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Edited Transcript of CLR.TO earnings conference call or presentation 3-Mar-20 6:00pm GMT

Q4 2019 Clearwater Seafoods Inc Earnings Call

BEDFORD Mar 13, 2020 (Thomson StreetEvents) -- Edited Transcript of Clearwater Seafoods Inc earnings conference call or presentation Tuesday, March 3, 2020 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ian D. Smith

Clearwater Seafoods Incorporated - CEO

* John Lane

Clearwater Seafoods Incorporated - VP of Finance & IR and Treasurer

* Teresa H. Fortney

Clearwater Seafoods Incorporated - VP of Finance & CFO

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Conference Call Participants

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* Bryan Cecil Hunt

Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst

* Doug Cooper

Beacon Securities Limited, Research Division - MD and Head of Research

* George Doumet

Scotiabank Global Banking and Markets, Research Division - Analyst

* Kyle McPhee

Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and welcome to the Clearwater Seafoods Investor Conference Call. (Operator Instructions) Note that this call is being recorded on Tuesday, March 3, 2020.

And I would like to turn the conference over to Mr. John Lane. Please go ahead, sir.

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John Lane, Clearwater Seafoods Incorporated - VP of Finance & IR and Treasurer [2]

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Thank you, Sofie, and thank you to everyone who's called in. With me are Ian Smith, Chief Executive Officer; Teresa Fortney, Chief Financial Officer; Christine Penney, Vice President, Sustainability and Public Affairs; and Donald MacNeil, Assistant Treasurer. This call is intended to provide information to Clearwater investors. We have also scheduled a media call at 3:30 Atlantic time, and we will be delighted to take questions from media at that time.

Earlier today, we issued a news release that provided the full details of our Q4 and full year 2019 results. For the purpose of this call, we have assumed that participants have reviewed this information, which is also located on our website at www.clearwater.ca. Therefore, during this call, we'll focus on the more significant points from this release.

Please note that during today's call, management may make forward-looking statements. All statements other than statements of historical facts, including, without limitation, statements regarding future plans and objectives of Clearwater, constitute forward-looking information that involve various known and unknown risks, uncertainties and other factors outside of management's control. Forward-looking information is based on a number of factors and assumptions used to develop such information, but which may prove to be incorrect. Forward-looking statements may include, but are not limited to, total allowable catch levels, selling prices, weather, foreign exchange rates, fuel and other input costs. There can be no assurance that such information will prove to be accurate, and actual results and future events could differ materially from those anticipated in such forward-looking statements.

For more information on risk factors applicable to Clearwater, please refer to Clearwater's continuous disclosure materials filed from time to time with securities regulators, including, but not limited to, Clearwater's annual reports, quarterly reports and annual information form.

Finally, the forward-looking information included in this call is made as of the date of this call, and Clearwater does not undertake to update publicly or revise forward-looking information, whether as a result of new information, future events or otherwise, except as required by applicable securities laws.

I will now turn the call over to our Chief Financial Officer, Teresa Fortney.

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Teresa H. Fortney, Clearwater Seafoods Incorporated - VP of Finance & CFO [3]

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Thanks so much, John, and good afternoon, everyone. Thank you very much for joining us. We're really pleased with our results for the fourth quarter and the year ending December 31, 2019. Our fourth quarter sales and adjusted EBITDA were $167.1 million and $30.1 million, respectively, and that compared to $159.8 million and $24.1 million in the prior year.

Our annual sales and adjusted EBITDA were $616.2 million and $114.9 million compared to $592.2 million and $104.4 million in the previous year. Full year adjusted EBITDA attributable to shareholders was an all-time record of $99.2 million, up 12.6% year-over-year.

Gross margin and adjusted EBITDA as a percentage of sales increased to 19.8% and 18.6%, respectively, in 2019 compared to 18% and 17.6% in 2018.

We saw a nice decrease in leverage. It came down to 4.1x in 2019, and that compared to 4.7x in 2018. And that was driven by strong shareholder EBITDA.

Our cash from operations, excluding working capital, was $73.3 million, an increase of $2.6 million year-over-year or 3.7%. Cash from operations, including working capital, decreased $12.8 million, and that was due to the timing of sales, which resulted in higher accounts receivable at the end of 2019. Return on assets increased to 9.6% in 2019, and that compared to 7.7% in 2018.

The Board of Directors declared a dividend of $0.05 per share payable on April 1, 2020, and that is to shareholders of record as of March 18, 2020.

Clearwater achieved its second highest annual sales in 2019, and year-over-year adjusted EBITDA grew by $10.5 million or 10.1%. Sales for the fourth quarter and year ended 2019 grew 4.6% and 4.1%, respectively. Strong harvest conditions, landings and available supply in clams, scallops and langoustines were partially offset by competitive market conditions for certain scallop sizes.

Sales benefited from the introduction of sea cucumber in 2019, and while shrimp was negatively impacted by the timing of landings, sales mix and competitive market conditions.

Adjusted EBITDA for the fourth quarter and full year was $30.1 million and $114.9 million, respectively, as compared to $24.1 million and $104.4 million in 2019 -- 2018. Gross margin as a percentage of sales increased in the fourth quarter and full year due to strong harvest conditions and favorable mix for both clam and scallops, which was partially offset by competitive conditions for shrimp. We saw steady market demand for lobster, which was offset by increased price competition in key markets. Overall, access to supply and customer demand in procured species remained strong as compared to the prior year.

Average foreign exchange rates realized on sales for the fourth quarter and full year had a negative impact to sales of $2.3 million and $1.3 million, respectively. Cash from operations increased $18.5 million in the fourth quarter of 2019 as compared to 2018. Excluding working capital, full year cash from operations and free cash flow were $73.3 million and $27.0 million, respectively, and that compared to $70.7 million and $39.5 million in the prior year. And that, with that, we saw EBITDA growth being partially offset by higher accounts receivable as well as a planned increase in our capital expenditures.

Leverage was reduced to 4.1x in 2019, and that compares to 4.7x in the prior year. And that was driven by the strong EBITDA growth and tightly managed CapEx spend, and it resulted in debt paid repayments of $18.6 million during the year. 2019 adjusted EBITDA attributable to shareholders was $99.2 million, following strong harvest conditions and favorable sales mix across multiple species.

Clearwater's business experienced a predictable seasonal pattern, in which sales margins and adjusted EBITDA are lower in the first half of the year and higher in the second half of the year. Investments in capital expenditures and working capital are typically higher in the first half of the year and lower in the second half. And what this does is it typically results in lower cash flows, higher debt balances and higher leverage in the first half of the year and higher cash flows, lower debt balances and lower leverage in the second half of the year.

We expect our year-end 2020 leverage to be lower versus our 2019 levels. And our long-term goal for leverage remained at 3.0x. Our return on assets increasing from 7.4% to 9.6% as at the end of the year was primarily due to higher earnings before interest and taxes and lower average asset balances following a weakening of the pound sterling compared to the Canadian dollar.

So what I'm going to do at this time, I usually provide a little bit of an outlook over 2020. I'm going to pause and -- for a moment, I'm going to hand the session over to Ian and will come back to some 2020 expectations at the end of our discussion. So Ian, I'll hand it over to you.

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Ian D. Smith, Clearwater Seafoods Incorporated - CEO [4]

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Thank you, Teresa, and good afternoon, everyone, and thank you for joining us. In 2019, Clearwater grew volume, revenue and margins, while significantly reducing our debt and leverage. We expanded our distribution to more than 58 countries and grew adjusted EBITDA by more than 10%. We ended 2019 with a leverage ratio of 4.1x, the lowest level in 5 years, which includes the acquisition of Macduff Shellfish in 2015.

We achieved balanced growth across multiple species. Most notably, improved market and harvest conditions in clam, langoustines and our global scallop portfolio led to better inventory positions and higher sales at favorable market prices. Reduced supply, prices and sales for our frozen-at-sea coldwater shrimp only partially offset the strength of our results for the year.

We successfully expanded our strategic relationships in the Canadian sea cucumber, shrimp and snow crab fisheries; announced a new joint venture in Newfoundland and Labrador to be closed in early 2020; and signed a landmark agreement with 14 First Nations in the Arctic Surf Clam fishery.

Clearwater will continue to advance our relationships with our indigenous partners, working with them to demonstrate that reconciliation can unite and strengthen communities, build trust, secure existing jobs, create new ones and provide greater prosperity for all.

Now I'd like to turn to Clearwater's 2020 and longer-term outlook. In 2020, Clearwater will continue to leverage our broad portfolio of species, global market reach and strong customer base to drive profitable growth while expanding our sales distribution into new markets and channels. At the same time, innovation and the application of artificial intelligence, machine learning and robotics will help us increase productivity, reduce costs and generate higher margins from our vertically integrated global supply chain.

We will maintain our focus and discipline on improving our financial performance and executing on our strategic priorities. Further reductions in debt and leverage will come from strong cash flow, from operations and working capital reductions as we strengthen our balance sheet and set the foundation for future organic growth and M&A.

Importantly, Clearwater has, with our First Nations partners, maintained access to the full Arctic Surf Clam quarter for 2020. The landmark agreement signed with our indigenous partners in early 2019 provides millions of dollars in benefits to First Nations through annual revenue sharing, training, leadership, development programs, employment as well as procurement of goods and services from indigenous suppliers. Beyond this agreement, Clearwater will continue to advance working relationships with our indigenous partners to the benefit of all parties.

Trade and economic and geopolitical uncertainty as well as the more recent impact of the COVID-19 outbreak will continue to create industry headwinds in 2020. In response, Clearwater will continue -- in response, Clearwater has taken and will continue to pursue timely and carefully considered measures, including adjustments to harvest schedules, species portfolio and product mix, pricing, regional and channel distribution, capital allocation, innovation priorities, cost savings and working capital reductions. These measures will generate strong cash flows from operations, reduce our debt and leverage, yield a higher return on assets and generate positive long-term returns to shareholders.

The fundamental and powerful undercurrents of growing worldwide population, shifting consumer taste towards healthier diets and the rising purchasing power of middle-class consumers in emerging economies will continue to drive increasing global demand for wild-caught seafood. In contrast, the supply of wild seafood is limited and is expected to continue to lag behind growing global demand. The supply-demand imbalance has created a marketplace in which the purchasers of seafood are increasingly willing to pay a premium to suppliers that can provide consistent quality and food safety, a wide diversity and reliable delivery of premium wild-caught, sustainably-harvested seafood.

We will maintain our focus and discipline on improving our financial performance -- excuse me. We believe Clearwater is well positioned with the right mix of assets and people to execute on this opportunity and our competitive advantages include: a modern fleet, featuring state-of-the-art frozen-at-sea factory trawlers and complementary land-based processing facilities, all of which enables our year-round harvest and delivery capabilities; a broad license portfolio, ensuring access to our renewable supply of seafood and strong global selling, marketing and distribution capabilities, as I said, to over 58 countries today. Of course, sustainability will always remain at the forefront of our business as we leverage our transit intellectual property and our continued investment in science, R&D and innovation to ensure sustainability, reduce waste and lower our ocean and environmental footprints, while making a difference in the workplace, the marketplace and in the local communities.

When you invest in Clearwater, you are investing in one of the most innovative, global and sustainable seafood companies in the world. And we are now ready to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

And your first question will be from George Doumet at Scotiabank.

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George Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [2]

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Congrats on delivering a solid 2019.

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Ian D. Smith, Clearwater Seafoods Incorporated - CEO [3]

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Thanks, George.

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Teresa H. Fortney, Clearwater Seafoods Incorporated - VP of Finance & CFO [4]

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Thanks, George.

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George Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [5]

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I'd like to spend a little bit of time, obviously, topical and the impacts of COVID-19. We're 2/3 of the way through Q1. Can you maybe talk about some of the impacts that we're currently seeing on the business?

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Ian D. Smith, Clearwater Seafoods Incorporated - CEO [6]

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Not an unexpected question, George. Thank you. Regarding the impact of COVID-19, first, I would tell you, if anybody in the industry is telling you things are fine, clearly, that is not the case, but the sky is not falling either.

The real question is what have the impacts already been and what are they likely to be going forward. Clearwater has a broad portfolio of species and is diversified by regions, customers and channels, selling products in, as I said earlier, 58 countries globally.

We are monitoring the coronavirus situation closely. We have an internal team established to monitor and develop prudent and appropriate risk mitigation measures for the business. We are working to determine the short-term impacts on our business as a result of coronavirus control measures in several countries. And we're particularly focused on the reduced restaurant and food service -- seafood consumption in China.

Our products are sold, just so everyone is aware, in food service, retail, e-commerce and to food processors in China. It's not just the food service business. There is no doubt that food service and wholesale operations in China have been disrupted. However, most of these markets have actually now reopened, and restaurants are adapting to a decline in customer visits by offering takeaway and online delivery services. We continue to have confidence in the Chinese food service market and it's not a question of if it will come back, it is when and how quickly.

Now I'd like to give you some more specific information. First, turning to the circumstances that we're experiencing in Europe and North America. I would like to reiterate that the situation is dynamic, things can continue to change. However, we have not seen any disruption or other significant changes in our customer order patterns and prices remain firm across multiple species in both our European and North American markets.

One exception being North America, Asia grocery and restaurant. It is trending lower. It is an important but smaller piece of our business. And it's nothing that cannot be recovered from through the balance of the year.

Our largest exposure, as you might expect, would be in the China market. And in particular, for 2 species and formats: one, live lobster; the second being frozen clams. First, let me speak to live lobster. First and foremost, Clearwater did not significantly participate in the benefits most of the Canadian lobster industry experienced as a result of the tariffs placed on U.S. lobster. Clearwater's live lobster business in China grew modestly in 2019, whereas the China market is currently halted for live lobster. Clearwater is successfully shifting our sales to other regions, customers and channels. Inventory levels in Atlantic Canada are relatively low and prices remain firm. We are also benefiting from our ability to harvest lobster 12 months of the year and the ability to store lobster for extended periods of time.

Opportunistically, all of the live lobster inventories in China that had been shipped prior to the Lunar New Year have either been consumed or further processed. The key point is that all live lobster tanks for North American lobster, all these tanks in China are now empty. This represents a multimillion dollar export opportunity when markets resume.

Now let me turn to frozen clam. From a logistics standpoint, because this is containerized product that typically takes anywhere from 45 to 60 days to enter the country through ports and then must clear customs and make its way into customers' hands, the first thing I can tell you is that containers that were shipped in December 2019 are moving from the port to their intended destinations, who are our customers and importers. They are receiving these products which are for intended sales.

Our frozen products typically have a 2-year shelf life. And so we obviously have no stale date or shelf date issues with respect to any of our frozen products being delivered into the market.

We have seen a significant increase in our retail and e-commerce business in China. For example, we project that our quarter 1 sales will have doubled versus our 2020 quarter 1 plan. Demand is very strong for repeat orders as in-market inventory for these channels has been depleted due to the increase in consumer demand in both retail and e-commerce channels. This does not fully offset our food service business, but it is a partial offset.

Within broader Asia Pacific, our quarter 1 sales in Japan are projected to be higher than our quarter 1 plan. And sales efforts to grow this business outside of traditional Kaiten sushi channels have borne fruit, and we are now doing business in other sectors beyond the traditional sushi trade, including major food processors.

We continue to sell products -- and this is a really important point. We continue to sell our products in China. In March alone, we are forecasted to sell hundreds of thousands of pounds of new orders just for clams, but also for other species into our Chinese customers.

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George Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [7]

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So just to take away the highlights, it seems that we're seeing impacts in the food service channel in Asia in the lobster and frozen clam category. Japan, North America and Europe haven't really seen an impact. Is that accurate?

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Ian D. Smith, Clearwater Seafoods Incorporated - CEO [8]

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Our customer order patterns are normal for this time of year, and prices remain firm.

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George Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [9]

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Okay. Okay, that's helpful. And just a clarification on the CapEx that you guys put out for 2020, the $35 million to $40 million. Is that just growth? Or is that inclusive of the typical 2025 of maintenance?

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Teresa H. Fortney, Clearwater Seafoods Incorporated - VP of Finance & CFO [10]

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So that would be inclusive of the maintenance. And so all our maintenance can fluctuate a bit from year to year, George, based on what our refit cycle is. But it does have some opportunistic ROI CapEx in there as well.

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George Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [11]

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Okay. I mean, it's not a big amount, but I was under the impression that there would be no refits investments until 2022. Can you -- just kind of wondering where that incremental investment is coming from.

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Teresa H. Fortney, Clearwater Seafoods Incorporated - VP of Finance & CFO [12]

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Actually, I think what we said was that there is no replacement vessels coming until 2022. We've always got a 3-year cycle of refitting our vessels. So it just depends on how many are coming in each year for a refit.

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George Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [13]

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Okay. That's helpful. And just one last one. On your, Teresa, on your prepared remarks about lowering leverage below 4.1x for 2020. I just want to make sure that reflects all of the impacts from, I guess, the higher CapEx now and also the coronavirus. Is that inclusive of all those factors?

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Teresa H. Fortney, Clearwater Seafoods Incorporated - VP of Finance & CFO [14]

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So it certainly reflects the forecast on CapEx, George. One of the things that we'll continue to work through as a business is where is the right level for us to land with inventory and how do we adapt with the coronavirus. So one of the biggest difficulties is when is it going to end and when do things start to return to normal, how much we shift to different markets, et cetera. So there's an opportunity for us to be going below where we were for this year. But we also -- what's the phrase, "You don't want to cut your nose off to spite your face." So we're going to continue to really dive deeper and manage through what we're going to do with our inventories and harvest plans.

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Operator [15]

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Next question will be from Bryan Hunt at Wells Fargo.

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Bryan Cecil Hunt, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [16]

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Just diving a little deeper into the leverage question. When I look at the levers to get there, to a lower leverage point, whether it's cash used to pay down debt and/or growing EBITDA from where we are today, what's the path to getting to lower leverage for you all for 2020?

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Teresa H. Fortney, Clearwater Seafoods Incorporated - VP of Finance & CFO [17]

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And so I think the path starts with where our -- we are going to generate cash flow. We are going to use that to continue to pay down our debt, Bryan. And then the one piece that will be the final determinant is where our EBITDA lands relative to where it has been growing, and that's going to be somewhat still a function of our -- the impact of COVID-19.

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Bryan Cecil Hunt, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [18]

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Okay. Just looking back to 2019, I mean, you all discussed in many different instances throughout the year and even in this conference call how efficient and available the species were in terms of harvest. So when you go back and look at cash efficient -- catch efficiency in 2019 maybe to historical levels, how does 2019 rank? Is it a year that is repeatable, in your opinion?

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Ian D. Smith, Clearwater Seafoods Incorporated - CEO [19]

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That's a very broad question, Bryan. I would say that it's repeatable in a number of species, perhaps not repeatable in all of them. But in particularly, 2 of our key species like -- in like scallop and clam, the improvements in catch rates are largely a result of not the health of the resource, which was actually pretty healthy and continues to be, but because of our R&D and innovation investments that have essentially permanently increased our efficiency on our vessels. So we expect to be able to hold on to those gains in the future. And in fact, in the case of changes that we made in terms of our harvesting and onboard factory processing in clam, those innovations were actually not fully deployed to the entire fleet, but are being deployed to the rest of the fleet, the fleet in quarter 1 of this year through our refit process. And so we expect those gains, in particular, in clam, to expand.

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Bryan Cecil Hunt, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [20]

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Great. And continuing down that path, when I look at CapEx, you all talked about AI, automation, robotics. What are some of the bigger opportunities for you all in 2020 employing some cost savings and/or growth CapEx beyond what you're doing on your clam vessels? And I don't know if you could bucket a couple of the best opportunities for us, so we can understand better where the money is going,

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Ian D. Smith, Clearwater Seafoods Incorporated - CEO [21]

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Sure. So from -- so first of all, a lot of the capital, as I know you're familiar, Bryan, is just going to steel, right? So refits and repair and maintenance. But our -- but many of our ROI CapExes are involved in these high-technology platforms. So for example, when you are able to get better automated sorting of different species that you're harvesting, it speeds up the efficiency of the factory, which, in many times, is the bottleneck in terms of your harvest, so your catch rates per day go up. It also creates labor cost savings on a cost per kilo basis. Also, when your -- it flows right through to the shore -- onshore processing because when you're bringing in a cleaner product off the vessels, there's less sorting and grading and defects in what you're processing and packaging for final delivery to customers in your land-based operations. So as a knock-on positive effect on yield, because you're throwing out less product, so you have less defect, higher yield, greater throughput, so better fixed overhead absorption. And geez, I'm talking like an accountant. Fixed overhead absorption and lower cost per kilo. So this comes -- and then robotics. We do have an aging workforce in Atlantic Canada. We don't have this draconian strategy of using robots to replace human beings, not at all. But we do have an aging workforce that's retiring. And also, there's a lot of jobs that really are difficult for -- that cause repetitive motion injury and things like that. And so it's a labor savings and a significant cost savings for us to be employing robots to do repetitive tasks. And again, it increases throughput, improves yield because there's less defects, and it lowers our cost per kilo.

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Bryan Cecil Hunt, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [22]

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Great. My next question is when you look at the species that were laggards this past year, either because of catch rates and/or because of pricing, what are the opportunities to either improve through mix and/or further processing those laggards in 2020?

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Ian D. Smith, Clearwater Seafoods Incorporated - CEO [23]

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Well, I think that -- I'm trying to imagine which laggards you're referring to. I think that the way we look at our portfolio is that different species play different roles in the portfolio. Some are both volume and profit drivers, some deliver a lot of volume and revenue, but are lower margin. Our lobster business, as an example, is one of our lower-margin businesses, but it is high-volume and revenue. And really, it, for many customers, it's part of a portfolio of species that we sell to them, helps us fill up containers, as an example. But I would -- to address your question directly, if I looked at our lobster business and our innovation pipeline on lobster, we feel quite bullish about our ability to improve our margins in our lobster business over time and also grow volume and revenue.

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Bryan Cecil Hunt, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [24]

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And then my last question is, you talked about expanding your -- expanding the number of countries you sell to. You had pretty significant growth in Europe in the back half of the year. Do you feel that there's permanency there and there's an opportunity to continue to grow within Europe despite some of the COVID issues that we're seeing in Italy and also in Germany?

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Ian D. Smith, Clearwater Seafoods Incorporated - CEO [25]

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Yes. So again, I want to reiterate, when we look at our European customer orders, we're not -- and so every one of our sales people has their finger on the pulse of the market right now. And we're specifically looking for changes in order patterns. So order cancellations and also orders shifting. So customers are saying, "I really don't want to take that containerized delivery in the month of March. Can I please shift it into the month of April?" So we're looking for those things actively and in very close contact with our customers, and we're not seeing that. I would include Italy in that. So that was a specific question on our sales conference calls earlier this week. And so we will stay cautiously optimistic until there's a reason not to be.

In terms of permanency, again, we are a limited distribution, sustainably harvested species player. And the types of customer relationships we have are typically long term. We've been able to add new importers and distributors. But we're really focusing on partners that are also -- share the same values that we do about developing long-term partnerships and working relationships. So we're really not interested in short-term deals where price is the #1 decision-making factor for the customer. And so do I think our new European expansion has sticking power? Yes. Do I think our expansion to Vietnam has sticking power? Absolutely. Same would go for Brazil.

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Operator [26]

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Next question will be from Doug Cooper at Beacon.

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [27]

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Nice quarter and nice end of the year. Just on the -- getting back to China. It's obviously -- was 28% of your sales in the quarter. Let's just -- under a scenario analysis, if things get worse, how quickly can you reduce costs on the cost side? Like in terms of -- like harvest? In terms of your -- you mentioned harvest, for example. Can you just stop fishing for a while? I mean how quickly can you put those pieces into place?

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Ian D. Smith, Clearwater Seafoods Incorporated - CEO [28]

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So we have -- without getting into specifics, Doug, we have a lot of control. We have a lot of control over that. And -- but I want to reiterate, we're nowhere near that, okay, in terms of our projections. What's more is, as the warmer weather approaches, we're getting into our best fishing period of the year. So the way to think about it is that we want to be fishing through the spring and summer. We want to have high catch rates at good catch costs, and it gives us time to look at what is actually going into -- on the markets and how quickly they're recovering. And we can make decisions on vessel harvest schedules later on as we get into the autumn, early fall and early winter in terms of controlling cost and inventory towards the end of the year.

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Teresa H. Fortney, Clearwater Seafoods Incorporated - VP of Finance & CFO [29]

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And the cost of our inventory is better as we harvest through the spring and the summer as well.

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Ian D. Smith, Clearwater Seafoods Incorporated - CEO [30]

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Correct.

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [31]

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I'm just getting -- you mentioned, Ian, the food service, obviously, is taking a hit right now. How quickly can you switch channels between food service and retailer e-commerce, for example?

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Ian D. Smith, Clearwater Seafoods Incorporated - CEO [32]

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So I don't think it's about how quickly we can shift. We're already there. In terms of high -- so we have flagship stores on Alibaba and jingdong.com and even some of the smaller players. We have products in the market that we're scrambling to replenish because our -- what we sell for retail and e-commerce is typically smaller pack sizes for individual serving or 2 or maximum 3-person servings. So we're already getting strong reorders for those products, which we are able to fill, and we're working rapidly to do so. It's more -- so it's not about shift. It's -- we can fill those orders, but the scale of retail and e-commerce is still relatively a small fraction of the business compared to food service. We really need food service and wholesale to recover. I see, and I don't want to be too overly optimistic, but, in China, I see green shoots of that just in terms of seeing orders from our wholesale and food service for the month of March that we had written off and weren't even expecting to see. So it's still -- we still have a long way to go here, but we are well positioned to take advantage of the opportunities that will present themselves in retail and e-commerce, but we do need food service and wholesale to come back without question. And we have confidence they will.

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [33]

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Okay. So from the darkest days, maybe, say, 3, 4, 5 weeks ago, you are seeing an improvement?

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Ian D. Smith, Clearwater Seafoods Incorporated - CEO [34]

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Well, I know you guys see the same stuff that we do. I can tell you, one of the things that frustrates the hell out of me is the fact that there are just under 90,000 cases of coronavirus confirmed in China, but there's over 43,000 recoveries already, right? So everybody reports the number of infections, the number of deaths, but no news -- I've yet to find a news media outlet that is consistently reporting the number of recoveries, okay? But that information is available online. You can find it at World Health Organization and a variety of other sites. The other data that's not being reported is that the number of recoveries per -- daily confirmed recoveries in China is greater -- significantly greater now than the number of new infections. So that data is not getting reported.

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [35]

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Do you think this disruption, obviously, would -- as you talked about, it's certainly not broken, it's just pushed out a bit. So it could be a V-shape recovery in demand. But also, do you think there's an opportunity to pick up market share from maybe other companies that weren't as strong financially as you guys?

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Ian D. Smith, Clearwater Seafoods Incorporated - CEO [36]

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Yes. So what I would say is we're too small a player to even count what our market shares are on particular species. What I would suggest here is that Clearwater is well positioned to gain new business from companies that don't have the resources that we do or has brought a portfolio of species or customers or regions they sell in. So if you're a narrow line operator that's heavily focused and dependent on the China food service market, you're struggling. An example I would give you is, is there are a number of companies in Scotland and live lobster operators here in Atlantic Canada, that's all they did; to sell live crab or live lobster to wholesale and wholesale importer operators in China. Well, they are literally out of business right now. And are they going to have the resources when the landing start coming in, in the spring to actually be able to participate significantly in the buy.

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [37]

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Yes. Okay. That's great color. And just my final one, sea cucumbers. We talked about this last quarter. What was the -- how do you -- what was the impact of the sea cucumbers this quarter?

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Ian D. Smith, Clearwater Seafoods Incorporated - CEO [38]

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We -- sea cucumber is a -- harvested in the July through September period. And really, the major sales period is October through Lunar New Year. So we sold out our inventories from 2019. And we don't fish again, fish and process again, until July, late June, early July.

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Operator [39]

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(Operator Instructions) And your next question will be from Kyle McPhee at Cormark Securities.

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Kyle McPhee, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [40]

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Just one remaining question for me. On external growth plans, with your balance sheet looking better, better financial capacity to invest, I think you were looking at some M&A opportunities. I'm wondering what that time line looks like now with Brexit and now coronavirus. Do these things change your timing outlook? Is that still a ways away now?

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Ian D. Smith, Clearwater Seafoods Incorporated - CEO [41]

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So great question. So let me give you some perspective. How we're thinking about business development and M&A geographically. So when we think of Canada, what we're thinking of is these investments that I referred to back into high-ROI innovation and R&D are going to, for sure, drive margin expansion in our core species. And where we get yield improvement out of those technologies, they're driving top line as well.

We're also focused, from a business development standpoint, on our indigenous partnerships. So our indigenous partners are actually being able to grow their access to supply through their own purchases of licenses and quotas in inshore and offshore. And we believe that Clearwater is well positioned to be an industry leader in this area of working with indigenous partners. And we expect that we'll continue to make progress in that area in 2020 and beyond because of how we positioned ourselves.

Outside of Canada, we are the scale player in key shell fisheries within the United Kingdom. And we're a very strong player in the market there from both own harvest and procurement. And we've talked on numerous occasions about the M&A landscape within the United Kingdom market, and that we feel that we're well positioned in that area as well.

Having said that, we are monitoring, and in many cases, actively involved with our industry partners in understanding and try to appropriately influence the post-Brexit regulatory and fisheries management policy environment in the United Kingdom. And we want to see where the chips are going to fall later in 2020 and be well positioned in 2021 with a balance sheet that has continued to improve. And also with a better understanding of what the post-Brexit landscape is going to look like for some of these, what I recall, tuck-in-type acquisitions. Having said that, we are in close contact and actively managing our M&A pipeline. And that includes business development opportunities where we're actually working on procurement opportunities, distribution opportunities and logistics opportunities with some of the same companies that are actually our targets.

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Operator [42]

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At this time, we have no further questions. Please proceed.

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John Lane, Clearwater Seafoods Incorporated - VP of Finance & IR and Treasurer [43]

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Thank you, Sofie, and thanks to everyone who called in. And we'll be having, by way of reminder to any media participants who are listening in, we'll be having another call later this afternoon, and we look forward to speaking with you then. Otherwise, I'd like to thank everyone for their time today, and best wishes to all.

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Ian D. Smith, Clearwater Seafoods Incorporated - CEO [44]

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Thank you very much.

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Teresa H. Fortney, Clearwater Seafoods Incorporated - VP of Finance & CFO [45]

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Thanks, everyone.

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Operator [46]

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Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.