The 19 per cent growth in both sales and adjusted EBITDA was driven by strong market demand that increased sales volumes and pricing for scallops, shrimp and lobster as well as a $6.6 million positive impact due to a foreign exchange rate environment that had average spots rates for major currencies such as the US dollar and Euro at higher levels in 2014 than the second quarter of 2013.
Earnings for the second quarter of 2014 were $18.9 million and included non-cash foreign exchange gains of $20.7 million as the Canadian dollar strengthened against the US dollar and the Euro resulting in large non-cash gains on the translation of both Clearwater's $200 million US dollar denominated debt and its' foreign exchange hedging contracts.
Free cash flows were ($11.7) million versus ($9.6) million in the second quarter of 2013, a decline of $2.1 million, due primarily to the timing of capital expenditures.
Year to date results
Clearwater reported sales of $191.2 million and adjusted EBITDA1 of $30.6 million for the first half of 2014 versus 2013 comparative figures of $163.7 million and $27.9 million, reflecting growth of 16.8 per cent and 9.7 per cent in sales and adjusted EBITDA, respectively.
Gross margin as a percentage of sales improved from 18.4 per cent in the first half of 2013 to 20.4 per cent for the same period of 2014, due to strong demand, higher prices for the majority of species and favourable exchange rates. Higher catch rates for sea scallops and the timing of landings for shrimp increased available supply which also contributed to the increase in total gross margin. Poor weather conditions for turbot and higher harvesting costs for scallops and shrimp partially offset the improvements to gross margin.
Free cash flows1 from operating activities improved $18.1 million from negative ($13.0) million to positive $5.1 million due to higher adjusted EBITDA and a $16.7 million improvement in working capital, offset by higher capital expenditures (net of designated borrowings) from scheduled refits and vessel conversions, and the timing of payments to minority interest partners. As a result year to date free cash flows improved $11.4 million from the same period in 2013.
Global demand for seafood is outpacing supply, creating favorable market dynamics for vertically integrated producers such as Clearwater which have strong resource access.
Demand has been driven by growing worldwide population, shifting consumer tastes towards healthier diets, and rising purchasing power of middle class consumers in emerging economies.
The supply of wild seafood is limited and is expected to continue to lag behind the growing global demand. This supply-demand imbalance has created a marketplace in which purchasers of seafood are increasingly willing to pay a premium to suppliers that can provide consistent quality and food safety, wide diversity and reliable delivery of premium, wild, sustainably harvested seafood.
Clearwater, like other vertically integrated seafood companies, is well positioned to take advantage of this opportunity because of its licenses, premium product quality, diversity of species, global sales footprint, and year-round harvest and delivery capability.
Ian Smith, Chief Executive Officer, commented: "We are delighted with the results in the second quarter in both harvesting and sales.
Mr Smith continued: "We posted strong sales results across our portfolio of sustainably harvested, wild caught seafood and are maintaining our annual financial targets. Also, we have continued to invest and advance several major capital projects that are key to sustaining our long term growth, profitability and competitive advantage."
Mr Smith concluded: "Looking to the longer-term, we are encouraged by a recent Agricultural Outlook published by the OECD-FAO that predicts growth in seafood pricing is expected to outpace other proteins by almost 3 times from now until 2020."