High Liner Foods (HLF), a leading North American processor and marketer of value-added frozen seafood, reported an increase in adjusted EBITDA by 9.6% in the first quarter of 2024, despite facing a challenging market and a decline in sales volumes.
The company's EBITDA rose by $3 million compared to the same period last year, while sales volumes decreased by 13% to 67 million pounds, and sales dropped by 15.9% to $277 million. High Liner Foods is focusing on strategic initiatives to drive profitable growth and mitigate short-term market pressures.
Key Takeaways
- Adjusted EBITDA increased by $3 million or 9.6% compared to Q1 2023.
- Sales volume dropped by 13% to 67 million pounds, and sales decreased by $52.2 million or 15.9% to $277 million.
- The company is focusing on leveraging its portfolio to offer value, convenience, choice, and quality.
- New value-added shrimp SKUs and Blue Cod SKUs were launched to target price-sensitive consumers.
- The company held market share in US retail with Sea Cuisine and C. Wirthy and saw distribution gains with Fisher Boy.
- Management emphasized a focus on reducing net debt and achieving long-term growth.
- Gross margin improvements were attributed to exiting unprofitable volume, lower excess inventory, and reduced distribution costs.
- High Liner Foods is interested in transformative growth through M&A, potentially including investments outside of North America.
- The next earnings call is scheduled for August 2024.
Company Outlook
- Plans to expand distribution, introduce new value species, and promote seafood consumption.
- Aims to leverage the 125th anniversary for strategic promotions and marketing.
- Expects to deepen omni-channel marketing initiatives to encourage regular seafood consumption.
Bearish Highlights
- Decline in volume due to the exit of unprofitable business, resulting in a 7% decline in Q1.
- Headwinds expected to continue throughout the year.
- Consumer macro conditions, such as higher grocery prices and a slowdown in at-home dining, negatively impacted retail and foodservice channels.
Bullish Highlights
- Despite volume declines, there was an increase in net income and adjusted EBITDA in Q1.
- Success in the discount space and holding market share in premium brands in the US retail market.
Misses
- Sales volume and overall sales experienced a significant decrease.
- Challenging market conditions with price-sensitive consumers and aggressive discounting.
Q&A Highlights
- No abnormal client shorting observed in the quarter.
- Gross margin levels are expected to normalize throughout the year.
- Willingness to pursue transformative growth through M&A, with a focus on seafood and North America, but also open to opportunities outside of North America.
Leverage and Financing
- The company aims to maintain leverage well below the target of three.
- Emphasized focus on deleveraging and generating annual free cash flow.
- Importance of finding the right strategic fit and financing for M&A opportunities highlighted.
High Liner Foods is navigating a complex market environment with strategic initiatives aimed at maintaining its position and fostering growth. The company's focus on value and convenience, coupled with targeted marketing efforts, aims to counterbalance the current market challenges. With an eye on long-term growth and potential M&A activities, High Liner Foods is positioning itself for transformative opportunities while maintaining financial discipline.
Full transcript - High Liner Foods Inc (HLF) Q1 2024:
Operator: Good morning, ladies and gentlemen, thank you for standing by, and welcome to the High Liner Foods Incorporated conference call for results for the first quarter of 2024. [Operator Instructions]. This conference call is being recorded today Wednesday, May 15, 2024 at 10:00 AM ET for replay purposes. I would now like to turn the conference over to Kimberly Stephens, Vice President of Finance for High Liner Foods. Please go ahead.
Kimberly Stephens: Good morning, everyone, and thank you for joining the High Liner Foods conference call today to discuss the financial results for the first quarter of 2024. On the call from High Liner food are Paul Jewer, Chief Executive Officer; Deepak Bhandari, Interim Chief Financial Officer; and Anthony Rasetta, Chief Commercial Officer. I would like to remind listeners that we use certain non-IFRS measures and ratios when discussing our results. As we believe these are useful in assessing the company's financial performance. These measures are fully described and reconciled to IFRS measures in our MD&A. Listeners are also reminded that certain statements made on today's call may be forward-looking statements that are subject to risks and uncertainties. Management may also use forward-looking statements when discussing the company's strategy and business in the future. Actual operating or financial results could differ materially from those anticipated in these forward-looking statements. High Liner Food includes thorough discussion of the risk factors that can cause its anticipated outcomes to differ from actual outcomes in its publicly available disclosure documents, particularly in the MD&A and annual information form. Please note the High Liner Foods is under no obligation to update any forward-looking statements discussed today. After market closed yesterday, May 14, High Liner Foods reported its financial results for the first quarter ended March 30, 2024. That news release, along with the company's MD&A and unaudited, condensed, interim consolidated financial statements for the first quarter of 2024 have been filed on SEDAR plus and can be found on the Investors section of the High Liner Foods website. If you'd like to receive our news releases in the future, please visit the company's website to register. Lastly, please note that the company reports its financial results in U.S. dollars and therefore, the results to be discussed today are also stated in U.S. dollars unless we otherwise note. High Liner Foods common shares trade on the Toronto Stock Exchange and are quoted in Canadian dollars. I will now turn the call over to Paul for his opening remarks.
Paul Jewer: Thank you, Kimberly. Hello and welcome to our Q1 conference call. I'm joined today by our Interim Chief Financial Officer, Deepak Bhandari and our Chief Commercial Officer, Anthony Rasetta. I will start with some high-level commentary on our results and our strategy. Anthony will then speak to the specifics of the quarter and our pipeline of initiatives. This discussion will be followed by a financial review by Deepak and then followed by my perspective on the longer-term outlook for High Liner. With that, I'll move straight into a review of the quarter, the highlight of which was undoubtedly the improvement to adjusted EBITDA, which increased by $3 million or 9.6% compared to Q1 2023. As I shared on our last call, strengthening our bottom line was the priority for the year and I am encouraged that we achieved this right out of the gate this year. The adjusted EBITDA improvements made during the first quarter set us up well to deliver year-over-year adjusted EBITDA growth for 2024. Our aggressive push last year to quickly return to normalized inventory levels played a critical role in enabling us to strengthen the profitability of our business in the first quarter. It's encouraging to see this work pay off while also delivering ongoing improvements to cash flow and our balance sheet. Our bottom-line performance also benefited from lower raw material costs during the first quarter, including a favorable mix. It was a more challenging quarter on the top line of our business, where volumes declined 13% year-over-year as a result of the combined impact of multiple factors, including a decline in our lower margin contract manufacturing business year-on-year, intentional decisions to exit unprofitable business, a highly competitive promotional environment in retail as well as softer volumes in the casual dining segment of our foodservice business as consumers traded down the lower cost alternatives and reduced frequency of dining. As I have discussed on prior calls, lower margin contract manufacturing business helps support plant efficiencies and we've already secured a significant new business contract that will help offset some of the declines from the lost contract manufacturing business in the second half of the year. Undoubtedly, the biggest headwind in the market across all industries during the first quarter was the price sensitivity of the consumer and emphasis on value. Consumers responding to challenging economic conditions by trading down in both retail and food service and competitors are engaging in deep discounting. Our diversified portfolio of brands enable us to offer compelling value across a variety of price points and species. We supported this with targeted promotional activity in the first quarter, but did not discount it deeply as our competitors in certain segments of the market. As you will hear from Anthony, we are leveraging our portfolio to proactively seize opportunities and push back against competitive pressure while considering the long-term impact on our brands and profitability. For us deep discounting is not the right sustainable long-term strategy. Instead, our focus is on how we can capitalize on the tools at our disposal to support the top line while ensuring that our actions today do not dilute our brands or detract from our ability to drive profitable growth as market conditions rebound. Throughout the remainder of the year, we will lean into promotional activity to strengthen our competitive positioning and support the top line. Our brands have been tested across many economic cycles and we know that even in a price sensitive environment, value associated with convenience, choice and quality remain important and help us to appeal to a broad base of customers and consumers. We will leverage these attributes within our portfolio and capitalize on our ongoing innovation to mitigate the impact of short-term pressure on our business. Overall, I'm encouraged by how the team and the business is responding to the challenges of the current market cycle and the gains we have already made on the bottom line. I remain very optimistic about the longer-term outlook for our business as I will discuss later on today's call. With that, I will pass the call over to Anthony.
Anthony Rasetta: Thank you, Paul, and hello, everyone. From an operational perspective, it was certainly a mixed quarter, both in terms of our results and how the category is performing as inflationary dynamics shift and consumer habits evolve. Across both foodservice and retail, we had several wins during the quarter, including expanded distribution and gains with our new innovations, validating our strategy of growing in targeted species and channels. We have a full pipeline of initiatives designed to build on these wins and support top line performance. I'll share details about this as I discuss our operational performance for the first quarter. Starting with Foodservice. Foodservice overall continued to see a slowdown in traffic this quarter, particularly in out-of-home dining, with sales dollar declines for the frozen value-added seafood category, while volume stabilized as customers and consumers shifted to value channels and offerings. After 11 consecutive quarters of market share growth in foodservice, we did experience some share decline in the first quarter on our branded business, as there was a shift to distributor private label, of which we are a major supplier, as customers were seeking even more value as the market slowed. Despite the slight erosion in foodservice market share during the first quarter, we remain well positioned as the top value-added seafood manufacturer and category leader. Once again, we saw the benefit of having a stable base of noncommercial customers that are more resilient in the face of market volatility. We have upcoming initiatives designed to expand distribution in noncommercial, supported with targeted marketing activation to promote seafood consumption. We continue to see a great response from marketing partnerships designed to recruit the next generation of consumers in colleges and universities in the U.S. Our research has shown that younger consumers are seeking out healthy, convenient and delicious choices like seafood over traditional fast food, and we've had some recent wins with key species like salmon within the athletic department of a major university. In our commercial business, we continue to focus on providing solutions to operators seeking efficiencies and menu simplification at a time of cautious consumer discretionary spending. We are pleased to grow with the market in quick service restaurants, while slower traffic in full-service and casual dining restaurants impacted our volumes. We expect that less affluent consumers will continue to trade down to QSR and this creates an opportunity for us given the wide space on the menu for seafood and fast food. There has been a strategic growth area for us for some time, and we continue to advance our partnerships with the national QSR brands on both sides of the border as part of our long-term growth strategy. Market tests in QSR are surfacing valuable data driven insights that we are leveraging to demonstrate the potential to adopt more seafood on the menu in the future. For example, we supported market tests with one of the largest QSR customers in Canada, leveraging an existing value offering and applying it to two separate new menu items, with results exceeding expectations, while also meeting the needs of the franchisee for back of house efficiency and simplification. The overriding focus on value in the market creates an opportunity for us to leverage the diversity of our portfolio. Within salmon, one of the largest species in North America where we are underdeveloped, we are rolling out our latest value, mainstream and premium strategy on Atlantic Salmon, with more offerings across the spectrum and more competitive pricing on the value end in particular. Similarly, we're focused on building on the strong first quarter performance we saw in value species, where we gained share in Pollock and Tilapia, and we are also taking a leadership position in introducing new value species to the market, such as Southern Blue Whiting, to drive volume through exceptional value and versatility of these species. We are pleased to be partnering with one of the largest distributors supporting institutional feedings, such as hospitals and long-term care facilities, to launch two new SKUs of value added Southern Blue Whiting to offer a delicious and sustainably sourced whitefish at the right value with the consistency, quality and ease of preparation that institutions are looking for. Turning to retail. As Paul spoke to, both the U.S. and Canadian retail markets were hypercompetitive with aggressive discounting. The Canadian retail frozen seafood category declined during the first quarter. Competitive deep discounting resulted in category contraction and some erosion of our market share. While we anticipate challenging conditions in retail to persist throughout 2024, as the market leader in Canada, we have strong customer partnerships and brand awareness, and we intend to capitalize on this to bring sustainable long-term solutions that will return the category to growth. We will do this across the breadth of our portfolio with a particular focus on our premium and value offerings as areas of competitive differentiation against the discounting in the middle of the market. This approach enables us to focus on consumers trading down from eating out who are seeking restaurant quality seafood to enjoy at home, while also targeting the price sensitive consumer with our value offerings. For example, we just launched two new SKUs of value-added shrimp and converted two SKUs in club and retail to Blue Cod, a quality value whitefish species, where we can reinvest savings into promotional activity for the balance of the year. We will continue to leverage our equity and advance strategic promotions and marketing associated with our 125th anniversary, while also deepening omni channel marketing initiatives to promote the benefits of seafood and versatility as a regular mealtime option. In U.S. retail, we held our market share and drove higher volumes in our premium brands, Sea Cuisine and C. Wirthy. The strong performance in these branded value-added products in the U.S. illustrates that the value associated with restaurant quality seafoods that consumers can enjoy at home continues to resonate, despite price sensitivity. This is an area that we will aggressively pursue moving forward. In our Sea Cuisine brand, we continue to gain distribution on our new value-added shrimp innovation across large regional and national customers. We expanded our business with the two largest club customers in the U.S. with rotations of our new Sea Cuisine Cheddar Biscuit Cod and Tilapia innovations, all supported by impactful new marketing activations. We saw a similar strong performance with C. Wirthy, our premium Atlantic salmon brand, which delivered double digit distribution and volume gains this quarter. At the other end of the pricing spectrum, we're performing well in the discount space. We will continue to aggressively drive ahead with efforts to attract new discount retail customers and expand our distribution and listings, especially in popular species such as shrimp, where our value-added innovations create a versatile dish for many eating occasions. We're focused on driving distribution gains of our value focused Fisher Boy brand in major discount retailers. We have recently established a regular cadence of in-store promotions with our leading discount retail customer, resulting in double digit growth in Q1 and the ability to continue to showcase affordable protein options for consumers. Overall, we are prepared for the headwinds of the first quarter to continue throughout the year. I believe that the strategies we have underway will help us to navigate the short-term pressures and mitigate the impact of the top line decline. As we do so, we will continue to invest in supporting category growth with our customers across our brands and private label. I'll now pass the call to Deepak to discuss our financial performance. Deepak?
Deepak Bhandari: Thank you, Anthony. Turning now to our financial performance. Please note that all comparisons provided during my financial review of the first quarter of 2024 are relative to the first quarter 2023 unless otherwise noted. Sales volume decreased in the first quarter by 10 million pounds or 13% to 67 million pounds. As Paul previously described, both High Liner Foods, foodservice and retail businesses were impacted due to a decline in contract manufacturing, the exit of unprofitable business, a highly promotional competitive environment within retail and some overall market softness within foodservice. The company continues to benefit from diversification of its foodservice customer base across noncommercial and commercial customers as well as a strategic focus on high-growth channel and species. Sales decreased in the first quarter by $52.2 million or 15.9% to $277 million due to reduced volumes as previously mentioned and reduced pricing reflecting deflationary market, partially offset by favorable sales mix. The stronger Canadian dollar in the first quarter of 2024 compared to the same quarter of 2023 increased the value reported in USD sales from our Canadian denominated operations by approximately $0.2 million relative to the conversion impact last year. Gross profit decreased in the first quarter by $2.9 million or 4.2% to $65.5 million and gross profit as a percentage of sales increased by 280 basis points to 23.6% as compared to 20.8% in the first quarter of 2023. The decrease in gross profit reflects the decline in sales volume previously mentioned. This was partially mitigated by the benefit of lower inventory levels, lower raw material costs market costs and the favorable changes in product mix reflected in the improved gross profit as a percentage of sales. The stronger Canadian dollar increased the value of reported USD gross profit from our Canadian operations in 2024 by nominal amounts relative to the conversion impact last year. Adjusted EBITDA increased in the first quarter by $3 million or 9.6% to $34.2 million and adjusted EBITDA as a percentage of sales increased favorably to 12.4% compared to 9.5%. The increase in adjusted EBITDA is a result of decreased net SG&A expenses and decreased distribution costs, partially offset by the decrease in gross profit. In addition, the stronger Canadian dollar increased the value of reported unadjusted EBITDA in USD from our Canadian operations in 2024 by nominal amounts relative to the conversion impact last year. Reported net income increased in the first quarter by $2.7 million or 19.4% to $16.6 million dollars and diluted earnings per share increased by $0.09 to $0.49 The increase in net income is due to increase in adjusted EBITDA, a decrease in business acquisition, integration and other expenses and a decrease in finance costs partially offset by increase in income tax. Excluding the impact of certain nonroutine or noncash expenses that are explained in our MD&A, adjusted net income in the first quarter of 2024 increased by $2.2 million or 13.4% to $18.6 million and correspondingly, adjusted diluted earnings per share increased by $0.07 to $0.55 in the first quarter of 2024. Now turning to cash flows from operations and the balance sheet. Net cash flows from operating activities in the first quarter of 2024 increased by $4.6 million to an inflow of $17.5 million compared to an inflow of $12.9 million in the same period in 2023 due to favorable changes in noncash working capital and higher cash flows provided by operation, including higher net income, lower finance costs and lower depreciation and amortization, partially offset by higher income tax expense. We remain focused on maintaining the strong improvements made in working capital and net cash flow in fiscal 2024. Capital expenditures were $2.4 million in the first quarter of 2024 compared to $3 million in prior year, reflecting the continued investment in our business. Net debt at the end of the first quarter of 2024 decreased by $5.2 million to $244.7 million compared to $249.9 million at the end of fiscal 2023, reflecting lower long-term debt, lease liability and a higher cash balance partially offset by higher bank loans. Net debt to adjusted EBITDA was 2.5 times at March 30, 2024 compared to 2.6 times at the end of fiscal 2023. Net debt to rolling 12 months adjusted EBITDA increased during fiscal 2022 due to increased investment in inventory. However, we continue to make additional progress this quarter in reducing the ratio and exceeding our long-term target. In the absence of any major acquisition or unplanned capital expenditure in 2024, we expect this ratio to continue to be lower than the company's long-term target of three times at the end of fiscal 2024. I will now turn the call over to Paul for some final remarks before opening up the call to questions. Paul?
Paul Jewer: Thank you, Deepak and Anthony. As you referred today, there's a lot of activity going on across the business and despite the top line performance, we had a lot of wins during the first quarter. As we navigate the year ahead, we will do so with a strategic and long-term view on the business. We must consider the dynamics at play across the globe and industry not simply related to frozen seafood in North America. The reality is we are competing not just within seafood but against other proteins. Similarly, we are not only competing within the frozen aisle but for every dollar consumer is spending on mealtime solutions. We are appealing to the customer to choose seafood on the menu and to the operator for space on the menu. We are selling the versatility and value of our products to customers and consumers and we're doing so at a time when consumer behavior is shifting in a post pandemic world. Convenience matters, efficiencies for operators are critical and health and wellness are increasingly top of mind. Undoubtedly, there's a lot to navigate in the short term and we are prepared that headwinds will continue to impact top line growth this year. From a longer-term perspective, however, these macro trends are tailwinds in our favor that are creating a time of significant opportunity for High Liner Foods. Our future growth requires us to position our portfolio, business and supply chain to capitalize on this growth potential. M&A remains on our radar as one path to achieve this. We are exploring opportunities across the value chain and emphasis on opportunities related to the North American market and our key growth species and channels. However, while we are actively looking at opportunities, we will always remain disciplined. I believe that our shareholders are better served by us continuing to decline opportunities presented to us if the fit or the price isn't right. Our recent strategic investment in Nordcod, a leader in responsible and sustainable cod agriculture is an example of a great strategic plan. As a shareholder in Nordcod, High Liner will have the ability to support and help shape and benefit from work underway to lead the future of sustainable cod farming. I recently returned from a trip to Norway and my time with the team and the Board was very productive. I continue to be very impressed with the caliber of the team and the innovative progressive thinking about sustainable seafood supply. In terms of the year ahead, we will execute on the plans you have heard about on the call today to support the top line of our business, preserve margin as raw material prices rise and deliver year-on-year adjusted EBITDA growth. We have the right plan and the right team in place to deliver, and I look forward to reporting back to you on our progress at the end of the second quarter. I will now hand the call over to the operator for our question-and-answer period. Operator, please go ahead.
Operator: Thank you. [Operator Instructions] Your first question comes from the line of Kyle McPhee from Cormark Securities. Please go ahead.
Kyle McPhee: Hi, everyone. First, can you help us understand the moving parts feeding into the revenue decline? I guess, first moving part, can you isolate the pure price deflation impact year-on-year for us?
Deepak Bhandari: Absolutely, Kyle. So about of the 16% decline, approximately 5% is driven by price deflation.
Kyle McPhee: Got it. Okay. And then so that's not including any increased promotional activity. That's just the pure input deflation factor, correct?
Deepak Bhandari: It would include some promotional in there, but the vast majority of it would be the market deflation.
Kyle McPhee: Got it. Okay. And then second moving part, the exit of some unprofitable business that you mentioned. How much of a volume cut year-on-year was that? And is there more of this for High Liner to do in upcoming quarters? Or will we just see the impact of what you've already done, until it's left?
Deepak Bhandari: So, from a Boeing (NYSE:BA) perspective, it does represent a built 7% decline in Q1. At this stage, from we will expect that decline to happen throughout the year as we exit that business and we'll continue to evaluate businesses throughout the year. But at this point, there's nothing further that we're looking to exit.
Kyle McPhee: Okay. Thanks for that. And then another moving part. But was there any client shorting beyond normal course levels in the quarter?
Deepak Bhandari: No. Absolutely not.
Kyle McPhee: Okay. And then, so the demand hit due to consumer macro conditions. It sounds like the extent of headwinds in the retail channel are kind of the same as prior quarters, but now also getting hit in in the foodservice channel for the first time. Is this an accurate assessment? And, will we kinda see more of the same for the rest of 2024, but maybe with a bit of a positive offset from all the initiatives that Anthony lifted off in the prepared remarks?
Anthony Rasetta: Yeah. Kyle, you have it exactly right. I think we're seeing the continued headwind within retail as we saw a little bit of deflation there, but just slow down as a result of high pricing in retail overall as consumers are experiencing higher grocery prices. Within foodservice, the biggest shift change was in casual dining and away-from-home dining. We're seeing that traffic slowdown where as you would have expected, QSR is growing and we're fairly stable in the noncommercial side of our business, and good news for us there is we're overdeveloped in that noncommercial institutional side of the business and we were growing with the market in QSR where we're underdeveloped. So yes, the casual dining slowdown is what we'll have to continue to watch and we'll still experience some headwinds there.
Kyle McPhee: Got it. Okay. And is this macro impact that showed up in your Q1 result, is it worse than it actually is because of any elevated channel inventory dynamics? What was that a demand destruction issue at all in Q1?
Paul Jewer: There wasn't really an impact on us from elevated inventory levels because of the fact as you know, we moved through inventory well in 2023. I do think some of the activity by some others in the category may have been driven by inventory that they were still moving through in terms of some of the promotional activity that we saw, but we think that's probably now largely behind the industry.
Kyle McPhee: Okay. And then moving over to gross margins, help us understand the moving parts being that big increase for gross margin percentage as a percentage of sales. So it was up 280 basis points year-on-year. How much of that is the structural change from exiting unprofitable volume?
Deepak Bhandari: So from an unprofitable perspective, Kyle, it's certainly the portion of that. I would not say majority of it, but it certainly benefits us from a mix perspective along with the lower contract manufacturing volume as well. Most of the margin improvement, as you recall, is coming from the fact that we have that lower excess inventory that we dealt through in 2023, and that kind of helped benefit us in a couple of ways. One, we certainly cycled through higher cost inventory in 2023 as we got rid of that excess inventory. So we are into lower raw material costs, inventory that's going to benefit us from a larger perspective. And two, if you recall, we also incurred in 2023 higher storage costs tied to that higher inventory. So inventory levels are much more normal. We have a reduction in our distribution costs particularly around stores that benefit that margin profile.
Kyle McPhee: Okay. So based on these moving parts, it sounds like until maybe contract manufacturing mix normalizes higher, you can kind of hold these types of gross margin levels throughout this year?
Paul Jewer: I think Q1 is a bit abnormally high. As you know, Kyle, we typically would suggest we like to be in that kind of 10ish range and obviously this quarter was higher than that. The other thing to keep in mind is the seasonality, right? Q1 is always a stronger EBITDA percentage for us. So you won't see that continue through the year, and to be honest, we do hope to see a bit more of a rebalance between the top line and the EBITDA percentage that will we think over the longer term be the right mix to drive EBITDA improvement from a dollars perspective.
Kyle McPhee: Got it. Okay. I'll pass the line. Thanks.
Operator: Your next question comes from the line of Nevan Yochim from BMO Capital Markets. Please go ahead.
Nevan Yochim: Thanks. Good morning, guys. Hoping we can start on the top line, I guess, in the retail business. Can you provide a bit more substance around what you're seeing in the market in terms of promotional activity from your competitors and then your willingness to compete on promotions go forward?
Anthony Rasetta: Hi, Nevan. It's Anthony. Yes, definitely we saw more aggressive activity, particularly on the mainstream portion of the category and a couple of competitors again could have been dealing with high inventory that they were clearing out as well as some lower costing, being aggressive on pricing in mainstream. As you heard, we were able to still hold share in U.S. retail by really doubling down on the premium side of the bar portfolio as particularly as at-home-dining slowed down and consumers are looking for more of that experience at home. We were really successful with Sea Cuisine and C. Wirthy, both promotionally, but with innovation and increased distribution and we're putting a lot into our advertising and promotional planning for the future as well. We had some good success within discount channels, as you would have heard as well with our Fisher Boy brand, which continued to drive growth for us. So we will continue to focus our strategy on the breadth of the portfolio competing in premium and in value. We're not looking to do things that are unsustainable in terms of promotion, but we will make sure that we're competing effectively for the balance of the year.
Nevan Yochim: Okay, great. And then I guess still on the top line, switching to foodservice, a few press reports coming out here about certain casual dining customers struggling and potentially closing stores. Can you remind us about your customer concentration and then your ability to redirect volumes in the event of lower customer volumes?
Anthony Rasetta: Yeah, the largest part of our portfolio as we talked about is actually in noncommercial and in institutional feeding. So hospitals, schools, long-term care facilities and that's the -- we are overdeveloped there. We're the market and share leader there. Casual dining is a significant portion of our business. It's larger than quick-serve restaurants for us, but more of our growth is coming from quick-serve restaurants as consumers are trading down and we're putting more time and effort into customer partnerships, innovation and promotional work there. So, it will continue to have an impact on us and on the category, no doubt, but we think with the breadth of the customer concentration across noncommercial and QSR that that'll be our best bet to weather it.
Paul Jewer: Yes. There isn't one individual or even a couple of customers in casual dining that we are -- that we could point to that would be a really significant part of our portfolio of business there is more diverse.
Nevan Yochim: Okay, understood. And then on distribution expenses, a big decrease year-on-year. How are you thinking about distribution expenses go forward? Should we think about those as a percentage of revenue? Would it be reasonable to extrapolate Q1? Or is it more of a dollar basis? Any thoughts there?
Deepak Bhandari: Yes. So I think from a distribution perspective, I think a couple of things to call out. So one, from a decrease perspective, obviously, a big part of that decrease is tied to our storage, largely driven by the fact that we had significantly high inventory in 2023, and so now that we're at that normalized level, you should expect to see that benefit of storage cost continue throughout the year. From a freight perspective, we're also benefiting from some favorable contracts and spot buys today. Again, I would expect most of that to continue for the balance of the year, but as demand starts to pick up for capacity or capacity to tighten, we would expect some of that freight to go up again in the Q4.
Nevan Yochim: Okay. And I'll just sneak one more in. On M&A, the balance sheet is obviously quite a bit stronger here today. How are you thinking about M&A and then your willingness to increase leverage for the right target?
Paul Jewer: Yes, we certainly do have some willingness to increase leverage for the right target. We'll always be prudent in that regard. But to your point, by getting the leverage down to where it is well below our target of three, it does give us some room on the balance sheet, and depending on the size of the opportunity, we'll of course consider what the right financing strategy would be for that opportunity. We're not going to return to historically high leverage levels. We don't think that is prudent, and the good news is with what we've done from a deleveraging perspective and the benefit of the free cash flow we generate on an annual basis, we don't think that's necessary to support our endeavors in this regard. What we will always look at is what does the deleveraging profile look like based on any opportunity that we can pursue.
Operator: We do have a follow-up question coming from Kyle McPhee with Cormark Securities. Please go ahead.
Kyle McPhee: Paul, maybe I misheard this, but in your prepared remarks, you said that the lower contract manufacturing volume helped plant efficiencies. Can you explain what you meant by that?
Paul Jewer: Well, no, I said contract manufacturing volume does help plant efficiencies, and so what we've been working on is as we've seen a decline in some of the existing contract manufacturing business is to replace it with some new contract manufacturing business where we've had some success, because we want to get that volume back into the plant to support the efficiency of the plant.
Kyle McPhee: Got it. Okay. That makes more sense. And then High Liner's filings have been mentioning the company is exploring transformative growth through M&A. Can you unpack what you mean by transformative? I mean, is this just the scale of the deals or the spot on the sector supply chain or geographic regions?
Paul Jewer: I wouldn't say it's necessarily one or the other. I think the biggest thing is we are thinking a bit more broadly than we have in the past. We've referred to Nordcod, that's just a good example of that where we're not just thinking about what is it that would help our business today, but one of the things that we need to be thinking about for our business for the next 5 to 10 years, and that could be on the supply side, that could be in supplementing what is already a strong position we have on the customer and consumer side. Right now, it's primarily focused on seafood for all of the right reasons and still primarily focused on North America. Although, Nordcod being an example, sometimes thinking about what growth could look like in North America may involve considering some investments that are outside of North America. So that's really how we're thinking about it, and I do think we've put ourselves in a position that we're looking at it more fulsomely and more aggressively, but still retaining that conservative approach that we have to making sure it's the right strategic fit that we can finance in the right way and create the kind of value that's required.
Kyle McPhee: Okay. Thank you. That's it for me.
Operator: Thank you. And there are no further questions at this time. I would like to turn it back to Paul Jewer, President and CEO, for closing remarks.
Paul Jewer: Thank you, operator. To close, I want to thank you all for joining our call today. We look forward to updating you with our results for the second quarter Q2 of 2024 on our next conference call in August. Please stay safe and well.
Operator: Ladies and gentlemen, this concludes today's call. [Operator Closing Remarks].
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