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.

Thank you, Will. We're now on slide 20 and 21. The Clearwater transaction in partnership with Mi'kmaq First Nations was historic and transformational. As Will explained, the transaction closed on January 25th, 2021. The deal created a global top 20 seafood company and the only vertically integrated seafood platform in North America. PB Seafood Division also delivered record growth and record EBITDA during the first quarter, leveraging best-in-class products combined with favorable consumer trends and strong retail demand. Our ocean-to-plate branding initiatives are beginning to take shape in the North American marketplace, leveraging on-trend attributes like premium quality, transparency, innovation, social responsibility, and community engagement. We are now on slide 23 and 24. We're making great progress in growing and in diversifying the sales of our U.S. protein platform. Its growth during the quarter was in the high teens. Its meat steak sales continue to ramp up, and we're on target to exceed 100 million. in meat stick sales in 2021. Operational and business improvement initiatives are going very well, including investments in increasing capacity at our hamper's facility, where we've commissioned a 50,000 square foot expansion. Our authentic charcuterie sales under the Obrados brand are going well, particularly in the C-Store segment where demand is projected to be particularly strong. And we're also in advanced discussions to acquire further capacity to support the growth of this exciting platform. We're now in slide 25 and 26. Demand for the products of our sandwich division is very strong. with QSR channel returning to or exceeding pre-COVID levels. Continued investment in technology and automation initiatives with two Generation 3 lines on order and the installation of a fully automated Panino line. Our investments in charcuterie and Panino tray assembly have been completed. We showed two videos yesterday at our AGM to demonstrate the reasons we're so excited. with our automation initiatives in sandwich and in panino assembly. We have invested in capacity to produce single-serve meals, and sales in this area are going well. Our plant-based breakfast sandwich sales are tracking to exceed 100 million this year. And finally, our sandwich division is projecting 2021 revenues to exceed $1 billion. for the first time. We're now on slide 27. As you can see, our acquisition pipeline remains very strong, and we expect to complete several transactions during the remainder of the year. Slide 28. Our first comprehensive ESG report is due to come out in June of this year. We are committed to achieving carbon neutrality and will be disclosing targets and objectives in our upcoming ESG report. I will now pass it back to Cheryl for the Q&A segment of the presentation. Cheryl?

Thank you. If you would like to ask a question at this time, please press star 1 on your telephone handset. We'll pause briefly to compile the Q&A roster. Our first question comes from John Zambaro. Please go ahead. Your line is open.

Thanks. Good morning. I wanted to start on the cost inflation side. How should we think about your ability to offset this? I mean, if we look historically, you've been able to get 1% to 2% price increases, but it does seem as though, based on the charts you're showing, but also commentary received from across the space, that Inflation could be materially higher this year. So what's the willingness and ability of your businesses to potentially pass through much higher price increases?

Yeah, again, it's a very good question, John. I think you have to remember that the majority of our business is either cost plus. For example, our entire sandwich platform is always been on a cost plus basis. And a lot of our business is always passing on price increases and price decreases, particularly on the distribution side, right? The pricing on the distribution side of our business is very, very dynamic. In fact, as Will mentioned earlier, sometimes inflation is beneficial because we're always holding very large inventory positions in that area. So really the only part of our business that has some exposure to inflation with regards to commodities is our protein group. But you have to remember that our protein group is really the most premium products on the market, and the products don't sell on price. If you're out there as a consumer and you want to buy the lowest quality out there at the lowest price, you don't buy premium brand products. So our consumers are very loyal. We've passed on substantial increases to them in the past, and they continue to buy the product. So we feel very comfortable with the ability of the platform to handle hyperinflation as we see right now.

Yeah, and so, John, you made the comment of 1% to 2% inflation. I'm not sure where that number comes from, but when you look at our protein group and you go back, for instance, to when we had the issues with ASF in 2019 or the disruption back in 2014-15 with a range of issues, they were double-digit price increases they were putting in place over the course of the year.

Got it. Thanks. Maybe we can move to the comment in the press release about global shipping networks and the disruptions you've seen there. Can you elaborate on exactly what the impact you're seeing on that is and what you expect for the rest of the year?

Yeah. I think it's well documented, John. There is a shortage of containers around the world. I guess world consumption has turned to goods and services as opposed to to goods as opposed to services and, you know, the shortage of containers. So there's a lot of delays. There's a lot of unloading type of delays because of congestion in different ports, et cetera, et cetera. Again, it's just another headache. As you know, we've had a lot of headaches to deal with over the last year. And we're just mentioning it because, again, it's out there and, you know, we'll manage through it. You know, we've always had diversified services supply chains and, you know, again, it's another area where we need to manage.

Understood. And then last one for me, on the labor supply issue in the U.S., I think you said during the call that this has been solved. This is an issue we're hearing from most of the companies in the space. So I guess how would you characterize your level of confidence that this isn't going to limit sales increases in the rest of the year, or would you maybe see a higher wage inflation that could impact margins the rest of the year in the U.S.?

Yeah, again, John, the issue for us really is the demand side. As I mentioned in my prepared comments, there is tremendous demand, particularly in the states where things have opened up. We are seeing unprecedented demand, particularly in the QSR channel. So again, the challenge for us is to hire more people to be able to keep up with the demand. What we're saying is we're going to grow, we're going to see some of the benefits of that, but unless in some cases we're able to find the labor, we're going to walk away from business or we're going to pass on some business. Really, the focus here is not the labor shortage, it's really the robustness of the demand.

Okay, that's great. I'll pass it on. Thank you very much.

Thank you. And our next question comes from George Dumais. Please go ahead. Your line is open.

Yeah, hi, guys. Good morning. I know this is a lot of moving parts to the inflation kind of debate, but can you maybe talk a little bit, looking at where input costs sit today, I think, Will, you mentioned kind of double-digit price increases in the past. We're more diversified across different commodities, but can you maybe tell us a little bit about what you're thinking in terms of order of magnitude of those potential price increases that you're going to put through in Q2 and Q3?

I think, George, it varies, of course, by segment and by commodity. And, you know, again, George, we're going to put whatever price increases through are necessary for us to maintain our our margins and to continue to run our business, right? And that's what we've always done. Again, I just want to remind you that our products differentiated. We're not a commodity player. And, you know, we have demonstrated our ability to pass on these price increases in the past. And thankfully, the consumer continues to buy our products, right? We're We're more concerned about velocity sometimes when we raise prices than anything else. But again, in the past, we've been pleasantly surprised by the fact that even with higher prices, our loyal consumers continue to support our products.

Okay, and given the magnitude, which looks to be pretty high, how confident are you that we'll get to hold on to some of these prices when inflation debates in a year or two?

Again, George, it's not about holding on to those. It's really about passing on the cost today. I think that a lot of times if raw materials come down, we'll invest in promotions and those types of things so that we can find new markets. uh provide new volumes and new new opportunities for our products right but but uh but again it's just you know i need the issue for us is to maintain our margins at fair levels rather than to gouge the market let's say when when commodities come down okay um on on the clear water uh substantial improvement in gross margins i think you guys looks like it's about 940 basis points

I'm just wondering how much of that is truly due to the PB ecosystem synergy and can maybe quantify that for us. And also looking at, you know, for this year and next, can you maybe call out what those PB ecosystem synergies could be or could look like or what they are?

Yeah, George, I, you know, I think that they were not in a position to do that at this point, George, but my comments would be that you know, commodity companies are never good public companies. You know, it's very tough to be a commodity company in the public markets. And, you know, I think that Clearwater is a very, very well-managed company, tremendous assets, great quality assets, tremendous access to great resources. And there's no doubt in our mind that this company will be a stronger seller and will exercise better price realization given the uniqueness of its products. I think that a lot of the benefits you're seeing are because Clearwater is not a publicly traded company. It doesn't have to report an increase in sales every quarter. Plus, again, the benefits of Intel from the front lines, which which Clearwater is getting are incredibly beneficial to them. And I would also like to say that there's a halo effect. Clearwater is a great company, a great brand, a great global reputation, and they've brought a halo effect to our PBC food business as well. And again, part of the reason why the PBC food division had a you know, a record quarter. So early stages, the markets have gone with us, which is a good thing. You know, there's great, great demand in China and the US as their economies open up. And, you know, Clearwater, of course, will benefit from some of the commodity inflation that you and John mentioned earlier, right? Even Clearwater provides a nice hedge for us when protein costs appear to be inflationary.

Okay, thanks. Just one more, if I may, maybe for Will. I know in the past you guys have done a few ad hoc kind of sales and leaseback transactions. It seems like we've got a nice capital unlock here. Is this something that we're going to be doing more and more of, or is this just a one-off?

Well, it's a tool we quite often use with acquisitions when the owner of the business has a piece of real estate that they bought way back when they founded the business. And there's a tremendous amount of value tied up in the real estate. So it's a nice way for us to unlock that value while continuing to control the real estate. So these pieces of property were all related to our Confed acquisition that we announced in the quarter as well. So generally, it's around that. It's very rare. It's occasional but rare that we'll take sort of legacy assets and roll them into the REIT. But having said that, here and there, that does happen.

Okay. Thanks for your answers, guys. Good luck. Thanks, George. Thanks, George.

Thank you. And our next question comes from Martin Landry. Please go ahead. Your line is open.

Hi. Good morning, George and Will. My first question is on your comments on April being a record month for you. I would love to get some color as to what the breakdown in terms of sales growth between Canada and U.S. I would assume that the U.S. has seen really good growth and Canada is probably more muted. given the lockdown measures in Ontario. So I'd like to hear a little bit more on that front, if you can.

Yeah, I think you've certainly captured it, Martin. We've talked a lot about our sandwich group, of course, our protein platform in the U.S. and our seafood platform in the U.S., and And a number of states have opened up their economies and all I could say is that we're just seeing amazing demand in those areas. And to the point, as I said earlier, where given some of the logistical challenges, we have to walk away from business. But again, or opportunities, but again, a lot of growth or, you know, the great majority of the growth for us is coming out of the US. You know, again, Canada, fine, we're doing well. As Will said, we were getting good traction in food service in the early part of the quarter. And then, you know, with the lockdowns in March, of course, things slowed down. And I mean, that shouldn't surprise anybody.

Yeah. And maybe that's a good segue into my next question on capacity utilization. Can you talk to us about which platforms are you tight on capacity right now? I would assume the sandwich platform is probably one of them. And maybe talk about what kind of capacity expansion is coming up near term to alleviate that.

Yeah, so we have announced several projects over the last couple of quarters across various platforms. Our sandwich group, we just announced the Buddies initiative as well as the Gen 3 lines last quarter. So investing in capacity in the sandwich group. The protein group, similarly in meat snacks, we announced the investments at Alberto's and in Hempler's. So those are two key areas we're investing in. Dry cured is another area where we're doing the Brantford expansion with pillars. So it essentially goes across all our key categories. Seafood, nothing major planned right now, but You know, we continue to invest in the infrastructure to support the distribution, but you know that that infrastructure is one of the things that a lot of capacity was freed up with the demand destruction and food service. And then the last major area artisan breads we're investing in our new strivers facility we announced that a couple of quarters ago. And that business is, again, a U.S. expansion story, tremendous opportunities down there, and lacking the capacity to execute on them. So it really, you know, there's projects across all the major categories pretty well, Martin.

Okay, and is it possible to perhaps quantify, you know, how much sales these expansion projects could support once fully ramped up

Yeah, I don't have that number. It's part of what we built into our five-year model in supporting that growth. It varies quite significantly from project to project, but it's certainly in the $200 to $300 million range when you add up all the projects as a minimum.

Yeah, the one comment I'll add, Martin, is that in the past we've also leveraged co-packer capacity to support our growth, right? That's always been a part of our playbook. And, you know, again, not all of our products are made by our companies, right? And, for example, now we are in the process of working with a few co-packers to support our growth.

Okay, that's helpful. Thank you.

Thank you, Martin. Thanks, Martin.

Thank you. Our next question comes from David Newman. Please go ahead. Your line is open.

Good morning, gentlemen. Great set of results, including Clearwater out of the chute. Not to beat a dead horse, but on the commodity inflation, I'm very confident you guys can get it through. You have done it in the past. Obviously, you can get it through. But is there any sort of short-term timing difference here in terms of 30, 90-day lag in retail? in a protein and should we be cautious about the second quarter margins on that front until you can get it through and cover the nut? Or do you have enough inventory or forward buy positions that you can leverage in the inflationary environment?

Yeah, we do have some inventory positions to carry us through and help mitigate. So really, David, it's one of tracking what happens in the market. If prices continue or costs continue to accelerate like they have, then certainly the inventory is only going to take us so far, our forward buys are only going to take us so far, and there will be some margin pressure in the short term. But again, it's going to be a function of what happens over the next two months.

Anything here?

Go ahead, George. Yeah, the other comment I'll make, David, is you shouldn't make the assumption that all of our commodities are bought always at market prices, right? There's cases where, you know, we've entered into long-term commitments with our suppliers and based on fixed pricing, et cetera, et cetera, right? So that's just a comment.

Okay. Well, hopefully they hedged it. I guess the second thing is you've done a great job of keeping your doors open, keeping your customers happy, and you made a comment that you're seeing some opportunities arise out of that in terms of being a good supplier to some of your key customers. Can you point to a few things that you're really seeing where that's really gaining traction?

Yeah, I think we've mentioned it earlier, David, and again, particularly with respect to our U.S. platforms, the demand with respect to all of our U.S. platforms is unprecedented because our three platforms in the U.S. have done an incredible job with regards to business continuity and and providing steady supply chains to their customers. I can tell you unequivocally that demand and opportunities in the U.S. are not lacking in any way. So the issues for us, of course, is to figure out the labor situation and some of the logistical issues we've talked about. But the U.S. platform's growth is a very good example of what you just said and how we are benefiting from the fact that we've had very good execution in those platforms.

Okay. And then the last one, sort of how the quarters shake out here in terms of the cadence of improvement coming out of COVID. as an example, obviously travel demand we're seeing, I think some of the cruise lines are sold out in the fall. We're seeing a resurgence in bookings, etc. So that's one area where you kind of got hit, coming in not only just full-service restaurants, but obviously airlines, cruise lines, all that area. So do you think there's a possibility coming out of this that you could over-index versus more normalized conditions as people are caged animals, they want to get out and and go south or go on a tour or go on a cruise line or whatever. Do you think there's a possibility we could actually over-index?

Yeah, our general expectations are for, you know, again, based on what we've seen happening in the U.S., David, and in China, and that little glimpse we saw at the beginning of the first quarter, you know, we are bullish that once things open up, there is going to be that surge. And, you know, our biggest food service exposure today that has yet to normalize from COVID is in Canada. So that's going to be a big factor in the turnaround that, you know, getting into some of the specifics though, you know, cruise lines, you know, We're slightly bullish that, yeah, we'll see some pickup towards the end of the year, but again, there's a lot of risk there, and what happens is going to be really a function of international markets. Airlines, we're fairly bearish, although I think you're going to see much more travel. We're not quite sure how the food element is going to work at this point, so we're being conservative there in our outlooks. And then food service, absolutely, when it comes back, it'll come back with a vengeance, but The question is, when does that happen? And I guess the only bearish comment on the food service segment is, you know, a big driver. And you saw this, there was that earlier chart in my presentation on the COVID impact by quarter. And you saw a bigger impact in the fourth quarter. And a lot of that is because of all the event type business that happens towards the last part of the year. And, you know, that's like large gatherings of people. And, you know, there's, you know, tremendous uncertainty how that's going to unfold for this year. So that's probably the only bearish element in there.

Okay, if I just squeeze one minor sub-question to that one. Are you seeing the potential for staycations this summer as people really make travel plans to hit the road in terms of meat snacks and sandwiches and things like that? Do you think that's really going to resonate this summer?

Well, I think that... And again, we have to be careful whether we're talking about Canada and the US, right? The US is opening up nicely and we are expecting unprecedented demand in C-STOR and QSR, David. We're already seeing it. As I said earlier, our issue is not You know, and, you know, I think a lot of people will still take driving holidays as opposed to flying holidays. You know, so, again, we're expecting substantial demand in those two channels.

Excellent. Thanks, guys. Very helpful.

Thank you, David. Thanks, David.

Thank you. And our next question comes from Michelle Sridhar. Go ahead. Your line is open.

Thanks for taking my questions. I understand the commentary that PBH is seeing substantial demand for its products, which is nice to hear. I want to focus in a little bit on the meat stick category, which is a focus category that management indicated that there was a lot of opportunity in. One of the lines was that there was opportunity to grow market share for the meat stick of brands because of the quality and success in other markets. Wondering how the market share is doing in that particular category. Are you seeing expansion there?

Yeah, I think we have to be careful when we talk about the meat stick category, right? Because, again, we're the lead meat stick company in Canada by far. but I'm not sure we've ever taken anybody's market share. We've simply found white space. We felt strongly when we acquired Obrados that the meat steak category was very underdeveloped in the U.S., mainly because the main brands of meat steaks were very low quality. So again, we've launched a lot of very high-end premium products, just like in Canada, and we're gaining great traction with regards to those products because those products are finding that white space, right? So it's not about taking somebody's market share, it's opening up new markets for a product. The premium brand never, never looks at the market in terms of going after somebody's market share. That is a silly equation. We try to find new opportunities and new white space for a certain product. When you look at our cook products in the U.S., for example, our cook skewer products, that is a substantial category, and that was a completely new space. We never took anybody's market share in that space. It's well over $100 million category for us, maybe close to $200 million. But again, that is the PB approach, right? It's not about market share.

Thanks for that, Collar. And just switching gears here, you talked about the traction in the sandwich platform with management's targeting a billion dollars, or I don't know if you said greater than a billion or a billion dollars this year for sales. which, uh, which is, uh, you know, impressive given the challenges with COVID. Just wondering, um, what is the runway for that platform? I mean, this is a fairly sizable growth over the years and I'm wondering how, when you look out several years, are you seeing substantial demand for that product continuing and could this business double again?

Yeah. You know, again, we refer to it, of course, as, as, as the sandwich division, but it's, it's really an assembly business, right? And, uh, you know, it's a sandwich business is grown well over 20% over 10 years, but you know, now they're, you know, in charcuterie assembly and the charcuterie category is growing, you know, nice, you know, nice. It's one of the fastest growth categories in retail today. And, you know, they're getting into panino assembly, which is a healthier type of, meat snacks and single-serve meals, which we think is a high-growth category. If you look at the growth of the category in Europe, for example. Anyway, it goes back to my comment with regards to finding white space and trying to create markets, not trying to steal somebody's market. Again, they're diversifying their assembly capabilities very nicely. They have a lot of they're getting a lot of traction in areas that I wouldn't call sandwiches. And again, we're really, really excited by the growth prospects of some of these new SKUs that they're in.

Thank you for the call.

Thank you. And our next question comes from Derek Lessard. Please go ahead. Your line is open.

Yeah, good morning, or sorry, good afternoon, everybody. I just wanted to take the Clearwater integration maybe a step further. Could you talk about the integration of the lobster business with Clearwater and Ready Seafood and maybe some of the wins and opportunities that you're seeing there?

Yeah, I would say that the word, Derek, is not integration, it's coordination. The management teams of both companies are working extremely closely on supply chain type of synergies and also on marketing and sale synergies as well. And really, it relates to price realization opportunities more than more than anything. Again, we're really pleased with the way the two management teams are working together. As you know, lobster is a big segment for us. We're working on several value added type of initiatives with regards to lobster. Clearwater was never focused on the value added part of the And again, all I could say is that we're extremely pleased with the coordination type of activities between the two companies. Great, great management teams, great initiatives, great coordination.

Okay, thanks for that. And my last one is I guess I'm wondering where you are in the automation of the sandwich plants and if you're expecting that to maybe perhaps alleviate some of the labor pressures you're seeing there.

Yeah, Derek, I don't know if you saw the AGM presentation yesterday, but you actually showed videos of our Generation 3 lines that we're installing, and it's very exciting. It's complete automation, the use of eye technology with robotics, and anyway, yeah, it'll give us more capacity, and also they'll be a lot more efficient. Thanks, George. Yeah, thanks, Derek.

Thank you. And our next question comes from Stephen McLeod. Please go ahead. Your line is open.

Thank you. Good afternoon, guys. Hi, Steve. Hi. Lots of great colors so far, but I just wanted to circle around on two things. One was, you know, you mentioned that in Canada particularly you saw you were off to a great start in Q1 2020. before the shutdowns hit. And I'm just curious if you could give a little bit of color on what growth rates looked like before things began to slow down in Ontario and other markets in Canada.

Yeah, we don't have a specific growth rate to discuss, Steve. What we did see was a good sort of week-to-week improvement, but we never came to the point of actually coming to a full sort of normalization of a growth rate.

You know, again, you know, you know, again, Steve, you know, in general terms, if lockdowns are announced, which impact restaurants, we get impacted, right? And that's generally in our distribution group. But, you know, again, March was a a lockdown month again in many parts of Canada, BC, Alberta, Ontario, and Quebec mainly. And, you know, our sales to that segment were impacted materially.

Okay. Okay. Yeah, that makes sense. And then I just wanted to, you know, make sure I'm – or see if you have any color, incremental color around kind of the cadence for sales growth through the year. You know, I mean, I think I would expect to see maybe that the top line based on the demand trends you're talking about accelerating Q3 or Q2, sorry, Q3, you'd probably begin to see minimal COVID impacts on a year-over-year basis. And then do you expect to be in a more normalized environment by the time you get to Q4?

You know, Steve, that's the very reason we're not giving any guidance for the year at this point is it all depends on how COVID rolls out. So you make a couple of key COVID assumptions and you change those and our outlook will change. You know, it's going to be so much a function of how the economy opens up and particularly with food service in Canada.

And Stephen, you saw the April numbers, right? We've disclosed the April numbers, right? And again, you can sort of deduce that We're still in lockdowns in Canada, and we've been impacted greatly in the distribution group, but that was by far the best April on record, followed by a very challenging April, obviously, last year. So that just shows you the robustness of the demand in markets where things are opening up, obviously in the U.S. So if we make the same assumptions with regards to when Canada is going to open up, then again, all bets are off and we're going to see substantial demand.

Okay, that's great. Thank you so much, guys.

Yeah, thank you.

Thank you. And our next question comes from Sabahat Khan. Please go ahead. Your line is open.

Great. Thanks very much. Just, I guess, following up on the commentary from the last question, I guess in terms of the uncertainty looking ahead, are you seeing or are you more concerned about the food retailer specialty foods channel or is it more premium food distribution? I just don't understand, based on the conversations you're having with your customers, which area is maybe more uncertain as you look to the back half of this year and into next year?

Sorry, Saba, can you repeat the last part of that you cut out on us?

Just in terms of the outlook, obviously you're not providing outlook just given the operating backdrop, but based on the conversations you're having with your customers, what is more of an uncertain area for you? Is it the premium food distribution side or is it the specialty food side? Where are you less certain on the outlook?

Oh, yeah, no. Certainly, you know... In the specialty food side, the key area being impacted is really the airline business. There's a little bit of food service exposure there, but it's the airline business, and like I mentioned earlier, we're pretty bearish on that. Probably the impact's gonna be relatively consistent for the rest of the year. So it's more in the premium food distribution side. That's where the heavy food service exposure is. the food service in the specialty food side tends to be in the QSR segment. And as George has talked about, you know, we've seen a significant rebound there already, both towards the end of 2020 and certainly in 2021. So it most certainly is the premium food distribution group.

And then just in terms of the cruise and airline stuff, is the airline exposure really sort of a feminist exposure quite a few years ago, or has that been, is there more business lines that are exposed to that side of the business?

It's primarily our sandwich group.

Okay. And then I guess just looking ahead into kind of 2022 and onwards, you know, there's a little bit of tailwind, obviously, for food retail as an industry through COVID. You know, how are you thinking about that as you go into 2022? You know, do you have enough initiatives or other programs in place to sort of start to comp against those strong numbers that you know, the industry benefited from over the recent years, or based on what you're seeing now, is that demand, you think, going to be more sustained as you move forward, even as kind of the economy reopens?

Yeah, we, again, when you sort of look back, I mean, we've never really had the, you know, access to the labor or a lot of capacity to take advantage of opportunities. There were a lot of opportunities, obviously, to sell through to these channels during the pandemic, but really, we were more focused on business continuity and obviously making sure that we didn't overstress our workforce. So again, we did fine in those channels, of course, but But I wouldn't say we took full advantage of the opportunities, mainly because of some of the other challenges. So we're expecting a return to normality of lifestyles. The question is when, of course, as Will said. And again, I wouldn't say that we've benefited immensely from the fact that demand in club and retail was so strong.

Yeah, we're hoping to... that there is some sort of longer-term sustainable benefit is our premium food distribution group. You know, the food service businesses in that group, you know, we've got a slide in our AGM presentation that talks about how they performed relative to some of the other peers in their segment of the food industry. And they've done an amazing job of developing new sales channels, particularly in retail. new relationships. So we really are bullish that there are some good sustainable opportunities in that channel. So when the food service comes back, you should see some really good solid growth if they can maintain those sales as well as then get back their food service. And then the one thing that's been lacking in all the growth numbers we've been talking about is You know, food service in Canada was a key growth market for us. You know, we made major investments in Quebec and Ontario in growing our sales in those segments. And none of that growth is built into the organic normalized growth rates we've been talking about. So, yeah, you could see some really strong numbers from premium foods group once everything comes back.

Okay. And then, you know, if we think about the sandwich business, you know, the target that you're laying out or the outlook for a billion dollars of sales, can you maybe help us think through the composition of that billion dollars? You know, many, many years ago, it was primarily one customer. You've gone into other channels. Can you maybe give us some context on, you know, whether it's mass or C stores, how big a portion of your sandwich business, those new channels could be in a few years?

Yeah. You know, it's exciting. What's happening in our sandwich group. There's, so many growth initiatives within that group. You're right, they sort of built their business around a core customer, but I can tell you that they had amazing growth in C-Store this quarter, in retail, both mass and general grocery. Like George talked about earlier, they're getting into other types of assembled products like charcuterie, which has been a big growth driver. Also, their assembled meals, is is another growth driver for them there's just so many areas they're expanding and and you're seeing that you know that that major customers is is becoming a a much less significant overall customer to their their platform okay and then just one last one for me i guess there's one c store customer you were doing some trials with and that was picking up and i guess through the pandemic presumably that program got put on hold or slowed down um

Is that something that's picking back up, or is that – we'll just get an update on where that program is at this point.

All I'll say, again, is that, you know, C-Store will see tremendous growth for us this year. We are, as Will said, we're getting excellent traction in both our sandwich and our – protein division in the U.S. in the sister channel. And, you know, we're really excited by that. Great. Thanks very much.

Thank you. And this concludes our question and answer session. I'll now turn the call back to George Pagliologo for closing remarks.

Thank you, everybody. I'd like to thank you for attending today and have a great summer.

Thank you for joining us today. This concludes our call. You may now disconnect.