflows for the purchase of raw materials. The Company uses hedge accounting to account for these foreign exchange contracts. At period-end, the Company had the following total foreign exchange forward single rate contracts outstanding: March 31, 2012 Sell Receive CAD$ US$ Forward rate 3,449,210 3,440,342 The forward single rate contracts at March 31, 2012 have a rate of $ with maturities ranging from April 2012 to December For the thirty-nine week period ended March 31, 2012, the Company had the following foreign exchange average rate purchase contracts outstanding: March 31, 2012 Weighted Weighted Average Average Total Average rate forwards Put Rate Call Rate US$ Value Average rate ,882,323 With the exception of US$1,823,708 average rate forward contracts with maturities ranging from April 2013 to December 2013, all foreign exchange purchase contracts have maturities that are less than one year. Average rate forward purchase contracts Where the average noon-day exchange rate during the contract term falls between the benefit and protection rates, no cash settlements are exchanged between the Company and the intermediary. If the average noon-day exchange rate during the contract term is less than the benefit rate, then on the contract settlement date, the Company would pay the intermediary the difference in the rate times the notional dollar value hedged. If the average noon-day exchange rate during the contract term is greater than the protection rate, then on the contract settlement date, the intermediary would pay the Company the difference in the rate times the notional dollar value hedged. The benefit and protection rates are the same for forward single rate contracts while forward average range contracts have a spread between the benefit and protection rates. Estimated fair value of financial instruments The estimated fair value of financial instruments as at March 31, 2012 and April 2, 2011 are based on relevant market prices and information available at that time. The fair value estimates are not necessarily indicative of the amounts that the Company might receive or pay in actual market transactions. The total fair value of all of the foreign exchange future contracts as at March 31, 2012 was an asset of $0.8 million (April 2, 2011: a liability of $2.2 million; December 31, 2011: an asset of $0.6 million). The fair value of 48

49 the interest and principal cross currency swap at March 31, 2012 was a liability of $1.1 million (April 2, 2011: a liability of $0.3 million; December 31, 2011: $nil). The fair value of the Company s long-term debt that was entered into in December 2011 is estimated to be $265.3 million at March 31, 2012 (December 31, 2011: $254.2 million). The fair value of the Company s capital lease obligations at March 31, 2012 is estimated to be $3.6 million (April 2, 2011: $3.8 million; December 31, 2011: $4.0 million). These fair values are calculated by discounting the future cash flows of each loan at the estimated yield to maturity based on publicly available information. Since the Company does not intend to settle its long-term debt or capital lease obligations prior to maturity, the fair values do not represent an actual liability and, therefore, does not include exchange or settlement costs. The Company s remaining financial instruments consist of cash and cash equivalents, trade and other accounts receivables and sundry investments and current liabilities. The difference between the carrying values and the fair market values of these financial instruments are not significant given the short-term maturities and, or the credit terms of those instruments. Fair value hierarchy All financial instruments carried at fair value are categorized in three categories defined as follows: Level 1: Quoted market prices in active markets for identical assets or liabilities. Level 2: Other techniques which use inputs other than quoted market prices included within Level 1 that are observable, either directly (as prices) or indirectly (derived from prices). Level 3: Valuation techniques which use inputs that are not based on observable market data. As at the dates indicated below, the Company had the following financial instruments measured at fair value categorized into the following levels: March 31, All amounts in ($000s) 2012 Level 1 Level 2 Level 3 Assets measured at fair value Foreign exchange contracts; hedged Interest and principal cross currency swap Liabilities measured at fair value Foreign exchange contracts; hedged 1,091-1,091 - Interest and principal cross currency swap Embedded derivative 6,133-6,133 - April 2, All amounts in ($000s) 2011 Level 1 Level 2 Level 3 Assets measured at fair value Foreign exchange contracts; hedged Interest and principal cross currency swap Liabilities measured at fair value Foreign exchange contracts; hedged 2,900-2,900 - December 31, All amounts in ($000s) 2011 Level 1 Level 2 Level 3 Assets measured at fair value Foreign exchange contracts; hedged 1,346-1,346 - Liabilities measured at fair value Foreign exchange contracts; hedged Embedded derivative 6,329-6,329-49

50 During the thirteen week periods ended March 31, 2012 and April 2, 2011 there were no transfers between Level 1 and Level 2 fair value measurements, and no transfers into and out of Level 3 fair value measurements. 17. Capital management The primary objective of the Company s capital management policy is to ensure that it maintains a strong credit rating and healthy capital ratios in order to support its business and maximize shareholder value. Capital includes funded debt, letters of credit, and shareholder equity including accumulated other comprehensive income, except for gains and losses on derivatives used to hedge interest and foreign exchange cash flow exposures. The Company manages its capital structure and makes adjustments to it, in light of changes in economic conditions. To maintain or adjust the capital structure, the Company may adjust the dividend payment to shareholders, return capital to shareholders, purchase its capital stock under a Normal Course Issuer Bid ( NCIB ) or issue new shares. Capital distributions, including purchases of stock, are subject to a fixed charge coverage ratio under the Company s working capital debt facilities. This ratio is only operative if the consolidated aggregated availability under the working capital debt facility is less than $22.5 million. The Company currently has availability in excess of $38 million as at March 31, The Company also has restrictions on their capital distributions, where the aggregate amount cannot exceed the greater of $8.0 million per year and the available excess cash flow as defined in its credit agreement. For the thirteen weeks ended March 31, 2012 the Company has paid $1.5 million in dividends. The Company monitors capital (excluding letters of credit) using the ratio of funded debt to capitalization, which is net interest bearing debt divided by total capital plus net interest bearing debt. The Company s objective is to keep this ratio between 35% and 50%. Seasonal working capital debt may result in the Company exceeding the ratio at certain times throughout the fiscal year. The Directors of the Company have also decided that this range can be exceeded on a temporary basis to affect the Icelandic USA Acquisition. The Company includes in net funded debt, finance lease obligations and interest-bearing loans and borrowings, excluding deferred financing fees, less cash and cash equivalents. March 31, April 2, December 31, Amounts in ($000s) Current bank loans (1) $ 128,477 $ 73,471 $ 121,975 Long-term debt (note 9) 249,151 46, ,250 Current portion of finance lease obligation 1,071 1,041 1,064 Long-term portion of finance lease obligation 2,577 2,723 2,599 Cross currency swap mark to market Less: cash and cash equivalents (1,308) (405) (3,260) Total funded debt 379, , ,628 Shareholders' equity 160, , ,527 Unrealized losses on derivative financial instruments included in accumulated other comprehensive loss 788 2, Total capitalization $ 541,503 $ 275,319 $ 538,265 Debt as % of capitalization 70% 44% 70% (1) Current debt on the statement of financial position includes $0.9 million of deferred financing charges at March 31, 2012 (April 2, 2011: $0.3 million; December 31, 2011: $1.0 million). 50

51 18. Supplemental information Cash flow Change in non-cash working capital balances: Thirteen weeks ended, Amounts in ($000s) March 31, 2012 April 2, 2011 Accounts receivable (21,515) (16,434) Inventories 15,345 (15,875) Prepaids (362) (237) Accounts payable and accrued liabilities (23,495) (8,832) (30,027) (41,378) 19. Comparative figures Certain comparative figures on the consolidated statement of financial position have been reclassified. This is due to adjustments made upon finalization of the Viking business combination purchase price allocation (please refer to note 4 of the 2011 Annual Report for further information), Icelandic provisional purchase price allocation adjustments, as well as an adjustment made to bifurcate an embedded interest rate derivative from long-term debt (see note 9). 20. Events after the reporting period On May 3, 2012, the Company announced that it will be closing two of its plants, one located in Burin, Newfoundland and Labrador, and the other located in Danvers, Massachusetts. The Company is rationalizing its North American supply chain as a result of overcapacity and the acquisition of a more modern plant in Newport News, Virginia in December The Burin plant is scheduled to close by the end of December 2012, and the plant in Danvers will remain open until the first quarter of These financial statements for the thirteen weeks ended March 31, 2012 have been adjusted to reflect the impact of this announcement, as disclosed in note 5 and note 9. On May 3, 2012, the Company entered into an interest rate swap to exchange floating 3-month LIBOR for a fixed rate on its term loan credit facility, with an embedded floor of 1.5% for a fixed rate of 1.997% 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, the Canadian company 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%. 51