Premium Brands Holdings Corporation

Hello, and welcome to Premium Brands Holdings Corporation's fourth quarter 2021 earnings conference call. Our speakers will be George Paliologo, CEO and President of Premium Brands, and Will Kaludich, CFO of Premium Brands. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, Simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to turn the call over to Mr. George Pellio-Logo. Please go ahead, sir.

George Pellio- Thank you, Lisa. Welcome, everyone, to our fourth quarter conference call. With me here today is our CFO, Will Kaludich. 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. The deck was just posted this morning, about two minutes ago, I believe. We will give you 50, 60 seconds to retrieve it starting now. We're now on slide five, which outlines certain key highlights for the quarter. Despite the various headwinds facing our industry and the world in general, we're pleased to report another quarter and year of record results. I'm pleased to mention here that this is our 18th year of record financial results. Our CFO, Will Kaludich, will give you more color on our quarter and on our annual results later on in the presentation. Unprecedented commodity cost inflation, persistent supply chain disruptions, and acute labor shortages continue to challenge our industry. We're managing these issues proactively and deliberately and our record results for the quarter and the year are a testament to the resilience, agility, and ingenuity of our team members and the diversification we have built into our unique business model. For the past 20 years, we have grown from a regional pork processor based in Western Canada into a much larger diversified food company with operations across North America and Europe. Four of our six platforms, namely seafood, protein, distribution, and sandwiches have grown to or are very near to the billion dollar revenue mark with multiple facilities selling to a variety of channels including retail, club, QSR, food service, airlines, cruise lines, and exports. Our product, channel, and business diversification play the key role in helping us navigate the many challenges we face during the pandemic and are currently helping us to manage the current inflationary environment. More specifically, and in this regard, during the fourth quarter, We have taken approximately $125 million worth of price action, with more pricing to be taken in 2022. Retail demand remained strong during the quarter, while food service demand, while strong during October and November, was negatively impacted by the onset of the Omicron variant in December. Our seafood group delivered record results for the quarter and the year, driven by strong demand in all channels, combined with excellent commercial execution. Clearwater Seafood continues to perform ahead of plan, driven by very strong price realization, combined with disciplined inventory and cost management. We remain very encouraged by 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. We're pleased to announce the closing of four transactions after the end of the quarter. Although these transactions are small relative to the size of premium brands, they're strategic to our various platforms and will contribute to their growth for many years to come. We're also investing heavily in capacity, expansion, technology, and in automation. For example, in January 22, I was pleased to attend the commissioning of our first generation three fully automated sandwich assembly line at our Phoenix facility. A similar line will be installed at our Reno, Nevada facility shortly. We're now on slides six to nine. We have included here some pictures of products made by newly acquired Leonetti's. We're very excited to add these iconic handmade and delicious products to our snacking and entertainment portfolio. I have also included pictures of several value-added seafood products here on slide seven. including lobster bisque and clam chowder soups that will be launched in several Asian markets later this year, and several lunch and appetizer-sized value-added seafood products we're currently launching in the retail and food service channels. With our unique access to scarce, best-in-class seafood inputs, combined with our passion for innovation, we're very confident that we will continue to offer consumers and customers new eating seafood experiences for many years to come. We're now on slides eight and nine. We continue to make great progress in growing our charcuterie, cooked protein, and specialty bakery platforms, with the only issue being the constant outselling of our capacity. While we're investing in more capacity as we speak, we're pleased to report that the delicious products you see here are getting excellent traction in the marketplace. We're now on slide 10. As you can see here, our acquisition pipeline remains very full, and we expect to complete many more transactions, both in the near term and in the future. The three columns on the left of this slide are the most relevant here, as we're in multiple discussions with interested sellers. However, the exact timing of transactions tend to be driven by them and not us. I will now pass the presentation to our CFO, Wilke Ludic, who will update you on our financial results for the quarter.

Will? Thanks, George, and good morning or afternoon, 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 future results may differ materially from what we discussed. Please refer to our MD&A for fiscal 2021 as well as other information on our website for a broader description of the risk factors that could affect our performance. I'll now flip over to slide 12 and our quarterly sales performance. You can see our sales for the quarter were $1.345 billion, up $289 million or 27.4% from 2020. The major drivers of that were acquisitions, which accounted for $119 million of the increase, selling price inflation, which was $111 million, Over the last two quarters, we have put in place over 230 million in selling price increases. Next driver of growth was our organic volume growth of about $44 million. COVID sales recoveries of about $31 million. Most of that came up from the food service channel where we saw about $44 million in sales improvement. And then in our airline and cruise line businesses, we saw some small increases, about $2 million of recovery. And then that was offset by about $15 million of normalization in the retail channel. Those increases were offset partially by the impacts of a stronger Canadian dollar, which resulted in lower translated values for our U.S. businesses. And that was about a $19 million negative impact on our sales for the quarter. Turning to slide 13 and just looking at our growth rates for the quarter, the solid line shows you our actual organic volume growth rate and the dotted line shows you our organic volume growth rate adjusted for the impacts of COVID. You can see our total organic volume growth for the quarter was about 7.1%, so above our normalized or long-term target of 4 to 6%, but our normalized organic volume growth rate was about 4.1%, so at the bottom end of our target. The reason for the lower normalized organic growth rate really is three major factors. The first and most significant were supply chain and labor-related disruptions that resulted in lost sales of about $40 million, most of that being not filling customers' orders fully, so customer order shorts, and then the balance being exports to Asia that were hindered by a lack of access to air travel. The next major factor impacting our organic volume growth rate was less featuring by our protein businesses. This was a strategy used to counter the impacts of extreme cost inflation in the quarter while they were putting through selling price increases to address that cost inflation. And then the final factor is in the food service segment, we're still not seeing a return to historic growth patterns due to the lingering impacts of COVID. and corresponding our food service sales are still below 2019 levels. Turning to slide 14, you can see this is a listing of all the major growth initiatives we have in place today. The ones highlighted in yellow are those that drove our growth in the quarter. You know, meat snacks, cooked protein, charcuterie and artisan sandwiches were the key drivers. But as we go forward to 2022, we see all of these being major contributors to our growth in 2022. Turning to slide 15, just a little color around the ongoing impacts of COVID on our business. You can see in the chart on the left the continuous improvement we've seen from Q2 2020 when the COVID impact was most severe to Q4 2021. which is our smallest impact yet at about $21.5 million. And that breaks down about $10.5 million of food service-related impact, $7 million of airline channel business, and about $4 million of cruise line business. All of those sales are slowly recovering, and we do expect a full recovery as the pandemic falls behind us. Turning to slide 16 and looking ahead to 2022 a little bit, you can see we've started the year with a strong sales trend and continuing to nicely exceed the prior year sales. Turning to slide 17, talking a little bit about the year. For 2021, we completed the year with $4.932 billion in sales. That was an $863 million increase, so 21.2% from 2020. Looking forward to 2022, we are providing guidance for the year of $5.6 billion to $5.85 billion in sales for the year. We show here on the chart the midpoint of that guidance, which is $5.725 billion, which would represent an increase from 2021 of about $793 million or 16.1%. Big factors driving that growth are organic growth initiatives, some inflation, as well as the annualization of acquisitions completed in 2021-2022. Turning to slide 18 and our EBITDA. EBITDA for the quarter was $113.4 million, an increase of $25.7 million or 29.3% as compared to the fourth quarter of 2020. The major drivers of the increase were selling price inflation, acquisitions, organic sales growth, incentive-based compensation and production efficiencies. These were partially offset by extreme cost inflation in commodities, wages and freight. In total, those represented about $125 million of cost inflation in the quarter. Also, we had some additional plant overhead and outside storage costs that are supporting our growth, as well as our inventory strategies we put in place to mitigate the impacts of the current supply chain disruptions we're seeing. Also, we saw a reversal of some of the COVID cost reductions from 2020, some of the subsidies we received in 2020, as well as some additional investment in SG&A staff. Turning to slide 19, there were five major challenges in the quarter. Inflation, labor shortages, supply chain disruptions, ongoing impacts of COVID, and then the stronger Canadian dollar and its impact on the translation of our U.S. businesses. This slide normalizes for the first four of those five challenges. So we've pulled out what we see as the estimated impact of COVID, the $21.5 million in sales, translating to about a $5 million impact on EBITDA. Some ongoing COVID costs that we expect to reverse in 2022, that's about a half a million. And then selling price delays, what we looked at was selling prices we put through during the quarter to address inflation in the quarter. But because of the timeline delays in getting those price increases to take effect with some of the major retailers, that resulted in about a $14 million lag in those price increases. So we've normalized for those. And then finally, the $40 million in supply chain disruptions I mentioned earlier, which was about an $8.7 million impact on our EBITDA. So normalizing for those factors, you can see for the quarter, we would have had sales of $1.420 billion. and EBITDA of about $141 million and EBITDA margin of about 10%. Turning over to slide 15 and looking at our EBITDA for the year, we came in at $430.7 million for the year, representing an increase of about $118 million or 37.8% as compared to 2020. We've also provided guidance for 2022 on our EBITDA, our adjusted EBITDA. Our guidance is 510 million to 530 million. We've shown on the chart the midpoint of that guidance, which is 520 million. Based on that number, that would represent an $89 million increase from 2021, or about 20.7%. Turning over to slide 21, The next five slides illustrate two key messages. The first is the extreme level of cost inflation we experienced in 2021 in all the major proteins that we buy. The second is that 2022 is starting off to be just as inflationary as 2021, with the cost of many commodities continuing to hit new seasonal highs. As George mentioned earlier, we are addressing these latest challenges with further selling price increases. Our general expectation for 2022 is that the cost of most protein commodities will stabilize later in the year, and as our selling price increases catch up, so should we see our specialty food segments margins normalize. Correspondingly, we are expecting to see the year-over-year improvement in our results in 2022 to accelerate over the course of the year with the first quarter showing the weakest improvement. I should also point out an anomaly on slide 22, which shows the trend in commodity port costs. The slide shows a deflationary trend in the fourth quarter of 2021. However, this is somewhat misleading when looking at our business as the chart shows USDA reported primal cuts, while our business generally buys value-added cuts that are not reported on, which continued to experience inflation over the course of the quarter due to labor issues at major primary processors. Turning over to slide 26. Our adjusted earnings for the quarter were 52.2 million, representing a 16.9 million or 47.9% increase as compared to the fourth quarter of 2022. The major driver of the increase was our EBITDA growth, with a little bit of interest benefit from the conversion of some convertible debentures during the quarter, as well as lower overall interest rates. These were partially offset by some increased income taxes due to the improved profitability of the company and some increased depreciation and amortization permanently associated with acquisitions. Our EPS for the quarter was $1.19 per share, which was a $0.33 per share or 38.4% increase for 2020. Turning over to slide 27 and looking at our earnings for 2021, we came in at $194.8 million, which represented an increase of $76.3 million or 64.4% as compared to 2020. On an EPS basis, our EPS for 2021 was $4.48 per share. representing an increase of $1.43 per share or 46.9% as compared to 2020. Turning over to slide 28 and looking at our five-year targets, this one is for our sales, which would be for 2023. In this slide, we've taken our fiscal 2021 actual results. normalize them for the ongoing impacts of the pandemic, which we fully expect to normalize over the coming quarters, and then annualize for acquisitions completed partway through 2021 or in 2022, coming to a normalized run rate for sales of about $5.5 billion. Then we looked at some nominal growth rates for 2022-2023 of about 6%, which is very conservative to the 7% to 12% we've been running at for the last two years, and that brings us to projected sales of about $6.1 billion, so in excess of our target, excluding the impact of any potential acquisitions we do going forward. Turning to slide 29 and our five-year targets for adjusted EBITDA, doing a similar calculation for sales, we came up with a normalized run rate of about $495 million, and then reflecting organic growth expectations or conservative organic growth expectations over the next two years. That brings us to an adjusted EBITDA of about $630 million. So again, well above our 2023 target of $600 million. So overall, you'll notice in both our MB&A and our press list, we talk about being very confident about exceeding our targets for 2023. Turning over to slide 30 and looking at the liquidity, we continue to have a solid balance sheet and strong liquidity. Our senior debt to EBITDA ratio came in at 2.7, so just slightly below the midpoint in our targeted range of 2.5 to 3. And our total debt to EBITDA ratio came in at 3.6, so at the bottom end of our targeted range of 3.5 to 4. We ended the quarter with available credit facilities about $485 million. I should also note during the quarter, as I mentioned earlier, we redeemed our 4.6% convertible debentures. 105 million of the debentures were converted into shares and 8 million of the debentures were repaid. Turning to slide 31 and looking at our free cash flow, free cash flow for 2021 came in at $263 million. an increase of $74.5 million or 39.5% as compared to 2020. Our free cash flow per share for 2021 was $6.05 per share, an increase of $1.18 or 24.4% from 2020. Our payout ratio for 2021 came in at 42.3%. And looking forward, we announced with our fourth quarter results a 10.2% increase in our dividend rate, which will bring our annualized dividend rate to $2.80 per share. Looking at capital allocations for the quarter, we allocated $210 million to acquisitions in the quarter and $36 million to Project CapEx. For 2021, in total, we allocated $714 million to acquisitions and roughly $111 million to project CapEx. I should remind you that all of these investments are stated expected return is 15% IRR on an after-tax, unlevered basis, generally based on 10-year plus models. Turning to slide 33, looking at capital locations post-2021, as George mentioned, we completed four acquisitions so far this quarter for a total allocation of capital of roughly $50 million. With that, that completes the financial presentation. I will now turn it back to the moderator. Lisa?

At this time, I would like to remind everyone, if you would like to ask a question, please press star and the number one on your telephone keypad. Your first question comes from the line of Derek Lussard.

Yep. Good afternoon, everybody, and congratulations on a really solid quarter given the operating environment. Thanks, Derek. Thanks, Derek. When do you guys expect all of the capital investments that you've made, whether it's a project or M&A, to start being fully reflected, I guess, in your return ratios?

For the CapEx made to date, Derek, we'll see it kicking in over the course of 2022, although it's There are a number of projects that come online in 2022, so I would say 2023 is the first year you're going to see sort of the full effect of everything that's in the pipeline.

And Derek, a lot of the CapEx we've spent is showing up, except unfortunately it's been impacted by a lot of the... the other challenges that we've talked about, right? So assuming that things normalize, as Will said, things will show up in late 22 and 23 very, very clearly.

Yeah. And, you know, just to give you a sense of that, Derek, you know, our RONA for 2021 came in at 10.6%, which was a slight improvement over 2020 at 10.2%, but certainly below our target at 15%. But You know, we did a normalization for, as George mentioned, the factors that are kind of hiding the improvement we are seeing from those investments. And we'd be close to a 13% RONA this year normalizing for that. So you are seeing that progress, that cash flow coming from those investments.

Okay, perfect. That's very helpful and good color there. And maybe just... I guess, as a follow-up to that, Will, and more of a housekeeping issue, what is the, I guess, your projected, sorry, your project CapEx looking like in 2022?

Yeah, so, you know, the way we look at project CapEx, Derek, is, you know, we don't start with a set project. We start with sort of a basket of possible projects at the beginning of the year, and then as the year unfolds, we do our full analysis, working with the business, and only the projects that meet our hurdle rates move forward. So at this point, everything that's moving forward is disclosed in our M&A, MD&A.

Okay, perfect. All right, thanks. I'll reach you.

Our next question comes from the line of John Zamparo.

Thank you very much. Some of your peers have suggested we might see food cost inflation in the double digits in 22. I was wondering what level of inflation your outlook contemplates, either for some of your largest inputs or for your basket as a whole.

Yeah, so our projections are based on, like I say, you know, sort of In the early quarter, Q1, you are seeing that double-digit inflation, and then the expectation is that's going to flatten out over the course of the second quarter. But ultimately, no one knows what's going to happen with inflation. There's so much uncertainty out there, and ultimately, our strategy will be to address any additional inflation with further selling price increases, which we've shown that we certainly can do. Our total selling price increases for 2021 were roughly $300 million, with, as I mentioned earlier, $230 million of that happening in the second half of the year.

Got it. Okay. And one follow-up on that, you did reference some slight deflation expectations on some commodities. Can you share which ones those are?

Yeah, primarily, you know, there's some thoughts we could see a little bit deflation in the port complex, which is an important commodity for our protein group. Again, that was sort of pre the current conflict between the Ukraine and Russia and sort of that. So there is a lot more uncertainty around that today than there was three weeks ago.

Yeah, the only thing at that, John, is that in the past year, depending on the business and the underlying commodity, we've had some commodities that that we're up as much as 300%. So we've gone through a very, very inflationary environment in 2021. And we've managed it. We've had commodities we purchased at a dollar a pound last year, and we're paying $3 a pound today. So again, it's easy to look at the average, but the fact of the matter is that that, you know, we've gone through a lot of inflation in terms of some of the commodities we use, the specific commodities. The other part that you should remember as well is that in the seafood segment in particular, you know, we're vertically integrated. We are the, you know, our 50% interest in clear water. And as a harvester, they benefit from inflation. because their harvesting costs tend to be relatively fixed. So that gives us a nice hedge as well with regards to runaway inflation, let's say. So again, it's a more complex picture. But I have to say that some of our businesses have seen a lot of inflation this last couple of years, particularly in 2021.

Okay, understood. And then just one more for me and I'll pass it on. On working capital, this is a pretty material drag on cash flow in 21, particularly Q4, mostly through inventory. Can you talk about the strategy there and what we might expect for 22? Is there a potential tailwind here or do you anticipate you're investing more in working capital this year?

Yeah, well, it's an interesting situation, John. There's two major components driving the increase in our inventories here. Part of it is just risk mitigation strategies around what's happening in supply chains. So, you know, some of that, you know, once supply chains settle down, there should be a little bit of normalization there on the favorable side. But the more positive factor built into that is that there are some significant inventories that we've built up, particularly in our seafood businesses. in anticipation of 2022. And so we're going into 2022 with really strong, particularly with processed lobster and some of our summer marinated programs going into the year. So those should be upside potential in 2022 in terms of sales and margins.

Understood. Thank you very much. Okay. Thank you.

Your next question comes from the line of David Newman.

Good morning, George and Will. And again, I echo the comments. Great perseverance in a very difficult environment.

Thanks, David.

So the first question is just on the consumer themselves. We live in this weird hybrid world and become a lot more hybrid. And basket prices are spiking, et cetera. Are you seeing consumers at all beginning to trade down, shifting toward lower cost alternatives, private label, and have you seen any demand destruction on branded?

We haven't seen it, David. I'm getting an echo, David, again. I don't know if you need to go mute or not. Is that better, Will? Is that better, George? Yeah, yeah, yeah, much better. Okay. yeah so so you know we expect that we may see that some point um but we're not seeing it and and you know we've been in the in the food space for a long time and and um and we always talk about what is the sort of pricing elasticity point to consumers but you know consumers are not generally scaling down to less quality food Once they get used to good food, they stick with it.

Makes sense. And I guess they're saving, I guess, in the food service channel so they can spend a bit more on the food at home, I guess, and treat themselves as well. Second question is just on the margins, what do you think the progression could be? You know, I was really interested in your chart that you guys showed on slide 19 of for normalized EBITDA for the 4Q, and it would be interesting to see what that looks like for the entire year and what a stretch it is to 520, but more with the headwinds on a myriad of raw materials as well as fuel now. What do you think the margin progression might be as we kind of go through the year?

Sir, you cut out there, David. Can you repeat your question? And also, once you finish your question, could – I get you to do me a favor and mute your phone because we're getting a really bad echo on your call.

Sure, probably my bad home equipment. So the question was, you know, if I looked at your slide 19, and it looks really interesting from what normalized EBITDA would be and kind of interested in what that would be for the entire year, and just what the margin progression, recognize that there's a lot of headwinds here from raw materials and fuel, what the margin progression might be.

Well, there's no doubt that looking at the full year, there'd be a similar calculation. We don't have the specific detail, though, for the year, David.

Okay, Will, just the margin progression that you might see throughout the year, the march forward, I guess, that you guys are kind of thinking, are you thinking it's more back-end loaded?

Oh, so you're talking 2022 now? Yeah.

Correct, correct, yeah, correct. I'm very interested in slide 19 as it relates to the year, but what it might show you in terms of what the EBITDA progression might be towards a normal. Do you know what I mean?

Right, right, right. I got you now. Yeah, so, you know, if you look at 2022 and what we built into our expectations, it's really based on kind of a continuation of the struggles we've seen In 2021 and for the first quarter and then you should start seeing some normalization in Q2 and in the latter half getting closer to you know that that 10% target where we're trying to achieve.

Excellent that's that's helpful and last one for me guys is just if you look at sort of logistics supply chain, and you know the rising fuel costs which will make their way into freight costs obviously. and you look at your sort of network and an onion skin over your network, is there any change, besides inventory, in terms of logistics, plant network, and things like that, how do you combat that kind of rising fuel freight cost phenomenon?

Well, fuel is, David, you know, it'll be interesting to watch how it plays out because as a direct cost, it's a pretty minor cost across our company. I think it represents about 2 or 3% of our sales in total. So for it to have a material impact directly, you've got to see something pretty incredible happen. The more uncertain is just how it flows through the entire economy. And ultimately, we'll deal with that as we deal with all other cost inflation.

And again, David, I just want to add that we've had a lot of freight inflation in the past year. But for example, the labor shortages for us was a much, much bigger issue. And as Will said, it's relatively minor cost to our business. And we managed it. And in some cases, we put through surchargers and those type of things to customers. Not as much of an issue as commodity input inflation and a lot of the labor shortages we have.

Okay. And is there any, do your customers at all, are they compelling you? Last question, I promise. Are they compelling you to, you know, in terms of where you're located, in terms of servicing them, some of your major customers, are they sort of saying it'd be nice if you're a little bit more co-located or anything like that?

Well, we have multiple plants in all of our businesses, David. It's one of our advantages, right? So we're able to give them local solutions to a large extent relative to the competition. So that helps actually.

Excellent. Thanks, guys. Terrific results and a great outlook. Thank you. Thank you, David.

Thanks, David. Our next question comes from a line of George Dumais.

Hi, guys. Good morning. Clearwater had a great year. I'm just wondering about the sustainability of the margins there as we enter 2022. Maybe some commentary on realized prices and obviously inflation hitting marine diesels. Can you just maybe talk to that business and the outlook?

Can I just say, George, and I want to emphasize as well is that Clearwater had a great year, but the PB Seafood Group had a great year as well. So again, we've been building out our PB platform. We like the consumer trends we see. They are some of the best trending we see in terms of the consumer marketplace. And again, we're really pleased with how the combined PBC Food Platform combined with Clearwater has done. And again, we see a lot more potential there, particularly with respect to value-added products that I commented on earlier. I'll pass it to Will now.

Yeah. And so while Clearwater had an incredible start and certainly well ahead of our plan and expectations for year one of the acquisition, the reality is there's A lot of work still to be done. Their Asian business is still well below 2019 levels. Their Scotland business still has work to be done. It's early days in recognizing the synergies associated with the transaction. So to the extent there is a nice bump from this inflation environment, as George mentioned earlier, due to the structure of the business. There's still a lot of upside to the business and a lot of things to be done.

The other thing I'll say is that, you know, normally in our business, if you have high inflation in beef, you know, sometimes consumers will switch to chicken or pork, et cetera. There's the substitution effect. But as you saw from Will's slides, there is inflation in all commodities, right, including seafood. I mean, you know, consumers... are paying more to consume good quality seafood. And that's what's really important to us. And they're consuming seafood in not just food service. During the pandemic, they've learned how to cook it at home and they're buying it in retail stores and consuming at home. So a lot of these trends bode well for the entire category, George.

Okay, that's helpful. Thanks for that. I recognize this is maybe nothing, but if I look at slide 16, there seems to be a dip, a pretty pronounced dip in weekly sales trend in the last couple of weeks. So I was wondering if you could maybe just share some thoughts on where you think that could be.

Yeah, that's just that if you look at those weekly sales, George, you can't take a lot from the week-to-week trends. It can be very choppy depending on when a sale goes out. So when we look at that change, it's a variety of businesses. It's just timing of the shipments. So it really does not imply anything.

Again, I'm not referring to this year, George, but if you look at the past years, a lot of the dips relate to the timing of shipments, particularly sandwiches. So you can't really go by that. It's just the timing makes a big difference to that. You'll see those kind of dips in the previous year. That's just part of our business.

The exciting part, George, is I mentioned earlier one of the questions about the inventory positions we've taken. you know, we're quite excited about the growth opportunities around some of those positions and none of that kicks in until Q2. So, you know, that's going to be a further accelerator of our growth.

Okay. And maybe on that topic, just Q1 in general, I mean, I think you guys called out $40 million in lost sales for this quarter, so for Q4. We're well into Q1. Any comment on how much larger that number could be?

Not at this point, George.

Okay. Okay. Just one last one, if I may. I don't want to steal thunder from the new five-year plan that you guys are going to put out, but any chance that we can maybe see a different platform in there above and beyond the sandwich, a seafood, a protein, or are we just going to operate in those lanes for the next five years?

I think, George, that you may see a different platform. You also may see some more vertical integrations.

Okay, we'll leave it there.

Thanks.

Thank you.

Thanks, George.

Your next question comes from the line of Stephen McLeod.

Thank you. Good afternoon, guys. Hey, Stephen. Hey, Stephen. I just wanted to follow up on a couple of things. You guys are giving some great color, so thank you. Just when it comes to the inflationary environment, are you able to get some color sort of entering the fiscal 22, sort of where you are in pricing as it relates to inflation? Like, did you end the quarter sort of caught up and then everything from January 1st onwards, it's sort of you're sort of resetting and catching up with incremental inflation? Or is there a different way to think about it?

Steve, you're absolutely dead on. You know, that $14 million we normalized for Those were for price increases that had been put through to address the inflation in Q4 and essentially normalize back our margins. Subsequent to the quarter, there's been further price inflation or cost inflation, as the charts show, and our businesses are going back to get more price increases. And that kind of ties into our comment that we don't expect margins to be normal levels in the first part of the year because of that.

And I would say, George, that you know, in this environment, dynamic pricing is the order of the day, right? Nobody's questioning the inflationary trends that we're seeing in terms of commodities, right? Right. So all of our businesses today are practicing dynamic pricing.

Right.

Okay. And that was actually going to be my next question was, are you, are you seeing any customer pushback? But I guess, I guess the answer to that might be no. Is that right?

Again, we're putting prices through as we need to. You know, the biggest issue with customers, George, is fill rates, right? You know, I was traveling in the U.S. in January and I saw a lot of empty shelves. There are issues with the supply chain, right? If a customer doesn't have a product to put on the shelf, they don't make any money, right? So they're more concerned about fill rates and and uh more than anything else today right because because supply the supply chain issues we've talked about are are real and and you know we'll talk about our increased inventory levels and and we are carrying more inventory because our focus is to be able to uh service these customers uh you know and we're and we're proud of our fill rates they haven't been you know, what we've experienced historically, but we've done a pretty good job. And that's really the key today in today's environment.

Okay. Thank you.

And then maybe just finally, what's your sort of view on the demand side of things with Omicron restrictions having eased this year in the food service channel? Like, has your customer mood changed? tending to be very optimistic about spring. Just any color you can provide there would be helpful as well.

George, outside of the current situation with regards to the war, yes, generally good. Demand is strong. As I mentioned in my prepared remarks, we're working really hard to... meet demand. In many cases, you know, the past year in the fourth quarter, in the new year, we, you know, we're having to say no to customers, you know, just to make sure that we can meet the orders we take. But again, overall demand has been strong other than, of course, you know, there is a little bit of hesitation here in regards to the war situation. Hopefully, that'll That'll end at some point, but demand is strong overall.

Great. Okay, well, thanks, guys, and congrats on your great performance through a tough environment.

Thank you, George.

Thanks, Steve.

Your next question comes from the line of Martin Landry.

Hi, good afternoon, and congrats on a good quarter.

Hi, Martin. Thanks, Martin.

My first question, you've talked about you're not seeing right now a shift into private label, but if price increases continue, if there's a scenario where we see a more pronounced shift to private label, I was just wondering, what exporter do you have to private label products in your protein and seafood business? Could you remind us a little bit how big is your private label business?

We don't disclose that number, Martin, but we're a big player in... We do have some numbers.

Martin, in our AIF, you can go in there and we do talk about that. It's under third-party brands.

Yeah, third-party brands, yes.

I don't have the number in front of me, though.

That's fine. I'll go and get it. And is this a strategy this year to maybe...

look at potential ways to increase your exporter to private label products well again martin we have nothing against private label and and we do a lot of business in private label um we tend to focus on on premium private label the you know we've always focused on the consumer that that is a discriminating consumer that that reads the ingredient desk, that demand certain quality, and they're willing to pay for it, right? So we've never focused on the value segment of private label. That's not who premium brands is, right? So the question is, you know, in my 35-year career, have I seen consumers switch to low-end value brands because of a recession? And we've been through many recessions. We have not seen that. I have not experienced that. You know, Alberta, for example, you know, we sell a lot of premium products in Alberta and they've been through a number of recessions. But our premium product sales have not gone down during those times. Consumers give up vacations and they give up luxury items, but they're not willing to switch down to low quality food when there is a recession. we haven't seen it in our long careers.

Okay, that's helpful, Culler. And then last question, just overall, does the conflict in Ukraine have any impact on your global supply chain currently?

No, not really. We don't ship to that part of the world, nor do we source from that part of the world. I think from our perspective, obviously we're observing the inflationary impact of some of the agricultural commodities that generally come from that part of the world. For example, wheat prices are up globally, right? So it's more of an inflationary type of impact. Okay.

Perfect. That's it for me. Thank you. Thank you, Martin.

Your next question comes from the line of Kyle McPhee.

Hi, guys. I see in your list of capital projects that you will be thinking a lot more capital and new meat snack and sandwich capacity. Can you speak to the demand opportunities you're delivering into with these two platforms? And maybe in particular, the substantial portion of this demand already in hand with specific clients and channels?

Yeah, just to start with sandwiches, Kyle, you know, Again, I spent quite a bit of time with our Sandwich Group in January, and I can truly say that that demand is far exceeding capacity, which is the reason why we're so pleased that we're installing some of the automated lines that I've talked about, which are amazing to see, doubles the productivity of each line with with one fifth of the number of people on each line. So again, you know, demand is very, very strong. Our pipeline for new business opportunities is close to a record and we're currently adding capacity in the incumbent facilities, but we're also in the process of building a new plant in Ohio. So, again, demand is very strong. And with regards to meat snacks, you know, handhelds, et cetera, again, we're just seeing a lot of growth in the U.S. We are trying to find co-packers in some cases to help us out. And in the meantime, we're adding capacity as well.

Got it. Thanks for the call.

Your next question comes from the line of Derek Lessard.

Yeah, I just had one follow-up and more particularly on, I guess, the labor situation. I was just wondering how that's trending for you guys and, you know, any mitigation efforts on your part.

Yeah, thank you for asking that question, Derek. Again, You know, the last couple of years have been very difficult for reasons that we all know. We've had a record amount of absenteeism. We had a record amount of absenteeism in late December and early January as well because of the onset of Omicron. Thankfully, it came and went very quickly. But the situation is getting better, and it's getting better for us in both Canada and the U.S., So that's one positive. We say that the last couple of years managing labor was probably our biggest challenge. Today it's inflation, as we talked earlier, but the immigration is opening up in Canada a lot more and most of our plans, or just about all of our plans are saying that the labor shortages are easing we're getting more people in. So that's a positive for us.

Okay. Thanks, George. Thanks, Derek.

Your next question comes from the line of Sabahat Khan.

Hi, great. Thanks and good afternoon. Just wanted to clarify, I think earlier in an answer to a question, you indicated, I guess, the margin progression through the course of the year. Did I hear right that you're assuming sort of directional improvement through the year and exiting at that 10% rate? That's sort of the long-term target?

Certainly getting close to it, but correct.

Okay. And then I guess, you know, if you look at the 2022 guidance, it looks like at the midpoint of revenue and adjusted EBITDA, it's about a 9.1%. So should we think it's you know, given some of the macro stuff this year, expect to be around that range with a much more significant ramp into 23 to get to that 10%? Or, you know, just reading from the press release, it refers more to the EBITDA dollar target of 600, not the margin. I guess just trying to understand, is the 10% kind of still out there and should we expect more of it in 23 if it is?

Yeah, certainly the 10% goal has not changed at all. And When you look at those five-year target slides that we do, you can see just how dramatic the impact of sales leveraging is on our margins as we execute on growing into the capacity we've invested in over the last couple of years. In terms of the 9.1% average, it's a little tricky because the sales range is built upon a little bit different assumptions than the EBITDA in the sense of how inflation plays out. So the 9.1%, if you took the actual average of what we've used in our model, is probably a little bit low, but not far off.

Okay, that makes sense. And I guess you indicated things are obviously pretty dynamic in the backdrop, even over the last few weeks. Is really, I guess, the range on the EBITDA dollar is just more around the ability to kind of price and get some of that pricing through? Or are there other variables that could lead to you coming in at the high end versus the low end of that range for 22?

Yeah, it's really the former sub.

Okay, great. And then kind of last question, in terms of more of the outlook, within your kind of growth, how are you balancing sort of the reopening versus some of the macro stuff? Are you expecting... you know, more of it, you know, specialty foods, branded stuff, retail, or is it still kind of thinking more from the premium food distribution side, just thinking where you expect a bit more torque in the backdrop?

Yeah, you know, there's a lot of torque on both sides of the business. You know, as that meat snack capacity comes online and the sandwich capacity online, there's tremendous growth opportunities in the specialty food, and And similarly, like you say, as COVID normalizes, that is going to be a big driver on the premium food distribution group side.

I think as well, again, in terms of channels, again, we think in terms of channels, we do expect more traction in airlines, cruise lines as the economy reopens. QSR and food service should be strong. Club should be strong as well. I mean, maybe retail will slow down a little bit, you know, for obvious reasons as people are out, you know, out and about and, you know, consuming food outside the home. So that's generally how we look at the potential of each channel in the coming years.

Okay, and then just one last quick one for me, I guess, you know, assuming this year comes in around some of the ballpark of that kind of low nine, slightly higher. Now, do you expect into 23, it's going to be more the organic improvement in the business to get you to that 10? Or do you have M&A on the horizon that that'll be a bit more margin of creative in terms of 23 contributions?

No, no, it's absolutely organic. And again, particularly when you look at our specialty food segment, the contribution margin on incremental sales in that division can be anywhere up to 35% plus. So meat snacks, which is a big growth driver, has really strong contribution margins. So it's really the organic. There's no acquisition assumption in that.

Thanks very much for the call. Okay, Shabba.

At this time, there are no further questions. I would like to turn the call back over to Mr. George Paley, your logo, for closing remarks.

Thank you, Lisa. I'd like to thank everybody for attending today.

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