HALIFAX -- Colin MacDonald wasn't acting like someone whose company had shed 35 per cent of its market value in the previous week.
The chief executive officer of Clearwater Seafoods Income Fund was relaxed and good-humored on Oct. 22, when he stopped by the company's flagship store on the Bedford Highway, outside Halifax. As he joked with and bowed to a group of Japanese tourists who were drawing crabs from a tank, there was nothing in his demeanour that would indicate his company had just suspended income distributions for the remainder of the year.
In an interview minutes later, Mr. MacDonald said the plunge in the price of the units was overdone and reflected particular issues, such as currency fluctuation and problems with vessels.
Clearwater Seafoods is a profitable company, he said, and it will deal with its problems by cutting costs, including operating a smaller fleet, and increase yields from its various products, partly by raising prices in foreign markets.
"We're going to face the cannons," Mr. MacDonald said as he settled onto a sofa in his office. "We are operating under the assumption that the dollar will soon go to parity, so we're looking to decrease our costs."
Clearwater Seafood suspended cash distributions for the rest of this year on Oct. 18, having paid out 63 cents a unit already for 2005. The company had originally forecast 2005 payments totalling 84 cents. The units plummeted the next day to close at $3.55, down from $5.45 before the announcement. On Friday, the units closed at $3.62.
Analysts also cut their forecasts for distributions in 2006 and their targets for the price of the units.
Clearwater Seafoods is 46-per-cent owned by Clearwater Fine Foods Inc., which in turn is owned by John Risley, Nova Scotia's leading first-generation entrepreneur and Mr. MacDonald's brother-in-law. CFFI initially floated at $10 a unit in Clearwater Seafoods as an income trust in August, 2002, raising $211.7-million.
CFFI had said in August that it planned to buy an additional 10 million shares or 17.5 per cent in Clearwater Seafoods, but scrapped the plan after the distributions were suspended.
All these problems are unfolding as the federal government is reviewing its policy on income trusts, which has sent shivers through the industry.
The government estimates it loses more than $300-million a year in corporate taxes because of the trusts' privileged tax status. The total value of income trusts has fallen by tens of billions of dollars since Ottawa said it would stop accepting advance tax rulings for income trust candidates and solicited comments on what changes, if any, should be made to the sector.
With so much upheaval, analysts are finding it difficult to determine what the Clearwater Seafoods units are worth, how much cash the trust will distribute next year, and whether the company will remain publicly traded.
"I feel bad for these guys because they're having a hard time with credibility on the street, and it's going to be hard for them to give guidance," said Chris Rankin, an analyst with Canaccord Capital Inc. in Toronto.
Mr. Rankin said his target for Clearwater Seafoods units, which plunged as low as $2.25 in trading the day after the Oct. 18 announcement, is now about $4, although he added that may be high. Mary McKee at CIBC World Markets Inc. markets placed a $2.50 target on the shares after the announcenemt, and investment bank Crosbie & Co., in a circular distributed by Clearwater, said the shares would have been worth $6.50 to $7.60 if CFFI had proceeded with its bid.
Estimates of the company's 2006 cash distributions range from below 36 cents to 60 cents. Arguably the toughest question surrounding Clearwater Seafoods is whether it will continue to be an income trust or, for that matter, a publicly traded company.
Mr. MacDonald declined to discuss whether CFFI might take the income trust private, saying only that he likes the income trust structure because of the discipline it imposes on management.
"I like it because it puts the earnings in the hands of the owners rather than the managers," Mr. MacDonald said. "If we people [managers] want to invest in a venture, we have to sell it to the owners first."
Though he did not mention it, a case in point would Clearwater Seafoods' April, 2003, agreement to buy $65-million of quotas for scallops and other fish from High Liner Foods Inc. With little in retained earnings, the income trust financed the purchase in part by selling $42.7-million in warrants.
Mr. MacDonald declined to discuss whether he would have chosen the income trust structure if he were starting the IPO process all over again. And asked if income trusts are best suited for a company with such volatile earnings streams, Mr. MacDonald said company executives simply needs discipline and understanding of its returns to work within the structure.
Still, analysts forecast that CFFI may renew its bid for a substantial portion of the traded units, although at a lower price, or take the company private.
"CFFI has indicated that they are still evaluating various options surrounding the fund," Ms. McKee said in her note. "One option we believe they may be examining is taking the fund private.''
Mr. MacDonald said he was "shocked" by the way the Clearwater Seafood announcement was portrayed in the media, as investors who have held the units all year will still receive 5.25 cents a unit a month over the complete calendar year rather than the 7 cents originally forecast.
The problem, Mr. MacDonald said, is that fishing is a seasonal business, and Clearwater Seafoods makes most of its money late in the calendar year. However, it must decide on its distribution payments at the beginning of the year -- long before it knows how it will perform in the quarter in which it earns most of its distributable cash flow.
Although it had a weak first half, with 26-week profit to July 2 falling 48 per cent to $3-million, Mr. MacDonald said the true extent of three one-time problems only became apparent late in the third quarter.
First, the Canadian dollar, which showed signs of weakening over the summer, soared in the autumn as oil costs rose, squeezing margins as only 15 per cent of the company's sales are in Canada. Second, the company's total allowable catch for scallops was slashed just before the third quarter ended. Finally, new ships it had bought required extraordinary repairs and were therefore not producing income for a short time.
Other than its currency difficulties, Mr. MacDonald believes Clearwater Seafoods has solved these problems as the boats have been repaired and the company believes its total allowable catch in scallops will rise next year.
It's trying to increase revenues by increasing yields by, for example, using new technology that can inspect the meat in a lobster before it is purchased at the wharf, or introducing new products, such as raw lobster meat already shucked from the shell.
National Bank of Canada analyst Carolyn Dennis is forecasting a 16.8-per-cent recovery in scallop sales next year to $115.3-million, but also warns that high fuel costs will weigh on the company's margins.
Mr. MacDonald said he doesn't comment on analysts' reports, adding that his company is continuing to invest for the future. As well as technology to improve the yield on its seafood, the company will receive a new clam boat late in 2006.
"We've always built this company around what's good for it in the long term,'" he said "If you're into short-term-ism in your decision-making, you shouldn't be a publicly traded company."
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