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Edited Transcript of CLR.TO earnings conference call or presentation 5-Nov-19 6:00pm GMT

Q3 2019 Clearwater Seafoods Inc Earnings Call

BEDFORD Nov 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Clearwater Seafoods Inc earnings conference call or presentation Tuesday, November 5, 2019 at 6:00:00pm 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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* Angus Rogers

Fiera Capital Corporation - VP & Senior Portfolio Manager of High Yield Bond

* 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 Clearwater Seafoods Incorporated Q3 2019 Results Investor Call. (Operator Instructions) This call is being recorded on Tuesday, November 5, 2019.

I would now like to turn the conference over to Mr. John Lane, Vice President, Treasury. Please go ahead.

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

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Thank you, Leone, and thank you all for taking the time to participate in today's call. 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's investors. We have also scheduled a media call at 3:30 Atlantic time, and we will be delighted to take questions from the media at that time.

Earlier today, we issued a news release that provided the full details of our Q3 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 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 or TAC 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 very much, John. Good afternoon, everyone, and thank you very much for joining us.

We're pleased with our results for the third quarter and first 9 months of 2019. Our third quarter results and adjusted EBITDA were $175.2 million and $34.5 million, which was up 6.7% and 12.4%, respectively, versus the prior year. Year-to-date sales and adjusted EBITDA were $449.2 million and $84.8 million, respectively, versus $432.4 million and $80.3 million, respectively, in the prior year. Adjusted EBITDA and gross margin as a percentage of sales expanded to 18.9% and 20.2%, respectively, in the first 9 months of 2019 compared to 18.6% for both in the prior year.

Cash from operations was $22.7 million in the third quarter, which was a 7% increase versus the prior year. The Board of Directors declared a dividend of $0.05 per share payable on December 2, 2019, to shareholders of record as of November 18, 2019.

Sales for the third quarter and year-to-date 2019 grew 7% and 4% as compared to the same period in 2018. Strong harvest conditions, landings and available supply in scallops, clam and langoustines were partially offset by competitive market conditions for scallops, particularly in smaller sizes and frozen-at-sea shrimp.

Adjusted EBITDA for the third quarter and year-to-date was $34.5 million and $84.8 million, respectively, and that compares to $30.7 million and $80.3 million in 2018. Gross margin as a percentage of sales increased in the third quarter and year-to-date due to strong harvest conditions and favorable mix in clam and scallops.

Steady market demand for lobster was partially offset by increased competition in key markets. Overall, access to supply and customer demand in other procured species remained strong as compared to the prior year.

Average foreign exchange rates realized on sales had a negative impact to sales of $0.8 million in the third quarter and net positive impact of $1.2 million year-to-date compared to 2018. Cash from operations and free cash flow were $22.7 million and $18.3 million, respectively, in the third quarter, and that compares to $21.2 million and $18.9 million in the prior year. And this reflects, again, strong harvest conditions and increased access to supply of procured species and was partially offset by timing of sales and distributions to noncontrolling interests.

Leverage at the end of the third quarter was 4.9x compared to 5.0x for the same period last year. Leverage improved modestly as adjusted EBITDA attributable to shareholders increased following strong harvesting conditions for most species and sales mix in the first 9 months of the year.

Consistent with the seasonality of our business, we expect leverage to be lower by the end of the year. Clearwater's long-term leverage goal is 3.0x.

Return on assets increased 8.9% versus 8% as at September 2018, and this was primarily due to higher earnings before interest and taxes and lower average asset balances following a weakening pound sterling versus the Canadian dollar.

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

At this time, 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 very pleased with our results for the third quarter. Our performance during the first 9 months of the year have us on track to deliver a strong finish to 2019 as we've indicated earlier.

Clearwater achieved record year-to-date sales of $449.2 million and year-over-year adjusted EBITDA growth of 6%. That's a high watermark for us. It's the highest since quarter 3 year-to-date of 2016, and we're pretty proud of that achievement.

Third quarter sales and EBITDA grew 7% and 12%, respectively, versus quarter 3 last year. And adjusted EBITDA margin improved to 19.7% in the quarter from 18.7% last year, reflecting favorable sales mix weighted towards higher-margin species and some very strong harvest conditions.

Sales in Europe expanded by 16% in the third quarter of 2019, largely due to a favorable mix for scallops and available supply of scallops as well as langoustine. Sales growth continued in Asia with year-to-date sales up 9% as compared to the prior year following the expansion of distribution channels and the growing market demand for clams.

Strong harvest conditions and improved access to supply for procured species enabled investment in higher-value inventory for the first 9 months of the year. And consistent with third quarter performance, this high-value inventory will continue to fuel growth in our fourth quarter. Adjusted EBITDA growth and margin expansion will drive cash flow in the final quarter of 2019.

Continued innovation throughout our global supply chain on land and sea will reduce costs 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 the fourth quarter of the year, prioritizing cash generation, cost savings, margin improvement, inventory reduction while making maintenance capital investments. The resulting cash generation will be used to reduce debt and leverage tangibly 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 continue to unite and strengthen communities, build trust and secure existing jobs, creating new ones and providing greater prosperity for the region.

Clearwater -- turning to Clearwater's long-term outlook. Our long-term investment thesis continues to hold. Global demand for wild-caught seafood continues to rise. Although Clearwater is passionate about resource sustainability, not all harvesters are, meaning that global supply of wild-caught seafood is flat to declining. The supply/demand imbalance has created a favorable marketplace for Clearwater.

Customers are increasingly willing to pay a premium for our products, a diversity of premium and super-premium sustainably harvested wild-caught seafood, product consistency and food safety arising from Clearwater's chain of custody and vertical integration and, of course, reliable, global delivery in over 50 countries.

Clearwater has the right mix of assets and people to execute on this opportunity, and our competitive advantages include a modern fleet with state-of-the-art, frozen-at-sea factory trawlers and complementary land-based innovative processing facilities. We have a broad license portfolio, ensuring access to a renewable supply of seafood. We have strong global selling, marketing and distribution capabilities in over 50 countries. And we have patented IP and a commitment to R&D to ensure sustainability while advancing our company-wide sustainability initiatives to improve economic, environmental and social outcomes, all of which enable us to provide year-round harvest and delivery capabilities.

Once again, we remain 100% committed to our core business and strategies. The powerful seafood industry fundamentals, value proposition and competitive advantages that form the foundation of our vertically integrated business model and ability to generate long-term shareholder value remains strong.

And we're now ready to take your questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question is from George Doumet from Scotiabank.

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

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I would like to focus on the scallop business. We seem to be trending down 5%, I think, year-to-date on the revenue side but solid gross margins because of size mix. Would you expect that kind of similar dynamic to play out going forward? Or can you maybe see some higher realized prices and volumes?

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

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Well, while we're expecting a strong fourth quarter on scallops, what I'd tell you, George, is prices have stabilized in 2019 after a pretty challenging 2018. Mix and catch rates -- and catch costs have also been favorable. So while revenues are not the big driver so far this year in the portfolio, it is expected to be a very strong profit contributor in 2019 and beyond.

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

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Okay. So we're going to see an uptick next year in revenues?

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Ian D. Smith, Clearwater Seafoods Incorporated - CEO [5]

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I think that's a good bet.

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

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Okay. Great. Maybe switching gears to free cash flow. I think I asked you guys this last quarter, but maybe for Teresa, do we expect to have -- to experience positive free cash flow growth in '19 year-over-year?

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

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Yes. So we've seen some solid cash flow in the third quarter, George. And -- but we've got lots of good, solid inventory behind us, and that's been due to the very strong conditions, harvest conditions we've had. And what we see that doing is really supporting strong fourth quarter results, and that's going to translate into a good reduction in our inventory and strong cash flow for the fourth quarter.

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

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Okay. Maybe on the topic. I think inventories are around $170 million. It seems like a big number. Maybe a bit of a breakdown in terms of species and kind of what number you're targeting maybe at the end of the year.

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Teresa H. Fortney, Clearwater Seafoods Incorporated - VP of Finance & CFO [9]

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So we're -- the interesting -- you got to keep remembering, too, our timing of landings, the -- and our ability to improve our catch rate can all result in our inventory building sooner. And that's the strength that we're seeing in our inventory numbers at the end of the third quarter. So we don't really get into that full breakdown publicly on what it is by species. But very comfortable that we are going to be back in the zone for -- of our inventories down towards where we were at the end of last year, George, because we've just got the good solid pipeline.

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George Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [10]

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Okay. That's helpful. Maybe taking a sneak peek to last year, can you maybe give us a sense of what we're targeting for maybe for maintenance CapEx, for growth CapEx? And just to confirm that there isn't any major kind retrofits or big spending anticipated for 2020, right?

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Teresa H. Fortney, Clearwater Seafoods Incorporated - VP of Finance & CFO [11]

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So in...

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George Doumet, Scotiabank Global Banking and Markets, Research Division - Analyst [12]

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Hello?

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Ian D. Smith, Clearwater Seafoods Incorporated - CEO [13]

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Yes. Sorry about that.

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

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Sorry about that, George. So we generally are looking at our maintenance CapEx as being in a very -- in our current environment has been around the $20 million to $25 million. We're in the process right now where we haven't finalized what our actual CapEx plans are for 2020, but we do look to continue to maintain where our overall longer-term leverage is. So we're very good about managing our CapEx.

We are excited by the growth opportunities that we actually see coming for next year, but we're going to continue to look to balance any new investments that we see coming relative to our cash flow and our leverage targets. So we're not at a spot where we've got that final view yet on 2020 CapEx.

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Operator [15]

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Your next question is from Bryan Hunt from Wells Fargo.

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

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I was wondering if you could characterize the efficiency of the catch in your major fisheries in Q3 as well as the read-through for maybe inventory costs for Q4. In Q1, you touched upon it kind of qualitatively that catch was very efficient. But I was wondering what does that mean for cost overall for Q4 and as well as in early 2020.

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

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Sure. So here's what I would tell you is that the -- it's been a great harvest year, and we've had good, solid, strong harvest conditions, catch rates and catch costs. So when we talk about high-value inventory, it's inventory that, for which we see strong demand, many of it -- most of it allocated already to customers for sale and at an attractive cost for us. We don't -- some of our fisheries, the efficiency of catch has been so good that we actually finished early, and we haven't left any material quota "in the water", so to speak. Everything harvestable has been harvested or will be harvested before the end of the year. And as you read through to inventory, I'll echo the comments that Teresa just made, which is we are not expecting year-end inventories to be materially different than where they were at the end of last year, number one. And number two, as we look at quarter 1, we expect that our quarter 1 opening inventory position will be reasonable. It'll probably be lower than we perhaps like it to be on some species but overall, in line with previous years.

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

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Given the fact that you feel like you have a very strong purchase situation with everything you've harvested, are you getting any indications of demand as well -- volumes as well as pricing for 2020 from your major retailer foodservice customers?

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

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So typically, our contracts don't extend out more than 3 months, and on a rare occasion, they can extend out as much as 6 months. And -- whereas we had 2 areas that we talked about, one is in our scallop portfolio. Everybody knows that there was price erosion last year across all different species and markets. Those prices stabilized, and we expect that trend to continue in 2020.

I think with respect to shrimp, cold water shrimp, there has been some price compression partially offset by catch rates and catch costs partially also offset by mix. So whereas it's too early to say right now, but we're anticipating relative price stability next year across most of our species.

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

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That's good news. And my last question, if I think about the political stress, whether it's U.S. and China, which wouldn't affect you but Canada and China and Brexit as well, has there been any volatility around your business model whether it's your sales out of the U.K. or out of Canada surrounding these political events? And can you describe what may be transpiring or what you anticipate?

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

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So notwithstanding all of the stresses on the system that you are referring to, business has been remarkably solid, remarkably solid. And it's not -- it's something that we continue to monitor very closely, but our customers continue to be bullish both in the U.K. and in Europe and in China. We had a very successful China seafood expo with record attendance to the show and record visits from our customers, and it's a show that's not just about showing your new products. We actually book orders, and it's helped fill up our order book for the fourth quarter. And in fact, I'll be in Asia by Thursday afternoon and having meetings again with many of our top Asian customers, especially our Chinese customers.

And it's actually -- if you look at our performance in China, it's actually a celebration for them just in terms of how great a year they have -- they've had. Chinese New Year is early this year, coming in the third week of January, and most of their orders are already on the water or already being packed up. And as I said, business has been remarkably solid, and customers have been remarkably calm and bullish about their markets and their customers.

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Operator [22]

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Your next question is from Doug Cooper from Beacon Securities.

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

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You gave a pretty bullish outlook of -- for Q4, whether it's between maybe ordering in anticipation of Chinese New Year or just the general bullishness going into Q4. In comparison to last year, how bullish are you, I guess, in terms of the EBITDA revenue?

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

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So we're expecting that our fourth -- that we're going to turn in the solid fourth quarter. And when you look at -- whether you're looking at revenue, we expect revenue trends to continue, margin trend -- margin expansion trends to continue, inventory to come down. If you look at our AR at the end of this quarter, that can give you a hint of where cash collection and final cash positions will be for the fourth quarter and, therefore, should help you figure out year-end free cash and leverage. So we feel pretty good about our vital statistics that we expect to achieve in the fourth quarter.

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

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Do you think -- you mentioned earlier that this was the best quarter, and I had mentioned to our guys this morning, the best quarter in 3 years. Can you match, in terms of profitability, the Q4 '16?

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

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I wish I had that at my fingertips to answer that question, and I'm going to have to take it away because I don't have that in front of me. A lot of it will have to do with timing of landings relative to revenue recognition, whether we can squeak out something versus 2016 fourth quarter. To tell you, perhaps I should have looked at it before this meeting but I haven't.

And just to qualify, 2019 is an all-time record relative to 2016, not just the 2016 at the time when quarter 3 year-to-date was an all-time record for the company in 2016. So we've just beat that.

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

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Okay. You mentioned you expect to reduce tangibly "by year-end." We're sitting here at 4.9x. What are you thinking you can get it down to? What would be a target? And on that, Teresa, you mentioned the long-term target of 3x EBITDA. How long can we realistically expect to take to get to that level?

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

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Great questions, Doug. So we're not going to provide that specific forward-looking information. We've just got good solid progress that we're going to hit -- achieve on the lower leverage by the end of the year. And part of that is just showing out this year as we've had just some of our quarter cycles with the strength in the harvesting that were perhaps a little bit higher than you would tend to expect, that's supporting a decline by the end of the year.

Going -- looking forward, we're just going through and looking at how those growth opportunities are coming in, the profitability. I don't have a very specific date other than we still keep looking to delever and bring ourselves down to that 3 target.

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

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Okay. And my final question, just to -- I think you talked last quarter about sea cucumbers. Any update on that species?

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

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So we had a very -- we had a solid first year. We harvested several million pounds, and everything is fully allocated for sale for this year. So inventory position at year-end will be 0.

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

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And that is grouped in with, I guess, when you have it in your...

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

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It's grouped in with all other.

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

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Under other. Okay. Okay. Would that be -- how much of that -- the other, I've got groundfish, whelk and other, $20.4 million for the quarter. Like how much of revenue is sea cucumber today? And what's it -- is it one of the fastest-growing species you have?

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

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So that's a good question. I'm not going to answer it. Sea cucumber is a new business for us. It's highly competitive for supply, and it would be too easy for someone to do the math on what we're getting out of the marketplace for me to give you that information. So I think when it reaches the scale that we wish it to, we will consider breaking it out as a separate number, but we've got more work to do there.

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

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And it's just for my edification. Is that 100% shipped to Asia?

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

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It is 100% shipped to Asia, although we're currently looking at opportunities for the Asian grocery market in North America.

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Operator [37]

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Your next question is from Jonathan Lamers from BMO Capital Markets.

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Jonathan Lamers, BMO Capital Markets Equity Research - Analyst [38]

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Most of my questions have been answered. Circling up on the Q4, we've spoken a lot about the inventory. But with respect to your current harvesting operations quarter-to-date and your plans for the rest of the quarter, are there any vessel timing considerations we should be aware of for Q4 this year versus last year? I believe at the end of Q4 last year, there was a significant amount of inventory sitting on the vessel at quarter end.

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Ian D. Smith, Clearwater Seafoods Incorporated - CEO [39]

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Yes. As we look out at our fourth quarter fishing plan, we're not seeing any -- there's no -- we're not seeing any major risks.

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Jonathan Lamers, BMO Capital Markets Equity Research - Analyst [40]

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And is there anything interesting to comment on in the catch rates this quarter as it might pertain to the outlook for next year?

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

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What I can tell you is that it's been a remarkably good harvest season. The weather has cooperated. The new technology that we are using in our clam fleet and in our scallop fleet has helped us continue to improve our catch rates. We will catch all of the total available catch in all of our fisheries this year, and size/mix also plays an important role in value, and we've had -- we benefited from excellent mix this year, particularly in sea scallop but also in clam. So when I say high-value, high-quality inventory, it's at an attractive catch cost for us. It's at a favorable size/mix and for which there is strong market demand.

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Jonathan Lamers, BMO Capital Markets Equity Research - Analyst [42]

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If I could ask a question about the U.K. procurement businesses, which have been a good supporter of the growth this year. I'd like to get a sense of the runway to continue growing those businesses. Do you have the share -- do you [guys break] out the share of the U.K. processor market per species?

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Ian D. Smith, Clearwater Seafoods Incorporated - CEO [43]

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Yes. So we do not give out that information. What I can tell you is that the industry in the U.K. is highly fragmented. And our scale, the services that we provide the fishermen and our global customer footprint position us ideally for continued growth and also for future M&A.

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Jonathan Lamers, BMO Capital Markets Equity Research - Analyst [44]

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And can you comment on where capacity utilization is now for the processing infrastructure in the U.K.? I believe there have been some minor upgrades there. I'm not exactly sure what was done, whether there's further upgrades. But maybe you could just comment on what's been done to-date and what else you're thinking about upgrading as you review your capital plans for next year.

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

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Yes. So we have already made most of the key investments in our land-based operations and fleet to support future growth. What I would tell you is, is in land-based operations, we significantly increased the intake capacity at our facilities in Scotland and also upgraded a lot of the processing equipment that we used that was done prior -- some of it was done this year, but most of it prior to 2019.

From a fleet perspective, we've actually downsized our Macduff fleet from 13 vessels to 9 and, at the same time, significantly upgraded catch capability, and we're now actually capable of catching the same amount of scallops with 9 vessels as we used to with 13. So we actually reduced our capital intensity in that fishery.

Forward-looking, in a post-Brexit environment, if the U.K. exits the European Union's Common Fisheries Policy regulatory platform, there will be opportunity for regulatory change in a number of these fisheries, particularly scallop where we have our fleet. And therefore, there might be some very high ROI capital investment opportunities down the road.

But we're not talking about 2020. We're talking probably minimum 3 to 5 years before we can get some of the regulatory changes that we think that will create breakthrough investment opportunities.

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Jonathan Lamers, BMO Capital Markets Equity Research - Analyst [46]

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Okay. And just a technical question for Teresa. I believe in the Annual Information Form earlier this year, it provided the CapEx expectations of $25 million to $30 million for projects this year. We seem to be tracking at $15 million. Do you still expect $25 million to $30 million? Or have some projects being deferred to 2020?

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Teresa H. Fortney, Clearwater Seafoods Incorporated - VP of Finance & CFO [47]

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Still expecting $25 million to $30 million for this year. Timing-wise, Jonathan, we had some deferrals, and then we also had some investments that required order time before we could do the rest of the work. So we're going to be back into that to $25 million, $30 million for the year.

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Operator [48]

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Your next question is from Kyle McPhee from Cormark Securities.

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Kyle McPhee, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [49]

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On the Surf Clam fishery, I wondered if you can offer any color on a redo of the TAC allocation process. I think when the prior process was all canceled and reversed, guidance from the regulator at that time was calling for a potential redo in late 2019. So is that still in the cards? Or are you going getting the sense that it's just going to be status quo through 2020?

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Christine A. Penney, Clearwater Seafoods Incorporated - VP of Sustainability & Public Affairs [50]

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Yes. It's Christine, and so I can take that question. We don't currently have any specific information on a time line for a decision. And certainly, given the timing of the election, we're not expecting a decision on the 2020 quota until late in the year after the new cabinet is announced. We continue to believe that the landmark agreement establishes a new model for the industry and indigenous collaboration in providing meaningful benefits to both indigenous peoples and promoting strong business relationships.

What I can tell you is the partnership that we fostered through the agreement has exceeded our expectations. We have a highly engaged steering committee and a human resource working group governing implementation. And both of those groups are focused on creating meaningful economic employment and capacity-building for First Nations. We've been very busy in the last 6 months. We've developed our strategy and training and -- for our respective HR team, and we're seeing very good execution on the agreement.

We have begun to hire indigenous candidates, and to-date, we hired 6 individuals under the agreement: 3 of those in the plant and 3 at sea. And so we're really pleased with that progress, and our efforts this fall will ramp up with career fairs and community events taking place in the indigenous communities to create more awareness and visibility of the opportunities that our landmark agreement creates.

And so again, we're very pleased with the progress, and we believe the agreement's very strong. And we'll continue doing work with our indigenous partners in anticipation that they'll continue to have and secure full access to the clam resource.

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Kyle McPhee, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [51]

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Got it. And then just a follow-up on some of that CapEx questions. You've said you're still budgeting for 2020, and you don't have any numbers to share. Sounds like there's some growth opportunities you're considering and balancing with leverage. But on the maintenance-only side, can you just confirm there's no chunky retrofits or rebuilds or vessel replacements such that, that maintenance-only CapEx is still probably in and around $25 million for the next couple of years?

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Teresa H. Fortney, Clearwater Seafoods Incorporated - VP of Finance & CFO [52]

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Yes. That's what the expectation is. We don't have any major refits or rebuilds to -- that we see coming. So it's still the core maintenance. What we're looking is what are those other return cost reduction opportunities that we have off -- as choices to go forward with. And we're looking at ranking and prioritizing those.

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Operator [53]

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(Operator Instructions) Your next question is from Angus Rogers from Fiera Capital.

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Angus Rogers, Fiera Capital Corporation - VP & Senior Portfolio Manager of High Yield Bond [54]

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Yes. Thank you. My questions have been asked.

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Operator [55]

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We have a follow-up question from Bryan Hunt from Wells Fargo.

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Bryan Cecil Hunt, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [56]

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I was wondering if you could touch on the significant acceleration in sales to Europe as well as the deceleration of sales to Asia in Q3.

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

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Yes. So the acceleration in Europe in Q3, it's really the scallop portfolio, and as that market has strengthened, particularly the French market has strengthened considerably for us within the quarter versus prior year. And then in China, there's -- in Asia, it's not a deceleration. It's more timing than anything else. And as I was thinking about it, we do between $20 million and $25 million worth of turbot. And depending on how much langoustine get sold in quarter 2 versus quarter 3, you can see those numbers switch year-over-year. So Asia is up 9% on a year-to-date basis, and we expect that trend to continue. And China is up -- is expected to be up about 25% by year-end.

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Bryan Cecil Hunt, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [58]

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And continuing on China, they're suffering this massive shortfall in pork supplies because of ASF. Have you had any customer specifically talk about pork to some type of fish species, whether it's turbot or substituting shellfish? Not that -- it's a hard equation to run, but the hole they have to fill is so big. Have any of your customers mentioned seafood demand jumping because of the lack of supply of pork or the relative pricing to pork? Pork prices are up 70% in the last 2 months.

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

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Yes. So one of our largest importer distributors China, one of his other businesses, matter of fact, one of his largest businesses is pork, which he imports from Europe. And he does not see a relationship between the growth of at least his seafood imports with us versus the -- versus what's happening to the supply of pork. But obviously, he's experiencing the same price increases as you referred to. And so he thinks that the growth in his seafood business is just pure growth in demand for -- in particular, for shellfish but more broadly in seafood.

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Bryan Cecil Hunt, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [60]

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All right. And then my last question is with your robust outlook and you see delevering and obviously market conditions are good based on your comments, does that give you some encouragement about making additional acquisitions in the near term? Or is it more of a priority to delever?

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Ian D. Smith, Clearwater Seafoods Incorporated - CEO [61]

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So I think as you -- as we all know, acquisitions have to be done when they become available if they're strategic. And notwithstanding the fact that we're still hard at work at getting leverage down, I don't think we're ever going to pass up an acquisition opportunity that is in the best long-term strategic interest to the company. We have an active pipeline that we're looking at. We've told you before that the U.K. continues to be a very attractive area for us, and I would expand that to include U.K. and Ireland. And we're continuing to look at our -- at these targets. And as I've said before, a number of whom are already suppliers of ours, and it's really a question of going that further step to vertical integration and then what type of takeout multiple are they looking for. And in many cases, these are relatively small tuck-in acquisitions, certainly smaller than the acquisition we made at Macduff, which was the key strategic one to make when we made it back at the end of 2015.

And so -- and for many of these smaller tuck-in acquisitions, it's really about what the plans are for the business owners -- business owner operators. So timing is important here, and we will certainly take advantage of those opportunities when they present themselves.

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Operator [62]

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We have a follow-up question from Jonathan Lamers from BMO Capital Markets.

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Jonathan Lamers, BMO Capital Markets Equity Research - Analyst [63]

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Ian, you touched on your preliminary expectations for competitive pricing dynamics heading into 2020. Just to drill down into that a little bit. Could you comment on the U.S. supply situation?

The latest plans that I saw called for landings, I believe, to be in the range of 50 million to 55 million pounds for the U.S. for next year. Could you just comment on maybe what's happening? And how you would expect that to impact your pricing going into next year?

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Ian D. Smith, Clearwater Seafoods Incorporated - CEO [64]

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Sure. And I think you're referring to U.S. scallops, correct?

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Jonathan Lamers, BMO Capital Markets Equity Research - Analyst [65]

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I apologize if I didn't say the U.S. scallops. Yes. That's what I meant.

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Ian D. Smith, Clearwater Seafoods Incorporated - CEO [66]

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I figured that's what you meant. So the U.S. scallop stocks continue to be healthy. It continues to be an effort-based fishery. Catch -- there's a difference between the total available stocks and what's actually landable because -- and size/mix plays a significant issue. And because it's an effort-based fishery, if they don't have larger sizes, it's actually harder to get all of the available quota out of the water. And we've seen in consecutive years that landings have been just a little bit below what was available to harvest for many of those reasons, but prices have stabilized.

I think that the industry learned their lessons from 2018. Prices went low very, very quickly. And I think many of the processors, traders and vertically integrated players realized that they didn't have to go -- prices didn't need to go as low as they went in 2018, and they left a lot of money on the table.

And so consequently, 2019, we saw prices stabilize. And generally speaking, the players in the industry that we speak to are basically saying that 2020, they expect it to be similar to 2019 in terms of relative price stability in the market.

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Jonathan Lamers, BMO Capital Markets Equity Research - Analyst [67]

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And maybe briefly, the MD&A mentioned increased competition from Peru. Could you -- I wasn't familiar with that. Could you just explain what's going on there?

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Ian D. Smith, Clearwater Seafoods Incorporated - CEO [68]

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Sure. So Peru is an in-shore scallop fishery, and they fish many different sizes of scallops, everything from larger, kind of, sea -- traditional deep sea scallops down to bay scallops. It's -- there's a lot of labor employed. It's heavily subsidized by the government, and they've had decent landings and decent catches and a significant supply. A lot of that supply finds its way into the European market. And the Peruvian scallop, it's a good scallop but it competes at the lower end of the quality range, and the price in the market reflects that. But it is a factor, it is a reference point relative to total scallop pricing.

We tend to get more price-competitive interaction with our nonfrozen-at-sea scallop offerings versus our frozen-at-sea scallop offerings, but we continue to have a differentiated product in the market, whether it's our Canadian sea scallops, Argentine scallops or U.K. King scallops, which -- our best market for those is the chilled market in France as an example.

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Jonathan Lamers, BMO Capital Markets Equity Research - Analyst [69]

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Okay. And sorry, so are the Peruvian -- where are the Peruvian scallops sold?

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Ian D. Smith, Clearwater Seafoods Incorporated - CEO [70]

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So they're sold all over Europe, with big markets for those scallops in Spain, Italy and France as well as in the U.K., and that's not new news. What's new -- what's newer news is that they've had a pretty strong harvest this year, and so there's more supply available in the market. But generally speaking, we do not see it as a direct competitor with our scallop products. And as I said, we continue to experience price stability.

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Operator [71]

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There are no further questions at this time. Please proceed, Mr. Smith.

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Ian D. Smith, Clearwater Seafoods Incorporated - CEO [72]

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Thank you. Well, if you have no more questions for us, we appreciate your time and attention this afternoon, and we look forward to discussing our quarter 4 results in early March of 2020. Thank you very much.

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Operator [73]

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Ladies and gentlemen, this concludes your conference call today. We thank you for participating, and ask that you please disconnect your lines.