Clearwater Seafoods

Clearwater Seafoods

Executive Summary

Currently Clearwater Seafoods is caught into a dilemma between the investors and the CFO. And the company is facing the foreign exchange risk as well as business risk. With the consideration of the current situation of the company, this paper states the risk exposure and points out some limitation in the current hedge. Then some suggestions are given out to improve the company’s earning ability.  

Introduction of Clearwater Seafoods

Clearwater, founded in 1976 at Bedford, is a seafood exporting firm located in Canada. In 2002 it went public as an income trust to finance a significant growth strategy.  It was the largest publicly traded shellfish company in North America as well as the largest holder of offshore rights to harvest premium species in Atlantic Canada. With strong customer base, innovative technology and vertically integrated, its sales revenues excess Cdn$300 million and mostly of them are transferring from the foreign currency. However, in recent year the company suffer a huge loss from the depreciation of Canadian dollar and had suspended monthly distributions to unit holders because of the 35% decrease of the value of the firm.

Foreign Exchange Risk

Clearwater Seafoods suffers from three types of foreign exchange risks, which are translation risk, transaction risk and economic risk. Clearwater Seafoods receives huge amount of payment in various foreign currencies though seafood trading. Foreign exchange risk is definite as the risk of an investment’s value changing due to changes in currency exchange rates. Especially the company as Clearwater that relies heavily on the exportation may have huge impact even though the foreign exchange rate changes slightly.

The translation risk occurs from the potential losses when translating into the home currency from the foreign currencies. And the cost of it is uncertain from time to time. As Exhibit 8 show, the foreign currency translation of Clearwater was varied. It was $1.443 million in 2003, $3.006 million in 2004 and $1.236 million in 2005. These unstable translation costs will make the company more difficult to estimate its budget and conduct the strategy of next year.

As for the transaction risk, it is the risk of adverse exchange rate movements occurring in the course of normal international trading transactions. The firm receiving foreign currencies will suffer a loss when the home currency appreciated. In the case of Clearwater, the payment in Canadian dollar of the firm occupied no more than 20% of the sales while the payment in US dollar having approximately 50%(seen in Exhibit 5). As Exhibit 2 show, from 2004 the Canadian dollar appreciated greatly with other major foreign currency especially with the US dollar. And if without effective foreign exchange risk management, Clearwater would have millions of losses.

The third risk is economic risk, which is the effect of exchange rate movements on international competitiveness. As mention above, the payment in US dollar covered 50% of the sales.  Clearwater will have dramatic impact negatively when the US market’s competitiveness weaken. Besides, when US dollar depreciates the revenue of the company that transferred into Canadian dollar will also decrease.

In addition, currently Clearwater has a foreign exchange risk management involving hedging by forward contract and option. As Exhibit 1 show, the gains from hedging are quite stable, however, the EBITDA of the company decreased from 2003 to 2005, $91243, $74311 and $56956 respectively. Apparently, the level of hedging is far from enough. The forward contract of Clearwater only cover 50% of the cash flow from forecasted sales leaving the rest exposing to the exchange risk. Besides, using option is a risky strategy. Clearwater takes the short position of call options, therefore, it is facing the risk of unlimited loss when the Canadian dollar appreciates.

Business Risk

Clearwater’s operation focuses mainly on the year-round offshore seafood trading. The industry was regulated by government agencies though the harvesting licenses. And Clearwater Seafoods is facing three kinds of business risks, strategic risk, operational risk and hazard risk.

The strategic risk is the uncertainty returns due to company relative to the competitors and reputation. Seafood harvesting is a competitive business and in the case of Clearwater, it has three elements of strategy to ensure its competitive advantage (seen in the Exhibit 10). Firstly, it applies innovation to enhance growth an ensure resource sustainability.  Second, it controls value chain through integration. Third, the company diversifies species and markets to hedge against downturns. To achieve these three strategies successfully, it requires Clearwater to put large amount of money. As for the innovation, it is based on the research, equipment as well as new vessel which need thousands of funds to support.  After the integration, the company should also put vast funds for the central control and monitoring. Compared to its competitors, its product range only convers shell fish while others have various species. Also, the harvest in Canada is strongly controlled by the government. In order to maximize the TAC, it needs more funds since the quotas and licenses could be transferred, traded and sold in Canada.  Besides, it is not a guarantee that through diversification the company can increase its revenue greatly. Even worse, if the increasing revenue could not cover the funds it invests, the company may have a loss.

Second, the operational risk is the variability in returns from how the business is managed and controlled on a day-to-day basis. In the case of Clearwater, it is hard to maintain the leading role among its peers since the seafood harvesting is a competitive business. It should guarantee the fast pace fishing method as well as the quality and value of seafood products. Besides, the government control limits the location, the type of fish and the quantity. As the seafood business is seasonal in nature, the company mainly profit in the second half year. However, it promises to pay regular monthly distribution as an income trust and the distribution is set at the beginning of the year leading to the uncertainty of the cash flow. All the factors above, the competitive business, government control, the nature of seafood business and the income trust contract, will limit the revenue of the company and may force it to construct a more aggressive strategy to obtain higher revenue, for example, investing fishery stocks and trading the licenses of TAC.