Premium Brands Holdings Corporation

Good day and thank you for standing by and welcome to the Premium Brands Holdings Corporation First Quarter 2022 Earnings Conference Call. Our speakers for today will be George Palilogo, CEO and President of Premium Brands, and Will Kaludich, CFO of Premium Brands. At this time, all participants are in the listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, George Paley-Logo. Please go ahead.

Thank you, Faith, and welcome everyone to our first quarter conference call. With me here is our CFO, Will Kaludich. Our presentation today will follow the deck that was just posted on our website this morning. You can also access yesterday's AGM presentation on our website at your convenience. Some nice pictures and videos there to enjoy. We are now on slide four, which outlines certain key highlights for the quarter. Despite the various headwinds, facing our industry, including acute inflation, we're pleased to report yet another quarter of record results. Sales of sandwiches and meat snacks remain strong during the quarter, while supply chain disruptions and reduced promotional activity negatively impacted our overall volumes for the quarter. Our CFO, Will Kaludich, will give you more color on our first quarter later in the presentation. Our strong results despite the headwinds are a testament to the resilience and diversification of our unique business model. It is also a testament to our great people who are working relentlessly and diligently as we navigate through these volatile and unusual times. Inflation is of course the issue of the day and during the first quarter we executed 122.6 million worth of price increases with more pricing to be taken during the second quarter. The first quarter was quite noisy and began with unprecedented disruptions to our operations due to very high absenteeism caused by the Omicron variant. Fortunately, Omicron subsided quickly around the end of January and our operations went back to normal for the remainder of the quarter. While overall demand was strong during the quarter, supply chain disruptions impacted our ability to pursue certain sales opportunities. On a positive note, we were very pleased to see food service demand return as COVID-related restrictions eased. We're also pleased to report that during the quarter, demand from channels that were previously hit hard by COVID, like airlines and cruise lines, begun to come back. Demand from these channels is now beginning to accelerate. We're now on slides 5 to 10. Over the past couple of years, we have invested a lot of capital on expanding capacities and on process improvement opportunities with excellent results. We believe that these investments greatly enhance our overall earnings and cash flow potential, and we're certain that this will be demonstrated in our financial results as things begin to normalize. We're now on slide 11. As you can see here, our acquisition pipeline remains very robust. and we expect to complete many more transactions in the months and in years to come. I will now pass the presentation to our CFO, Will Kaludich, who will update you on our financial results for the quarter. I should also mention that Clearwater Seafood delivered strong results for the quarter, driven by economy reopenings and the return of food service around the world, combined with excellent operational and commercial execution. Clearwater's access to sustainable, wild, top-quality seafood resources is unmatched, while demand for its products continues to be very strong. 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. I will now pass it to Will.

Thanks, George, and welcome, everyone. I'm now on slide 13, our quarterly sales performance. For the quarter, we generated sales of $1.251 billion. That was an increase of $241.4 million or 23.9% as compared to 2021. There were three key drivers of our growth. Selling price inflation, as George mentioned earlier, of $122.6 million. Acquisitions contributed $93.1 million, and organic volume growth, $27.5 million. Turning to slide 14 and looking at our growth rate for the quarter, our organic volume growth rate, it came in at 2.7%, which was well below our potential. There were six main factors contributing to this, four of them temporary, two of them structural. The temporary factors were reduced featuring of our branded products in the retail channel to mitigate the impact of cost inflation while price increases are being implemented. The second was supply chain and labor-related disruptions resulting in lost sales of approximately $28.8 million. Most of this was labor-related, and as George mentioned, a lot of that occurred at the beginning of the quarter with the outbreak of Omicron, the Omicron variant and incredible absenteeism in a number of plants. The third factor was sales mix changes with lower average selling prices for certain new listings offsetting volume growth. And the final factor was a later Easter. On the structural side, there were two key factors that impacted our growth rate for the quarter. One was the evolution of our process lobster strategy, which resulted in additional inventory being put away for the busy spring and summer seasons and less live trading of lobsters. Then the second factor was seasonality with the first quarter being our slowest. Naturally, our growth rate tends to be lower in the first quarter. If you normalize for two of the more quantifiable factors, namely the supply chain challenges and the sales mix challenges, and sorry, a third factor Easter, then our normalized growth rate for the quarter would have been about 6.5%, which would be above our long-term targeted range of 4% to 6%. but still below our potential largely due to seasonal factors as well as the featuring factor I mentioned earlier. The next slide, slide 15, shows the major growth drivers across all of our platforms. The ones highlighted in yellow were the ones mainly contributing to the quarter's growth And as George mentioned earlier, sandwiches and meat snacks were big drivers, as well as some of our initiatives in the food service channel. The remaining items listed on this slide are future growth drivers that all are well underway and should contribute to our growth in 2022. Turning to the next slide, slide 16. We are maintaining our sales guidance for 2022 of 5.6 billion to 5.85 billion. The midpoint of that is $5.725 billion. Assuming we achieve that, that will represent growth of 773 million over 2021 and a growth rate of about 16%, which is below our 11-year CAGR of about 22.4%. but does not reflect any acquisitions that have not yet been announced. Turning to the next slide, slide 17, our weekly sales trend. You can see we've started the second quarter of 2022 with strong sales momentum, the gold line representing 2022, the green line 2021, and like I say, good momentum going into the second quarter. Slide 18, for the quarter we generated EBITDA of $95.8 million. This is a $13.3 million or 16.1% increase over 2021. There are three key positive drivers of that, selling price inflation, acquisitions and organic sales growth, and three smaller drivers, namely incentive-based compensation accruals being lower, investment income from a full quarter of clear water seafood the acquisition there and production efficiency improvements offsetting that were several negative factors the by far the most significant of one of which was cost inflation primarily with direct materials wages and freight inflation that totaled about 124.5 million dollars in the quarter And smaller factors included plant overhead, mainly associated with the growth and building infrastructure for the future. Additional outside storage costs, mainly associated with hedging strategies we're using right now to address and mitigate the impacts of inflation and supply chain disruptions. And finally, some additional SG&A infrastructure. Turning to slide 19. Looking at our EBITDA margin for the quarter, we came in at 7.7%. This was roughly 230 basis points off our annual target of 10%. There were five factors contributing to the difference, four temporary and one structural. The four temporary factors were, first off, and the most significant one, being delayed selling price increases due to retail notice periods. This was about a $16.2 million impact if you perform a reflected price increases put through partway through the quarter. The second was lost contribution margin from supply chain and labor disruptions. The third Certain product categories, and this relates mainly to our premium food distribution businesses, were being temporarily managed to maintain margin dollars versus margin percentages in order to assist customers with dealing with the extreme cost inflation. And then finally, cost plus contracts, again, mainly in our premium food distribution group. The structural issue was the seasonality of the first quarter. It is our slowest quarter of the year. and generally is a lower growth quarter. So if you normalize for the delayed selling price increases and the supply chain disruptions, our normalized EBITDA margin would have been 9.2%, which is within normal expectations given the seasonal consideration relative to our 10% target. The next five slides. The next five slides show general market pricing trends for the major commodities used by our businesses. You will see that all of them illustrate a very inflationary environment with seasonal record high prices for most or all of the quarter. This first slide, slide 20, which is for our basket of pork-based commodities purchased mainly by businesses in our protein group, is the least dramatic of them with seasonal record high prices for most of the quarter but not absolute record highs. The next slide is for a basket of beef based commodities purchased mainly by our businesses in the protein and distribution group. It shows record seasonal highs but at least a somewhat stable market which is a positive for us as volatility is generally the biggest challenge to managing our margins in the short term. The next slide is a basket of chicken-based products purchased mainly by businesses in our protein group. As the chart clearly shows, chicken cost inflation for the quarter was at extreme levels with most items reaching seasonal and absolute record highs. We will be discussing the impact of chicken as well as turkey commodity costs in our business later in the presentation. The next slide is for a basket of lobster products sold by businesses in our seafood group and again shows record high seasonal prices and close to record high absolute prices. The final slide is for a basket of salmon products purchased by businesses in our seafood and distribution groups and similar to the previous slides show record high seasonal and absolute prices. Turning to the next slide, slide 25, this is an analysis of the impact of chicken and turkey commodity cost inflation on our first quarter results. As I mentioned earlier, these commodities are purchased primarily by our businesses in our protein group, and with the recent success of our cooked protein initiatives have become a meaningful input for the group. The pictures at the bottom of the slide illustrate some of the group's products that use these commodity inputs. The table on the slide bridges our sales and gross margins from Q1 2021 to Q1 2022. You can see in Q1 2021, we had sales of approximately 80.6 million with a gross margin of 28.6%. Over the course of the year, we've put through 17.3 million in price increases that impacted the quarter. Despite these price increases, we continue to see volume increases of about $4.3 million. But during the quarter, we saw commodity cost inflation of $21 million. So the net result was at the end of the first quarter, we had sales of $102.2 million, but our margins had fallen to 19.5%. And the decline in our margins you can see as a result of the commodity cost inputs relate mainly to the delays in pricing that result from retailers requiring 60 to 90 day notice periods. Again, using the price increases that were put through during the quarter but didn't have a full quarter's impact, normalizing for a full quarter's impact, that would have been about another $9.2 million of margin in selling price increase and that would have brought margins more in line with the historic level, roughly at 26.1%. The next slide shows a case history on a specific chicken-based skew, a very successful skew. You can see in 2021, looking at the table on the left, it had sales of roughly 58 million. During 2021, we put through almost 24% price increases. And just to show the inelasticity of the product, you can see we still had volume growth of 8% despite those price increases. The table on the right just shows you how extreme the situation has gotten. Subsequent to 2021, we put through three additional price increases such that over the past year, The total price increases are almost 76% for this product, and the product continues to move well. Turning to slide 27, we are also maintaining our EBITDA guidance for 2022, a range of $510 million to $530 million. The chart shows a midpoint of $520 million, which if we achieve that will be an increase of $89.3 million from 2021, or roughly 20.7%, which is in line with our 11-year CAGR of about 22%. And again, this does not show or reflect any potential acquisitions for the balance of 2022. Turning to slide 28 and our adjusted earnings performance, adjusted earnings for the quarter were $39.4 million. That was an increase of $8.1 million, or 25.9% as compared to 2021. Our EPS for the quarter was $0.88 per share. This is an increase of $0.16 per share, or 22.2%. Looking at our slide 29 and our five-year targets, we continue to remain very bullish on achieving the target. Using the midpoint of our 2022 guidance, adding some very moderate growth for 2023, you can see we easily exceed our $6 billion target. Turning to the next slide in our EBITDA target for 2023, You can see again with our midpoint of our guidance and the moderate growth and a conservative contribution margin on that growth, we will exceed both our EBITDA profit target or absolute number target and our 10% EBITDA margin target. Turning to our balance sheet on slide 31, we continue to maintain a solid balance sheet and good liquidity. Our key ratios continued to be in their targeted zone and our available credit capacity at the end of the quarter was $305 million. Turning to slide 32, our free cash flow for the trailing 12 months increased to $269.8 million. That was a modest increase of $6.5 million or 2.5%, but again, it reflects only one quarter and a slow quarter at that. of change from our 2021 number. On a free cash flow per share, we grew that to $6.16 per share, up from $6.05 per share. Our payout ratio came in at a very conservative 42.7% on a trailing 12 months basis. and subsequent to the quarter we announced that I declared a dividend for quarter two of 70 cents per share turning to capital allocation total project capex for the quarter was 33.8 million dollars and and again we define project capex as projects that are generally expected to earn an internal rate of return of 15% or greater after tax unlevered, normally using a 10-year plus business model. You can see we have 13 major projects underway, with four of those coming complete online in 2022, so there will be some contribution in 2022. but most of these projects will be major drivers of our growth in 2023 and forward. In terms of acquisitions, we completed four acquisitions in the quarter with a total capital allocation of $41.6 million. Again, all of our acquisitions, there's generally an expectation of a 15% internal rate of return. And as George mentioned earlier, we continue to have a very full pipeline of opportunities we are exploring. With that, I will turn the presentation back over to the commentator.