Clearwater Seafoods Inc (OTC:CSEAF) Q3 2018 Earnings Conference Call November 7, 2018 1:00 PM ET
Executives
John Lane – Vice President Finance, Treasurer and Investor Relations, Finance
Teresa Fortney – Vice-President, Finance and Chief Financial Officer
Christine Penney – Vice President, Sustainability and Public Affairs
Donald MacNeil – Assistant Treasurer
Analysts
George Doumet – Scotia Capital Inc.
Bryan Hunt – Wells Fargo Securities
Jonathan Lamers – BMO Nesbitt Burns Inc.
Kyle McPhee – Cormark Securities Inc.
Ryan Bloom – Hartford Investment
Operator
Good afternoon, ladies and gentlemen, and welcome to Clearwater Seafoods Q3 Investor Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Wednesday, November 7, 2018.
I would now like to turn the conference over to Mr. John Lane, Investor Relations. Please go ahead.
John Lane
Thank you, Leonie, and thank you all for taking the time to participate in today’s call. My name is John Lane, Clearwater’s Treasurer, and with me are Teresa Fortney, Chief Financial Officer; Christine Penney, Vice President of Sustainability and Public Affairs; and Donald MacNeil, Assistant Treasurer.
This call is intended to provide information to Clearwater investors. We also have immediate cost scheduled for 3:30 Atlantic Time, and 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 2018 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 involves 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 cash 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.
Teresa Fortney
Thanks very much, John, and good afternoon, everyone. Thank you very much for joining us. In the third quarter of 2018, sales were $164.2 million versus $163.6 million in Q3 of 2017. Gross margin as a percentage of sales improved to 20.3% from 17% in the prior year. Adjusted EBITDA was $30.7 million versus $32.8 million in Q3 of 2017.
In the first nine months of 2018, adjusted EBITDA, as a percentage of sales increased 18.6% from 18.0% in the prior year. We experienced strong year-to-date cash generation as cash from operations and free cash flow were $30.7 million and $12.6 million, an increase of $15.2 million and $43.2 million versus the prior year.
Improved cash generation is attributed to margin improvement, continued focus on cost savings and lower capital expenditures following the company’s completion of its fleet renewal program in the first quarter of 2018.
Adjusted earnings attributable to shareholders of Clearwater improved to $11 million, an increase of $0.8 million, or 8% versus the prior year. Q3 sales margins and adjusted EBITDA results were impacted by strong prices, favorable sales mix, including turbot and FAS shrimp related to timing of landing, shifting into Q3, improved sales mix for clams and expansion of our live brown crab business in China.
The expansion of distribution channels in China have resulted in inventory levels continuing to decline from peak levels, particularly in clam. Competitive scallop market conditions associated with the increase in U.S. scallop supply has also had a negative impact for our results and prices found their bottom at approximately the end of July this year.
And finally, foreign exchange rates had a positive impact on sales of $7.6 million for the first nine months of 2018. Overall, we’re pleased with our results for the third quarter and the first nine months of 2018. Positive cash generation and further inventory reductions in certain key species led to lower debt and leverage for the period.
Leverage at the end of Q3 was 5 times adjusted EBITDA attributable to shareholders, which is consistent with December 31, 2017 and slightly below Q2 reported leverage of 5.1 times. Based on the seasonality of our business and harvest plans, we’re expecting leverage to further decrease to finish the 2018 year.
As a reminder, it’s important to emphasize that Clearwater’s core fisheries are renewable resources and they are managed for long-term sustainability. We have and will continue to pursue timely and carefully measured – measures – concerted measures in response to near-term volume challenges, which would include adjustments to harvest plans, pricing and distribution strategies, as well as other cost and working capital reductions like our restructuring that was done last December.
In 2018, solid sales, combined with disciplined cost management, lower CapEx and significant inventory reductions, which improved working capital management have us on a track to generate strong free cash flow, reduce debt and leverage, yield a higher return on assets and generate positive returns for shareholders.
I would now like to discuss the company’s outlook and our core strategies. Normally, at this point, I would turn the call over to to our CEO, Ian Smith. However, Ian sends his regrets as he is currently traveling in Asia for the annual China Fisheries & SeaFood Expo, which is currently taking place in Qingdao.
At the event, Clearwater is hosting its Clearwater Chinese name launching ceremony at the Grand Mercure in Qingdao, where we will proudly unveil our Clearwater’s Chinese name and logo to attendees, which will include employees, customers, government officials, business associates and the media.
Our event will feature cooking demos, tasting, speeches and introductions, all of which are important steps towards continuing to expand distribution channels in the fast-growing Chinese market.
And other positive news. In the third quarter of 2018, the Department of Fisheries and Oceans announced the decision to cancel the process to issue a fourth clam license to the Five Nations Clam Company, and they have subsequently confirmed that the remaining 25% of the clam quota will be issued to Clearwater for 2018 and 2019. This decision enables Clearwater to avoid adjustments in our operations and workforce, keeping our people working in 2018 and 2019 and allowing economic benefits from this quota to remain in coastal communities where these year-round jobs are vital.
The DFO will also signal their intent to initiate a revised process in the spring of 2019 that would identify a new license holder, reallocating access to the clam resource, while promoting indigenous reconciliation, effective 2020. We intend to participate in the new process in partnership with indigenous communities. Clearwater believes that it is best positioned to provide meaningful and tangible benefits to indigenous partners given our assets and experience in this unique and very capital-intensive fishery.
In 2019, we expect meaningful and balanced growth across all regions, led by Asia-Pacific, driven by increased volume and improved sales mix, favoring higher-value species and modest price improvement. Clam sales are expected to benefit from expanded distribution channels in China, particularly in Tier 2 and Tier 3 cities, favorable product mix and the introduction of new clam products and format that leverage our existing licenses, as we continue to plan for success and long-term shareholder value creation in our clam business.
Clearwater will also continue to delever – our deleveraging activities in 2019, prioritizing cash generation, cost savings, margin improvement and low capital expenditures. The resulting free cash flow will be used to reduce debt and leverage for the balance of 2018 and through 2019.
Turning to Clearwater’s longer-term outlook. Our investment thesis continues to hold that global demand for wild-caught seafood is outpacing supply, creating favorable market dynamics for vertically integrated producers such as Clearwater, which have strong access to renewable resources.
Demand is being driven by growing worldwide population, shifting consumer taste towards healthier diets and the rising purchasing power of middle-class consumers in emerging economies, especially in China and led – especially in Asia and led by China. The supply of wild seafood is limited and is expected to continue to lag behind 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.
As a vertically integrated seafood company, Clearwater is well positioned to take advantage of this opportunity because of our licenses, premium product quality, diversity of species, global sales footprint and year-round harvest and delivery capability.
Some examples of how we have advanced our six core strategies in the first nine months of 2018 include: Under expanding access to supply, catch rates have continued to be strong for our harvested species, and the first first quarters of 2018 saw improved catch rates for frozen-at-sea shrimp, turbot and from our Scottish scallop fleet.
Under target profitable and growing [Technical Difficulty] customers, we’ve seen that global demand for shellfish continues to remain strong, and we have focused on distribution expansion for clam and all Macduff products. Recently, Clearwater achieved significant wins in new channels such as China e-commerce and was awarded the Canada China Business Council Excellence Award in both outstanding achievement and e-commerce achievement. This is a significant win for us.
Under innovate and position products to deliver superior customer satisfaction and value, we have continued to offer new products to consumers and foodservice customers. And in the first three quarters of 2018, we took advantage of existing processing partnerships to expand our clam sushi offerings, and we entered into the live crab business.
Under increasing margins by improving price realization and cost management, we saw that prices were stable in the third quarter for most of our species, including FAS shrimp and clam. And year-to-date volume reductions in scallops and the competitive conditions associated with the increases of U.S. supply put pressure on our scallop pricing and sales.
Our frozen-at-sea technology provides a distinct quality advantage in the market, creating some competitive insulation from downward price pressure, and that enables us to maintain a price premium above non-frozen-at-sea products. The company was effective in reducing cost throughout the organization through ongoing cost savings programs.
Under pursue and preserve the long-term sustainability on land and at sea, we undertake key research initiatives to support the long-term sustainability of our fisheries, including innovative ocean bottom mapping research and analysis, which Clearwater conducts in partnership with the Nova Scotia Community College.
Our ocean bottom mapping data is exclusive intellectual property that contributes directly to our increasing harvest efficiency, while reducing impact on the ocean habitat and improving sustainability.
On an annual basis, Clearwater in collaboration with other industry participants continues to undertake video monitoring research in the Canadian sea scallop fishery, adding to our understanding of resource dynamics and informing management for the development of harvest strategies that support long-term sustainability.
And finally, under building organizational capability, capacity and engagement, we continue to invest in talent and programs to develop world-class capabilities throughout our organization.
In the first nine months of 2018, we successfully expanded our learning management system portal, called Clearwater University. This system provides web-based access globally in 10 languages and encompasses over 150 courses across 10 disciplines from company policies to quality assurance trainings and the Harvard Business School leadership courses right through to SAP skill building.
We have a company-wide participation rate of over 85%, and we believe this state-of-the-art learning system is helping us to build the workforce of the future. We remain 100% committed to our core businesses and strategies. The powerful seafood industry fundamentals, value proposition and competitive advantages that form the foundation of Clearwater’s vertically integrated business model and ability to generate long-term shareholder value remain very strong.
We’re now ready to take some questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Your first question is from George Doumet from Scotiabank. George, please go ahead.
George Doumet
Yes. Good afternoon, Teresa, and thanks for taking my questions.
Teresa Fortney
Hey, George.
George Doumet
I’d like to focus a little bit on leverage. I think, the call last quarter was for leverage to move up a bit and peak this quarter. But it looks like actually we’re sequentially down. So maybe a little bit of, I guess, some color as to what happened vis-à-vis our prior expectations there?
Teresa Fortney
So I think what we saw is we saw some stronger sales volumes in this quarter. And so as a result, we saw more inventory coming down further, more cash generated, some higher returns and so all of that boded favorably on what our final leverage was for the quarter. We’re expecting that to continue to come down. I think, you know our history that when you look at our fourth quarter, we always see that our deleveraging continues into the fourth quarter when we’ve started to see our harvesting fall off.
George Doumet
That’s helpful. Maybe on that topic, maybe looking forward with the deleveraging, what has typically been our comfort zone? And maybe if you can give us some indication as to when we ideally hopefully plan on getting there?
Teresa Fortney
So we’re in the middle of the process at this stage, George, of going through and looking at what our budget looks like. We don’t tend to provide that forward guidance. What I’m very comfortable to say is that, we’re confident that we’re going to be able to continue to delever next year. And so we’ll see further decreases coming in our leverage.
Our longer-term target is to get to three time. And in all honesty, I hope we don’t get there, because I hope there’s some M&A opportunities that present themselves to us that allow us to kick-start on the growth pattern before that. But as to M&A, we – that’s where our goal is.
George Doumet
Yes, I was going to say, I think that’s a good segue into my next question. It’s maybe early you’re talking about M&A and CapEx to your point. But I think, I was just wondering if there are any maybe tuck-in opportunities or potential projects that have come to us that we passed on maybe because of the high leverage that we may be opened to in a year or two out?
Teresa Fortney
So we’re continuing to still stay eyes wide open and – at M&A opportunities and to continue to nurture ones that we see that coming on. There has been nothing that we passed on, George, that – over the course of the last year because of the leverage scenario. So – and as you noted, it’s tuck-in opportunities that we would see and they’re predominantly associated with our UK operations.
George Doumet
That’s very helpful. Thank you.
Operator
Thank you. Your next question is from Bryan Hunt from Wells Fargo. Bryan, please go ahead.
Bryan Hunt
Thank you for the time to ask questions today. It’s interesting that Ian is over in China. Recently, one of the other food companies I have – I cover signed a $1.5 billion, 3-year supply agreement with Alibaba. I was wondering can you talk about, whether the company has any purchase-minimum agreements with your Alibaba or JD partnerships? And if not, is this something that you all are working on?
Teresa Fortney
So, Bryan, we have not implemented purchase-minimum agreements. I think, one of the things that we’re always cognizant of is that, we are also within a wild fishery. So that’s something always to be mindful of. We are quite adapt at being able to leverage where we’re selling our product. But we’re focused on growing the e-commerce, we’ve got great success going there on Alibaba.
We’re seeing double-digit growth for our products and our demand and we’re continuing to expand what products we’re listing there. We’ve modified the format of the clams that we’re selling, focusing on the 150 to 250-gram size, which is really the focus of the same-day eat-at-home experience for a family. So we’re not finding that we need minimums.
The other thing you’ve got to remember is that, we’re also supplying Alibaba through our distribution network, which is already in place in China. And so while we’re actively taking orders on Alibaba, it’s through our existing distributor network that the product is getting connected and distributed to Alibaba, who then gets it to the end consumer. So we’re not seeing that requirement there.
Bryan Hunt
Very good. Next – and you talked about getting the Arctic Surf Clams harvests, all of it for the next two years. In light of maybe being awarded or receiving back, which you once owned late in the year, is there any rush or inefficiencies that may occur from having to harvest that last 25% and what could be viewed as a compressed time period?
Christine Penney
So I can’t take that one. It’s Christine Penney. And you’re right and – that we did get that announcement fairly late in the year. But what it enabled us to do is to avoid chaos to keep up going for the balance of the year. And we will fish straight to the end of the year, and really the amount that we land will depend on catch rates and methods.
Bryan Hunt
All right. And – go ahead.
Teresa Fortney
So I think, there is some positive impact that will flow, I think, for 2018. I think, a larger portion of the balance that carries over into next year.
Bryan Hunt
Great. And then I was wondering if you could talk about any benefit that you are receiving in light of U.S.-China trade issues. I mean, now we have seen as a solid acceleration in the export of lobsters out of Canada and into China. But – and I know that’s mostly procured species instead of vertical species for you all. But can you talk about whether you are seeing accelerated demand from China in light of any trade tensions between the U.S. and China?
Christine Penney
So it’s Christine again. We are certainly seeing strong demand for a number of our products in China. But these trends were strong and positive even before the U.S.-China issue. Some of them are unique offerings of direct U.S. substitute. And so we really do feel that this success we’re experiencing in China is not driven or linked to the U.S.-China issue. And really we see trade disputes on these ones is short-term type of issues and we’re confident in our ability to compete based on quality of the product and our brand irrespective of short-term trade distortion – disruption.
Teresa Fortney
And a good piece of that comes back to we’ve been doing business for 20 years in China. So really we’ve been playing well on our own.
Bryan Hunt
Very good. And then my last question is, I was wondering if you could just put some framework around leverage targets for the end of the year? I know you’ve talked about trying to get to three times over the longer time period, and then you did discuss potential acquisitions. But one, can you give us an idea of what you would like to trend towards before making an acquisition, or if you do make an acquisition, where is your comfort zone in taking leverage back up to? And that’s it from me. Thank you.
Teresa Fortney
I love it, Bryan. When I go looking forward, I have to use one of Ian’s comments, which is that the analysts don’t know when it’s quarter end. And I’m going to use a simple example of the biggest impacts can come from frozen-at-sea shrimp. The vessel doesn’t come in till it’s full, if the vessel doesn’t come in till it’s full, and it means moving from a December sale to a January sale, and all those costs stay wrapped up in inventory.
I can have – I suddenly have multi-millions that stays on the balance sheet and that affects my leverage. Same thing can happen with the clam vessel. So any of these larger species where we’re harvesting, it’s a tough call. I’m expecting that I have got two species that are carrying inventory over the new year on the boats, because that’s just the way the timing of the fishing plan is going to work. And so this is why it becomes very tough to be specific in our targets. So wild harvest, it’s fishing and it’s you fish when the weather is good, and you bring the boat in when it’s full.
So that’s why, not to be evasive, I step back and I be a little bit more broad about what the leverage target is for year-end. I can tell you that seasonally, typically, it always does come down at the end of the year, because we have a couple of species that are not fishing anymore. And that means that our inventories are coming down and that means it’s translating into sales.
So it all just naturally flows to better leverage in the Q4. The trend overall, we’re going to keep continuing to generate the free cash flow to bring down the leverage again throughout next year. And the target, it depends on what kind of an M&A opportunity comes forward, what kind of volatility do we see on the TAC horizon, and what the size of the opportunity is.
Bryan Hunt
Very good. I’ll hand it up. Thanks for your time, Teresa.
Operator
Thank you. [Operator Instructions] Your next question is from Jonathan Lamers from BMO. Jonathan, please go ahead.
Jonathan Lamers
Good afternoon.
Teresa Fortney
Hey, Jonathan.
Christine Penney
Hey, Jonathan.
Jonathan Lamers
On the clams, so Teresa, you mentioned during the Q&A that the late timing of the minister’s announcement has somewhat deferred your harvest plans. And so you may not be able to sell all the clams your harvest in Q4, rather you’ll sell some of that a bit later. If I’m understanding, is that correct?
Teresa Fortney
Yes.
Jonathan Lamers
So – but you have quite a bit of clams in inventory. So typically, from Q3 to Q4, we see quite a pickup in your clam sales. Do you have sufficient inventory to support like a typical seasonal pickup for clams?
Teresa Fortney
Yes, we’ve got clam selling well through – we’re solid for Q4. What we also see is, we usually also have some strong clam sales very, very early in January and that supporting depending on how the Chinese New Year lands for timing. So our clam inventories have been continuing to come down. Yes, we’re good for selling our Q4 demand. And so it’s not particularly worrisome to me that all the clams of the remaining 25% TAC is not coming in for Q4 availability. You’re always fishing for the next quarter, couple of quarters ahead.
Jonathan Lamers
And you mentioned that there’s two species where you expect fish to be on the vessel at the end of the year. One would be clams, what is the other one?
Teresa Fortney
I think I’m expecting shrimp to also be on the water.
Jonathan Lamers
Thanks. And just another question on the clams. So I noticed that the sales mix improved this quarter, which I take it was positive for pricing and margin percentage. Would you attribute that to the company’s efforts to target larger clams with its bottom mapping technology. I – what I really want to get a sense of is, is this improvement in mix sustainable going forward?
Christine Penney
I can take that one. It’s Christine. So – and certainly, the research investment that we pour into the fishery, systems improving knowledge about the resource, and that helps us to improve harvest planning. But you got to remember, it is a wild fishery and there is always going to be variability. And so we also focus on broad distribution and developing demand across full spectrum. So we approach that both types.
Jonathan Lamers
Okay. Thank you. And Teresa, you made a comment about prices being stable in Q3, and like – I found that a little bit confusing just because shrimp and clam prices are up so much year-to-date. Can you elaborate a little bit on the price trends that you saw in Q3? And how those compare to the first-half of the year?
Teresa Fortney
So we’ve seen strong prices for sure in shrimps all of this year, so that’s continued. So that was my reference there to stable, Jonathan.
Jonathan Lamers
So you’re saying that the Q3 shrimp prices were similar to the first-half shrimp prices?
Teresa Fortney
Right.
Jonathan Lamers
Okay. And then scallops, have you seen prices continue to come off in Q3 and Q4 based on the orders that you’re seeing, or are those starting to stabilize?
Teresa Fortney
Good. We saw a fair bit of speculation in the market and I guess, instability this year, as people were anticipating what the demand, the volume coming in from the U.S. fishery was. So we saw a pretty aggressive downward pressure in the first-half of the year on prices. And by the end of July, we saw pretty much we feel is probably the bottom for this year for sure. And so we started to see some strengthening and some improvement there.
What we’re hoping and we’re certainly going to try and influence is that, the market is expecting another big supply year next year for U.S. scallops. But we’re going to be very strong reminders of don’t play the guessing game and keep that stability in the prices. We’re not expecting to see them hit back up to the 2017 levels at this point, but keep it steady guys.
Jonathan Lamers
Okay. But you would be expecting a stronger volume result in the first-half of 2019 as customers hesitate less to place their orders with you. Is that a fair observation?
Teresa Fortney
That’s certainly what we’re going to try and influence, Jonathan. I don’t have a good read on where customers are going at this point.
Jonathan Lamers
Yes, that’s fair. All right. Thanks for your comments.
Teresa Fortney
Okay.
Operator
Thank you. Your next question is from Kyle McPhee from Cormark Securities. Kyle, please go ahead.
Kyle McPhee
Hi. I just wanted to dig in a bit on some of the outlook commentary in the quarter release. So you’re calling for revenue growth in 2019, but not a lot of detail on the moving parts. Can you maybe just go through some of those moving parts that may be a high level? In which core fisheries should be up year-over-year, which one should be down? And then of course, any color on the reasons would be appreciated? I suspect you outlook for TAC and pricing plays into those moving parts.
Teresa Fortney
Yes. And you know what the hard part is for us is there is no TAC that’s been firmed up yet for us. So we’re doing a little bit of the looking out. Are we seeing markers that are going to tell us there’s a decline, and so – no, we’re not. Are we seeing markers that are telling us there’s going to be some strength and some growth support? Yes.
So I’m not able to speculate and share at this point, Kyle, what the actual TACs are going to look like by fisheries. You can take from my comments that we’re expecting some more stability in scallop market for next year in one species particularly. I think the fact that we’ve got the indication on the clam for all of next year also bodes favorably for us.
Kyle McPhee
Okay. Thanks for that color. And then just on your OpEx, your SG&A. You guys previously did a round of cost cutting. I think that – at least a part of that was linked to the loss of clam quarter, which you’re now keeping. So does any of that SG&A cuts reverse, or are you kind of at a normalized run rate now?
Teresa Fortney
No, we will be at a normalized run rate. The SG&A cost cutting, it wasn’t directly into the clam fishery. But it was seeing the clam announcement, seeing what the forward look was, where our leverage was, and saying, pause, we need to do a downsize on our SG&A to go forward. No intention to be increasing that. That’s going to stay more normalized where it is now.
Kyle McPhee
Okay, thanks. That’s it from me.
Operator
Thank you. Your next question is from Ryan Bloom from Hartford Investment. Ryan, please go ahead.
Ryan Bloom
Yes, good afternoon.
Teresa Fortney
Hi, Ryan.
Ryan Bloom
I just wanted to – hi. I just wanted to follow-up on the SG&A comments. I know you had some increases in stock compensation, incentive comp and labor overall been up 13%. Can you detail what drove the increase in labor separate and part from the stock compensation? And then two, is that $14 million now the appropriate run rate given the cost cutting in place or are there some seasonal blips?
Teresa Fortney
I’m going to ask somebody to pull up the $14 million run rate that you’re referring to. In terms of – the SG&A, it’s the big – the two changes in the quarter and basically on a year-to-date basis or impact the share-based comp and it’s the variable incentive-based cost. So we’ve had continued other cost savings. We continue to maintain the restructuring that was done back in 2017. So we’re on track with that, and we are expecting that to stick. What is the $14 million?
Donald MacNeil
$14.7 million is the Q2 SG&A on our Q2 2018 results and $14.5 would be the Q3. So it’s basically saying it’s $14 million going to sustain.
Teresa Fortney
Yes, gotcha. Don’t have a Q4 SG&A view in front of me at this moment. You’re going to see the same trend go forward. Stock-based comp is really share price-driven. So that’s a tough one for me to call.
Ryan Bloom
Okay, fair enough. I guess also, you alluded to obviously the deleveraging – cash flow priorities, part of that being still further working capital efficiencies. I guess, what continues to drive that? Is that going to be a function of – largely from a late clam harvest, or are there other variables in there that continue to build upon this year?
Teresa Fortney
No, I think, everybody is very focused and very aware of the inventory investment. And where there’s procured species, it’s also a little bit more flexibility around when is the product available, when do we want – when are we going to sell, when do we want to buy it and so forth.
So, on the harvest side, weather is a stronger driver on when the need to go and do your fishing and put the product into inventory. But it’s just being smarter, wiser and how we’re managing the total working capital. It goes beyond to accounts receivable, accounts payable as well. Overall, we just be – we’re continuing to get more efficient at it.
Ryan Bloom
Okay. So it’s a broad game overall in each of those categories?
Teresa Fortney
Yes.
Ryan Bloom
Okay. And then my last question was really trying to get an update on Brexit impacts. I know in past presentations you referred to maybe not risk, but you do suggest supply agreements being part of what you will monitor in fishery, specifically fishery access. Can you speak to that, like is there anything that would prevent access, or is it really the trade agreements that you have in terms of exporting out of your UK fisheries on the scallop side? And then if you could just give me – refresh my memory of the European exposure of sales exposure, how much is related to the UK?
Teresa Fortney
So we’re going to answer that in two separate ways. I think we really got to pause and first just answer the Brexit and the access to our harvesting rights. First, I’ll ask Christine, if you want to talk about first.
Christine Penney
Yes, absolutely. So we’re continuing to engage the UK industry government and it’s understanding influence on all the key issues around Brexit that are relevant to our business. With respect to fisheries act passed, that is not a big concern. We get species that we harvest and the geographies that those species are harvested in. And so that one is not – we’re not seeing that as a big risk. As you referenced, of course, the trade issues coming out of the UK and what the relationship – trade relationship with Europe is going to be is one that we are tracking carefully and we expect to be able to assess measures and plan regarding Brexit.
Ryan Bloom
Okay, I’m sorry.
Teresa Fortney
I was going to say, then to track over to your question on the European sales. You really have to step back and realize that we’ve got products from all of our fisheries that are going into Europe. So they are really disconnected questions. So we’re not expecting that there’s going to be a significant impact there.
We’ll watch for any incremental costs that come along with tariffs and so forth. But there is different ways that, that can be managed as well, because we’ve got a global footprint and we would certainly be looking to minimize any impact there.
Ryan Bloom
Thank you very much.
Operator
Thank you. There are no further question at this time. Please proceed.
John Lane
Okay. Thank you, everyone, for attending today’s call. I appreciate your time and looking forward to speaking with you next with our Q4 earnings. Thank you.
Teresa Fortney
Thanks, everyone. Have a great day.
Christine Penney
Goodbye.
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