Good morning, ladies and gentlemen. Thank you for standing by. Welcome to High Liner Foods Incorporated Conference Call for results of the second quarter of 2024. At this time, all participants are in a listen-only mode. Following management prepared remarks, we will conduct a question-and-answer session. Instruction will be provided at the time for you to queue up for questions. If anyone has any difficulties during the conference, please press star key followed by zero for operator assistance at any time. This conference call is being recorded today, Thursday, August 8, 2024, at 10:00 A.M. Eastern Time for replay purposes. I would now like to turn the call over to Kimberly Stephens, Vice President of Finance for High Liner Foods. Please go ahead.
Good morning, everyone. Thank you for joining the High Liner Foods conference call today to discuss our financial results for the second quarter of 2024. On the call from High Liner Foods are Paul Jewer, Chief Executive Officer, Darryl Bergman, 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 financial 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 under applicable securities law. Management may use forward-looking statements when discussing the company's strategy, business, and markets in which the company operates, and operating and financial performance in the future.
These statements are subject to risks and uncertainties and based on assumptions believed to be reasonable at the time that they were made in currently available information. Actual results or events, including operating or financial results, could differ materially from those anticipated in these forward-looking statements. High Liner Foods includes a thorough discussion of the risks and other factors that can cause its anticipated outcomes to differ from actual outcomes in its publicly available disclosure documents, particularly in its MD&A and annual information form. Please note that High Liner Foods is under no obligation to update any forward-looking statements discussed today. After the markets closed yesterday, August 7, High Liner Foods reported its financial results for the second quarter ended June 29, 2024.
That news release, along with the company's MD&A and unaudited, condensed, interim consolidated financial statements for the second quarter of 2024, have been filed on SEDAR+ and can also be found in the investor section of High Liner Foods' website. If you'd like to receive our news release in the future, please visit the company's website to register. Lastly, please note that the company reports its financial results in US dollars, and therefore, the results to be discussed today are also stated in US dollars, unless otherwise noted. 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.
Thank you for joining us today to discuss our financial results for the second quarter of 2024. I would like to welcome Darryl Bergman to his first earnings call in his position as our CFO. Darryl joined us this quarter after having most recently served as CFO of Clearwater Seafoods. He brings with him extensive global financial experience, having held executive-level finance roles for more than two decades, and we are thrilled to have him on board. I would also like to extend my sincere thanks to Deepak Bhandari for serving as our interim CFO since January. Deepak demonstrated exceptional leadership during this period. As usual, I'm also joined today by Anthony Rasetta, our Chief Commercial Officer. Before I hand the call over to Darryl, I will provide an overview of our performance and my perspective on Q2 in the context of our strategy and outlook.
It was another good quarter on the bottom line. Gross profit increased by $500,000, or 1%, and adjusted EBITDA grew by $1.8 million or 8.2%. Consistent with the first quarter, our EBITDA growth in Q2 was supported by lower raw material costs and normalized inventory levels. We continue to drive efficiencies across our business, and we were pleased to announce the completion of a refinancing of our Term Loan B ahead of schedule, which will result in annual interest savings. We continue to operate in a dynamic market in which market data shows that despite easing inflation, the consumer continues to feel stretched and continues to pull back on discretionary spending, such as dining outside of the home, and remains price sensitive in the grocery store.
We are seeing these trends play out as the food service traffic slowdown in Q2 led to an overall category decline. While we did see an uptick in our premium products in retail, the frozen seafood category overall has not yet returned to growth. While market dynamics are creating headwinds for our business, the year-over-year decline in volumes during the second quarter was a result of the same decreases in contract manufacturing and the intentional exit of low-margin business that I discussed last quarter, along with the impact of the return to a normalized inventory environment. Against this backdrop, we are focused on leveraging the opportunities associated with our value and premium offerings and using the diversity of our business to lean into areas of greatest stability and opportunity in terms of species, channel, or customer. We also continue to drive efficiencies across our business to support profitability.
I believe that the actions we are taking to mitigate short-term pressures will ultimately serve to drive sustainable improvements and reinforce our leadership position as we drive future growth for our business and the category. While we expect that market challenges will continue to put pressure on our business in the short term, I remain confident that we will end the year with annual adjusted EBITDA growth and continue to withstand short-term performance volatility during this phase of the market cycle. I will now hand it over to Darryl to discuss our financial results. Darryl?
Thanks, Paul, and good morning, everyone. It's a pleasure to be here today and reporting to you on High Liner's second quarter financial results. As Paul alluded to, and Anthony will subsequently address further, the second quarter results reflect some headwinds the organization is facing. That said, it's important to note that they also reflect the company's resilience and ability to maintain profitability when challenged. Before I get started, please note that all comparisons provided during my financial review of the second quarter of 2024 are relative to the second quarter of 2023, unless otherwise noted. Let's now turn to our financial performance. Sales volume decreased in the quarter by 7.7 million lbs, or 13% to 51.7 million lbs. As Paul previously described, the company continued to operate in a challenging market conditions, driven by consumer pullback and increased competitive pressures.
The decline in sales volume was primarily driven by the decline of the same contract manufacturing business and the exiting of low-margin business disclosed in Q1 2024. The lower sales volume in our retail and food service business. In the company's retail business, we experienced year-over-year decline in volumes. The company expanded distribution in strategic areas including club, value, and premium offerings. In the company's food service business, we saw continued success of new value-add innovations in terms of volume and expanded distribution, and saw continued growth in alternative species, despite the overall year-over-year decline in volume. Sales decreased in the second quarter by $36 million or 14.2% to $218.3 million, driven by volume declines and reduced pricing, reflecting deflationary markets.
Given highly promotional and price-sensitive retail and food service markets, the company continues to take actions on price, innovation, and distribution to strengthen its competitive positioning and to mitigate the impact of external pressures while preserving profitability. The weaker Canadian dollar in the second quarter of 2024, compared to the same period in 2023, decreased the value of reported USD sales from our Canadian-denominated operations by approximately $1.1 million. Gross profit increased in the second quarter by $0.5 million, or 1% to $52.5 million. Gross profit as a percentage of sales increased by 3.6% to 24%, as compared to 20.4% in the second quarter of 2023.
The increase in gross profit is due to lower raw material costs, normalized inventory levels, and a more profitable mix and balanced approach to pricing, focused on supporting both the bottom line and top line of the business. At this point, I would like to comment that High Liner continues to drive continuous improvements across operations to ensure prudent cost management. In addition, the weaker Canadian dollar decreased the value of reported USD gross profit from our Canadian operations in 2024 by $300,000, relative to the conversion impact last year. Adjusted EBITDA increased the second quarter by $1.8 million, or 8.2% to $23.8 million, and adjusted EBITDA as a percentage of sales increased favorably to 10.9%, compared to 8.7%.
The increase in adjusted EBITDA reflects the increase in gross profit and favorability in distribution expenses, offset by an increase in net SG&A expenses. The impact of the weaker Canadian dollar decreased the value of the reported adjusted EBITDA in US dollars from our Canadian operations in 2024 by $100,000, relative to the conversion impact last year. Reported net income increased in the second quarter by $13.4 million, or 227.1% to $19.3 million, and diluted earnings per share increased by $0.42 to $0.59. The increase in net income is due to the increase in adjusted EBITDA, an increase in business acquisition, integration and other expenses, a decrease in finance costs, and lower depreciation and amortization costs, partially offset by an increase in income tax expense.
Excluding the impact of certain non-routine or non-cash expenses that are explained in our MD&A, adjusted net income in the second quarter of 2024 increased by $1.2 million, or 12% to $11.2 million, and correspondingly, adjusted diluted earnings per share increased by $0.06 to $0.35 in the second quarter of 2024. Now let's turn to cash flow from operations and the balance sheet. Net cash flows from operating activities in the second quarter of 2024 decreased by $6.4 million, to an inflow of $39 million, compared to an inflow of $45.4 million in the same period in 2023.
Due to lower cash provided by operations, including lower positive changes in non-cash working capital balance in comparison to the first half of the previous year, non-cash gain on shares reacquired in a legal settlement, lower depreciation and amortization, and higher income taxes paid. This was partially offset by a higher net income, higher share-based compensation expense, and lower interest paid. We remain focused on maintaining the strong improvements made in working capital and net cash flows in fiscal 2024. Capital expenditures were $10.1 million in the first half of 2024, compared to $9.1 million in the prior year, reflecting the continued investment in our business.
Net debt at the end of the second quarter of 2024 decreased by $17.2 million to $232.7 million, compared to $249.9 million at the end of fiscal 2023, reflecting lower bank loans, long-term debt, lease liabilities, and a higher cash balance as at June 29, 2024, as compared to December 30, 2023. Net debt to adjusted EBITDA was 2.3x at June 29, 2024, compared to 2.6x at the end of fiscal 2023. The ratio has continued to improve into the first half of 2024 due to lower net debt and higher rolling 12-month adjusted EBITDA compared to the fiscal 2023 period.
In the absence of any major acquisitions or unplanned expenditures in 2024, we expect this ratio to continue to be lower than the company's long-term target of 3.0x at the end of fiscal 2024. Subsequent to the end of Q2, the early refinancing of the company's Term Loan B was completed and announced. This is a stable platform. Sorry. This provides a stable platform for our organic and accelerated growth strategies. I would also like to note the refinancing was not only at improved rates, but was also oversubscribed, demonstrating the confidence of our lender community in High Liner Foods. Also, during the second quarter, I would like to note, our net debt reached the lowest levels the company has seen in more than 10 years.
Our strong balance sheet, supportive financial partners, and demonstrated ability to produce consistent EBITDA performance amidst a dynamic economic background certainly helps to position us well to capitalize on future growth opportunities. Finally, on that note, since joining the company, it's been very apparent that the people at High Liner are passionate about reimagining seafood to nourish life. With our term debt maturity extended to 2031 and largely undrawn $200 million working capital facility, we have created a foundation that gives us the flexibility to strategically invest in initiatives to drive that passion forward. I will now turn the call over to Anthony to discuss our operational highlights. Anthony?
Thanks, Darryl, and hello, everyone. As Paul mentioned, we continue to operate in a challenging and dynamic market. The food service category experienced a further contraction during Q2 as consumers continued to pull back on discretionary spending, limiting or pausing on dining out of home. In retail, while food prices are now easing, prices remain high, and consumers remain cost sensitive and focused on value. Our response, much like last quarter, was to continue to focus on the diversity of our portfolio, and on our premium and value offerings across retail and food service, as these are the areas of greatest competitive differentiation and market opportunity in the current environment. We also continue to target opportunities to align with strong or growing areas of the market and expand our distribution. We executed against this plan. We saw positive results in U.S. retail and in Canadian food service.
In U.S. retail, we continued to drive momentum on our premium products, which enabled us to gain market share once again. This was driven by the robust performance and expanded distribution of our Sea Cuisine and C. Wirthy premium products, as well as our new branded value-added shrimp SKUs. We saw a particularly strong performance in our C. Wirthy premium Atlantic salmon brand, which was the fastest growing value-added brand in frozen seafood in the U.S. during the second quarter. This value-added premium product offers consumers easy-to-prepare, high-quality salmon to enjoy at home. We are positioned to continue to grow this brand on the strengths of the consumer appeal of the product and alignment with the shift back to elevated dining experiences at home among our target demographics.
Our premium products are performing well in the club channel, and we're pairing the value offering of club pack sizes with limited time promotions to emphasize value and draw new consumers to our products and highlight our innovation. The Sea Cuisine Cheddar Biscuit Cod that I referenced in Q1 had another strong quarter, and we have a pipeline of limited time innovations targeted at the club consumer, ready to roll out through the second half of the year and into 2025. This is a great example of how our approach to promotion is aligned with our long-term goals, allowing us to show value beyond price that is sustainable for our business, while also competitive in the current value-oriented market. We are focused on expanding distribution of our value products among mainstream retailers and in the discount channel.
During the second quarter, we expanded distribution on Fisher Boy with a national retailer, a growing regional customer in the U.S., as well as distribution with a major discount seller. In Canadian retail, the category continues to be challenged as we experienced a decline in market share, driven by aggressive competitive promotional activity that is not translating to category growth. We're pushing back against these headwinds with omni-channel marketing, promotional activity in partnership with our retailers, and continued innovation. We're also leaning into the club channel in Canada for the same reasons I just discussed, and expanded distribution into new regions with a major club retailer during the second quarter. We also expanded distribution of our High Liner branded value-added shrimp innovation across all major Canadian retailers following the launch of these products in the first quarter.
We believe that innovation will continue to play a key role in drawing consumers back to the category and position us to help drive the recovery and capitalize on the rebound. Turning now to food service, where all but schools were affected by increased market softness during the second quarter. That said, our non-commercial business continues to be a steady, strong, developed component of our business, and we expanded distribution and grew in our Canadian food service business. In U.S. commercial food service, volume and market share declined as the category contracted and operators experienced slowing traffic, menu trade downs, and check management by guests. We're focused on delivering solutions to operators who need to compete in a highly promotional and competitive environment. This is where the diversity of our portfolio supports us through market cycles.
You may recall that in 2022 and 2023, when the labor market was challenged for operators, we focused on value-added products to support operator back-of-house efficiency. This is still important as operators face margin pressure, but there is also a greater need to offer value to operators so that they can use this to draw in traffic. The renewed salmon lineup we launched earlier this year is well timed to meet this need, with products across price points in a growth species and one in which we're underdeveloped. While QSR traffic slowed in the second quarter, we see this as short-term contraction and doesn't detract from the white space and growth potential for us.
Turning to alternate species, as I shared last quarter, we're leading the way for market adoption around southern blue whiting, and it's showing promising signs of growth in both the U.S. and Canada in retail and food service. We are encouraged by our early wins with this species, including upcoming club partnerships, and will continue to capitalize on the value and versatility of this species, along with pollock and tilapia. Overall, the quarter performed in line with our expectations, given the continued market challenges and price-sensitive consumers. We are equipped to navigate persistent headwinds through the end of the year. We will continue to focus on consistent execution against our targeted plans to mitigate the impact of market softness while playing to our strengths, seizing areas of opportunity, and supporting category growth in partnership with our customers across our diverse brands and in private label.
With that, I'll hand it back to Paul for some final remarks before opening up the call to questions. Paul?
Thank you, Anthony. As Anthony said, overall, the quarter was in line with our expectations, given market conditions and the year-over-year shifts in contract manufacturing and inventory levels. That said, there is still much work to do to support category recovery, improvement on the top line, and a return to profitable growth. I am confident in our ability to do this, and we will continue to ensure that our focus is oriented to the evolving needs of the consumer and opportunities for our business beyond this point of the market cycle. As previously discussed, we are exploring a wide range of potential value-accelerating opportunities with a particular interest in businesses that have synergies with our company, fit strategically with our long-term growth objectives, and provide the appropriate return on our investment.
This includes, but is not limited to, branded value-added companies that would add to our existing North American food service and retail businesses, as well as businesses that offer us the opportunity to expand into species that are showing promising growth prospects. In a dynamic global seafood market, the supply chain will inevitably continue to evolve, particularly around certain species, and we are positioning High Liner Foods for long-term success. I believe that land-based salmon and cod aquaculture will play a significant role in the long-term strength of the seafood supply chain globally and at High Liner Foods. This was an important driver behind our recent investments in aquaculture leaders, Norcod and Andfjord , along with the future opportunities we see to leverage our sales and marketing expertise in North America to help bring products to market when volumes reach the appropriate scale.
In the near term, as you have heard today, we are focused on strong execution, using all available levers to drive efficiency and support profitability while leveraging the diversity of our business to manage market conditions and deliver healthy, quality, protein meal solutions to customers and consumers across the value spectrum. I look forward to reporting back on our performance in Q3 and demonstrating how we are advancing our near and long-term strategic objectives, while positioning High Liner Foods to continue creating long-term value for all stakeholders. With that, I will open the line to questions. Operator, please go ahead.
Thank you. We'll now begin the question and answer session. To ask a question, please press star one on your touchtone phone. If you're using a speakerphone, please pick up the handset before pressing any keys. To withdraw your question, please press star two. Once again, star and one if you wish to ask a question. And the first question comes from Kyle McPhee from McCormick, I mean, Cormark Securities. Please go ahead. Kyle, your line is now open. Please go ahead.
Hi, sorry about that. First, regarding the intentional volume cuts you've been making, are the cuts in Q2 the same round of cuts from Q1, or have you started an additional round during this quarter?
Hi, Kyle, it's Paul. Yeah, no, thanks for the question. It's really just a continuation of the cuts that we made in the first quarter, the ongoing impact of that. And the same actually, in fact, with contract manufacturing. It's the ongoing impact of the contract manufacturing declines we experienced in the first quarter as well.
Got it. Okay. So the volume cut, you quantified it at kind of a 7% year-over-year impact last quarter. It's similar this quarter?
It is similar this quarter. It's probably a little bit higher. When you include contract manufacturing, contract manufacturing and that volume cut, in terms of the lower margin business, collectively are about 60% of the volume decline.
Okay, thank you. And then why is, so this volume you're intentionally cutting out, that's now, you know, low or no margin, I assume it wasn't the case that this pocket of volume wasn't, you know, low or no margin back in 2019 after the last round of your volume cuts, so, or, or maybe it was, correct me if I'm wrong, but what changed to kind of make this little pocket of your business, kind of unprofitable?
Yeah, no, I mean, it was lower profitability back in 2019 as well. But, you know, as market dynamics change and you see increases in raw material prices, and if you conclude that you're not able to pass those on, or there's a decline in the volume anyway, so that the scale of the business doesn't support the benefit that you would get from plant absorption, it's those kinds of things that factor into our decision about, you know, what volume do we want to continue to do at what price?
Got it. Okay. Moving on to your, your price changes, it looks like it's been fairly modest, you know, deflation and discounting and promotional activity. Should I expect this to accelerate through the back end of the year to, to support your top line? Or is it gonna be kind of the same intensity, of, of price discounting?
Yeah, I mean, right, right now, the deflationary impact was about 4%, but it was offset by a positive mix impact of about 3%, resulting in that 1% gap that you see between volume and sales dollars. I think it'll probably be a bit higher as we look at the back half of the year. We are going to be promoting more to support volume in the category, as you suggested.
Okay. And then last one from me. So it seems like High Liner is gonna be getting into a period of what looks like will be excess capital generation flowing to an already good balance sheet to keep getting better. Do you have larger M&A aspirations versus, you know, relative to these kind of smaller toe-hold type investments you've been making? Or will this excess capital, do you think, kind of odds are, is just go to increase return of capital to shareholders?
Yeah, no, certainly we have aspirations for M&A. That would be larger, to your point, than, you know, the investments we've made thus far in companies like Norcod and Andfjord. And we're out there, actively looking at opportunities. But, as I said in my remarks, we're making sure that it's the right strategic fit, that it's got the right financial profile, and that we can execute well on it, if we're put ourselves in a position to pull the trigger. To your point on capital in the meantime, we're continuing to invest in CapEx in our business, of course, and fortunately, finding ways for more of that capital to be invested in profit improvement type projects rather than just maintenance.
As you saw over the past quarter, you know, we continue to use the NCIB to buy back some shares when the opportunity presents itself. Of course, we had the Rubicon settlement, which ended up being a large share buyback as well, supporting a return to shareholders.
Got it. Okay, thanks for all the answers, and great performance in a pretty tough world out there right now. Thank you.
Okay. Yeah, thank you, Kyle. Thanks, Kyle.
Thank you. Once again, for those who want to ask a question, please press star and one on your touchtone phone. Star and one if you wish to ask a question. No further questions at this time. Please continue.
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 third quarter of 2024 on our next conference call in November. Thank you all.
Thank you. This concludes our conference for today. Thank you all for participating.