High Liner Foods Incorporated (HLF)
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High Liner Foods provides products of
great quality, taste and convenience for a healthy lifestyle, available at local
supermarkets, Club Stores, and in food service channels
He is a member of the Young Presidents' Organization and serves on the Board of Directors for the Food and Consumer Products Manufacturers of Canada and Dover Industries Ltd. He is active in community affairs and youth recreation.
Henry is a graduate of Acadia University. He
and his wife, Rena, have 3 children.
In Canada, High Liner Foods Incorporated, based in
Lunenburg, Nova Scotia focuses on serving the Canadian retail and food service markets as
well as the North American fresh fish markets. It is home of the High Liner® brand. They
are the only Canadian manufacturer competing in all five major segments of the frozen fish
market: raw fillets, battered fish, breaded fish, fish and chips and prepared fillets.
They also market frozen entrees.
In addition, the company's Italian Village Foods division in Secaucus, New Jersey produces and markets frozen pasta products to the U.S. retail market. The Company's Italian Village Foods division has the Number 2 position in the market for Italian style stuffed frozen pasta sold at retail in the United States. Italian Village sells cheese-filled ravioli, tortellini, manicotti, gnocchi, cavetelli and stuffed shells throughout the United States under the Gina Italian Village® and Floresta® trademarks. Italian Village is the leader in three of the top seven frozen pasta markets in the United States and is number one in New York and Philadelphia, the two highest consumption markets for these types of products.
CEOCFOinterviews: Mr. Demone, please give us a brief history of High Liner Foods and tell us where you are today.
Mr. Demone: High Liner Foods has been through a ten-year transition from a resource based fishing company to a frozen food processor. We still sell more than eighty percent seafood but increasingly we sell value-added seafood products. The difference is that now we are a consumer and customer-focused company. We spend a lot of time trying to figure out what customers and consumers want and need. We then develop products that meet those needs and purchase the raw materials necessary to manufacture them. This is a different mindset and process from a fishing company, which is much more resource based and focused on catching fish and selling it to the best available market. We have also entered the second category, which is Italian food and our Italian Village brand is the number-two brand of frozen Italian-style pasta products like ravioli and tortellini in the U.S market. It is the leading brand of Italian-style stuffed pasta in the Canadian market as well.
CEOCFOinterviews: You recently sold your scallop harvesting business. What else do you need to do to get the ten-year program finished?
Mr. Demone: The deal which we announced last week was the major plank in that whole program. We sold our Nova Scotia based fishing assets to a consortium of companies led by a Canadian company Clearwater Seafoods for $65,000,000 Canadian dollars. This has had a very positive impact on our balance sheet; most of the results of the sale will be an after-tax gain, which will be approximately $4.00 per share. We will use that to pay down long-term debt and we will have lower interest expenses going forward. If you look at the impact on the income statement, we will continue growing because our value-added business is growing. We anticipate a one-time drop in sales of roughly $38,000,000.00 Canadian dollars. The growth of our value-added business, which has been in the order of 100-115%, should compensate for that quickly. We have been able to maintain our guidance for 2003, which is an increase of earnings-per-share before unusual items of 10%. In 2002, we earned 71 cents per share and we expect to earn in the high seventies in 2003 before unusual items. We had substantial positive unusual items in 2002, and the sale of these fishing assets will be another substantial positive unusual item in 2003 as well.
CEOCFOinterviews: Please tell us about your expansion in the club channel.
Mr. Demone: We have a sub-category up in Canada of natural portions of products like salmon, sole, cod and haddock, which are lightly coated and flavored. We call that the High Liner Signature line and it has done extremely well in Canada over the last three or four years. We took the best products from that line such as salmon in creamy dill sauce, salmon in roasted garlic and herbs or scallops in a lime salsa marinade and introduced them to the Club Channel. Products like that are very much restaurant quality in nature but very simple to prepare for the consumer. We like to talk about one-step cooking where you set your oven or microwave with a time and a temperature and when the beeper or buzzer goes off, the products are finished. They are not only easy to cook but are very delicious. We took those products and adopted them to the Club Channel and have been selling aggressively to both Costco and Sams Club for the last two years. In 2002, our sales were thirty-three million Canadian dollars. That is from a standing start two years ago, so we have had a lot of success there and these products really respond to what consumers are looking for today. They want to eat more seafood but they do not want to take the time or risk involved with preparation. We give them a great tasting product without the worries.
CEOCFOinterviews: Is there much difference regionally in how your products sell?
Mr. Demone: There are traditional regional differences in both Canada and the U.S., mainly related to species. That is something that comes from a time when the world was a much bigger place. In New England and Nova Scotia, people ate quite a bit of Haddock, so these are still big Haddock markets today. Quebec ate a lot of Sole and Flounder. These are regional tastes, which developed over time based on local catches when the market was not so international. In our Italian foods business, the market for those kinds of products tends to be much more in the big coastal cities and urban areas, so New York is the biggest market. There are regional differences in most of our products, but it is becoming less and less as the consumers are exposed to more products all the time. The consumer is much more accepting of new food ideas, so we see fewer regional differences than we once did.
CEOCFOinterviews: How do you keep in-touch with what consumers want as far as developing new products or changing the products that you have?
Mr. Demone: It is a combination of traditional market research and customer feedback. We do many different types of market research ranging from focus groups, to taste panels, to mall intercepts, to home-use tests for new products. We try to make it easy for consumers to talk to us using our website and our 800 number. That information is important because if a consumer takes the time to give you feedback, they really care about your brand. On the customer side, it is a little bit different because these are large organizations. The grocery industry and the food service distribution industry are becoming more consolidated. That is more of an issue of establishing good personal relationships at multiple levels. The buyer for the sales person or account manager should really have a good relationship and understand the drivers for the business. We like to have senior management relationships as well as relationships between the warehousing people and our customers, the logistics people at High Liner Foods and the merchandising people, and the customers and marketing people. We try to have multi-point relationships with our customers so that we know what is driving their business. There is an interesting phenomena taking place with the large retailer, Wal-Mart. Wal-Mart has sales in excess of 250 billion dollars and there is no way any manufacturer is going to measure up to Wal-Mart in size. However Wal-Mart needs to work with leading manufacturers who can add value to their business due to innovative new products and the strength of their brands. That is exactly how we plan to position ourselves, as the supplier of choice for these large retailers. When you lead a category, you can sit down with these retailers no matter how large they are and have business discussions that add value to both parties.
CEOCFOinterviews: Is it still a fight for shelf space?
Mr. Demone: The whole industry is competitively challenged because, from a retailer perspective, there is only so much shelf space and they have many more products offered them than they have space. It is a question of what products will best satisfy the consumers and earns reasonable returns for my shareholders. That is something that the retailers face everyday. There is always a line up. From a manufacturers point-of-view, you need to go in there with credibility, a track record of success and market research that shows that this new product adds value to the category and convince the retailer that this is a good use of their shelf space. Those retailers want products that are going to satisfy their consumers and grow their business.
CEOCFOinterviews: Where do you manufacture your products and are these facilities adequate for your needs?
Mr. Demone: We have four manufacturing facilities; one plant in Newfoundland, a plant in Nova Scotia and two plants in the U.S.; one in New Hampshire and one in Secaucus New Jersey, which does Italian-style pasta. We have adequate capacity. We find that through an innovative approach to operations, we can increase our capacity utilization substantially. You identify the bottleneck and determine whether you have the demand to give you a payback if you would approve that bottleneck and figure out how much of an investment it takes to remove it. Once you do that, you are going to get higher throughput and lower cost structure. Typically, we would invest that into a combination of growth initiatives, more new products and leave some for the shareholders. By doing that, we feel confident that our current manufacturing facilities are more than adequate for internal growth over the next three to five years. A few years ago, we did not run continuous shifts; we would start at eight and take a break at ten and then shut the line down until lunch. We do not do that anymore, we work continuously so we have to staff a little bit more. We have much better capacity utilization and throughput as well as a quality improvement. When we start up one of these new lines it is kind of like the first pancake on Sunday morning; its hard to get it right. These are the things we do to make sure that we have adequate plan capacity, a combination of shifting patterns, investment removed bottlenecks and other innovative approaches.
CEOCFOinterviews: Do you need to maintain much inventory?
Mr. Demone: Inventory is something we focus a lot on; we try to get our inventory turns based on cost of sales up to the level of five-and-a-half to six times. That is important in terms of the effect of working capital on our balance sheet and making sure that our consumers get a good fresh product that has not been in the freezer too long. That is a big focus for us and a constant challenge, particularly on the seafood side where the raw material comes from all over the world. We have developed systems that help us manage that. We have an Internet based system that our suppliers in different parts of the world use. At any point in time we can look in that system and go product-by-product or supplier-by-supplier and find out how much is on order, how much is in production at our supplier facility, how much has already been shipped and is on the water in a container vessel. This gives us a view of what is going on horizontally. That tool dramatically improved inventory management at the company. You need to know where you stand with different suppliers at different times of the year relative to our customer needs.
CEOCFOinterviews: How do you grow the business?
Mr. Demone: We feel very optimistic in terms of our growth opportunities. The two categories we are in really respond to consumers looking for healthy lifestyles. Yet they are also products that consumers are not likely to prepare at home from scratch. There are consumers that do prepare Italian food and seafood from scratch but the vast majority of North Americans, when they enjoy these two categories, would choose to eat in a restaurant. We provide great quality and taste as well as convenience in two categories that respond to a healthy lifestyle. We see many growth opportunities just through the supermarket channel. There are other channels such as the food service channel in Canada and the Club Channel. There are some new initiatives that we have such as school food service that is a growth initiative where we are going to take some of our kid-focused products such as fish sticks and ravioli, which of course appeal to kids, and sell them to school districts across the U.S. We have not seen much impact on that yet but it is one of our growth initiatives for 2003 and 2004.
CEOCFOinterviews: Do you see acquisitions as part of your future?
Mr. Demone: We see many growth opportunities in the two categories in which we are present today. We do not see ourselves getting into a new category for some time. If we could take advantage of the consolidating market and strengthen our core business through acquisitions, we would definitely do it.
CEOCFOinterviews: How does the strengthening Canadian dollar affect your company?
Mr. Demone: We are
essentially a North American company and we are now seeing the Canadian dollar strengthen
rather dramatically relative to the U.S. dollar over the last year or so. There have been
many questions as to how this affects different companies in the Canadian economy. For
many companies the strengthening Canadian dollar is a problem, but for us it actually
improves our financial situation. The reason for that is that most of the raw materials
that we buy are priced in U.S. dollars. Our raw material cost base is in U.S. dollars but
about half of our sales are in the Canadian market and in Canadian dollars. As the
Canadian dollar strengthens, this improves our business when we buy in U.S. dollars and
sell finished goods in Canadian dollars. We expect the Canadian dollar to continue to
strengthen over the next six months; it will probably end up in the low to mid-seventies
in U.S. dollar terms, and that is very good for our business.
Mr. Demone: The biggest thing that investors should acknowledge is the transformation that we have been through for the last ten years from a resource based company to a branded value-added marketer. That is a huge transition for us and it makes our earnings more stable. This allows us to grow impressive food company growth rates of 10-12% without having to worry about a lot of the resource issues that a fishing company has to deal with. In a fishing company world, you need to buy quota or do an acquisition in order to grow, and we do not have those constraints. We are focused on growing in these two categories; we sold our fishing businesses. Our balance sheet is very strong and we expect our earnings to go up this year. Watch for continuing top-line growth in 2004 to confirm that we can deliver against consumer and customer needs, better than our competition.
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