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Edited Transcript of CLR.TO earnings conference call or presentation 7-Aug-19 5:00pm GMT

Q2 2019 Clearwater Seafoods Inc Earnings Call

BEDFORD Aug 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Clearwater Seafoods Inc earnings conference call or presentation Wednesday, August 7, 2019 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christine A. Penney

Clearwater Seafoods Incorporated - VP of Sustainability & Public Affairs

* 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

* Jonathan Lamers

BMO Capital Markets Equity Research - 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 Incorporated Second Quarter Investor Conference Call. (Operator Instructions) Also note that this call is being recorded on Wednesday, August 7, 2019.

And I would like to turn the conference over to 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, Sylvie, and thank you for all of those who have called in today. As Sylvie mentioned, my name is John Lane. I'm Clearwater's Treasurer. With me are Ian Smith, CEO; Teresa Fortney, CFO; Christine Penney, VP of 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 would be delighted to take questions from media at that time.

Earlier today, we issued a news release that provided the full details of our second quarter 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 will 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 involves 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, 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 used in -- sorry, excuse me, 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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Thank you, John. Good afternoon, everyone, and thank you very much for joining us. We are pleased with our results for the second quarter and in first half of 2019.

Second quarter sales and adjusted EBITDA were $153.9 million and $30.3 million, respectively, versus $148.1 million and $30.5 million in the prior year.

Second quarter gross margin as a percentage of sales improved to 20.5%, which was up from 19.3% in the second quarter of 2018.

For the first half of 2019, sales and adjusted EBITDA were $274 million and $50.3 million, respectively, and that compares to $268.2 million in sales and $49.6 million adjusted EBITDA in the prior year.

First half gross margin as a percentage of sales expanded to 19.4%, which is up from 17.5% in the prior year.

The Board of Directors declared a dividend of $0.05 per share payable on September 3, 2019, to shareholders as of record as of August 19, 2019.

So sales for the second quarter and the first half grew 4% and 2%, respectively, and this compares to the same periods of 2018. We had very strong harvest conditions, landings and available supply in scallops, crab and langoustine, which are partially offset by market conditions across our scallop species and FAS shrimp.

Timing of FAS shrimp and turbot landings had a favorable impact on second quarter sales. Scallop prices remain consistent with the fourth quarter of 2018.

Gross margin as a percentage of sales increased in the second quarter and the first half, primarily due to strong harvest conditions across our species portfolio and favorable mix in scallops.

Steady market demand for lobster was partially offset by lower selling prices, consistent with seasonal expectations.

Overall, our access to supply and customer demand in other procured species remains strong as compared to the prior year.

Sales growth continued in Asia, representing 43% of our year-to-date sales, and that compares to 39% in the same period of 2018. And this is following the distribution channels expansion.

Average foreign exchange rates realized on sales for the second quarter and first half had a net positive impact to sales of $0.9 million and $2.1 million, respectively.

Cash used in operations and free cash outflows were $35.6 million and $48 million, respectively, in the second quarter of 2019 versus $5.4 million and $16 million in the prior year. And this is a reflection of strong harvest conditions and increased access to supply of procured species.

Leverage for second quarter was 5.2x, and this compares to 5.1x for the same period in 2018. Leverage increased slightly as compared to the second quarter of 2018 as adjusted EBITDA attributable to shareholders decreased modestly, and net debt increased due to higher inventory, following the strong fishing conditions across all species.

Consistent with the seasonality of our business, margins and adjusted EBITDA are typically lower in the first half of the year and higher in the second half.

Furthermore, investments in capital expenditures and working capital are typically higher in the first half of the year, resulting in higher leverage. We expect leverage will be lower by the end of the year, resulting from higher sales, cash flows and lower debt balances. Clearwater's longer-term leverage goal remains 3.0x.

For the balance of 2019, we have a positive growth outlook and combined with disciplined cost management, we have our sales on track to generate strong free cash flow, reduce debt and leverage, yield a higher return on assets and generate positive returns for shareholders.

At this point, I'd like to now turn the call over to our CEO, Ian Smith.

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

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Thank you, Teresa, and good afternoon, everyone. We are pleased with our results for the second quarter and the first half of 2019. And we think we're at -- we're bringing strong momentum into the back half of the year.

Gross margin as a percent of sales improved to 120 basis points in Q2 and 190 basis points for the first 6 months versus prior year, and gross margin improvements are attributable to strong harvest conditions and favorable mix in scallops as well as our ongoing continuous improvement in cost-saving efforts. And so yes, we expect to hang on to this gross margin expansion in the back half of the year as our momentum picks up and revenues increase.

We are expecting strong harvest conditions across the -- across our species portfolio, coupled with improved access to supply of procured species, resulting in high-quality inventory. And when I say high-quality inventory, I am predominantly talking about a favorable mix of species from a profitability standpoint and also a favorable mix within an existing species in terms of size mix and quality. Peak harvesting activities will continue through to the end of the third quarter.

In the second half of 2019, our access to supply will fuel expansion into new markets and distribution channels, along with new product offerings like sea cucumber, cockle clams, whelk and a full year offering of live brown crab from the United Kingdom.

We continue to expect top and bottom line growth across multiple species and regions led by Asia-Pacific, and growth will be driven by the strong harvest conditions and improved access to supply for procured species experienced in the first half of the year, along with continued margin expansion. Continued innovations throughout our global supply chain on land and sea, where we continue to reduce cost and increase the productivity of our asset base while continuing to enable product diversification in response to changing consumer trends.

Clearwater will continue deleveraging activities in 2019, prioritizing cash generation, cost savings and margin improvement as well as reducing inventory, while making maintenance capital investments. The resulting cash generation will be used and prioritized to reduce debt and leverage by year-end.

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

Turning to Clearwater's long-term outlook. Clearwater's long-term investment thesis continues to hold. Global demand for wild-caught seafood is rising, although Clearwater is passionate about resource sustainability, not all harvesters are, meaning the global supply of wild-caught seafood is flat to declining. This supply/demand imbalance has created a favorable market plays for Clearwater.

Customers are increasingly willing to pay a premium to Clearwater for a diverse -- a diversity of premium and super premium, sustainably harvested and wild-caught seafood. For product consistency and food safety arising from Clearwater's chain of custody and vertical integration, and of course, reliable delivery.

Clearwater has the right mix of assets and a great talent in our organization 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; a broad license portfolio ensuring access to our renewable supply of seafood; strong global selling, marketing and distribution capabilities in over 50 countries; the patented IP and a commitment to R&D to ensure sustainability while lowering our carbon footprint and our cost structure, all of which enable year-round harvest and delivery capabilities.

We remain 100% committed to our core business and our strategies. The powerful seafood industry fundamentals, value proposition and competitive advantages that form the foundation of Clearwater's vertically integrated business model and ability to generate long-term shareholder value will remain strong, and we're looking forward to the second half of 2019.

We are now ready to take questions. Thank you very much.

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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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I just wanted to focus on scallops. Gross margins were up in the context of close to 10% declines in sales. Is it just size mix there? Anything you can provide. And how should we think of sales and margins for that species, I guess, for the back half of the year?

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

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So if we think of our total scallop business, what we see in the back half of the year is -- so first of all, in some of our different species, we see a very strong order patterns and a high amount of the product that we already have in inventory is fully allocated. Also, we see a favorable cost structure relative to the strong harvest conditions that we have had. So we remain bullish on our scallop -- global scallop business for the back half of the year.

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George Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [4]

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Okay. And just maybe shifting gears to free cash flow. Seems like we're substantially down. I know some of it is working capital, and I know it's seasonality, but it looks pretty sizable. So I think, Teresa, last conference call, I think you mentioned that you expected modest positive growth and free cash flow for this year. Is that still the case? Maybe any color you can provide on kind of that reversal working capital?

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Teresa H. Fortney, Clearwater Seafoods Incorporated - VP of Finance & CFO [5]

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Yes. And it really is coming back down, George, to the strength of the harvest conditions and the procurement of species, where we've had some really strong conditions that have enabled us to harvest and procure the inventory earlier. So that's where you see the linkage. That is all working capital related. And when you think about some of the seasonality of our species, we have clear line of sight that the inventory -- I know it comes down significantly in the second half. And that's where we're going to see the strong cash generation.

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George Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [6]

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Okay. And we still expect -- are we still on track for a positive growth this year in free cash flow?

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Teresa H. Fortney, Clearwater Seafoods Incorporated - VP of Finance & CFO [7]

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Yes, we are.

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George Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [8]

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Okay. Great. And maybe to Ian. Just one last question, if I may. On the sea cucumber fishery, can you maybe give us a little bit of sense of how much an opportunity that can be? Maybe quantify that or just frame in a way?

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Ian D. Smith, Clearwater Seafoods Incorporated - CEO [9]

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Sure. So we see some long term for sea cucumbers, this is a multi-million dollar top and bottom line new business for us. It's an abundant resource. The margins that we have in the species are in line with some of our more profitable species in the company. So it's attractive from that respect. And it's the same customer base that we currently sell to. And in fact, we've been slow to take advantage of this opportunity. And our customers have been asking us to sell them Canadian sea cucumbers for some time. And so we've had a strong start, we've had successful procurement, our production startup was virtually flawless. And all of the inventory that we are producing is fully allocated for the rest of the year. So it's -- we're off to a strong start in the species, and our geographic proximity to the fishing grounds gives us, we believe, a competitive advantage for the future of being able to be successful long term in the sea cucumber fishery.

So a lot of it is fished in a geographic area, call -- what we call 3Ps and Grand Bank, which is our #1 plant in Clearwater, which is located in Grand Bank, Newfoundland, it literally sits on the doorstep of this resource. So we feel pretty excited about the future for the species within Clearwater, and it fits very, very nicely into our portfolio.

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Operator [10]

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Next question will be from Bryan Hunt at Wells Fargo Securities.

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Bryan Cecil Hunt, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [11]

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I was wondering if you could touch on the tax for major species as they -- some of them get updated this time of the year. Kind of what are the tax stand on scallops and other major species?

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Ian D. Smith, Clearwater Seafoods Incorporated - CEO [12]

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So I'm going to refer to Christine Penney, as our VP Sustainability and Public Affairs, to answer your question.

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Christine A. Penney, Clearwater Seafoods Incorporated - VP of Sustainability & Public Affairs [13]

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Yes. So of course, we don't have finalized tax across all of the species range to date, and so we don't report on tax until they're final. But Ian alluded to strong harvest conditions, and so our resources are healthy. And we're expecting them to be within normal ranges.

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Bryan Cecil Hunt, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [14]

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So with regards to inventory and the strong harvest, could you discuss -- and Ian, you alluded to the relative quality within the species. Can you discuss the overall cost per ton that you're experiencing this year relative to a year ago?

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Ian D. Smith, Clearwater Seafoods Incorporated - CEO [15]

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So I would say that the cost profile, broadly speaking, across our key fisheries is favorable to prior year. And that is a mixture of the harvest conditions that we've been referencing but also the investments that we have made in continuous improvement and new technology for the vessels. So all of that is creating tailwind for us from a margin expansion standpoint and has also helped us, along with mother nature, put us into a position to win in the back half of the year with a strong high-quality inventory position.

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

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Maybe you danced around another issue. Is -- has there been -- or can you possibly discuss whether there's been any trade tensions with some of your Asian partners, kind of considering the tension of certain personnel within Canada?

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Ian D. Smith, Clearwater Seafoods Incorporated - CEO [17]

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So trade tensions in Asia?

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

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Yes. With your Asia [or] trading partners. I mean U.S. obviously has...

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

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Sure. Yes. So if we talk specifically about the ongoing political tension between China and Canada, here's what our customers tell us. First of all, China -- we know that China continues to be an attractive market for Canadian seafood exports, both Canadian- and Chinese-owned exporters in Canada and any importers, foodservice distributors, restaurants, caterers are all benefiting directly from Canada's seafood trade with China. We've been operating in China for many years, more than 2 decades, probably longer than any other Canadian seafood company. And our growth in China has been broad-based. We have many Chinese employees who are living and working in China, not just sales but government and regulatory affairs, logistics, quality assurance, food safety and so on. And we see no indications of slowing business with China. And we remain in full compliance with all food-related regulations, and our relationships with our Chinese customers remain strong.

That said, I would add that China is a member of the WTO. They have to have grounds for suspension of trade on any particular goods that Canada sells them. We obviously are working diligently to ensure that we do not create a situation that creates any opportunity for our experts to be blocked or suspended. So we're very, very careful with our paperwork, and we have paper working on both sides of entry into China to ensure that goods flow smoothly and legally and with compliance into the country. We've been doing this for a very long time. And I'll just reiterate that, so far, it has been business as usual as reported by our customers. In many instances, they're the ones clearing the goods.

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

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Great. And then my last question is [related to] balance sheet. Is there any chance you can give us an idea where leverage might fall out by the end of the year? Do you think you it could be closer to 4 than to 5?

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Teresa H. Fortney, Clearwater Seafoods Incorporated - VP of Finance & CFO [21]

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So I'm very comfortable in saying, Bryan, that we're going to be quite a bit lower than we were last year. So we'll see a nice downtick in leverage by the end of the year.

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Operator [22]

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Next question is from Doug Cooper at Beacon Securities.

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [23]

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Just following along from sort of political issues or from the last question [in] China. What about Brexit? Any update there and the impact that it may -- or may continue to have?

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Ian D. Smith, Clearwater Seafoods Incorporated - CEO [24]

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Yes. I mean if we all had a crystal ball, we could try to forecast what happens next. What I would tell you is we are taking full participated active in an advisory role in all government preparations, working groups for shellfisheries and processing, looking at trade, fisheries access, immigration and labor-related matters. We're doing everything we possibly can to make sure that we are well prepared. And in fact, I would be as bold as to say that our preparations relative to other Canadian and U.K.-based companies are actually going to be a competitive advantage for us. Whatever may come, whether there's a deal or there is no deal. What I would also add is, to the extent that we can preposition inventory inside the EU because we believe in the short term, if there is a hard Brexit or a no-deal Brexit, if that actually occurs, there will be disruptions at the border in the short term. And we are going to make sure that we work with our customers to the greatest extent possible to mitigate that. And that's a combination of inventory we preposition inside the border. And also our customers taking their own inventory positions to protect themselves.

I would also say, longer term, at some point, whether it's a hard Brexit or a deal Brexit, the U.K. will lead the common fishery policy scheme, which they're in with the European Union, and they will have greater control over fishing within their territorial waters. And this, we believe, actually represents an opportunity for U.K. fisheries, including shellfisheries, for positive regulatory change that will help and create value for the entire U.K. industry.

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [25]

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Okay. And just to confirm, in the U.K., you are predominantly or exclusively in Scotland? Is that correct?

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Ian D. Smith, Clearwater Seafoods Incorporated - CEO [26]

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So we are geographically located. Our processing operations are in Scotland, but we fish around the entirety of the British Isles.

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

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Okay. Speaking of inventory, inventory is up 14% versus Q2 last year, and I guess part of the bullish outlook into the second half of the year. How should we think about that translating to your second half year-over-year growth, would 14% increase in inventory translate to double-digit increase in revenue? All other things being equal in terms of foreign exchange and price in the underlying species?

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Teresa H. Fortney, Clearwater Seafoods Incorporated - VP of Finance & CFO [28]

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Lots of pieces to keep managing [in the group] because it does keep evolving when we look at our inventory by species and aligning it to the fishing seasons and what the customer demand is. So I -- we've got our sales positioned to have a good second half. And so -- and I can see that flowing all the way through with the inventory coming down significantly by the end of the year.

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [29]

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Okay. And any indicator that at least a few of the species you mentioned, scallops, I'm thinking sea cucumbers are fully allocated. So the visibility you have of that inventory as it translate into sales versus prior years. How would you quantify that or clarify that?

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

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Well, I won't speak for our -- my finance associates, but I would tell you, from a commercial side of business, we're pretty excited.

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

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Okay. And my final one, just to follow-up on the sea cucumbers. Was there any sales in sea cucumbers in the quarter?

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

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Yes. There were. Just at the end of the quarter because we literally started up at the beginning of June. So we'll see the bulk of those sales go through in quarter 3 and beginning at quarter 4.

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

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Okay. So is there going to be a separate line item? Right now, I'm assuming it's grouped in with groundfish and other species. Is that where it's in?

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

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That is correct. And it'll probably stay there for some time.

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

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Okay. And when you said -- I think you indicated the opportunity was multimillion, like just in terms of -- maybe just quantify that a bit. Would this have a chance to be a top 3 or 4 kind of product line for you or somewhere down the line from that?

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

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Great question. It will certainly -- from a margin perspective, we expect it to be probably, I would say, a top 5 or 6 item.

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

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You're talking margin or absolute dollars?

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

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No, margin. For a margin perspective...

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Teresa H. Fortney, Clearwater Seafoods Incorporated - VP of Finance & CFO [39]

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Percent.

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Ian D. Smith, Clearwater Seafoods Incorporated - CEO [40]

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Margin percent perspective. And then absolute dollars is really going to depend on how quickly we can build procurement. We certainly have the production capability and the customer base.

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [41]

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And are you fishing this? Or you're buying it from someone else, just to be clear?

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Ian D. Smith, Clearwater Seafoods Incorporated - CEO [42]

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So we're procuring it. It's an inshore fishery. we're procuring it from the inshore. And we believe we have a competitive advantage in that area.

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Operator [43]

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Next question will be from Kyle McPhee at Cormark.

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Kyle McPhee, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [44]

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Just maybe on some high-level growth guidance. Wondering if stuff like the sea cucumber entry and increased procured species is enough to increase that top line growth rate beyond kind of the mid -- beyond that low single-digit growth rate you've been delivering in the first half of this year. Or is it kind of more status quo at that growth rate? Or is there a chance we could actually see it accelerate here?

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Ian D. Smith, Clearwater Seafoods Incorporated - CEO [45]

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So we are -- if you look at where we've been in the first half of the year, you should expect to see sales growth rate go up in the back half of the year, understanding that seasonality tips as some of it comes in the third quarter, a lot of it comes in the fourth quarter.

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Kyle McPhee, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [46]

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Okay. But that year-over-year trend, I think you've been kind of 2%, 3% year-over-year growth in the first half of this year. So just making sure I'm understanding correctly, that year-over-year growth rate can accelerate in the back half of the year?

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Ian D. Smith, Clearwater Seafoods Incorporated - CEO [47]

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Yes, it can.

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Kyle McPhee, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [48]

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Okay. Got it. And then in your press release, you guys mentioned scallop and market conditions were a bit of a drag in Q2, I assume you mean pricing. But for upcoming results, I'm wondering if that dynamic still holds true, the data I'm following suggests scallop pricing is now actually higher year-over-year. So adding to your growth. Is this something you're actually seeing with your business?

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Ian D. Smith, Clearwater Seafoods Incorporated - CEO [49]

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Yes.

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Kyle McPhee, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [50]

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Okay. I mean is it a material pickup or just a small little incremental?

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Ian D. Smith, Clearwater Seafoods Incorporated - CEO [51]

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We're expecting, overall, a solid year in our global scallop business.

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Kyle McPhee, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [52]

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Okay. And I know we've talked a lot about debt already. But wondering if you can just kind of fine-tune a little bit the time. We all know free cash flow rolls in, in the second half of the year, and it's going to happen this year but based on what you know with harvesting activity and working capital, and Ian, you had mentioned peak harvesting activity will continue through Q3. So is that leverage reduction largely Q4-weighted or kind of all through the back half of the year?

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Teresa H. Fortney, Clearwater Seafoods Incorporated - VP of Finance & CFO [53]

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It's heavier-weighted in the fourth quarter.

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Ian D. Smith, Clearwater Seafoods Incorporated - CEO [54]

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That's when all the inventory goes out and all the cash comes in.

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Operator [55]

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(Operator Instructions) And your next question will be from Jonathan Lamers at BMO Capital Markets.

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Jonathan Lamers, BMO Capital Markets Equity Research - Analyst [56]

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Just circling up on the comment on the scallop and shrimp sales in Q2. So the sales -- the revenue were down year-over-year for both species, but I take it the size mix of the ones that were sold was very good. So the reason that the sales were down for scallops, just that they went on unusual -- unusually high level -- went into inventory in Q2, and it sounds like a lot of shrimp went into inventory as well. Is that the right way to think about what happened to the volumes in Q2?

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Ian D. Smith, Clearwater Seafoods Incorporated - CEO [57]

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Yes. So what happened -- so in scallops, we had caught at a greater velocity than we had sold them, which is typically the case. And we do have a favorable overall pricing in scallops and related to size mix and margin expansion related to cost structure. And with the sales rate low, accelerate in the back half of the year on all of our scallop business as it typically does. In shrimp, we had a couple of things going on, timing of landings relative to last year have moved some of the shrimp landings out of quarters and into back half of the year. Also, shrimp prices have been lower this year, year-over-year versus last year, not dramatically, but the shrimp prices have been lower. And we expect pricing to be better in the back half of the year and also for our landings to be also stronger.

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Jonathan Lamers, BMO Capital Markets Equity Research - Analyst [58]

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Ian, you mentioned that you expect to hang on to the gross margin percentage over H2. Like, I'm a little puzzled by the improvement in the gross margin percentage this quarter given that volumes for these high-margin species were down. Like, was the weather particularly favorable? Why was the gross margin percentage up so much year-over-year?

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Ian D. Smith, Clearwater Seafoods Incorporated - CEO [59]

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So as you know, again, the overall harvest conditions were strong. All inventory is not created equal. So the larger the sizes are, the more valuable customers will pay a premium for, in some instances, larger sizes or particular size of product. And then also our continuous improvement and technology efforts have really borne fruit in terms of our cost structure in both our land-based and at-sea operations. So going back to my earlier comments, if we feel confident that we are going to hold on to that margin expansion, and we're confident that there is strong demand for the product that we already have in inventory, that is where our confidence comes from for our expectations for the back half of the year. And our comments regarding the total year, which I've actually been repeating since fourth quarter of last year, which is that we are expecting top and bottom line growth in 2019.

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Jonathan Lamers, BMO Capital Markets Equity Research - Analyst [60]

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Okay. And just on the clam quota, has Clearwater submitted an expression of interest with its partner yet?

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Christine A. Penney, Clearwater Seafoods Incorporated - VP of Sustainability & Public Affairs [61]

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So it's Christine. So there is no formal process that's been initiated from DFO, but we are certainly positioned and ready to submit that proposal if and when there is a new expression of interest processed.

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Jonathan Lamers, BMO Capital Markets Equity Research - Analyst [62]

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And has Clearwater received any feedback with respect to the announcement made earlier this year?

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Christine A. Penney, Clearwater Seafoods Incorporated - VP of Sustainability & Public Affairs [63]

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So as you would be aware, our -- the agreement that we structured with First Nations is a long-term agreement, with commercial terms that are beneficial to both parties. And that agreement was effective January 1, 2019. So we are making good progress on implementation of that agreement and moving forward with it. Not sure that's a direct answer to your question. So you can follow up if...

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Operator [64]

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At this time, Mr. Lane, we have no other questions registered. So I would like to turn the meeting back over to you, sir.

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John Lane, Clearwater Seafoods Incorporated - VP of Finance & IR and Treasurer [65]

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Okay. Thank you very much, Sylvie, and to all the participants who dialed in. By way of reminder, we are having a media call at 3:30, if there are anyone -- any individuals on the call who would like to participate in the call, we encourage you to call in. That said and there being no other questions, so we'll wrap up our meeting. And we thank you all for your attendance.

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Operator [66]

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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. Enjoy the rest of your day.