Net profit

When Ian Smith was named chief executive officer of Clearwater Seafoods, in May 2010, the seafood harvester, processor, and exporter was struggling.

The Halifax-based company was heavily indebted and still struggling to repair its finances following a go-private effort that failed during the 2008 global financial crisis. Clearwater’s stock price was also way down — in the 80-cent range — and, despite being structured as an income trust, the company had stopped issuing dividends.

“An income trust that doesn’t distribute dividends is a broken income trust,” Smith says, seated in his office.

The trust structure was ditched, debt was paid down, the corporate fishing fleet was upgraded, and Smith — a former Fortune 500 executive — pushed to improve the company’s marketing, selling, and distribution efforts, with a particular focus on courting higher-end customers willing to pay more for Canadian seafood.

Improvement followed. A five-year plan to grow annual revenue to $500 million and EBITDA to $100 million was achieved ahead of schedule. In China, revenue grew from less than $20 million in 2010 to nearly $100 million in 2015. The company’s stock price has risen over the same period — to a high of $15 per share in early 2015. “It’s been incremental improvement over time,” Smith concludes of the company’s revival.

Clearwater’s upgraded position is perhaps best revealed by the company’s acquisition, in 2015, of U.K.-based Macduff Shellfish Group for nearly $200 million. The Macduff acquisition, which boosted Clearwater’s seafood supply by 20 per cent, was a display of corporate and financial health that was surely lacking five years earlier.

Clearwater’s turnaround over the past half decade can be attributed to a mix of factors. Chief among them, Smith insists, is the company’s attention to innovation. “It has been essential,” he says.

Doug Cooper, the managing director and head of research at Beacon Securities, a firm that provides analyst coverage of Clearwater and also helped the company raise money, agrees.

Cooper notes that Clearwater has benefited from growing global demand for seafood, particularly in China, during a time when the supply of wild-caught seafood has been flat. That means prices are up.

Yet Clearwater has also been helped by its new ideas and technologies, Cooper adds.

“I would say innovation is quite important in the DNA of the company.”

The word “innovation” is surely overused in the corporate and business worlds, especially so in tech startup circles. It’s a label often slapped on even the smallest internal changes, R&D efforts, and new products.

Here’s one flakey example: in describing his company’s “innovations” for 2013, Kellogg CEO John Bryant pointed to the introduction of a peanut butter Pop-Tart: Gone Nutty! It was nothing more than an old product stuffed with a new filling.

Writing shortly after for the Harvard Business Review, William C. Taylor, the co-founder of Fast Company magazine, argued that the word “innovation” was “quickly losing whatever meaning it once had”.

“If the CEO of a major company can call Gone Nutty! an innovation, then what isn’t an innovation?” he wrote. “What does the word even mean anymore?” Taylor called for the word to be banned from the business lexicon.

For his part, Smith says there are two types of innovation — Big Innovation and Little Innovation — and that Clearwater is involved with both. Small innovations at Clearwater include the company’s production of two value-added products: bacon-wrapped scallops and scallops in sauce.

Big innovation, according to Smith’s definition, is an advancement that is “significantly disruptive” to a company’s business model — one that gives the company a meaningful competitive advantage. He argues Clearwater has developed a number of big innovations, most of them technical, and that they are all partially responsible for the company’s position as one of the world’s largest vertically integrated seafood companies, a global exporter of scallops, lobster, clams, shrimp, crab, and other seafood.

Smith points to Clearwater’s ocean mapping technology, which has enabled it to better understand what’s on the ocean bottom — be it scallops or clams — and be more productive in pulling it up. The result has been a more efficient use of its fleet.

“That was a huge breakthrough,” he says. “This technology had never before been applied to the fishing industry.”

Smith’s office overlooks Bedford Basin in Halifax Harbour and his job is to oversee a seafood company with a market capitalization of more than $900 million (up from $48 million in 2010), yet he doesn’t have a fishing background. He’s originally from Montreal and previous to his appointment as Clearwater’s CEO worked for the Campbell Soup Company. From 2006 to 2008, he led Campbell’s operations in China, establishing their soup business in mainland China. Before that he worked for Colgate-Palmolive.

His previous employers appear to have shaped his ambitions for Clearwater. “We want to measure ourselves against the best protein-producing and food-manufacturing companies in the world. That’s who we want to aspire to be like in the future,” he says.

Asked to name example companies, Smith lists a group of Fortune 500 mainstays: Tyson Foods, ConAgra Foods, Danone, and Nestlé. Clearwater, Smith argues, should aspire to match the quality, service, and brand reputation of those companies. “We really believe we have the opportunity to move from best-in-class in seafood to being world-class.”

It’s a bold ambition. Clearwater’s 2015 sales totaled just over $500 million; Nestlé, meanwhile, posted revenue of roughly US$90 billion.

Smith says growing Clearwater in the image of those food industry powerhouses will require plenty of capital, talent, and — most importantly — more innovation.

Tony Jabbour, Clearwater’s vice-president of Fleet Operations, is standing on a dock in Shelburne, N.S. Towering next to him is the Atlantic Preserver, one of Clearwater’s two scallop draggers.

At one time, Clearwater used a dozen boats to collect its scallop quota. Around 2001, however, the company launched a major transition, cutting the fleet first to four vessels, then two: the Atlantic Preserver and the Atlantic Protector. Both are modern factory ships, capable of gathering, processing, freezing, and storing upwards of 200,000 pounds of scallops in a two-week trip.

In addition to consolidating its fleet, Clearwater changed the way it crews its vessels.
Instead of fishing for a share of the catch — the typical way fishermen get paid — Clearwater’s crews are now mostly salaried. They can earn anywhere from $75K-$100K, depending on the type of fishery as well as their own training and experience.

“The rest of the industry thought there wouldn’t be any incentive for the fishermen to produce,” Jabbour says before stepping aboard the Atlantic Preserver. “But it’s proven to be the other way.”

Jabbour steps into the wheelhouse. Down below, on deck, he can see the large mechanical arms that drop the scallop dragging gear to the ocean bottom. Jabbour then maneuvers carefully down three steep flights of steps to the ship’s internal factory — one of Clearwater’s key technical innovations.

Before it can be fried or wrapped in bacon, the edible white nugget of scallop muscle must be shucked from the mollusk’s shell. Traditionally, that was done by hand on deck, or down below at a shucking box.

Conway Hutt, first mate on the Atlantic Preserver, started as a Clearwater crewman 10 years ago, four days after graduating high school. Each day at sea he spent roughly 11 hours hand-shucking scallops. “It gets sore,” he says with a smile. Hutt quickly realized he’d rather be in the wheelhouse.

In 2010, Clearwater began using automatic shucking machines (ASMs), an in-house technology the company had been working on for years. Jabbour, who has been with Clearwater 23 years, had just started in the fleet department when the shucking machines were first tested. They worked well in the lab, but were suffering from startup glitches when implemented at sea. Jabbour wondered if the technology would actually function outside the lab. He was overseeing modifications to the setup when a young crewman walked up to him.

“Whatever you do, make sure these things work because I don’t want to go back to that shucking box,” the crewman told Jabbour.

The automatic shucking technology is now a key component of the company’s scallop business. “The technology exceeded our expectations,” Jabbour says. “People are making more money, we’re catching the quota quicker, we’re reducing our carbon footprint… It’s just been a total success story.

Aboard the Atlantic Preserver, scallops brought on deck are quickly sent down to the factory. Each scallop is run through one of two automatic shucking machines. The shell — held in place in a cup — is cut and the scallop meat is peeled off. Ten years ago, a quick-fingered crewman could hand-shuck 15 scallops per minute. The shucking machines can process between 40-50 in the same amount of time, thus reducing the traditional backlog. “We’ve created a better quality product because a machine doesn’t get tired at the end of a trip or the end of a watch,” Jabbour says. “The cut is exactly the same every time.”

After emerging from the shucking machines, the scallops are counted, washed, run through quality stations and then frozen. “Literally within about 20 minutes the product has gone from the bottom of the ocean to being minus-18 degrees Celsius frozen,” Jabbour says.

The changes made to the company’s scallop fleet (fewer vessels, salaried crews, automation) have improved the final product and increased the fleet’s profitability.

The changes have also helped with hiring. Before the upgrades, the average Clearwater crewman was in his late 50s. It was difficult to attract younger workers to positions that involved hours of manual, highly repetitive work. The shucking also resulted in frequent injuries, including carpel tunnel.

According to Jabbour, the number of injuries is now much reduced, and younger workers have returned to the fishery. Today the average worker is in their mid-40s.

Clearwater scallop crews work 16 days on; 16 days off. The use of two crews — of between 20-30 men — means the Atlantic Preserver is at sea nearly continuously. One crew returns, another heads back out to sea. The season starts in January and the crews fish until Clearwater’s quota is caught. Some years they fish until the end of the calendar year. This year they wrapped up in August. The fishing was over for the year, but as salaried employees the fishermen continued to be paid.

“They have the same benefits as anyone working in an office: they have RRSPs, they have Blue Cross, in some cases they have long-term disability. All that stuff,” Jabbour adds. “We’ve created more technical and better paying jobs.”

The changes, he says, were inspired by many factors. The company’s large scallop fleet was in need of replacement and vulnerable to high fuel costs. A high rate of crew turnover (20-25 per cent annually) was also a problem, but has since been cut below five per cent. “It really wasn’t a sustainable model for a public company to continue down that path, to continue doing the same thing year in, year out,” Jabbour concludes.

Standing next to one of the Atlantic Preserver’s shucking machines, Jabbour notes that more changes are planned.

“This is version one of the automatic shucking machines. We’re now working on version two,” he says. “In two to three years it will be a different machine altogether. And this is just scallops. We’re doing the same thing in clams. We’re doing the same thing in lobster. We used to have five offshore lobster boats. Now we’re catching the quota with one.”

John Risley and Colin MacDonald started Clearwater in 1976. The pair founded their live lobster distribution company with a single pick-up truck. Live lobster sales long dominated the company’s focus, though it did present a problem: many lobsters die before they can be sold.

Michael Roy has worked at Clearwater for 30 years, holding various positions in the company. He now manages Clearwater’s plant in Lockeport, N.S., overseeing complicated seafood processing and packaging lines. Nearly 75 per cent of all Canadian scallops are processed at the Lockeport plant. “That’s our bread and butter here,” Roy says.

In all, the plant’s nearly 300 employees process approximately 15 million pounds of Canadian and Argentine scallops annually; the product is shipped to more than 30 countries. On this day, frozen scallops are being bagged for sale by Marks and Spencer in the U.K. Bag after bag is quickly filled with frozen scallops, sealed, and packed in boxes for shipment.

The Lockeport plant also houses the solution Clearwater developed to solve its lobster mortality problem. In other words, what to do with lobsters deemed not strong enough to endure short-term live storage and shipping.

Roy — clad in a hairnet, smock and shoe covers — walks across the plant floor, past the scallop processing line and industrial freezers, to the company’s high-pressure lobster equipment. The technology was first used by Clearwater in 2004. “Since then other people have started to do this as well,” Roy notes. “But it’s pretty safe to say we were one of the first to do it.”

The process works like this: Roughly 250 pounds of lobster is loaded into a white barrel and moved into one of two high-pressure machines. The water inside the barrel is pressurized, a process that both kills the crustaceans—without cooking them—and breaks the bond between their shells and the raw meat inside, making it easy to remove. (The pressurization process takes between six and seven minutes and Roy says the lobsters die within the first 20 seconds).

The lobsters are then sent down the processing line. Special equipment is used to remove the meat from the knuckles, tails, claws, and legs. Leg meat is usually used as an ingredient — such as in lobster ravioli — while the larger pieces are frozen and vacuumed sealed in blue plastic, typically with knuckle and claw meat stuffed in the body of the shelled lobster. The raw, frozen meat has a two-year shelf life, allowing restaurants and other customers to prepare lobster year-round, regardless of supply at sea. The meat can be boiled right in its plastic package.

Looking over the production line, Roy says Clearwater is spending money to expand it. “We’re just starting,” he says. “Our target is to have the capacity for next spring.”

Roy then walks to a nearby building. Once used for crab processing, the building is now used to make bacon-wrapped scallops.

A couple dozen workers are standing at tables, wrapping scallops with strips of bacon. Some of the scallops are then pierced with toothpicks. The bacon-wrapped balls are placed on trays, packed, and frozen.

Compared to the other automated production areas, the bacon-wrapped scallop line seems antiquated — so many people, so few machines. “That’s a very manual process and we’re now looking at opportunities for automation,” Roy notes. Even the lobster production line could use more automation, he adds. “There is money to be saved,” Roy says. But there’s another factor at play in the push for more automation: it’s increasing difficult to find workers willing to gut and shell lobsters and wrap scallops in bacon.

Sitting in his office, Ian Smith is outlining how Clearwater uses innovation to improve its operations at sea, in its plants, and in its sales and marketing. “It’s end-to-end innovation,” he says. “You have to be looking across your entire route to market, your entire business model, and pushing that flywheel of innovation across every aspect of your business.”

He mentions the shucking machines (“huge cost savings and productivity boost”), the high-pressure lobster equipment (“an instant success which has been more than 15 years in the making”), and many other examples. Among them: the company’s live lobster storage facility in Cape Breton, the biggest in the world, which is capable of holding 1.5 million pounds worth of live lobsters for up to six months, ensuring steady supply year-round. “Clearwater invented the ability to… hold and then distribute later through the season,” he says. Then there’s the $150 million the company has pumped into its clam business over the past six years, including the recent purchase of a new $70-million clam dragger.

Smith takes nearly an hour to run through Clearwater’s recent innovation and investment highlights. “I apologize,” he eventually says, reaching the end of his notes. “Don’t mistake my verbosity for arrogance. Please take it as passion for what we’re doing. I’m incredibly proud of what we’re doing here.”

He laments, however, that the fishing and seafood industries are not associated with innovation and technology.

“We’re spending millions on innovation in all different aspects of our business,” he says. “And it’s not just about the almighty dollar… It’s better for the animals, it’s better for the habitat and it’s economical for us. There’s a win-win-win going on in many of our investments.”

Smith also laments that technological advancements and innovations developed in Atlantic Canada often go uncelebrated. “We always talk about the things that we don’t do well enough in Atlantic Canada,” he says. “We don’t spend enough time talking about some of the things we do well and that are successes. I do think this is an Atlantic Canadian success from an innovation stand point.”

The improvement of the past half-decade, combined with Smith’s intention to mimic companies like Tyson, ConAgra, Danone, and Nestlé, means innovation will continue to be among his main mantras. He notes that new lobster storage and distribution technology that will enter the market in 2017.

“Our future pipeline of innovation is full. As we look at the next five years and how we’re going to invest in R&D and technology, we’ve got a full slate of projects,” he says.

“We have more ideas that we can possibly execute.”