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.