Premium Brands Holdings Corporation

Good day, ladies and gentlemen. Welcome to the Premium Brands Holdings Cooperation first quarter 2020 earnings conference call. Our speakers today will be George Pilego, CEO and President of Premium Brands and Will Kluch, CFO of Premium Brands. As a reminder, this conference is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a Q&A session At the time, participants are asked to press star 1 to register for a question. For assistance during the call, please press star 0 on your touch-tone phone. It is now my pleasure to introduce your host, George Perligo. Please go ahead, sir.

Thank you, Brian, and good morning, everyone. I would like to welcome you to our 2020 First Quarter Conference Call. We hope... that you and your families are healthy and safe during these uncertain and difficult times. Also, I would like to thank all of my 9,000 PB associates who have been doing an amazing job in producing the foods needed to nourish our fellow citizens. Their hard work and dedication is greatly appreciated. Turning to our results, our strong first quarter numbers are indicative of the progress we're making in becoming North America's leading specialty foods company. During the quarter, we made great progress on many fronts, including in our core categories of value-added seafood, artisan sandwiches, meat snacks, premium dry cured meats, and cooked proteins. Our organic growth for the quarter, or 14%, speaks for itself. The first quarter is, however, old news. and it seems that it happened a very long time ago. COVID-19 has changed everything we know, the way we live, and even the way we interact and communicate. No one knows what the post-COVID-19 universe will look like, and those that pretend to will probably be proven wrong. But what we do know is that people's love for good food and their interest in finding healthier and more convenient ways to feed their families will continue. The physical venue where they enjoy their meals or the method they use to source food may change, but demand for this basic human need will not. At Premium Brands, we're well positioned to get to the other side of this crisis. Please see my 2020 letter to shareholders titled Great People and Great Culture are Points of Difference for details on why we're confident in making this statement. The letter can be found on our website at www.premiumbrandsgroup.com. In the letter, I focus in on why we're anti-fragile, a term coined by Mr. Nassim Taleb, and by which we mean that we will emerge from this formidable challenge a stronger company. In short, this is due to three factors, namely our decentralized entrepreneurial culture, which push decision-making to the front lines, our unique PB ecosystem, which provides support and resources and allows our businesses to focus on the long-term, and our diversified business portfolio. Also on our website, you'll find the PowerPoint presentation used for AGM last Friday. In the presentation, you'll find many details on how we're dealing with the COVID-19 crisis, as well as additional color on our long-term financial strategies and our acquisitions pipeline. I will now be turning the presentation over to our CFO, Will Kaludich, for an overview of our financial results for the quarter, which will then be followed by the Q&A segment of the presentation. Will?

Thanks, George, and good morning, everyone. Before discussing our results for the quarter, I would like to caution you that to the extent we make forward-looking statements during our presentation, Our forecasts and assumptions are subject to change and actual results may vary. Please see our 2019 MD&A, which is filed on our CEEDAR website, on the CEEDAR website, www.ceedar.com, for details on some of the factors that could cause our actual results to differ from our current expectations. Turning to our results. Our revenue for the quarter grew by $158.4 million, or 20.4%, to a record The majority of the growth was driven by organic sales initiatives, which accounted for $113.7 million of the increase. Acquisitions accounted for $33.5 million, selling price increases for $6.5 million, and currency translation for $4.7 million. Our organic volume growth rate, which excludes the impact of selling price increases and currency exchange-related inflation, was 14.6% for the quarter, which was well above our long-term targeted range of 4% to 6%. On a nominal basis, i.e. after selling price and currency exchange inflation, our organic growth rate was 16.1%. Our strong organic growth for the quarter was driven by a wide range of initiatives that we have been working on for a while and span across our five platforms, with seafood, artisan sandwiches, meat snacks, and premium dry cured meats being the product categories we are seeing the most success in. Our growth rate was also positively impacted by an unusual spike in demand in the retail channel in the last two weeks of the quarter, that was tied to consumer concerns around the COVID-19 outbreak. This factor was, however, partially offset by COVID-19 related decreases in our sales to food service focused businesses. And as a result, the net impact on our sales in the quarter of the COVID-19 crisis was relatively small at $6.6 million. Normalizing for the COVID-19 impact, our organic volume growth rate for the quarter is still a very strong 13.8%. A key factor to note about our growth is that this is the fifth quarter in a row where we have increased our quarter over quarter growth rate. From a 2% rate in the first quarter of last year to 14.6% this quarter, we have consistently increased our growth rate each quarter as many of the initiatives that we've been talking about over the last one plus years gained traction. In terms of our adjusted EBITDA for the quarter, it increased by $4 million or 6.6% to our first quarter record of $64.3 million, which we were pleased with given that our first quarter is historically our weakest of the year due to the seasonality of many of our businesses. The growth in our adjusted EBITDA was driven by our strong sales performance, offset by investments that we've been making in production and SG&A infrastructure to support our continued growth, as well as some labor inflation, additional outside storage costs associated with several inventory strategies, which I will come back to in a moment, and extra costs incurred in relation to the COVID-19 crisis. The increase in our outside storage costs, which was about $1.7 million for the quarter, was a result of increased inventories in many of our businesses as they implemented a number of hedging and risk mitigation strategies to deal with commodity cost inflation and supply chain disruption risks associated with both the African sign fever-related challenges that we have discussed in the past and the fallout effects of COVID-19. Our adjusted earnings per share for the quarter increased by 1 cent to 53 cents per share due to a variety of factors, including the improvement in our adjusted EBITDA, lower borrowing costs, and the reversal of $2 million of contingent consideration relating to a past acquisition. These factors were partially offset by additional amortization and depreciation associated with recent investments in acquisitions and capital expenditures. as well as the dilutive effects of our equity offering from the third quarter of last year as a significant portion of the new capital race has not yet been invested. In terms of our outlook for 2020, while the first quarter was a great start to the year, as George mentioned earlier, it seems like eons ago and the world has changed dramatically. The COVID-19 crisis and its fallout effects are impacting almost all areas of our business. On the sales side, we have seen our food service, airline, convenience store, cruise ship, and export customers all hit hard. Our production facilities and supply chains are also experiencing a significant amount of destruction through these turbulent times. And while we are confident in the abilities of our dynamic and entrepreneurial management teams to navigate through these trying times, In the near term, the crisis is having a negative impact on our performance. While these disruptions are not expected to affect our long-term objectives, the extent and specific timing of their impact is highly uncertain and cannot be predicted, and correspondingly, we are not able at this time to forecast with reasonable accuracy our results for the balance of 2020. As a result, we have withdrawn our revenue and adjusted EBITDA guidance for the year. In the meantime, we are actively managing the situation and, where appropriate, erring on the side of caution in terms of what's best for our employees, communities, and customers. Furthermore, our decentralized business model, which includes a large number of regional production facilities rather than one or a few centralized facilities, provides us with flexibility and redundancy and better positions us to service customers without disruption. Turning to our financial position, we went into the COVID-19 crisis with a very strong financial position and continue to maintain a conservative balance sheet and strong liquidity. Our senior debt to adjusted EBITDA ratio at the end of quarter was 2.8 to 1, which is within our long-term targeted range of 2.5 to 1 to 3.0 to 1. And we had approximately $214 million of unutilized credit capacity at the end of the quarter. Looking forward, we have stress tested our financial position using a variety of bad case scenarios and are confident in our ability to weather the storm. We have, however, out of an abundance of caution, temporarily suspended the closing of any new business acquisitions and deferred certain capital expenditures until we have better clarity on the length and impacts of the COVID-19 pandemic. During the quarter, we invested $22.6 million in capital projects, all of which are expected to generate a 15% or more return. These included a recently announced 41,000 square foot expansion of our artisan bakery in Langley, BC, several meat snack capacity expansions, additional charcuterie tray capacity at our Reno sandwich plant, and newly installed automated sandwich production lines at our Phoenix Sandwich Plant. Earlier in the quarter, we also invested $32.2 million in new businesses consisting of BC-based food broker and distributor, Informed Brokerage, Washington-based meat snack producer, Bavarian Meats, and our first European investment, Italy-based dry cured meats producer, La Filonese. Turning to dividends, during the quarter, we declared a dividend of $21.7 million, or $0.57.75 per share, which on an annualized basis works out to $2.31 per share. Our free cash flow for the trailing 12 months was a record $182.2 million, as compared to dividends of $80.7 million, resulting in a payout ratio of 44.3%. I will now turn the call over to the operator for the Q&A segment.