Premium Brands Holdings Corporation

Ladies and gentlemen, thank you for standing by. And welcome to the Premium Brands Holdings Corporation's second quarter 2021 earnings conference call. At this time, all participants are on 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. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, George Palilego, CEO and President of Premium Brands, and Will Kalulich, CFO of Premium Brands. Thank you, Mr. Palilego. You may begin.

Thank you, Christy. Welcome, everyone, to our 2021 second quarter conference call. With me today here is our CFO, Will Kalulich. Our presentation today will follow the deck that was posted on our website this morning. You can also access it by clicking on the link off our press release issued this morning. As we've had some technical difficulties this morning, I will give it 60 seconds to allow you to download the presentation, which is on our website, dated August 2021. We're now on slide five, which outlines key highlights for the quarter. Despite the many challenges facing us, we reported excellent results for the quarter and year to date. In general, food service demand came back strongly during the quarter and is now running at or slightly ahead of pre-pandemic levels. Also, our meat snack charcuterie, cooked protein and sandwich platforms are performing well and are ahead of plan. Our seafood platform, which includes Clearwater Seafood, had an excellent quarter and delivered record results for the quarter and year to date. We're very well positioned to capitalize on favorable consumer trends in both retail and food service. We have invested heavily in seafood over the past few years, and our assets, people, and products are best in class. We very much look forward to reporting back to you on our various growth initiatives in seafood, as we go forward. We're now on slide six. As you can see, our acquisition pipeline remains very active and robust, and we expect to complete many more transactions in the months and years to come. We're now on slide seven. We're very pleased to issue our second comprehensive ESG report titled Healthy Planet, Healthy Food, Healthy People. We're committed to meeting or exceeding our various goals and objectives stated in the report, including achieving net zero carbon emissions by 2030. Our full ESG report can be found on our website at www.PremiumBrandsHoldings.com. We're now on slide eight, nine, and 10. Our organic growth is driven by our passion to innovate and disrupt the traditional food chain. We're bringing great quality, new and innovative products to market, and customers and consumers are responding very favorably. Meat snacks, charcuterie, cooked protein, value-added seafood and sandwiches are shown on Slides 8, 9, and 10, are driving our organic growth and have a long runway to continue to grow for many years to come. I will now pass the presentation to our CFO, Will Kaludich, who will update you on our financial results for the quarter.

Will? Thanks, George, and welcome, everyone. 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 actual results may differ materially from what we discussed. Please refer to our MD&A for fiscal 2020 and for the second quarter of 2021, as well as other information on our website for a broader description of the risk factors that could affect our performance. I will now turn to slide 12 of the presentation, starting with our sales for the quarter. We generated 1.234 billion in sales. which was an increase of $258 million or 26% from our sales in the second quarter of 2020. The main drivers of this were our general organic growth across a range of products, and I'll talk a bit more about that later. Recovery from the impacts of COVID in the second quarter of 2020, which was roughly $85 million. Acquisitions. which accounted for about $84 million of our growth and selling price inflation of roughly $58 million. Most of which was in our premium food distribution group, which has very dynamic pricing models and cost plus structures that allowed them to pass on the current inflationary environment in terms of commodity costs very quickly. Challenges in the quarter for our sales consisted mainly of the appreciation of the Canadian dollar and the impact of that on the translation of our US-based businesses. The impact of that was roughly $58 million on our sales for the quarter. On a COVID normalized basis, our sales for the quarter would have been close to $1.3 billion. representing an increase of about $177 million over our Q2 2020, normalized for COVID sales of $1.1 billion. Again, the key drivers of that being the organic growth I'll talk about shortly. In terms of organic growth rates, on a year-over-year basis for the quarter, we generated total organic growth of close to 18%. But once you exclude the impacts of the COVID recovery, our overall organic growth was about 9.3%, and that consisted of very strong growth in our specialty food segment, which generated about 12.5% organic growth, and then a much lower growth rate in our premium food distribution group of about 2.7%, as that group continues to get impacted by the COVID pandemic. related impacts on the food service segment. Turning to the next slide, which outlines all of our major growth initiatives across our six platforms, we've highlighted in yellow the key initiatives that contributed to the organic growth in the second quarter. You can see in our seafood segment, it was two key initiatives, our new SACO facility, lobster processing facility in Maine, and COVID recovery. Our distribution group was primarily COVID recovery. In our protein group, by far the single biggest driver were our U.S. meat stack initiatives, which are going incredibly well, but also Italian charcuterie, cooked protein, mainly our Concord chicken bites program, and COVID recovery also contributed to the platform's organic growth. And in terms of our sandwich platform, it was firing on all cylinders with its various sandwich initiatives in QSR, retail, and C-Store, as well as its charcuterie slicing initiatives, all having stellar organic growth. The last point on this slide is really the fact that a lot of the growth initiatives in play that we're working on, i.e., the ones that are not highlighted in yellow, will be future drivers of our growth. So we see a lot of runway ahead in terms of future growth. Turning to slide 14, just a little bit on the COVID recovery in the quarter, which was about $85 million. You can see it consisted of roughly $91 million of recovery of food service related sales. and offset by a loss of some of the retail bump sales we saw in the second quarter of last year. Looking at our individual segments, you can see most of the recovery was in our specialty food segment, and in particularly the QSR segment, which you see is that strong food service recovery. And we saw some recovery in our premium foods distribution group as the food service economy started reopening through the quarter and we saw a return in demand in the food service segment. Turning to slide 15, the continuing COVID impact that was reflected in our normalized sales numbers I discussed earlier. Looking at the chart on the left, you can see in Q2 2020, the dramatic impact COVID had on our business, $132 million in sales. For the second quarter of 2021, we estimate a continuing impact of roughly $48 million. Turning to the charts on the right-hand side of the slide, you can see most of that impact, that continuing impact, is in our premium food distribution group. with the still returning or recovery of the food service segment to come, being the big component of that, and then a little bit of cruise line business we're expecting to come back in the later part of the year. And then down below in the specialty food segment, you can see the ongoing impact is relatively small, a little over $16 million, and most of that is associated with the airline industry. Turning to slide 16, our weekly sales trend, the gold bar being our weekly sales for 2019, the blue bar our weekly sales for 2020, and the green bar our weekly sales for 2021. You can see the momentum of the second quarter has continued strongly into the third quarter. And as the food service segment continues to open up, hopefully with the reopening of the economy, That should be even a further driver of that momentum in our sales growth. Turning to slide 17, showing for the last 11 years plus our TTM annual sales, you can see our 2021 trailing 12-month sales of $4.4 billion, nicely exceeded our 2020 normalized for COVID sales of $4.269 billion. And then looking at our 2021 trailing 12-month sales normalized for COVID, we would have been close to $4.6 billion in sales. With the release of our second quarter results, we also reinstated our annual sales and adjusted EBITDA guidance. For 2021, we are projecting total sales at between $4.7 billion and $4.85 billion. We made the range relatively wide to allow for the uncertainty associated with the specific timing of the launch of a variety of new sales initiatives, mainly the items I showed earlier on the slide of all our growth initiatives. Turning to slide 18 and looking at our EBITDA performance for the quarter, we generated $112.2 million in EBITDA. An increase of $45 million or roughly 67% over second quarter of 2020. The key drivers of that were our sales growth acquisitions, including about $13.3 million in investment income from Clearwater. The reversal of COVID-related costs from the second quarter of 2020, which was approximately $11 million. mainly consisting of supply disruptions, thank you bonuses, and plant inefficiencies in the second quarter of 2020. And then finally also production efficiency improvements through automation and continuous improvement across mainly our protein group, but also our sandwich group. Offsetting those positive factors were six negative factors, First off was our continued investment in plant sales and administration infrastructure to support both our current and future growth. The biggest challenge of the quarter by far was commodity cost inflation, net of selling price increases. For our premium food distribution group, it was a slightly positive factor as they have very dynamic pricing, as I mentioned earlier, as well as cost plus pricing models. So they were able to pass on a lot of the commodity cost inflation experienced over the quarter very quickly. But it was a major impact on our specialty food segment and in particular our protein group, which because of the nature of their business and dealing with a number of retailers, there's generally a time lag associated with putting through the price increases needed to address the rising commodity cost environment. Also, there was some wage inflation in the quarter, particularly in our U.S. sandwich businesses as they're addressing some of the tightness, labor tightness in that market. And then also the translation of our U.S. businesses into Canadian dollars was impacted by the stronger Canadian dollar. And rounding out the list was a bit of incentive-based compensation, accrual increases, and some general cost inflation. Normalizing for the impacts of COVID, our EBITDA, adjusted EBITDA for the quarter was $121 million, representing about a $14 million or 13% increase over our 2020 normalized EBITDA of about $107 million. In terms of EBITDA margins for the quarter, it was 9.1%. which was below our expectations primarily due to the commodity cost impacts. You know, normalizing for those, we would have been closer even above our 10% target for the quarter. And similarly, for the COVID normalized number, our EBITDA margin was roughly 9.4%, and certainly would have been excessive 10% normalizing for the commodity cost impacts in our protein group. Turning over to our next four slides just give you a sense of the trend in a number of key commodities purchased by our companies. The first slide on slide 19 shows a basket of pork products purchased by our companies. Pork is the largest component for our protein platform. You can see the inflationary trend there. We've listed the demand and supply factors on the right-hand side, but really the key driver of the inflation has really been the reopening of the economy with the food service segment in particular. The next slide shows a basket of beef products. Beef is the largest component for our distribution platform. Again, a very inflationary environment going into Q3. Q2 there was that unusual spike, but overall certainly a continued inflationary environment for beef. Next slide is lobster, which is a significant cost or input for our seafood group. And lobster is certainly at absolute record highs right now, as you can see from this chart. And then finally, the final chart is for salmon. Again, another key input for our seafood group. 2019, there was some noise in the numbers from supply disruption. The green line, which is 2021, has really been driven by demand and reopening of the economy. So overall, again, what made this quarter unique from a commodities perspective was any one particular commodity was inflationary, but never have we seen a situation where everything was so inflationary. Turning to slide 23, a trend in our annual EBITDA, again for the last 11 years and the trailing 12 months. Similar to our sales, you can see our trailing 12 months 2021 EBITDA is now in excess of our 2020 EBITDA normalizing for the impact of COVID. And if you normalize our 2021 trailing 12 months EBITDA for COVID, we would have been in excess of 400 million in trailing 12 months EBITDA. For 2021, we are projecting an adjusted EBITDA margin of approximately 9%. We have been a bit bearish on this number on the basis that we expect to see some continued margin pressure on our protein platform businesses Again, due to the timeline associated with them putting through price increases to address cost inflation as I mentioned earlier. Turning to slide 24, our earnings for the quarter were $53.5 million, an increase of $32.3 million or 152% from the second quarter of 2020. Key driver of that was our EBITDA growth offset with some associated incremental taxes and some amortization associated with the sale and leaseback transaction we did in the quarter. Normalizing for COVID, our earnings would have been $60.1 million for the quarter, representing a $14 million increase, or roughly 31% over the 2020 COVID normalized number. In terms of EPS, for the quarter we generated $1.23 per share in earnings per share, a 66 cents per share or 116% increase over the second quarter of 2020. On a normalized basis, our EPS was $1.38 representing a 15 cents per share or 12% increase from the normalized Q2 2020 number. Turning to slide 25, a little bit about Clearwater, certainly our most significant capital allocation we've made yet. Clearwater continues to generate very strong momentum in their business. You can see their sales are nicely up, roughly 33 million or 31% from the second quarter of 2020 to 139 million. The key driver of that really was the reopening of the economies, particularly in North America and in China. And that was offset a little bit by some deflationary impact of the stronger Canadian dollars, a lot of their sales are in U.S. dollars, as well as some continuing impact on their wealth business due to some COVID-related inventory issues in their key markets. From an EBITDA perspective, Clearwater generated $28 million for the quarter, up roughly $14 million or 96% from the second quarter of last year. And certainly comparing it to 2019, also strongly up from about $26 million in that year. So very solid performance by Clearwater, driven by their organic growth, and in particularly the selling price inflation being driven by the reopening of the economy. Because unlike many of our other business, because Clearwater is a harvester of many of its species, and has a relatively fixed cost, that inflationary impact pretty well flows directly to their EBITDA, so a very positive contributor to the quarter. And then also some good strong operation efficiencies, generally relating to less at-sea days resulting from better catch rates. Offsetting that was the negative Canadian dollar, similar to the selling price inflation the impact of the dollar flows straight down into their EBITDA and so the translation of the US dollar sales obviously was a negative. Also for the products they do procure, those were higher driven by the commodity cost inflation and then also some increased incentive accruals. In terms of net earnings for the quarter, Clearwater generated $2.5 million. Our 50% equity interest in that was roughly $1.2 million. which is well ahead of our expected plan. We expected negative equity earnings for the quarter in our original business plan. So Clearwater doing very well and nicely exceeding the plan built into our IRR modeling. Turning to page 26 in terms of capital allocation for the quarter, we allocated just a little over 100 million in capital. 16.5 million of that was to our 35 to 40% owned reach structures, which associated with the sale and lease pack I mentioned earlier. And then we spent about $82 million on, or allocated $82 million to new capital projects, namely the expansion of our Hempler's facility to add additional meat snack and premium processed meats capacity. expansion at our Berto's operation to increase their meat snack capacity, the addition of two automated lines in our sandwich plants, both for capacity and production efficiency improvements, and then finally the expansion of our buddy's sandwich plant in Minnesota. In terms of actual expenditures for the quarter, we spent roughly $44 million. on IRR 15% based projects, again, $16.5 million for the REIT and roughly $25 million for project CapEx. And again, these are all projects that we expect to generate at least a 15% internal rate of return after tax, unlevered, and usually using a 10-year plus business model. Subsequent to the quarter, we allocated another $110 million for two acquisitions, one which closed subsequent to the quarter, Murmax, a Quebec-based food manufacturing and distribution business, and then Made Right, which we have a signed agreement and we're just going through the closing conditions before it can be completed. For the year to date so far, we have allocated roughly $931 million in capital and spent $725 million of that. Turning to slide 27, our liquidity, our balance sheet continues to remain strong with our senior debt EBITDA ratio at 2.1 to 1, which is below our long-term targeted range at 2.5 to 3 to 1. And our total debt TBDOT ratio of 3.4 to 1, again, well below our long-term targeted range of 4 to 4.5 to 1. Our unused credit capacity at the end of the quarter was roughly $470 million, giving us great flexibility to continue on with our various capital allocation strategies. And turning to the final slide of the financial update, our free cash flow. we generated record free cash flow of the quarter of $238 million. This is roughly a $50 million increase over our 2020 free cash flow, driven a lot by the drop off at the second quarter of 2020, which was severely impacted by COVID. From free cash flow per share, we generated $5.79 for the trailing 12 months, again, a record level. up $0.92 per share, or roughly 19% from 2020. Our payout ratio for the trailing 12 months was 43.6%. If you normalize this for total shares outstanding versus weighted shares outstanding at our current dividend, new dividend rate, our payout ratio would have been 46.5%. With that, that concludes the financial update, and I will now turn the call over to Christine.