Premium Brands Holdings Corporation

Thank you for standing by and welcome to the Premium Brands Holdings Corporation fourth quarter 2020 earnings conference call. At this time, all participants are in a mission only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. Please be advised that today's conference is being recorded. Our presenters on today's call will be George Palialogo, CEO and President of Premium Brands, and Will Kalutich, CFO of Premium Brands. I would now like to hand the conference over to George Palialogo. Please go ahead, sir.

Thank you, Cheryl, and good morning, everyone. Welcome to our 2020 fourth quarter conference call. With me here today is our CFO, Will Kaludich. Our presentation today will follow the deck that was posted on our website this morning. Hopefully you all have had a chance to access it. For those of you that don't have it, you can access it by clicking on the link off our press release issued this morning. On slide five, we're now on slide five, which outlines certain key highlights. Will Kaludich will walk you through our financial results shortly. In early 2021, we closed the acquisition of Clearwater Seafoods in a historic partnership with a coalition of Mi'kmaq First Nations. I will be expanding on our seafood platform later on in the presentation. I will also be updating you on our progress at our sandwich and U.S. protein platforms. 2020 was a difficult year for all of us. COVID-19 challenged us in ways that were unimaginable just a year ago. But despite the challenges, we entered 2021 stronger, larger, and more resilient. We're very excited about where we're at, and we're very optimistic about our future prospects, as our various platforms reach or exceed the billion-dollar mark. I will now pass it to our CFO, Will Kaludich, who will update you on our financial results for the quarter, and the year. 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 2020 and fourth quarter 2020 MD&A filings both of which can be found on the CEDAR website, www.cedar.com, for details on some of the factors that could cause our actual results to differ from our current expectations. Turning to our results for the fourth quarter. Please turn to slide seven. And just starting with a discussion on our revenue for the quarter. Total sales for the quarter were $1,056,000,000. That was up about $97 million or 10% from 2019, the fourth quarter of 2019. Major drivers of our growth in the quarter were first off acquisitions, which contributed about $44.3 million to our growth. And then that was followed by the success in our protein group of our meat snack, dry cured and cooked meat strategies. And in particularly the traction we're gaining in the US with our meat snack category initiatives in general and our meat sticks initiatives specifically. Also our sandwich platform had a very good quarter showing growth on a variety of new initiatives, as well as with legacy customers. And then finally, our seafood and distribution groups also had solid performances as they leveraged recent investments in capacity, new capacity, namely our new Saco lobster processing facility and our new distribution facilities in Toronto and Quebec. On the negative side of things, COVID continued to have a major impact on our business. We estimate it to be about $53 million for the quarter. That consisted of about $71 million of lost food service, airline, and cruise line business, partially offset by stronger than normal retail sales of about $19 million. Our organic growth for the quarter was 5.2%. This was within our long-term targeted range of 4% to 6%. but below our original expectations for the year due solely to the challenges of COVID. In the presentation, we've shown some normalization for COVID. We estimate the COVID normalized sales for us would have been about $1.1 billion, representing a 15.6% increase. And in terms of organic growth, a normalized run rate of about 10%. which would have been in line with our expectations at the beginning of the year. Turning to slide eight, looking at revenue for the year, our sales came in at $4.68 billion. That was up from 2019 by roughly $420 million, or 11.5%. Despite the challenges of COVID, our sales for the year actually came within the original guidance we gave back in March 2020 of roughly $3.975 billion to $4.75 billion. If you exclude new acquisitions that we completed in the quarter or post our announcement of our guidance last year, that would have given us sales of just a little over $4 billion. So still within our original guidance range. So we're very happy with that considering the challenges that many of our businesses faced with COVID. You know, normalizing for COVID for the year. We have sales of about 4.3 billion, COVID impact of a little over 200 million, and that would have given us total sales growth for the year of about 11, organic sales growth for the year of about 11.6%, or in total growth of 17.3%. Interestingly, the most heavily impacted quarter was the second quarter due to COVID. The impact there was about 132 million on our sales. And if you turn to slide nine, this slide shows you the normalization of our growth rates by quarter. The solid line is our actual growth rates, and these are all organic volume growth rates. And the dotted line is our normalized growth rates. You can see the dramatic impact in the second quarter. By the third quarter, our growth rates were getting almost in line to the normalized level with food service, cruise line, airlines being the continuing impacts. And then in the fourth quarter, with some of the lockdowns, you can see that that spread, it whined a little bit because of the impact on our food service businesses, but still nowhere near the impact that we saw in the second quarter. So overall, you can see the dotted line really was a continuation of the trends that we went into 2020 with prior to COVID impacting our business. With a lot of that growth being driven by a number of recent both organic and acquisition investments, the new plants I mentioned earlier in our distribution and seafood groups, our new sandwich plant in Phoenix, as well as several strategic acquisitions such as Abertos in the meat snack category, Ready Seafoods in the lobster category, and Concord Meats in the cooked protein category. Turning to slide 10, discussing our EBITDA performance. So for the quarter, we came in at $87.7 million in EBITDA. That was up $12.6 million for 2019, fourth quarter. or roughly a 17% increase. There are eight major drivers in the improvement in our EBITDA, five of them positive, three of them negative. On the positive side of the ledger, organic sales growth was by far the biggest driver of our improved EBITDA. After that, we had some really solid efficiency gains in our protein group. roughly $5 to $6 million driven by automation and continuous improvement. We saw a little bit of commodity benefit in the quarter, largely due to some favorable dynamics around seafood where there was some demand destruction in the category that in the food service segment that created some favorable commodity prices that our businesses were able to leverage when they took those products into the retail channel. Acquisitions was a bit of a driver of the EBITDA growth as well. And then finally, COVID related costs was actually a positive in the quarter, unlike the last two quarters, where we continued to see a negative impact on our margins. gross margins as a result of thank you bonuses, additional PPE, and production inefficiencies. But that was more than offset by marketing cost savings and reduced travel costs. So overall, the COVID cost impact was a favorable $3 million for the quarter, or $2.9 million for the quarter. The negative impacts on our EBITDA for the quarter, The largest was by far additional infrastructure spending, both in plant overhead and in SG&A overhead. That was about $8 to $9 million in the quarter. A significant portion of that being investments being made for the future of our business, for our future growth initiatives. So there's some sales deleveraging benefit to be had there. And then wage inflation was another factor in the quarter. It was about a $5 million impact on the quarter. We do expect that number to start falling in 2021 as we're starting to lapse some of the wage inflation, wage increases we put through towards the beginning of 2020. And then finally, discretionary compensation was up for the quarter as well. So overall, a very solid quarter, even before normalizing for COVID. Once we normalize for the COVID impact in the quarter, which we estimate the sales impact to be about 10.6 million negative, offset by the 2.9 positive in cost benefits that I mentioned earlier, that would give us a normalized EBITDA for the quarter of about 20 million, representing a 27% increase from last year. Turning to slide eight, talking about our EBITDA for the year. For the year, we came in at $312.6 million in EBITDA, about a $5 million increase from 2019, or about 1.6%. That was below our guidance for the year, which had a fairly wide range because of the unknown impacts of ASF, and the range was about $320 million to $360 million. So slightly below the bottom end of that range, but certainly once you normalize for COVID, and in fact, if you just normalize for the impacts of COVID on the second quarter of the year, which was about $50 million... our normalized EBITDA would have been about 340 million. Sorry, I got that wrong, the normalization. But the normalized EBITDA is about $340 million for just Q2. So with that, you see we're nicely in the targeted range of our original guidance, despite COVID having a major impact on our businesses for the third and fourth quarter of the year. So, you know, again, a good solid year driven by a lot of organic growth and with the one major negative being the impact of COVID. Turning to slide 12, our adjusted earnings for the quarter increased nicely, $36.4 million for the quarter, up $6.1 million, so 20% from 2019. The major driver of that was our EBITDA growth, and that was offset by some increased depreciation, taxes, And roughly for the year, about $10 million in COVID-related costs to additional PPP inefficiencies and plants, thank you bonuses, and a variety of other similar costs, partially offset by reduced marketing and traveling costs. On an EPS perspective, we came in at 86 cents for the quarter versus 79 cents last year, so a nice increase there as well. And similarly, normalizing for COVID, we would have been close to about a dollar per share for the quarter. Turning to slide 13, our adjusted earnings trend. For the year, we came in at $122.7 million, roughly flat over 2019. Again, the major impact there being COVID, and particularly in the second quarter of the year. Normalizing for COVID, our sales for the, our EPS, our earnings, sorry, for the quarter would have been about $165 million, representing a $42 million increase or roughly 34% increase. On an EPS basis, our EPS for the quarter came in at $3, sorry, for the year came in at $3.06. That was up, sorry, down about 25 cents from 2019 or about 7.6%. Again, COVID being the major factor and particularly the second quarter of the year. And then in addition to that, we did raise a significant amount of equity in 2020 that did create some dilution as a lot of that capital had yet to be put to work by the end of the year. And we'll talk more about that when we look at the balance sheet and some of our capital allocation decisions. Tony slide 14 capital allocation during the quarter we invested about $75 million in acquisitions and project capex the one acquisition completed in the quarter was all see seafood, which was about $61 million and then a range of capital projects major PAC capital projects. Our Pillars Brantford meat snack capacity expansion, dry cured meats expansion is going very well. A million spent on that in the quarter. Our harvest meat snack capacity expansion, which was completed in the quarter, we spent a half a million on. We launched our Montreal cooking line in Montreal for Concord. That's proceeding well and is on track, but in early days. And then our sandwich group completed both their new Panino line as well as a second generation automated sandwich line in the quarter. Those are completed on track and are running exceptionally well. George will talk a bit more about them in a bit. And then finally, our most recently announced expansion of our Stivers artisan bakery, which is proceeding well on plan but in early days still. Subsequent to the quarter, we've allocated about $555 million of capital, the vast majority of that being to acquisitions. The three acquisitions we show there is Clearwater, which was most of that capital, roughly $450 million, and then the acquisition of Distribution Cote Nord, which is a food service distribution business in Quebec, which fit very nicely with our Viendex business. And then we also acquired Starboard Seafood, which is an Ontario and Quebec seafood distribution business. We also announced three larger CAPEX projects. One was the expansion of our Hemplers premium processed meats, meat snack facility in Ferndale, Washington. That's about a $26 million U.S. dollar project. The expansion of our aborter's smokehouse capacity to help support their meat stick growth initiative. That was about a $5 million U.S. dollar project. And then finally, our sandwich group is adding two additional automated lines, third-generation automated lines, which are an improvement from the second generation we just implemented. Similar efficiencies, but more flexibility built into the line, and that's about a $23 million project. So lots of good stuff in the pipeline. As most of you who are familiar with our company, our expected internal rate of returns on all of these investments is either 15% or greater, so these should be significant contributors to our earnings and cash flow in future quarters. Turning to slide 15, our return on net assets, just sort of walking through the line. The green line is our free cash flow. The red line are five-year average RONA, and the gold line are actual RONA by year. Then we show a couple of targets. The blue line is our 15% target RONA, and the black line is our weighted average cost capital of about 11%. So for 2020, our RONA was 10.2%, so below our target and slightly below our weighted average cost of capital. Three main factors contributed to this by far, COVID, the impacts of COVID and of recent capital expenditures that are works in progress. And I'll come back to those and normalize for those on a later slide. And then also, you know, over the last two to three years, we've made some significant investments in both acquisitions and capital projects. Those projects and initiatives are just, you know, 2020 was a key year. They showed tremendous traction. They're just gaining traction. And, you know, we expect as they, their longer term business plans, play out that we will not only get back to that 15% target, but will exceed that 15% target. Turning over to slide 16 is just the normalization I referred to earlier. So, you know, our actual RONA for 2020 was about 10.2%. We show on this slide the COVID impact of about $50 million. and the capital projects under construction, which was about $15 million. Normalizing for that, our RONA for the year would have been 12.4%, which is above our weighted average cost of capital, but still below our 15% target. On a five-year rolling average, we normalized would be at about 14.1%, so not far off from our long-term target. Turning to slide 17, talking about liquidity, our balance sheet. We finished the year in an incredibly strong position. We had almost $900 million of excess credit capacity at the end of the year. That compares to about $700 million at the end of the third quarter. That was driven by an equity issuance we completed during the quarter. And our total debt TB dollar ratio was 2.2 to 1, down from 3.0 to 1 at the end of the third quarter. And our senior debt TB dollar ratio, which is the critical metric that we use in managing our balance sheet, was down to 0.6 to 1 from 1.4 to 1 at the end of Q3. Now, normalizing for those capital allocations that I outlined on an earlier slide, which You know, roughly the $600 million of announced acquisitions and projects that are actually hitting the ground right now. Our senior debt to EBITDA ratio would be about 1.9, which is still well below our targeted long-term range of 2.5 to 3 to 1. And our total debt to EBITDA ratio would be about 3.2 to 1, again, well below our long-term targeted range of 4 to 4.5 to 1. Turning to slide 18, free cash flow. Our total free cash flow for the year was a record $188.8 million. We declared a record number of dividends, roughly $92 million. That resulted in a payout ratio of just a little under 49%, 48.7%. Our free cash flow per share for the year came in at $4.87. That was down about 2% from 2019, and again, driven primarily by COVID. but also we did raise a significant amount of equity during the year, which hadn't gotten put to use until 2021. So that also impacted our free cash flow per share. And then the final comment I want to make, we did announce with our fourth quarter results a 10% increase in our dividend, bringing the annual dividend rate to $2.54 per share. With that, I will pass the presentation back to George.