High Liner needs ‘at least two’ acquisitions to hit $150m earnings target

February 22, 2013, 8:24 am

North American frozen giant High Liner Foods is gearing up for more M&A activity over 2013, having finished the integration of Icelandic USA over 2012.

High Liner’s main strategic goal for the year remains the same as last year – profit growth. It plans to do that through acquisitions and operational efficiencies, Kelly Nelson, chief financial officer for High Liner, told Undercurrent News.

Nelson declined to comment on what size the acquisitions might be except to say they will be smaller than the Icelandic USA acquisition ($230.6 million).

The company experienced challenges in the US market during the latter part of 2012, but that is not the reason the company plans to seek acquisitions, Nelson said.

“We’re always looking to grow,” Nelson said.

The Icelandic USA acquisition certainly helped the company to grow last year. Total sales for 2012 increased by 39.5% to $942.6m, with Icelandic USA contributing $275.8m in 2012.

Because of the slow pace of organic growth, the company will need to look to M&A to hit a target of $150m in earnings before interest, taxes, deprecation and amortization (EBITDA), said Michael Mills, an analyst with brokerage Beacon Securities.

"The next goal on the horizon is management’s ambitious $150 million EBITDA target for 2015. In order to get there, we believe at least two acquisitions will be required," said Mills.

"Organic growth is slow, it was actually negative on a pro-forma basis in 2012, therefore management needs to rely on capturing increased market share through selective acquisitions," he said, in a report on the company sent to Undercurrent.

"We are not building any acquisitions into our forecast, but note that there is now a very strong track record of accretive acquisitions in the last five years with FPI, Viking and Icelandic USA," Mills said.

There is balance sheet flexibility to pull-off a small deal, including amended lending terms that will save $6.2m in interest costs in 2013, but also valuable equity currency available, said Mills. "We would not be surprised to see an M&A transaction before year-end 2013."

'Tough' US market

Despite the challenges it foresees in the US market, which accounts for two thirds of its sales, Nelson is positive on 2013 for the company.

Claims for jobless benefits rose more than expected last week, as claims rose to 362,000 – 7,000 more than Reuters economists had predicted.  High Liner felt the burn last year, as comparable US sales figures declined year on year.

“The US economy is not doing as well. There’s no question…We are not growing," said Nelson, when asked how he expects the US market to respond in 2013.

Approximately two thirds of the company’s sales and assets are in the US.

While EBITDA grew in 2012 at a rate of 8.7% in Canada and 12.9%in the US, the company faced some challenges that it is continuing to see.

"It is clear that the US business is seeing some pressure at the large, single point of contact accounts," Mills wrote, in his report on the company. "There have been contract losses on the private label side and with national foodservice accounts."

Both High Liner and Beacon attribute those losses to intensive pricing competition, but they pertain largely to contracts that -- while high in volume -- are low in margin. Yet the Canadian business continues to perform well, with the Flame Savours product line leading the success.

Looking ahead to Q1, management is focused on recapturing sales and volumes in the US market with a targeted TV and radio advertising campaign for its higher-end Sea Cuisine line.

"This will increase expenses by $3.3m in Q1 and $1m in Q2. We note that with Easter falling in the last weekend in March, versus eight days later in 2012, High Liner will see the full benefit from the Lenten season in Q1 results," said Mills.

For the full year, Beacon is forecasting topline sales growth of 1.3%, led by Canada, with relatively flat results in the US.

"The company will need to shake off the recent declines we have seen out of the non-Icelandic product range in the US," said Mills.

"The market remains extremely competitive, and now High Liner is the leading value-add frozen seafood company in North America, maintaining market share will be the challenge," he said.

Salvador Diaz, investor relations for High Liner, told Undercurrent one of the most important pieces of news to note is High Liner’s earnings report is increasing its pay-out to shareholders by 36%, with dividends increasing from $0.11 per share to $0.15 per share. Dividends increase every year, but this is a higher level of increase than normal.

“It says a lot about how confident the board and management are about their operations,” Diaz said. 

Beacon Securities is also bullish, maintaining its buy rating of High Liner.

"The synergies achieved from the Icelandic integration in recent months are likely to drive EBITDA and earnings growth in 2013," said Mills.

This year, Beacon continues to view High Liner as "a market leader with a great management team in place, operating in a defensive sector that has growth opportunities through M&A activity".

The positive outlook does not come without risks -- namely in non-commodity fish prices such as flour, soy and canola oil. Other risks include a weak Canadian dollar, customer dependence on retailer and club stores, interest rate risk and food quality assurance.

Yet Beacon's overall outlook for the future of High Liner's value to shareholders is positive.

"Although the dividend has doubled in the last three years...we see no reason why the dividend could not double again from here over the next two to three years," Mills wrote.

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