Premium Brands Holdings Corporation

Good day, and thank you for standing by. Welcome to the Premium Brands Holdings Corporation Third Quarter 2021 Earnings Conference Call. At this time, our 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 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. Our speakers will be George Pagliologo, 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 Pagliologo. Please go ahead.

Thank you, Misty. Welcome, everyone, to our 2021 Third Quarter Conference Call. With me today, I have our CFO, Will Kaludich. Our presentation today will follow the deck that was posted on our website this morning. We're now on slide five, which outlines certain key highlights for the quarter. Despite the various well-documented challenges facing the manufacturing sector and the overall economy, we reported excellent results for the quarter and year to date. Our CFO, Wilka Ludic, will provide you with more color on our results later on in the presentation. Commodity cost inflation, supply chain issues, and labor shortages continue to challenge our various platforms almost daily. Our strong results for the quarter demonstrate the balance and resilience of our unique business model and its ability to continue to deliver above average and consistent returns to our shareholders despite the headwinds. Food service demand returned during the quarter while our seafood group delivered record results. In addition, our meat snacks, charcuterie, cooked protein and sandwich platforms continue to perform well. Clearwater Seafood once again had an excellent quarter and results are running well ahead of plan. Clearwater's results are benefiting from robust demand and strong pricing for its products, combined with proactive and disciplined cost management. We remain very encouraged with what we see in terms of seafood-related consumer trends, and we're very well positioned to capitalize on these trends in both retail and food service in North America and globally. Our original investment thesis that seafood is at the intersection of several powerful consumer trends like health and wellness, convenience, and aging demographics is beginning to translate into excellent financial performance for our seafood platform. We're pleased to announce the closing of two strategic acquisitions after the end of the third quarter. MaidRite, which is located in Pennsylvania, US, complements our cooked meat platform very well while Westmoreland further strengthens our value-added lobster business. Both companies have been highly successful and are run by very talented entrepreneurs whom we welcome as partners. We're now on slides six to nine. I have included here some pictures of new products recently launched by the PB ecosystem. I'm sure you'll agree with me that the products look amazing and demonstrate our passion for innovation and for reinventing and disrupting the traditional food chain with best-in-class, clean, wholesome, and great-tasting products. We're now on slide 10. As you can see, our acquisition pipeline remains very full, and we expect to complete many more transactions in the months and years to come. You will notice that the active and advanced files add up to 1.4 billion in sales. 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. 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 in material from what we discussed. Please refer to our MD&A for fiscal 2020 and for the third quarter of 2021 as well as other information on our website for a broader description of the risk factors that could affect our performance. Okay, now turning to the quarter, I'm on slide 12, talking about our sales. Sales for the quarter were $1.341 billion, up $240 million from 2020, representing a 22% increase. The major drivers of that was, by far, The largest was selling price inflation, roughly $120.6 million in the quarter. This is very broad-based across all of our businesses and pretty well across all of our product categories. Acquisitions contributed about $96 million to our growth. Organic volume growth contributed $51.1 million, and that came within our specialty food segment from sandwiches, meat snacks, charcuterie and cooked protein products, and within our premium food distribution segment from the retail expansion initiatives. COVID-related factors had a relatively neutral impact on our quarter as we saw a tremendous comeback in our food service sales, roughly $26.4 million of growth in the quarter. However, that was mainly offset or primarily offset by a recovery or return to normal demand levels in the retail channel, which resulted in a decline of about $25.8 million, giving the overall impact a neutral impact. And I'll discuss about that more in a later slide. Our sales were also negatively impacted by the stronger Canadian dollar. which resulted in a lower translated value for our US-based businesses. Looking at the COVID-related impact on our quarter, we estimate that to be about $33 million continuing impact, and I'll talk a bit more about that in a later slide. Normalizing for that, our sales for the quarter are $1.375 billion. Turning to slide 13, talking about our organic growth rates for the quarter, Overall growth rate for the quarter was 4.6% or 4.7%, which is down from where we've been trending the last number of quarters. And that was primarily due to a number of what we consider transitory factors. Within our specialty foods group, we had some capacity related issues in the meat snack and kebab categories. This resulted in about $21 million of short shipments. Our specialty food businesses also, particularly our branded businesses, did a lot less featuring during the quarter. It's part of the normal sales cycle. However, they pulled back as a result of both margin pressures from the commodity price inflation we were seeing out there. And as they put through price increases, there's delays in that. And one way they manage those delays is through less featuring. and then also with labor and supply chain challenges impacting the ability to grow as well in the short term. On our premium food distribution group, we saw some transitory impacts with less live lobster featuring as a result of record high lobster prices, and I'll show you that in a bit on another slide. As well as longer term, we see a key growth driver in our premium food distribution group being the food service channel, And while we saw a tremendous recovery in that channel from the COVID related impacts last year, it's still in recovery mode. So if we look at the two segments and sort of analyze their organic growth a little bit, you know, I want to show how there's a lot of tremendous activity, a lot of growth going on there and sort of try and filter out some of these transitory impacts. So if we look at specialty food groups, Organic growth rate, volume growth rate for the quarter was 5.5%. We normalized for COVID-related factors, namely the recovery or the reversal of the retail demand bump we saw in 2020. Their normalized rate for that is about 7%. And then if we normalize for the shorts, meat snack and kebab shorts, they're close to a 10% growth rate for the quarter. which is getting closer to our medium-term expectations of the growth in that category. And that's before considering the featuring impacts and the supply chain impacts. In terms of our premium food distribution group, its organic volume growth for the quarter was 3.2%. Once we normalize for the food service recovery, their sales are relatively flat, 0.3% organic growth rate. But then when we take into account the impacts of the reduced live lobster featuring, again, a transitory impact, and reduced exports due to some supply chain challenges in Asia, their growth rate is about 6.2%. So again, approaching our longer-term expectations with that group, particularly given that we're not seeing the organic growth yet coming from food service. Turning to the next slide, it shows most of our major growth initiatives across our six platforms. The ones highlighted in yellow are the ones contributing to the quarter, and the unhighlighted ones are ones that are in the works and are expected to be major drivers of organic growth in the future, so lots of good stuff to come. Turning to slide 15, This is a summary of our major capacity expansion initiatives across the six platforms. The ones with no highlighting are completed, and those are contributing to our current organic growth. The ones highlighted are ones in the works that will address some of the capacity issues we're having today. And you can see particularly in our protein group, we've got three major initiatives underway. all focused on the meat snack category which we've been seeing tremendous growth as we roll out our u.s based strategies and then in our sandwich group we've got three major projects as well as that that group continues to generate high double digit organic volume growth turning to slide 16 and just talking a bit about the impact of covid related factors on q3 Starting with the premium food distribution group, you can see we saw a good recovery in food service sales, roughly $21 million of recovery from the 2020 impacts. And then that was partially offset by the reversal of that unusual demand we saw in the retail channel in 2020. So overall, a favorable impact of about $11 million in the premium food distribution group. In our specialty food distribution, we saw some food service recovery positive impact, but that was by far offset by the reversal in the retail demand impact, giving them an overall sort of negative impact of just a little under $11 million. Once you net the two segments, you can see overall COVID-related factors was a neutral factor on the quarter, overall organic volume growth. Turning to the next slide talks a little bit about the continuing impact of COVID on our business in the quarter. You know, looking at premium food distribution group, you can see most of the continuing impact is on their cruise line business. We saw very little recovery in that in the third quarter. We do expect to start seeing that ramp up in Q4 and then an even quicker in Q1 next year. and then also a little bit of continuing food service impact mainly related to hotels and events and the fact that Q3 was sort of a ramp-up quarter for food service. So overall, the continuing impact in the third quarter on premium food distribution, roughly $12 million. Looking at the specialty foods group, you can see airlines. We saw some recovery of airline business in the quarter, but it's still relatively small. We expect to see that improving in Q4 and again Q1 next year. So a continuing impact in Q3 of about $7 million. And then continuing food service impacts relating mainly to hotels and institutions and then the ramp up factor in Q3. You can see on the retail side, we've pretty well reversed the full extent of what we estimated the unusual COVID demand bump to be in 2020. So going forward, that should no longer be a factor. And then we had some new impacts in the quarter, roughly $8 million relating to supply chain challenges, mainly some procurement issues on some very high-valued pork items and then some plant shutdown issues in our burger division. So we do expect all of that to reverse in 2022. So the overall impact on specialty foods, about $20.6 million, and then the combined impact on the two segments, roughly $33 million in the quarter. Turning to slide 18 and looking ahead a little bit, the green line represents our weekly sales volumes or sales for 2021, the blue line for 2020, the gold line for 2019, You can see post the third quarter, we continue to generate very strong sales momentum driven by organic growth, COVID recovery, as well as inflation. Turning to slide 19, looking at our EBITDA for the quarter, it was $122.6 million, representing an increase of 29.1 million or 31% from 2020. Looking at the major drivers, clearly selling price inflation, acquisitions, organic growth were the big three drivers. Following them, we did see some reversal of COVID-related costs from 2020, mainly plaintiff inefficiencies and staff thank you bonuses paid out last year that weren't incurred this year. We also saw a reduction in our marketing and promotion costs. It ties back to my comment earlier on our branded businesses doing less featuring as a strategy to manage their margins as well as deal with some labor growth issues. We continue to see production efficiency improvements, and in our specialty food group, there was some reduced incentive-based compensation accruals. Offsetting these positive factors were incredible commodity cost inflation. We saw it across all of our commodity inputs. as well as just general costs. That pretty well offset our selling price increases for the quarter. You know, our businesses are continuing to put through more selling price increases post the quarter, as well as in the quarter, that $120 million selling crisis we saw was a transitioning of initiatives, so it wasn't the full impact of the current price increases put through. So... While commodity costs continue to rise, we are addressing it with selling price increases. Wage inflation was another significant factor in the quarter. Plant overhead increases, some of that due to our higher volumes, but also we did have to take much more significant inventory positions just to manage our way through the supply chain disruptions we're seeing, and that created a lot of additional costs, particularly in outside storage. Then we also saw some freight inflation and the impact of the stronger Canadian dollar on the translation of our US-based businesses. Our EBITDA margin for the quarter was 9.1%. A nice improvement from 2020, which was 8.5%. Still below expectations because of the commodity price inflation primarily. and also the continuing impacts of COVID. If we look at the impact of COVID on the quarter, we estimate that to be about $7.6 million, primarily all of that related to the sales impact I talked about earlier. Normalizing for that, our EBITDA margin for the quarter is about 9.5%. Turning to slide 20, the next four slides, 20 to 24, indicate or show you the trends in some of the key commodity inputs used by our businesses in all four slides you'll see the story is very similar it's one of increasing demand with the reopening of economies particularly north america and asian economies and then offsetting or creating tightness in the market is supply challenges relating to labor, relating to supply chain disruptions. So you kind of have a worst-case scenario of increasing demand and sluggish supply growth, and as a result, the tremendous inflation we've been seeing. So in all these slides, you'll see the commodities are at record highs. This one shows a basket of pork-based products that we purchase or businesses purchases. You can see all at record highs. If you flip to the next slide for beef, Again, all at record highs. I know there's stories in our company of some of our businesses on certain beef products because of such high increases in these costs of these products and have to put through price increases as high as 24% on certain beef entree products. Next slide shows you lobsters. Again, record highs. And then finally, the last slide, Atlantic and Chilean salmon, both at record highs. Turning to slide 24 and our adjusted earnings for the quarter, which were $57.8 million, an increase of $15.8 million, or 37.6% from 2020. The key driver of that was our EBITDA growth, and then that was offset by a little bit of increases in our depreciation as a result of acquisitions and recent capital projects. and also some additional interest expense due to higher debt balances, partially offset by favorable market conditions and better credit spreads on our senior debt. Then also increased income taxes offset our EBITDA growth. Looking at the impact of COVID, taking the impact on our EBITDA of $7.6 million, which after tax was about $5.7 million, are normalized for Covet earnings would be about $63.5 million or $1.46 per share. Turning to slide 25 and the results of our recent investment Clearwater Seafood, a very good quarter as George mentioned earlier. Their sales increased by $24.7 million or $24.7 million from 2020 to $158.4 million. This was driven by primarily the reopening of the economies in North America and Asia, which provided a tremendous amount of price inflation, which benefits Clearwater and their seafood commodities, as well as some volume increases. And then offsetting that was the stronger Canadian dollar and the translation of their U.S. are their exports with a large portion of which are US and Europe Euros. And then some lower crab sales as a result of some procurement issues and the timing of landings. Clearwater's EBITDA for the quarter was 40.1 million, a 14.7 million or 58% increase from 2020. This was driven by the strong pricing environment, based on the nature of Clearwater's business, whereby as a harvester of many of their species, their costs are relatively fixed. So they've benefited immensely from the inflation we've seen across all proteins, including seafood. Then also organic growth was a positive contributor, some operational efficiencies, partially due to better catches this year, as well as the reversal of some pandemic-related inefficiencies last year. And finally, some positive FX hedging gains, and then these were offset partially by the reversal of some government subsidies last year, as well as increased incentive accruals. Turning to slide 26 and talking a little bit about our five-year outlook. We set back in 2018 objectives to have $6 billion in sales and $600 million in EBITDA by 2023. Walking through where we are in terms of our sales target, you can see our sales for the trailing 12 months at the end of Q3 were $4.642 billion. If we normalize for the trailing 12 months impact of the pandemic or COVID-related factors, That's about $179 million. And then we annualize for acquisitions completed partway through 2020 or in 2021. That's an impact of about $423 million, giving us a current run rate of $5.244 billion. And then if we look ahead to 2022, 2023, make a very conservative growth assumption of nominal growth of 6%. The reality is we've been growing at a volume growth of roughly 8.5% over the last two years or over 10% nominal terms. So again, a very conservative assumption that would give us about $648 million of growth, leaving us with only the need to complete about $170 million in acquisitions to achieve our $6 billion target. And as George mentioned, we have well over... $1.4 billion in acquisitions in the pipeline is active or advanced and even just in the advanced acquisition pool, which are transactions where we have assigned LOI, that's about $116 million in sales. Correspondingly, we're very bullish on exceeding our 2023 sales target. Next, I'll turn over to EBITDA, which is on slide 27. Again, going through a similar calculation, the trailing 12 months is $405 million of EBITDA. Normalizing for COVID-related sales impacts, that's the $33.8 million impact on EBITDA. And then annualization of acquisitions and our clear water investment income brings us to a run rate EBITDA of about $504 million. which represents a 9.6 EBITDA margin. And then we add in EBITDA related to the growth assumption we made on the earlier side using a very conservative contribution margin of 20%. That's about $130 million. And then a conservative estimate of the EBITDA from our acquisition assumption. That would take us to about 642, 43 million in EBITDA. So again, well ahead of our target. both in terms of dollars and percentages. Turning over to slide 28 and capital allocation, during the quarter we allocated $34.2 million in capital to acquisitions and capital projects, and by capital projects we're defining those as generating a return of at least 15% or greater on an after-tax unlevered basis. Really, the capital project expenditures were across a variety of projects, while the most significant investment in the quarter was in our MERMAX acquisition. For the year, we've invested roughly $582 million in acquisitions and project capital expenditures, and the total capital allocated with those initiatives are about $803 million, leaving about $180 million still to spend on those initiatives. Looking forward, subsequent to the quarter, as George mentioned, we completed the Westmoreland and Maidwright acquisitions, which is about another $200 million of capital allocation. And again, just to re-emphasize, all of these investments, our expectations are a minimum 15% internal rate of return after tax, unlevered. Turning to slide 29, looking at our balance sheet, it continues to be very strong. Our senior debt and total debt ratios were stable from Q2. Our total debt to EBITDA ratio staying at 3.4 to 1, and our senior debt to EBITDA ratio staying at 2.1 to 1. Our overall credit capacity still remains strong at $426 million, down slightly from $50 million last quarter as we've invested in the projects I mentioned on the previous page. As well as we made significant investments in working capital this past quarter driven in large part by inventory and the issues I talked about in terms of securing more inventory to protect against supply chain disruptions as well as some inflation hedging. Subsequent to the quarter, we renegotiated our senior revolving credit facility. We increased the facility by US$250 million, bringing the total to roughly a $1.5 billion facility. And we extended the term, maturity date of the facility to November 2026, i.e. another five years. And then finally, we added some ESG-linked targets, sustainability-linked targets to the facility, mainly tied to our greenhouse gas emissions food safety targets and our employee diversity targets. Turning to slide 30, the final slide in the deck, our free cash flow. Free cash flow for the quarter on a trilling 12-month basis was $245.6 million, representing a $56.8 million or 30% increase from 2020. Our free cash flow per share was a record $5.80 per share, as George mentioned earlier, representing a $0.93 per share or 19% increase from 2020. Our payout ratio for the quarter was 44.1%, or if you normalize for a full year at our current dividend policy rate and shares outstanding, it's 45.1%. That concludes the formal presentation For the quarter, I will now turn it back to Misty for the questions section.

At this time, if you would like to ask a question, press star 1 on your telephone keypad. Again, that is star and the number 1. Your first question comes from the line of George Delmet. Thank you.

Yeah, hi, thanks for taking my question. In the SF, you guys called out higher input costs that exceeded selling price increases in the quarter due to timing. So can you maybe quantify that, give us a sense of magnitude? Just trying to get a sense of what, I guess, normalized margins are once price catches on to inflation.

Yeah, so, George, again, it's a challenging question in the sense that we're really not through inflation. what's been going on with commodities. And so in the short term, we're seeing some moderation in commodity costs in certain categories, which is a positive. But still, there's a lot of uncertainties there, how the supply chain is going to pick up, what's going to happen with consumer demand. So in the short term, it's challenging to answer your questions. In the longer term, all of our businesses and their pricing strategies are focused on You know, on an EBITDA perspective, that's sort of 13% plus average in our specialty food group and, you know, roughly 7% average in our premium foods distribution group. You know, those are the targets in sight and those have not changed.

Okay. George, last quarter you mentioned that we lost about $25 to $50 million in potential revenues owing to labor constraints. Would you estimate that number to be bigger or smaller or the same this quarter?

No, I'd say it's about the same, George. Similar issues. I'd say the second and the third quarter were very similar in terms of the challenges and the disruptions that we faced. Nothing much has changed. So about the same. Okay.

And one last point, if I may, there was some talk last quarter's call about adding extra sandwich capacity. Can you maybe give us a little bit of an update there? And should we think of that investment as being maybe substantially higher than the unlevered kind of after-tax IRR of 15% that you typically get from other CapEx projects?

Yeah, so we announced two projects with the press release. We announced a second facility in Columbus, 144,000 square foot, to support our continued sort of artisan premium sandwich initiatives across North America. And then we also, and that was about a US 25, $26 million investment. And then we also announced a new plan for, to support a Canadian initiatives. based in Edmonton. It both replaces an older facility as well provides additional capacity. And that's about a $17 million investment. So post those will be well suited to continue to drive some solid growth over the next couple of years. In terms of IRs, you're absolutely right, George. Those would be particularly the US investment we expect to be higher than that 15% minimum.

And I'll just like to add to that, George, that in general terms, the labor shortages or the labor challenges that we're having are also driving a lot of the demand for our products because a lot of our customers, a lot of our QSR customers in particular, are trying to solve some of their labor issues coming to us. So again, the demand is there and it's even accelerating given some of the labor shortages that you're hearing out there in all parts of the economy.

All right, guys. Thanks for answering. Good luck.

Thanks, George.

Your next question comes from the line of Martin Landry.

Hi, good morning. Good morning, Martin. Selling price increases contributed a meaningful part to your revenue. You mentioned $120 million during the quarter. You're talking about putting further price increases. Just trying to understand if you see these price increases as temporary or permanent. Under a scenario where we would see inflationary pressures abate next year. Could we see you decrease your selling prices?

I think in general terms, Martin, in the past, we've raised prices, of course, to reflect commodity type of inflation. And at times, as commodity prices come down, then we will lower prices as well. Now, in terms of your inflation question, of course, right now we're facing other type of inflation, including labor cost inflation. Yeah, so some of that inflation will, I think it's permanent and some of it is more temporary. So, you know, again, we're monitoring it, we're managing it and, You know, as Will said earlier, I think that there will be some commodity inflation, which normally will pass on to our customers and sort of maintain our margins at consistent levels.

Yeah, and Martin, you know, it's interesting. In a number of our, especially our branded protein businesses, you know, some of the more differentiated products, these do set new consumer price points. So there is some permanent recapture of that margin. But what businesses will often do is they'll use that additional margin to drive additional featuring. And so similar to how featuring was a negative impact on this quarter because of managing their margins, in the future it could be an acceleration of their organic volume growth as they use that additional margin to generate new demand.

Okay, that's helpful. And I just wanted to maybe have a little bit more color on your recent acquisitions. Westmoreland seems to be the largest one you've done this year aside from Clearwater. Can you give a little bit of color at what attracted you to that business, the kind of historical growth rates they've generated, potential for cross-selling synergies, anything like that would be helpful.

Yeah, I'll start Martin by saying that, you know, Westmoreland is a very, very well managed company built by a very successful entrepreneur. They're a big player in lobster meat. This is an area that, you know, we've spent a lot of capital and a lot of effort with our investment in ready seafood. You know, we believe that lobster meat is a growing protein with respect to demand. We want to make it easier for consumers to consume lobster. A lot of consumers don't want to buy the tails and have to fight to split it up and cook it. Our view is that we want to make it easier for consumers, both in terms of at-home consumption as well as uh, in restaurants. And, and, uh, you know, again, Westmoreland is a leading player in North America in this area. So, uh, an actual fit for us.

Did you have, uh, that kind of offering before, uh, in terms of lobster meat?

Uh, yeah, when we, uh, when we invested in ready seafood, we built a facility that, um, that basically, uh, separated the, uh, the meat from the, uh, the lobster. And, um, And yeah, I'd say it's a major category for us. We've done well there. Ready Seafood has done very well building this category. There's some pictures of some of the products, the lobster meat products that we sell in the deck. And again, Westmoreland is a major player in that segment. Okay.

And truly, it's a very exciting category, Martin. You know, Ready Seafood made the investment in the Saco facility, as George mentioned, And the IRR we've seen in that facility, it was all based on growth and it's just been fabulous. And through COVID, there's been a real sort of realization of the product by the consumer, both in retail and by food service customers across the U.S. So we're seeing tremendous growth opportunities and Westmoreland is part of the Ready Food Group strategy to be able to benefit from that growth.

Perfect. Thank you. Thank you, Marta.

Last question is from the line of Derek Lessard.

Yeah, good afternoon, gentlemen, and congratulations on another good quarter. Maybe just talking, continuing along the lines on the acquisitions, I was just curious on the split between the $200 million that you paid between the two companies and And maybe on the, you know, what the revenue contribution we should expect from both?

Yeah, so, you know, vendors are very sensitive about individual prices. So we don't talk about individual prices, Derek. But in terms of sales, you know, Ready is about, or Made Right is about $80 million in sales, roughly 80 million U.S. in sales and Westmoreland's about 140 million in sales, I believe. We've disclosed it in the MD&A, so you'll have a chance to get the specific numbers there. And the valuations, if you wanted to sort of make some estimates, made rights margin profile is very reflective of our specialty food group. while Westmoreland's margin profile is very reflective of our premium food distribution group.

Okay, that's helpful. Thanks, Will. How should we look at the timing of the unrecovered COVID or supply impacts over 2022?

Yeah, so in terms of the third quarter, I would suspect, you know, the impact we talked about the third quarter, the $33 million, all of that should be gone by the third quarter of 2022, assuming things continue to normalize, right? So airlines, cruise lines, we expect that to normalize over the coming two quarters. The food service, similarly, you know, certainly by 2022, Late next year, that should be fully normalized in terms of maybe events and some of those sort of final strategy components. But, yeah, you know, certainly by Q3 next year, we would expect that all to be gone.

Okay. And maybe just one last one for me is just remind us where you are in terms of, you know, the increased automation in the sandwich plants and maybe just talk about the decision behind building the – another sandwich facility and why in Ohio, a second one in Ohio?

Yeah, for us, Derek, as we said earlier, you know, we're seeing a lot of demand from various channels with regards to our products. The decision around Ohio is that we already have a facility there and a management infrastructure there. So look at it as more of a satellite plant rather than a new plant, right? It gives us 144,000 square foot of new capacity, and we already have an established management infrastructure there. So that was the logic behind Ohio. And in terms of the automation initiatives, again, it's well known that Labor is challenging. What we bring to the table for our customers is the fact that, you know, we're able to scale and automate. So a lot of automation initiatives, not just in our sandwich group, but also throughout the company as we speak.

All right. Thanks, George. Thanks, Will.

Thanks, Darren. Thanks, Darren.

Your next question comes from the line of Stephen McLeod.

Thank you. Good afternoon, guys. Hey, Steve. Hey, Steve. Okay. A couple of follow-up questions. Just very quickly, in terms of Westmoreland, you cited, you noted that the margin profile is sort of reflective of the PFD group. Would that business sit in premium food distribution? Is that the way to think about it?

Correct. Yeah. It'll form part of our seafood group, and premium food distribution consists of the distribution of seafood groups.

Right. Okay. Great. Thank you. And then I just wanted to follow up. You know, you have some really good slides about the major growth initiatives, slides 14, and then the CapEx expansion projects on slide 15. I mean, it's a bit of a big question, but is there any way to quantify kind of what the revenue contribution could be from these growth initiatives and CapEx expansion projects? I mean, I guess as we think about beyond 2023, are these the kinds of things that drive growth

beyond that 2023 target yeah no no yeah again in that 2023 target i said that nominal growth of six percent yeah you know the reality these are foreign these are drivers far in excess of that you know the way we look at growth steve is you know four to six percent volume growth is just sort of a no-brainer you know it's there our market's growing it faster than that that's easy to achieve and then as we invest in these capacity initiatives, these new initiatives, you know, those are the factors that are going to get us to, you know, that low or high single digits, low double digit growth rates. And that's exactly what these factors are.

Yeah. If you look at what we've done historically, Steve, is we're kind of shy in terms of investing until we prove the demand. And once we prove the demand, we're not afraid to invest, as we've done in in the sandwich group, for example, right? So, yeah, absolutely. And, you know, we'll probably be coming out with our next five-year plan sometime in 22, and all the sales projections will be adjusted in accordance to the capital we're spending in these areas. Right. Okay. Yeah, that's helpful.

And then maybe just one more question, more of a near-term question, just thinking about the commodity inflation, labor inflation, supply chain issues, understanding, obviously, that these are manageable over time. But when you think about Q4, I mean, is it safe to assume that these factors will still be a headwind? The price that you put through may not be enough to offset some of those headwinds. I'm just thinking more near-term versus longer term.

Yeah, near term, Steve, I would say, as Will said earlier, it just depends on what happens to commodities. Commodity inflation is a big part of the overall inflation we're seeing. So, you know, we've seen a little bit of a downturn in terms of commodities more recently from the record level. So I guess we'll see, you know. the rest, you know, the rest, yeah, there is some inflation in other areas of the business. You know, it's pretty well manageable.

But Steve, I would add, and, you know, you saw this trend in the third quarter, you know, our premium food distribution group exceeded our expectations for the quarter, while our specialty food group was below expectations. And really was one a story of the reopening going better than than we had planned and commodity prices taking off a lot stronger than we we did expect it and those trends will continue likely into the fourth quarter the effect of the commodities hopefully will be much lesser on the specialty food segment as some other price increases take effect and like george says that we We are starting to see some moderation in commodity prices, but in general terms, those trends will likely continue. And that was the reason we moved our guidance for the year from being a percentage to a range. We're still very confident of being within our EBITDA range, but likely we'll be below that 9% target because of those factors.

Oh, okay. Okay, that makes sense. Okay. Well, that's great, Collar. Thanks so much, guys.

Thank you, Steve.

The next question is from the line of David Newman.

Good morning, guys. Hey, David. Great results in a chaotic environment, obviously, here. So as you push through price increases, are you seeing anything at all in the way of any demand destruction, you know, mid-growing concerns about inflation or stagflation, or are personal savings so strong that people are still spending? And I know you guys are really nicely balanced that you have the food at home and away from home. It does give you a bit of a balance there, and you can capture, you know, people's eating or consumption patterns somewhere. So maybe just some thoughts of what you're seeing in the channels as far as the inflationary environment.

Yeah, so David, we're certainly concerned about that. We're not seeing.

Okay. Well, that's good. And I guess, again, people have pretty thick pocketbooks right now, courtesy of the government, I guess they're spending at restaurants as well. And the supply chain.

Can I just add, can I add, David, that one of the things you have to remember is that We generally sell premium products, right? So that means that the consumer that buys our products tends to buy them for reasons other than price. That's a key differentiating point to premium brands.

No, absolutely. And on the supply chain, George, and the challenges you guys are facing, we're kind of moving into the peak season phase. obviously for lobster exports in the early part of the new year. Are you seeing any signs that some of these supply chain challenges are abating to any degree?

Not really, David. I wouldn't say that. In general terms for us, it just means longer lead times and more stockpiling. We'd have to adjust the way we do business, basically. We're managing. It's different, but But generally, again, we've adjusted.

Okay. And you guys, obviously the Clearwater results have been exceptionally strong, and I think there was some concern out there that you might not, depending on what the results were in the first year, I know you're not actually collecting until the second year, but it does look increasingly confident that you might be able to receive your payment in the second year. Is that how you're looking at it?

Yeah. Hey, David, can you do us a favor? Can you mute your phone after you ask the question? Because we're getting a really bad echo from your phone.

Oh, okay. Sorry about that.

Great. Thanks, David. Oh, sorry. I guess it wasn't your phone. We're still getting the echo. In terms of Clearwater, yeah, no, status quo, David, you're absolutely right. They're tracking well ahead of plan, and we would expect to see that interest payment start sooner. But the reality is there's also all sorts of other exciting opportunities we're looking at with them. And so I can't commit to any one specific question at this point.

Got it. And last one for me, more of a housekeeping issue. But if I look at your growth capex for next year, obviously you've expanded your lines, et cetera, in part because of the acquisitions you're doing, but also because you're investing in in your plants. Does the growth capex, it looks like to me if I tally everything up, it looks like it could be about $180 million next year. Am I off the mark there?

Yeah, that sounds about right, David. I'd have to go back to the math. All of the projects that we're looking at that have been approved are in our MD&A. And the way we generally look at it is maintenance capex is roughly $30 to $40 million a year. General CapEx is roughly $30 to $40 million per year. And then you have all the special projects, which, as you know, they're all disclosed in our MD&A.

Excellent. Thanks, Sherman.

Thanks, Damon.

Your next question is from the line of John Zampero.

Thanks. Good morning, guys. Hey, John. Good morning. I think I'll start with a quick housekeeping question. You gave some really compelling growth numbers specifically for seafood and distribution in the quarter. But I'm wondering if you can quantify those even approximately versus 2019 rather than 2020, just trying to get a sense of how those are doing versus pre-COVID.

Oh, yeah. And, John, that's exactly what our COVID normalization calculation was. when we went through the growth slide. So, you know, we looked at when you strip out inflation, the volume growth in the premium food group was, you know, 3%, and then you strip out the COVID impact, and it was roughly flat with 2019 in a premium food group. The specialty food group, you do that same calculation, and it was roughly up 7% in volume terms from 2019.

Okay, understood. I know it's beating a dead horse, but the supply chain and particularly the labor constraints, I know no one's got a crystal ball on this, but we'd just like to get your sense of how long you expect this to last. And are there any regional differences you're seeing that are worth calling out?

Yeah, John, I would say we're feeling more confident in terms of Canada. I think Canada is looking at... opening the doors of immigration a little wider, I believe, this coming year. So we're feeling more optimistic about this situation resolving itself sooner in Canada. U.S., we don't know. We hope that this will be the case in the U.S. as well. I mean, we have to remember that the majority of our industry in particular relies on immigrants for labor. So, again... feeling a little more positive about the Canadian situation improving at this point.

Okay, understood. And then sticking with that, are the labor shortages within your operations, do you find those are solvable by wage increases or are there other components like immigration or otherwise that you might need to fill that labor gap?

I would say, John, that we're using... every tool available to us to resolve these issues. Part of it, of course, is wages. But again, you know, as I mentioned earlier, automation is a big focus as well, effectively trying to reduce our dependency on labor with regards to all of our operations, right? So there's a lot of initiatives going on to deal with the situation.

Okay, got it. And then last one from me. I wanted to ask about the 2023 EBITDA margin goal. It's a super helpful analysis you provided on a bottom-up basis. But if I think about this from top down, you're expecting to be sub-9% margin this year, which would mean you'd need at least 50 basis points of expansion each of the next two years. This has historically been a business that's grown sales at around the same rate as EBITDA. So Maybe just elaborate on what gives you confidence in the environment of food cost inflation and labor cost inflation that you can get that type of margin expansion either on the existing business or on your acquired businesses.

Again, the compression we're seeing in our margins today in our minds is completely transitory. We fully expect to recover whether it's through selling price increases or a normalization of commodity prices. to recover that and get back to what is really the key driver of our margin expansion, which is sales leveraging. And on that point, if you just normalize for the COVID sales impact and the annualization of our acquisitions, we're at a 9.5, 9.6 EBITDA margin. So it's not that far to go. And with some normalization of commodities, which is obviously not built into that bridge we gave, we're very bullish on it being able to achieve that 10% plus EBITDA margin.

Okay, that's helpful. Thank you. I'll pass it on. Thanks, John.

Your next question is from the line of the bad cons.

Great. Thanks very much. Just, I guess, along those similar lines, I think there was some commentary earlier around the IR targets being around 15% for projects. Just looking at the ROIC here over the last few years, it seems to be sort of in that high single-digit range, kind of maybe 10% this year. Is it maybe the acquisitions that are kind of keeping you from having sort of 15% ROIC, or how do you think about that return metric sort of over the long run, or is there a target for that?

Yeah, no, it's very straightforward. It's both acquisitions and capital projects because the reality is in these projects, they're generally 10 year plus models. And quite often in the early years, they're putting pressure on our return on investment. And then as we start realizing on acquisition synergies, we start realizing on capacity investments. that ultimately is what generates those returns, and that takes time to appreciate. So we've made some significant investments over the last three years that have pushed down our RONA, but 2020, 2021 should have been kind of a pivot year, and certainly when we run our modeling and we do our normalizations for the impact of the pandemic, you do see the returns starting to turn back up, But ultimately, yeah, no, we're very confident that over time that, you know, you're going to see as these investments play out. And we've got a history of that. You know, we went in earlier in our history, we went through a similar, it wasn't near to the degree because we were a much smaller company, but we went through a similar investment cycle. where it pushed down our RONA, and then as we started realizing the returns on those investments, and we'd been fairly stable on new investments for a period, you saw our RONA spike to well over 17%.

Okay, so is the idea, I guess, here that after, so is the investment period maybe next few years, or I'm just thinking in terms of timeline, is there a plan to sort of be around that 15% IR that you target otherwise? Or is that sort of just when the investment period stops?

Yeah, no. Again, yeah, it's kind of a bit of the both. The reality is it should be in the relatively near future in terms of the commodity and the COVID transitory impacts going away and this stuff rolling out. But if everything else stayed the same, then yes, it would be relatively short term. The only unknown is future investment, right? So we are continuing to invest in new sandwich facilities, meat snack facilities. You know, our acquisition strategy is, as George showed, is we've got a tremendous pipeline. So it is a little bit challenging, but, you know, the exciting part is the growth. And we see, you know, part of our process, Saba, is we do do with every significant investment that we make, we do, you know, look backs. And the reality is our legacy investments are all exceeding targets. And we see that. Unfortunately, it's a little more challenging for you. But, you know, the reality is it is working. It's just it's being camouflaged by all the new investment. And that is not going to stop, you know, fortunately or unfortunately.

Okay. That makes sense. And then just kind of following up on the margin discussion earlier, you know, obviously the last couple of years, the last year and a half has been impacted by COVID. And if we look at the specialty food segment here, I guess, what do you see as sort of the medium-term potential here? I think, you know, margins this year are obviously along the lines of your guidance. But, you know, could we get north of that 10% over the next couple of years? And is that going to be a change in mix or just operating leverage, as you were talking about earlier?

Yeah, no, absolutely. You know, as I mentioned earlier, you know, sort of 13% plus is our target for a specialty foods group. Um, so, and, and, and, but a lot of that is sales deleveraging and then just the normalization of the commodity markets. Okay.

Great. Thanks very much.

No problem.

Is from the line of Kyle McPhee.

Hi guys. Just a quick question on the linking of your cost of debt, um, capital to your ESG performance. It's an interesting concept you've moved forward with here and probably something that's It'll be increasingly topical as the years go by. So can you quickly provide maybe a bit more color? Is this something your lender brought to you or did you propose this to your lender? And how meaningful is your ESG performance on your ultimate cost of debt capital?

Yeah, so this is something we brought to our lender. You know, we've been following the market. We've been very active in improving our reporting around ESG. The principles of ESG have been core to our business since the beginning of And it just made sense, given what we were seeing in the market, that we reflect that focus in our credit facility. You know, at this point, it's not a huge factor. It's a plus or minus five basis points factor tied to the three metrics I mentioned earlier. But it's a step in the right direction. And, you know, it's a signal of how important we view these principles and our continuing investment in them. Got it.

Well, hats off to you for the move. Thanks, guys.

Thanks. Thanks, Kyle.

Do you have a follow-up question from the line of Derek Lessard?

Yeah, guys, just two more for me in this housekeeping. I was wondering if you, Will, if you have an idea of what the, I guess, the pro forma leverage impact of the latest two acquisitions would be.

You know, I should know that off the top of my head, Derek, but I don't. But it really doesn't have a material impact on our overall financial position in Covenants. There is some, but we'll certainly still be below our targeted range.

Right. Okay. And a follow-up on the CapEx. Do you have a quick and dirty number that you're looking for for 2022?

total capex? Again, yeah, we talk about maintenance capex, sort of that $35 million on average, $30 to $40 million a year in maintenance capex, $30 to $40 million on general capex across all of our different businesses, smaller projects, and then just all the items we disclose in our MD&A as sort of above those two categories.

Okay, so all of the, all of what you've disclosed in the MDNA is 20, 22 CapEx.

Yeah, some of it goes into 2023, but the majority of it is in 2022. Okay, fair enough.

Thanks, guys.

There are no further questions at this time. I will now turn the calls back over to the presenters for closing remarks.

I'd like to thank everybody for attending today. Thank you very much. Back to you, Misty.

This concludes today's conference call. You may now disconnect.