Premium Brands Holdings Corporation

Good day and thank you for standing by. Welcome to the Premium Brands Holdings Corporation first quarter 2021 earnings conference call. At this time, all participants are in a listen-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. To require further assistance, please press star 0. Our speakers today will be George Palialogo, CEO and President of Premium Brands, and Will Kaludich, CFO of Premium Brands. I would now like to hand the conference over to your speaker today. George Palialogo, please go ahead.

Thank you, Cheryl, and good morning, everyone. I would like to welcome you to our 2021 first quarter conference call. Hopefully, You had a chance to attend our AGM presentation yesterday. In case you didn't, you can find the presentation deck on our website. We are now on slide four of the presentation. Our CFO, Wilka Ludic and I, will walk you through our Q1 results as reported this morning. We're now on page five, on slide five. Our key messages this quarter are that we're making excellent progress with all platforms. We delivered record Q1 results despite ongoing COVID-19 related challenges, including supply chain disruptions, logistical issues, and of course, commodity inflation. Demand for our product remains very strong, particularly in the US, driven by economy reopenings and the return of out-of-home dining. April sales were very strong across all platforms. For the first time in our history, our US-based sales in our specialty foods division exceeded our Canadian sales. Clearwater delivered an excellent first quarter, with a 940 basis point margin improvement, driven by ecosystem coordination synergies and strong price realization. Our acquisition activity remains robust. We expect to complete many transactions over the course of the year. And our PB seafood platform, including Clearwater, is beginning to take shape as the only vertically integrated seafood entity in North America with unique competitive advantages, leveraging best-in-class assets, excellent management teams, and featuring ocean-to-plate related attributes like premium quality, sustainability, and traceability, combined with excellent social and environmental stewardship. I will now pass it to our CFO, Will Kaludic, for the financial portion of the presentation.

Will? Thanks, George. Before I begin, I would like to remind you that some of the statements made on today's call may constitute forward-looking information and our future results may differ materially from what we discussed. Please refer to our 2020 MD&A and other information on our website for a broader description of the risk factors that can, in fact, affect the company's performance. Now turning to our sales on slide seven. Our sales for the quarter were $1.9 billion, up 74.8 million, or 8% from 2019. The key drivers of our growth were organic volume growth of roughly 79 million, Driven by the continued solid progress we are making in all of our core categories including meat snacks, charcuterie, cooked meats, artisan sandwiches and seafood. The next major driver of our growth were acquisitions which accounted for about 59 million of our increased sales and then finally selling and price inflation of roughly 16.6 million dollars. When looking at the selling price inflation between our specialty food segment and our premium foods distribution segment, most of the inflation came from our premium food distribution segment, which has very dynamic pricing and was able to address the inflationary environment we were in very quickly. Our specialty food segment had about $6.5 million of selling price inflation. roughly half of that being cost plus related, cost plus contracts with certain customers, and the other half being selling price increases put through to deal with price inflation from late in 2020. Offsetting these positive drivers of our sales growth were three key challenges. The first by far and most significant was COVID related factors. which was a headwind of about $46 million in our sales. I'll talk a bit more about that on a later slide. Next was the stronger Canadian dollar. Our average translation rate for our U.S.-based businesses for the first quarter of this year was 1.26 versus 1.35 in the first quarter of last year. And then finally, we had some labor-related lost sales due to are certain sandwich plants ramping up for customer demand and having some issues getting labor to ramp up for that demand. Those problems have now since been resolved, but they were an issue in the first quarter. Normalizing for COVID, our sales would have been 1,055,600,000 or roughly a 13% increase from last year. Turning to slide eight, talking about our organic growth rates. The solid line on this slide is our actual organic volume growth rate and the dotted line is our organic volume growth rate normalized for COVID. The key message of this slide is really how much COVID has been hiding the success of our businesses in growing their sales. If you look at the last six quarters and you strip out the impacts of COVID, you can see that our businesses have been growing in high single digits, low double digits. So good solid traction gaining there, driven largely by our product categories all being on trend and the investments we've made in capacity over the last several years. Turning to slide nine and looking at the impact of the pandemic on our sales you can see for the quarter the impact was 45.8 million oddly in the first quarter of 2020 the pandemic actually had a positive impact on our overall sales our especially food sales were up about 16 million and then this was offset by some food service impacts in our premium food distribution group for a net impact of 6.6 million Once normalizing for that, the impact in the first quarter this year was roughly $39 million. You can see that the breakout of the impact, most of it was in the food service segment, $34 million in food service, $9 million relating to airlines, $2.6 million to cruise lines, and retail was roughly flat again because of the bump we saw in the first quarter of 2020. Looking forward, we are cautiously optimistic that once the economy starts reopening, that we should see a quick recovery in our food service. And we base that on a couple of considerations. One is what we're seeing in the U.S. and Chinese economies with the reopenings there and the strong demand in the food service channel resulting from that. But also, interestingly, we saw early in the first quarter some decent demand in our food service channel starting to form as there's some normalization in the environment. However, with the increase in infection rates in Canada and the increased lockdowns associated with those, we quickly saw that trend reverse. Turning to the next slide, our weekly sales trend. Really, the only point to illustrate here is we're starting Q2 very strongly. Q1 was a good quarter. It is our seasonally slowest quarter and you can't read too much into it. As we go into Q2 and start seeing some of the seasonal demand kick in, we're very excited about what we're seeing at this point. Next slide, turning over to EBITDA. Our EBITDA for the quarter was $82.5 million, an increase of $18.2 million or 28.3% from 2020. The major drivers of this were acquisitions, and particularly the Clearwater acquisition, which generated about $9.5 million of investment income, and sales growth, which was a major also contributor to our EBITDA growth. And then finally, production efficiencies. We continue to see great strides being made in our specialty foods group across various plants. Other factors positively impacting our EBITDA, but in a much more insignificant way, was COVID from a cost perspective overall had a slightly positive impact as Negative costs in our plants associated with additional PPE and production efficiencies were offset by savings in marketing and travel and a small amount of government subsidies. From a commodities exposure perspective, it was slightly positive overall. We saw in our premium foods distribution group some margin expansion. Given the inflationary environment, their dynamic pricing models and some decent inventory positions and forward buys, they were able to take advantage of that to get some margin expansion. But that was largely offset by margin contraction in our specialty food segment as that inflationary environment hit them. And in many of these businesses, there's a 30 to 90 day notice period for getting selling prices through with their larger retail customers. Most if not all of our specialty food businesses now are in the process of putting through price increases to deal with these so we're cautiously optimistic to some degree we will mitigate the impacts of this inflationary environment going forward. The negative factors impacting our EBITDA for the quarter, we continue to invest in infrastructure to support our growth both from the perspective of plants as well as SG&A. And then we saw wage inflation, albeit we're starting to lap some of the numbers from last year, some of the increases put through last year, so not as material as last year, but still a factor in the quarter. Discretionary compensation was up. And then finally, the stronger Canadian dollar continued to impact our EBITDA as well, the translation of our US dollars, as I talked about earlier in our sales. If you normalize our EBITDA for the impact of COVID, which overall for the quarter was about $9.7 million, that consisted of about $11 million of negative impact from the sales lost, offset by about $1.3 million in net COVID-related savings, as I discussed earlier. Normalizing for that, our EBITDA is $92.2 million or an increase of roughly $28 million or 43% as compared to 2019. Our margin for the quarter was 8.2%, which was a nice improvement over the last few years. And then normalizing for COVID, it would have been 8.7%. Turning over to the next slide, talking a little bit about the inflationary environment We are seeing inflation across all sorts of elements of our business, clearly most commodities that we buy as inputs, pork, beef, chicken, turkey, certain species of seafood, corrugated and then other parts of our raw materials such as corrugated materials, packaging and several other elements that we use in our manufacturing. This slide highlights two key commodities, a pork index and a beef index, and you can see the significant amount of inflation happening in these. As I mentioned earlier, our businesses are putting through selling price increases to deal with these inflationary pressures. Turning to our earnings in slide 13, earnings for the quarter were $32.3 million, an increase of $11.2 million. or 53%, and this is despite COVID. The key driver of that was our EBITDA, which was about $18.2 million, as I discussed earlier, and then offsetting that were some increased taxes and some increased depreciation associated with acquisitions and recent capital expenditures. Normalizing for COVID, which had a net of tax impact on us of about $7.3 million, Our adjusted earnings for the quarter were $39.6 million, an increase of $18.5 million, or roughly 57%. In terms of earnings per share, our number for the quarter was 72 cents a share, up 19 cents a share from 2019, or roughly 35, 36%. Normalizing for COVID, our earnings per share would have been up would have been 91 cents per share for the quarter or up 38 cents per share or 72%. You'll notice the percent increases in our EPS relative to our earnings was a bit lower. And this is really a function of the equity issuances we did in 2020. A lot of that capital was still sitting on our balance sheet and not yet put to work. which you'll see in a later slide, and so we do expect as that capital starts to generate returns, continuing improvement in our EPS relative to our earnings overall. Turning to slide 14, talking a little bit about our Clearwater acquisition, the most significant in our history. We acquired a 50% interest in them. A very strong start, as George mentioned earlier. Top line was relatively flat, slightly down about $6.4 million, and largely due to some Brexit-related challenge for their Scotland operations, a lot of which have been dealt with and is in the rearview mirror. And then also the stronger Canadian dollars, a good portion of their sales are in US currencies. Also, interestingly, their sales were lower because of some of the discipline they were able to take in the selling of their products given their stronger balance sheet. So more product went into inventory this quarter than in past quarters in the expectation that it will be sold later in the year at higher margins when those products, for seasonal reasons, there's a much more significant demand for them. Offsetting those negatives on the sales was China and the reopening there. We saw some good demand, particularly in clams and live lobsters. In terms of EVDA, very strong performance by the company, up $7.8 million to $20.1 million. Driven by four key factors, operations, great efficiencies, both from continuous improvement but also Very high quality catches that allowed for very efficient processing was a big driver of the results. Stronger margins in China, the US in food service as those economies reopen and some improved demand in retail in Europe helped with the general pricing environment across a range of species. And then, most interestingly, the next two big drivers of the improvement in their margins were their synergies with our ecosystem. One was, as I mentioned earlier, them taking a much more disciplined approach in what they're selling, not being afraid to put product into inventory, and as a result, what they did sold was sold at higher margins. And then also leveraging the knowledge and distribution within premium brands to maximize their margins. So overall, a really solid start with Clearwater and a great improvement in their EBITDA, well ahead of expectations for the quarter. If you look at the statement on the left-hand side of the slide, you'll see down below highlighted in gold some large costs. These were the acquisition costs and closing fee paid to premium brands. These were purely one-time costs associated with the transaction and will not be reoccurring. Turning over to slide 15, talking a bit about capital allocation. During the quarter, we allocated $721 million of capital, $637 million of that for acquisitions, $67.2 million for major capital projects, and $16.5 million to our REIT as part of a sale and leaseback transaction on certain properties held by the company. In terms of actual dollars spent in the quarter, we spent $682 million putting to work some of that capital that I mentioned earlier that was sitting on our balance sheet at the end of 2020. Again, acquisitions being the big number, $637 million. Large capital projects, we spent roughly $17.1 million. On smaller capital projects, $11 million, and then $16.5 million on the REIT, as I mentioned. Looking forward, subsequent to the quarter, we've announced another new capital project, an expansion of our Buddy Sandwich plant, roughly in Canadian dollars, a $15 million project. Again, as we've talked many times in the past about, our base expectations around any capital we invest is a minimum 15% internal rate of return based on after tax unlevered and generally on a 10-year plus cash flow model. So again, these are long-term value drivers that will continue to help us create value at premium brands. Turning to slide 16 and looking at our balance sheet, at the end of the quarter, despite the capital allocations I mentioned earlier, we continued with a very strong balance sheet. We had about $405 million of unused credit capacity at the end of the quarter. Our senior debt TBDAH ratio was 2.5 to 1, which is at the very bottom of our long-term targeted range of 2.5 to 1 to 3.0 to 1. And our total debt TBDAH ratio was 3.8 to 1, nicely below our long-term targeted range of 4.0 to 1 to 5.1, or sorry, 4.5 to 1. And I should mention the only difference between our senior and our total debt EBITDA ratios are our convertible debentures. Looking forward, we did complete the sale and leaseback transaction in the quarter. It closed on the last Friday of the quarter. Unfortunately, the funding didn't flow until the following week. As a result, the net proceeds of the sale and lease back of roughly $152 million was sitting as a receivable on our balance sheet. When you normalize our financial position for that cash flow, that would increase our unused credit capacity to $550 million, clearly positioning us well to continue to execute on our acquisition and capital projects initiatives. and it would drop our senior debt to EBITDA ratio down to 2.1 to 1 and our total debt to EBITDA ratio down to 3.3 to 1. So again, we continue to have a very strong balance sheet. Next slide, slide 17, just a couple of comments on convertible debentures. Again, our convertible debentures is an equity strategy for us. The concept that we're raising equity ultimately at a premium instead of a discount by just issuing shares directly. Correspondingly, our strategy is always to force conversion with our converts as soon as we can. We've done nine debentures so far. Six of them have been fully converted. Three are still outstanding. You can see the next one that matures at the end of December 2023. is now well within, you know, our share price is well above the call price of $107.25. Unfortunately, until the end of this year, the conversion can't be forced unless the share price is 125% of that price. So we can't convert it as to today, but again, as soon as we can, we will be forcing conversion of that convertible to venture as well. And then my final slide, slide 18 on our free cash flow. Nice improvement in our free cash flows for the quarter, up $14.2 million to $203 million as compared to on a trailing 12-month basis as compared to 2020. And this is, again, despite COVID. From a free cash flow per share basis, we are back at our historic record of $5.08 per share. The last couple of years, our free cash flow per share has been impacted by a couple of challenges. In 2019, it was the outbreak of African swine fever in China that disrupted global protein markets. And then 2020, it was COVID. And then as well, both years there were some share equity issuances that resulted in some short-term dilution until that capital was put to work. But with that capital being put to work now and the growth we continue to see in our business, we now expect to generate continued records, free cash flow per share amounts. Our dividend for the quarter was 63.5 cents per share. which works out to an annual rate of $2.54 per share. That's up 10% increase that we announced during the quarter from our dividend rate in 2020. And that dividend resulted in a payout ratio based on a trailing 12 month basis of 48.3%, which is below our sort of general targeted range. As my final comment to the presentation, I would like to make aware to everyone who has not seen our AGM presentation that in it we provide a detailed roadmap on how we expect to achieve our 2023 targeted sales and adjusted EBITDA of $6 billion and $600 million respectively. I encourage you to have a look at it. With that, I will now turn the presentation over to George.