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.

Back to you, Faith.

Thank you, presenters. As a reminder to ask a question, you will need to press star 1 on your telephone. To withdraw a question, press the pound key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Martin Landry. Your line is open.

Good morning, George and Will.

Hi, Martin.

Hey, Martin. You seem to be doing a really good job dealing with several challenges, but I'm wondering if we look at what you're facing, you're facing inflation, you're facing uncertain consumer sentiment, you're facing supply chain challenges. your flight facing labor shortages, which one of those are you the most concerned with? Which one of those impacts your business in the biggest way?

Well, I think, Martin, as you know, we faced a number of challenges over the last two years. shortages in particular. I think we've done a pretty good job managing through a lot of these headwinds, and we continue to do a good job. The issue of the day, as I said earlier, is inflation. And again, as Will explained, we're we've demonstrated our ability to pass on pricing. You know, the big question mark for us is, you know, at what point are consumers willing to push back, right? Because there's a price point that we might get to, but it is that very price point that will force proactive and you know we run our business in a dynamic way particularly with regards to pricing and again we'll see what happens with inflation but you know the other side of the coin is that you know these tough conditions may be difficult for premium brands but they're more difficult for other companies as well and In an environment where consumer demand for food is relatively stable, that provides us with more opportunities. The pluses and the minuses to this challenging environment. We're very confident that we're well positioned. We've invested a lot of capital in automation and robotics. I showed a video of our Generation 3 line. which we installed at our Phoenix plant recently. We've made a number of investments in our business to deal with some of these issues. Anyway, so I think overall we're very well positioned for when things normalize. The unfortunate part is that some of these investments and efforts and capital that we've spent hasn't really shown on our results as of yet because of some of the headwinds that you've mentioned. But eventually it will. Anyway, hopefully I answered your question.

Yeah, it's super helpful. Good call. And maybe my other question would be on capacity utilization. I'm wondering if you can give us a bit of a view of what was your capacity utilization during the quarter Are you still capacity constrained? Are you still selling everything you produce?

Yeah, yeah, absolutely. Again, as Will mentioned, you know, our business is quite seasonal. So the first quarter in general and the fourth quarter, you know, capacity utilization is relatively low. As I mentioned in my prepared remarks earlier, January was particularly tough. If you're not running plants at or near full capacity, your margins suffer immensely because your costs get out of line and your productivity gets out of line. But generally speaking, we're looking forward to the second and the third quarters where we've added more capacity now. Um, you know, we've invested in automation and efficiencies and, and we're, you know, we're well positioned for the, for the rest of the year.

Okay. That's it for me. Congrats on your results.

Thank you, Martin. Thanks, Martin.

Your next question comes from the line of George Dume. Your line is open.

Yeah. Hi guys. Um, I wanted to just, um, Talk to a little bit on your prepared remarks, Will, you alluded to temporary providing attrition to customers. I think that showed up in the PFD margins. Can you talk a little bit about what that entails a little bit? And is that something that we'll probably see more of across other commodities?

Hey, George, you cut out there at the beginning of your question. Can you just repeat the start of it?

Sure, sure. I think in the PFD, we had some margin pressure relating to temporary providing cushion to customers. I was wondering if you can maybe provide a little bit more color that's going to maybe spread to other areas of the business or other commodities, other segments.

Yeah, no, that's pretty unique to the premium foods distribution group. We don't expect that to go into the specialty foods group. You know, the premium food distribution group, you know, a big part of their business is cost plus. So you've got that element. And then this environment with the extreme, you know, a lot of the restaurants, those types of customers, they need time to adjust. And so they're working with them. They're maintaining the gross profit dollars. So ultimately, we do expect that normalized, whether it's just through stability or ultimately through deflation. But, you know, this is, it is a transitory impact.

Okay. And it looks like your 2022 guidance is predicated on some mild deflation in certain commodities, I guess, in the latter half. I guess there's some expectation out there that raw material prices are probably going to remain elevated for longer, well into even next year. So can you talk a little bit about maybe, if pressure continues, what that could mean for, I guess, for our margin guidance for the year? Any call in there?

Yeah, no. You know, the reality is what's most important to us, George, is stability, right? You know, what causes us the most grief is these extreme, especially when you have all the baskets moving up at once, you know, it's that pricing delay impact on our specialty foods segment. So as long as we get stability, that's the most important assumption in our guidance. then if there's some deflationary impact, that puts us towards the top end of our guidance kind of thing. So based on the current outlook and how we're seeing the commodities and the general expectations of the market, we're pretty comfortable with our guidance.

I think, George, the example that Will gave you in the deck with regards to poultry is is a very good gauge to use. I mean, we've seen unprecedented inflation with regards to our commodity pricing, as you know, and we keep pushing prices up. We're expecting volumes to go down, but they haven't as of yet, and we'll see what happens. But that's a very good example, really, of our ability to manage inflation in this type of environment.

Okay, thanks. Just one last one. Maybe a housekeeping question for Will. You guys put out a maintenance, I think you put out a maintenance CapEx number for this year, but not a growth. Can we assume like around 150 to 170? First question. And second question is, would you expect, I know it's early days, but would you expect that number to be directionally higher, lower or flat next year?

Yeah, it's, you know, your number's not far off for the year. Again, all the projects that are in the pipeline are in our NB&A, and this quarter we did announce three new projects, two of them fairly material. And, you know, don't expect any other major things impacting this year. There may be some other new projects, but they'd be coming online towards the end of the year. So not a bad number for this year. And in terms of 2023, it's really playing out the projects that are currently in the pipeline.

Okay. Thanks, guys. Thank you, George.

Thanks, George.

Your next question comes from the line of John Zanparo. Your line is open.

Thanks. Good morning, guys. Good morning, John. I wanted to follow up on the inflation dynamic. And you mentioned there's a point at which consumers push back and inflation might subside at that point because of lower demand. Assuming we do eventually get there, though, is there potential for inflation to remain high because of what's going on on the supply side rather than just looking at demand? I would like to get your thoughts there.

I think it depends on the commodity, John. I think, as you probably know, poultry is – Poultry supplies are quite tight, and we do have the avian flu situation now in North America. So again, I think that there's, what, 37 million birds, I think, were euthanized with regards to that, you know, the avian flu already. And I think we probably have about a month to go with regards to that. So I don't think poultry is going to subside. But really, I think you have to go back to Will's comment. And, you know, for us, you know, we've gone through high pricing in the past, particularly with pork. And, you know, it's the volatility that – that we're concerned about. If prices go up and they remain high, you know, we'll do fine. We'll maintain our margins. We'll move prices up. Our products generally are branded and consumers don't buy, you know, they buy them for their other attributes. And I think you're seeing that. You've seen that in, you know, Will's slides with the poultry examples.

Okay, thanks. And then in the press release, you called out global supply chains and access to goods and services for manufacturing and distribution as one of the conditions of the guidance. Can you add some color here? It doesn't sound like that's referring to food purchases. I'd just like to better understand that component of the guide.

Yeah, it's just a general risk, John. And I don't know if you recall, in Q4, one of the major impacts on our sales was a couple of critical lines were shut down because we couldn't source parts for those lines. Literally, for three or four weeks, they were not running. It's that kind of stuff. Now, things have gotten much better. A little bit of that carried over into Q1. But by the end of the Q1, those issues seem to be easing up. And again, we'll see how things unfold globally, but it seems that, you know, at least for goods, things are improving. But anyways, it's more just highlighted as a general risk factor.

Okay, understood. One more on inflation in the guide and then one housekeeping question. So assuming your price increases are a one-to-one offset on the cost inflation, and I would assume you're in double-digit territory on inflation like most are in this industry, can you quantify even approximately what it is you're expecting for the back half of the year?

Yeah, we don't provide that information, John.

Okay, fair enough. And then last one for me. Can you remind us approximately how much access to liquidity does Clearwater have?

We don't disclose that, but their balance sheet is very solid and they're well ahead of our expectations. We built into their original model just given the solid performance of their business.

Okay, that's all for me. Thank you very much. Thank you, John.

Your next question comes from the line of Stephen McLeod. Your line is open.

Thank you. Good afternoon, guys, or I guess good morning for you. Hey, Steve. I just had a couple of questions. I wanted to start with just some of the headwinds that you've seen in the quarter, and I know lots of moving parts, but just wondering if some of the volume headwinds that you've cited have abated, so things like the retail featuring and some of the mix changes there. You know, the ones you cited as temporary, just wondering how those are trending as you get to Q2.

Yeah, so the big, you know, they're kind of segment specific. So the big impact on specialty foods was by far the issue with featuring. And that's one, Steve, is we, you know, we got to catch our price increases up. And once they've caught up, then they'll start resuming their normal preaching activities. So that should be something we see transitioning over the course of Q2, given our outlook around commodities and our pricing structures in place. So it will be a bit of a story for Q2 and hopefully not much of anything in Q3. In terms of the sales mix, actually it's kind of featuring related as well, and that's more a premium food distribution group story. The premium food distribution group, they've they're constantly looking for new procurement opportunities, new solutions they can provide customers. And they made some really great grounds and products they've been sourcing out of Mexico and some other markets. And it's created some great sales momentum, but the reality is the prices for those products are lower dollar items. And what's happened is the volume they've seen grow there, which we expect to be sustainable, That volume growth has been hidden because of the incredibly high prices for premium protein and premium seafood products. Their traditional retail customers aren't featuring their products, and that's a big part of their sales is helping their customers with those features. And that's a different featuring concept from specialty foods where it's our decision. This is the retailers not featuring it. So we fully expect that business to come back. but it's probably not going to come back until you see some easing of, of those premium proteins and seafood product pricing. But you know, in the reality is though that we are showing good volume growth. It's just getting hit, hit or hidden by that noise of the sales mix.

Right. Okay. Okay. That's a, that's great. Thanks. Well, um, and then with respect to the gross margin outlook, um, Do you still expect margins to kind of get back to that, get into that 10% range in the back half of the year? I think that was what you were looking at as of last quarter.

Now, you mean EB down margins, right, Steve?

Yeah, sorry. Yeah, that's right. I meant EB down margin. Yeah, that's right.

Yeah, and 10%. Yeah, no, no. Certainly by Q3, we're expecting that. The reality is our normal cycle or what we built in to hit that 10% annual target is better than 10% margins in Q2 and Q3. And then, again, Q1 and Q4 being shoulder seasons, lower margins with the average coming in at 10. So Q2 is still going to have some normalization from featuring. or sorry, from pricing delays as some of those still catch up. But by Q3, you should see that solid excess of 10% margin.

Great. Great. Okay, and then maybe just one more if I could. You know, it's a trickier one. I think I know the answer, but I just wanted to ask. Like, as you exited Q1, do you feel like you were sort of fully caught up on inflation with price, and then you have to put through more price in Q2, or is it just so dynamic that you feel like you're still sort of catching up?

Materially, yes, Stephen, materially. There's still some pricing we need to take, particularly with poultry. Poultry continues to go up in certain situations, but, you know, mostly, yes, we've pretty well caught up.

Well, and the nice thing, too, Steve, is, you know, one of the biggest challenges for us is We've quite often had these incredible inflationary cycles within a specific commodity. In 2019, you had pork with ASF, and we've had drought issues impact. But the unique thing over this last year, two years, has been everything going up. And now it's moving away. You know, we're getting, as you saw from the charts, we're starting to get stability in a number of items. And it makes it a little more manageable, like George says, when it's only one commodity spiking.

Right. Okay. Well, great, guys. Thank you so much.

Thank you, Steve.

Thanks, Steve.

Your next question comes from the line of Vishal Shadar. Your line is open.

Hi, thanks for taking my question. And thanks for that commentary on the impact of the inflation on your various metrics. That was very helpful. I noticed in the language and the 2022 outlook, it's changed slightly from what you presented in Q4. I mean, the baseline commentary regarding reaffirming guidance is the same, but the risks have changed a little bit. So wondering if there's any if your views and feelings on how the risks have evolved from Q4 to Q1, have those changed? Have you reprioritized them?

Again, I think it is more reflective of what's going on today, Michelle, and But overall, if you rank them, again, it's still inflation and supply disruption. I don't think the rankings changed at all, and we've just refined some of the language.

I wouldn't say they've changed, Vishal. They're the same issues.

Okay. And... PBH, you know, through the last few years, like many companies, has faced many challenges and the company, as you noted off the top, has executed through them currently and in the past as well. But given the challenges that we're in and given how you're seeing PBH is reacting, is that causing you to reflect on any of the elements of the strategy and how you might orient yourself in the future with acquisitions or CapEx investments? Obviously, the key tenants of PBH are still in place, but I'm thinking about geographies, market segments. Is anything like that been fine-tuned as a result of this experience?

You know, again, Vishal, we've been doing this for, you know, 22 years now from the time we launched premium brands. And as you said, we've been through a lot of challenges and headwinds and particularly with Matt, Matt cow disease and, the early 2000s and, you know, followed by the economic collapse of 2007, 2008. So we've been through a lot. And, you know, I would say that, you know, we never change our strategy. You know, we think that consumers looking for better quality food is a megatrend. And consumers looking for more convenient, better for you food is a megatrend. And, you know, Again, we never deviate from our vision. We take a very long-term view to the food business. We don't manage quarter by quarter. By and large, we've delivered over 20% compounded return to our shareholders over the last 20 years. Again, we manage the challenges. Yes, they do impact our quarterly numbers once in a while, but The strategy has not changed. We're not deviating from it. And I think that our success kind of gives us more conviction even to continue it and sometimes to accelerate it, you know, because a lot of times you find the best opportunities during these tough times.

Okay. And just moving on to your thoughts on the consumer last quarter, Management indicated that the demand outlook was very robust. And wondering what you're seeing with your various segments and your diversified base of business. What are your thoughts on potential slowdown of the consumer? We're seeing some broader peers mention that they're seeing some of that. And are you seeing a difference between Canada and the U.S.? ?

Yes, I mentioned earlier, Vishal, you know, the mega trends that we've talked about are universal. You know, they're not unique to Canada or the U.S. We think they're universal. And, you know, I think Canada and the U.S. are very, very well positioned to feed the world in terms of growing demand for for proteins in particular and good quality food in general. So, again, you know, again, we're in a good place. We're in a good situation. And, you know, as we've seen during the pandemic, the trends don't change. Sometimes the channels change. And that's why we've invested a lot of time and effort in having a multi-channel approach to our business. And, you know, we want to be able to offer consumers food in every venue that they decide to consume food, whether it's at home or in a hockey arena or on an airline or on a cruise line, right? So, you know, that's... again, part of our strategy overall to make sure that we're able to cater to demand where that demand happens to occur.

Okay. And are you able to, through your various businesses, gather insights on the consumer's ability to accommodate this inflation currently right now? Are you seeing anything that's leading you to think one way or the other? Off the top, George, you mentioned that as one of the risks.

Well, as I said earlier, Michelle, I think that there's an element, and we've seen that in the past. For example, like, you know, if we go back 10 years ago, you know, belly prices, which is what you used to make bacon, as you know, skyrocketed. And, you know, when you've got very high bacon prices, a lot of the QSR stopped featuring their – a bacon burger products right so as soon as that happens you know demand of course for for bellies goes down and then the price of bellies comes back down you know and and we expect that to happen you know as you probably know a lot of restaurant chains launched chicken breast type of sandwiches in the last couple of years and and you know there will be a point in our view that that the pricing will become too high and the margins for the QSR chains will be too low and they will move to another protein and they'll feature other products. And at that point, we think that prices for boneless, skinless chicken breasts will come down from its record high. Anyway, so you have all these dynamics in our industry all the time. Supply and demand does matter. the behavior of certain channels with regards to a commodity does matter.

Thank you for your call.

Your next question comes from the line of Sabahat Khan. Your line is open.

Great. Thanks very much. Just, I guess, starting with sort of the balance sheet and the M&A strategy, you know, how are you thinking about, just given where leverage is at, I think closer to the high end of the three to four range, How do you think about financing, the size of transactions? You know, what kind of does that lead you to maybe focus on more smaller tuck-ins? So I want to get perspective on that at this point, you know, where the leverage is at.

Yeah. Well, we do expect, Saba, you know, status quo anyways for the balance sheet to, you know, significantly improve over the course of the year with, you know, one of the – you'll probably note it, one of the issues or one of the big – elements on our balance sheet is our inventory. And we have significant inventory positions going into Q2, Q3 that we built up for the number of businesses that built up for the busy summer and spring seasons. So that's naturally going to unwind. That combined with the natural growth we're expecting in our EBITDA will bring both the ratios down as well as help with our capacity. In terms of future acquisitions and opportunities there, like George mentioned, lots of stuff in the pipeline, and all we really can say is we're committed to maintaining a solid balance sheet, and any capital allocation decision will be done within that context.

Okay, and then I think you partly answered my other question. Just I guess the expectation for, I guess, working capital companies obviously driven by inflation and inventory buildup. How should we think about the working capital for the year relative to the 2021 spend on working capital?

Certainly, looking at the two big assets, receivables and inventory, outside of receivables, we expect to be in line with historic turnover ratios. In terms of inventory, they're way above historic term ratios, and we do expect that to come down over the course of the year. However, a big part of that being, as I mentioned earlier, the unwinding of inventories built up for the busy spring and summer seasons. But there's also additional sort of built-up inventories in response to managing our way through inflation and these supply chain disruption issues. So as the world normalizes, those will naturally unwind too, but really that's going to be driven by how quickly the world returns to a normal environment. So, you know, if that happens sooner, then you could very well see, you know, our inventory turns coming back down to historic levels by the end of the year.

Okay. Thanks for that, Culler. And then if we look at the sort of the buildup you provided toward 2023 on slide 29 and 30, particularly on slide 30 around the EBITDA. I just want to understand this 25% of sales organic contribution to EBITDA to sort of get to that 10% range. Is it just, I guess, the growth that you're expecting is going to be in super high categories? I just want to understand how you're building up to that, the $88 billion deal.

It's a good question. Well, if you looked at our contribution margin, our growth in Q1, again, a slow quarter, it was roughly 30%. And it is a mixed issue. The contribution margins in our specialty food segment, because of the manufacturing overheads, and the depreciation and those things associated with producing this product, the cash flow from a sale, the contribution margin from a sale, is quite high because they have to cover all those fixed costs. But once those costs are covered, incremental sales are incredibly accretive. And so that's what you're seeing on the contribution margins, especially foods, which tend to be, you know, you know, 25 to 35%, and sometimes more depending on the business and the product. And, you know, but then we have to blend that with our premium food distribution group, which tends to be more distributive in nature. And as a result, the contribution margins are closer to their gross profit margins. And so they tend to be in that sort of 15% range. And so that 25% is kind of a blend between not aggressive contribution margins in especially foods, but average contribution margins and the contribution margins in our premium food distribution groups. So it's kind of a midpoint at those.

Okay. So this is, I guess, the right way to think about this sort of like incremental margin sort of assuming SG&A stuff stays flat?

Well, not only SG&A, but plant overhead and depreciation, right? Like because Because when we sell a product, it's covering the cost of all those fixed cost items. And so when you have a manufacturing operation, that contribution margin tends to be quite significant because there's a lot of fixed costs that product has to cover. But once you cover those fixed costs, those incremental sales are incredibly creative. Which is why your margins are much higher in the second and the third quarter. And Saba, that is a big factor of how we saw ourselves getting from that 8% historic level to 10% EBITDA margins. is through that contribution margin growth. And the fact is we have seen that over the last couple of years as we've grown the business. The problem is all of this noise from COVID and the supply chain disruptions and the inflation has masked that. And that's why we spend a lot of time on these normalizations showing, hey, look, you take out this noise and there's some really good trends here. There's some really good stuff happening. And a lot of that is driven by this contribution margin concept.

Okay, and then just one last question for me, I guess, you know, there's been a lot of discussion around inflation and pricing, and I appreciate this example on poultry you provided on slide 25. I guess, whenever looking over here, it looks like if pricing comes in, the gross margin is a little bit below historical, but are you, I guess, is there a point this year where you think, you know, based on your outlook on where the commodity prices are, the pricing you've taken and plan to take, like, is this sort of a catch-up quarter where it's sort of 100% of the inflation is offset or is it sort of look before we even get there you and your forward purchasing are seeing commodity prices come back down anyway so i want to get an understanding of when we're sort of caught up on that or and what is sort of the assumption that you're sort of building off of at this point well we're getting to that point as i mentioned earlier but you have to remember that like in the first quarter um you know january for us was was a mess right the impact on our margins was not just

Inflation was a factor, of course, as we mentioned. We've moved prices up, but not entirely. They didn't take effect. Some pricing didn't take effect until the second quarter, but January was a mess because we had extremely high absenteeism with our plants. If our plants can't produce, then whatever we produce is very expensive. Our fixed costs have to be spread over much fewer products, right? So, you know, you have to sort of separate the different issues in terms of what's impacting our overall margins, right? It wasn't just inflation in the first quarter, right? January was pretty rough.

Great. Thanks very much for all the callers. Thanks, Salma. Thank you.

Your next question comes from the line of Derek Lazard. Your line is open.

Yeah, good morning, gentlemen. Just one question for me. Most of my questions have been asked. Just curious, and I know that you guys, you buy good businesses, but I was just wondering if there's been any impact on potential M&A valuations, you know, given the difficult macro environment and if there's been more opportunities come across your desks.

Yeah, so what I would say, Derek, is that, and as Will mentioned earlier, our acquisition pipeline has never been more robust. A couple of things happened during the last couple of years. A lot of successful entrepreneurs, food entrepreneurs, are really, really tired. They're very fatigued. They've been through a really rough time. They face just about every every issue possible. And, you know, it's one thing when you're part of the ecosystem and you have, you know, a lot of, you know, a lot of partners to help you out and to work with you. So we're having a lot of these type of entrepreneurs approach us directly and they tell us, listen, I still want to do this and I still love the business, but I don't want to do it alone anymore because it's been very stressful. And anyway, so we're seeing a lot of opportunities because of that. Secondly, I would say that for a while there, there was a lot of capital chasing food deals, particularly from private equity. We're not seeing that as much at this point. So it's a good environment for us to continue to make acquisitions that kind of complement our different platforms.

Very helpful, George. Thanks, and have a good weekend, guys.

Thank you, Derek. Thanks, Derek.

There are no questions over the phone. I would now like to turn the call over to Mr. Paley Logo.

Yeah, thank you, Faith, and thank you for attending, everybody. All the best.

This concludes today's conference call. Thank you for participating. You may now disconnect.