High Liner Trawling for More Acquisitions:
High Liner Foods Inc. (HLF), Canada’s largest seafood producer by market value, is hunting for more acquisitions as part of a plan to boost profit by two thirds over the next two years.
High Liner, which bought American Pride Seafoods LLC for $34.5 million last week, wants to be North America’s largest frozen seafood company, said Chief Executive Officer Henry Demone, 59. The company plans to boost earnings before interest, taxes, depreciation and amortization to $150 million by 2015, he said. The company had adjusted EBITDA of $91.7 million in 2012.
“We’re very focused -- North America, frozen seafood, brand equity, reasonable profitability, we’re looking for those kinds of businesses,” Demone said in a telephone interview Oct. 2 from Lunenburg, Nova Scotia, where the 114-year-old company is based.
High Liner’s purchase of New Bedford, Massachusetts-based American Pride, a frozen seafood and scallop-processing business, was the company’s fourth acquisition in six years. The company turned to producing frozen seafood for restaurants, caterers and supermarkets after giving up on fishing in 1999, a decade after the collapse of the North American cod industry.
High Liner purchased C$143 million ($139 million) of manufacturing plants and marketing assets from St. John’s Newfoundland-based Fishery Products International Ltd in 2007, bought Viking Seafoods Inc. in 2010 and took over ISF USA LLC from Reykjavik-based Icelandic Group HF in 2011.
The company’s shares have surged 160 percent in the past two years, the second-best performer among 15 North American food manufacturing stocks tracked by Bloomberg. Pilgrim’s Pride Corp. (PPC), a chicken processor, was first with a 309 percent gain. High Liner closed little changed at C$38.25 in Toronto today for a market value of C$648.5 million.
High Liner needs to do another acquisition to reach its earnings goal, said Michael Mills, a Halifax-based analyst with Beacon Securities Ltd.
“It’s really a business that requires scale so that you can have a leaner supply chain,” Mills said in an Oct. 3 phone interview. “They have much better buying power now with their suppliers.”
Demone declined to discuss possible acquisition targets.
“Typically when we do these deals we get a lot of synergies,” he said. Consolidating the businesses can mean savings of 60 percent to 80 percent of the company’s earnings before interest and taxes at the time of the purchase, he said.
High Liner will finance the deal with existing credit facilities, according to the company’s statement.
“The business generates substantial free cash flow and I expect the debt is going to be repaid fairly quickly,” Mills said. High Liner should be able to finance another deal the same way by the middle of 2014, he said.
High Liner’s acquisitions have enabled the company to increase efficiency, said Andrey Omelchak, a Montreal-based portfolio manager at Montrusco Bolton Investments Inc. Montrusco Bolton owns a 10.8 percent stake of High Liner worth $62.9 million at yesterday’s close.
“They don’t make acquisitions for the sake of growing the company,” Omelchak said. “They only make strategic acquisitions that allow them to leverage an existing network. It’s a top management team.”
Demone has led that team since 1989. Three years after he took over, Canada stopped all northern cod fishing after stocks of the bottom-feeder collapsed. The fishing grounds of the Grand Banks and Flemish Cap had been depleted by decades of sonar-aided trawling.
The company -- then known as National Sea Products Inc. -- closed plants and fired workers as the moratorium cut the fish it could harvest by 95 percent, Demone said.
“Imagine a paper company if 95 percent of the forest disappeared,” he said. In 1988 the company employed 7,000 people and ran nine plants. Six years later it was down to 1,500 employees and three plants.
“By the end of the ’90s, the fish hadn’t come back,” he said. So in 1999 Demone, whose father and grandfather were both fishermen, stopped fishing and switched the company’s focus to value-added frozen seafood.
High Liner has risen 256 percent since the beginning of 1999, compared with a 97 percent advance with the Standard & Poor’s/TSX Composite Index. The stock has three buys, one sell and two of the four analysts estimate it will rise 1.2 percent in 12 months to $38.75, according to data compiled by Bloomberg.
High Liner reported second-quarter earnings of $9.2 million, adjusted for certain items, or 59 cents a share, compared with $5.5 million, or 35 cents, a year earlier, according to a June 29 earnings report. Revenue dropped to $204.9 million from $216.8 million a year earlier amid lower U.S. food service and retail private label sales in Canada and the U.S.
High Liner is still a small player in the U.S., but its influence is growing in the eastern part of the country, said Omelchak. Monstrusco is comfortable with the company’s direction, he said.
High Liner hopes rising demand for seafood among health-conscious U.S. consumers will translate into more sales, Demone said. The company is also targeting higher-income consumers with products like citrus peppercorn haddock and lime chili tilapia.
“Demographics are on our side,” Demone said. “I think the health trend is on our side and the older you are, probably the more concerned you are with your health.”
What will really impact sales though, is new growth in the dormant U.S. restaurant industry, where the company makes 70 percent of its sales, Demone said.
“Once we get a stable or growing restaurant market then seafood consumption will start to increase again,” he said.
U.S. restaurant sales are projected to total $660.5 billion in 2013, compared with $636.4 billion in 2012, according to the National Restaurant Association. Adjusted for inflation, sales will rise 0.8 percent in 2013, while sales increased 1.3 percent in 2012 and 1.6 percent in 2011, the National Restaurant Association said in its 2013 forecast report.
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