Premium Brands Holdings Corporation

Good afternoon, ladies and gentlemen, and welcome to the Premium Brands Holdings Corporation second quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded today, Friday, August the 5th, 2022. Our speakers today are George Paliologo, CEO and President of Premium Brands, and Will Kalutz, CFO of Premium Brands. I would now like to turn the conference over to Mr. Paliologo. Please go ahead, sir.

Thank you, Michel. Welcome, everyone, to our 2022 second quarter conference call. With me today is our CFO, Will Kalulich. 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 earnings press release issued this morning. We're now on slide five, which outlines certain key highlights for the quarter. Despite the various headwinds, we reported very good results for the quarter and year to date. Our CFO, Will Kaludich, will provide you with more color in our results later on in the presentation. Commodity cost inflation in a volatile and unpredictable environment continued to challenge our operations. The silver lining is that for the first time in over two years, we're beginning to gradually see normality back into the market and in consumer and customer behaviors. Our labor challenges are abating, supply chains are catching up and are becoming a little more reliable, and inflation appears to be peaking. Consumers are now out and about, traveling, visiting friends, attending large gatherings, and consuming food outside of their homes. Once again, we're pivoting and adjusting to this new normal, which, by the way, is beginning to look very much like the old pre-pandemic normal. Our solid results for the quarter, despite the transitory headwinds, once again demonstrate the balance and resilience of our unique business model and its ability to continue to deliver above average and consistently growing returns to our shareholders. Food service demand came back strongly during the quarter as customers added sitting capacities, expanded menus and hours, and hosted larger gatherings. Our protein platform faced the perfect storm during the quarter, including bad spring weather reduced featuring, acute inflation, some price elasticity points, and the reopening of food service, which reduced eating at home occasions. Despite these challenges, the macro trends we have been investing in over the past few years remain on track, and our charcuterie, cooked protein, and sandwich platforms continue to do well. Clearwater Seafood had a record quarter and is performing ahead of Flan a year today. Clearwater's results are benefiting from robust demand and strong pricing for most of its species. Despite weak margins in its snow crab business and substantially higher fuel costs, Clearwater's species and sales channel diversification combined with proactive and disciplined coast management are helping to deliver excellent results. We're pleased to announce the closing of two more strategic transactions due in the second quarter. King's Command is located in Ohio, US and has capacity and market reach to our cooked meats platform while the purchasing of the other 50% of Golden Valley that we did not previously own will enable us to more seamlessly expand our dry curing capacity in the future. We're well positioned to continue to profitably grow our various platforms and we're pleased to see normality beginning to return in terms of consumer actions and buying behaviors. Our food service, airline, and cruise line sales are nearing pre-pandemic levels while our export business is gaining traction. Similarly, the explosion in consumer discretionary spending, which clogged up supply chains around the world, is slowing down. This means more labor availability for the consumer staples and service industries. Overall, We're feeling very good about what lies ahead, assuming a continued return to normality. We have come through some unusual volatile and unprecedented times, and we have demonstrated our diversification, our resilience, and our ability to pivot quickly. We're confident that our decentralized entrepreneurial business model, combined with our great people and culture, will continue to propel us to new opportunities and new growth. We're now on slides five to 11. I have included here some pictures of products manufactured and sold by our cooked protein businesses. Demand for cooked protein products continues to grow in both food service, club, and retail, and the recent acquisitions of Beach Grove, Maidwright, and King's Command provide us with more capacity in market reach in Canada and the U.S. Over the past five years, we have established ourselves as a leading provider of cooked protein solutions to customers in Canada and the U.S. Cook Protein offers retail and food service customers solutions to their labor shortage issues, while providing consumers with convenient, excellent quality food experiences. We're now on slide 12. As you can see, our acquisition pipeline remains 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.

Thanks, George. Before I begin, I would like to remind you that some of the statements made on today's call may constitute forward-looking information and our future results may differ materially from what we've 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. Now turning to slide 14. Our sales for the quarter were $1.519 billion, an increase of $285 million or 23% from 2021. The key growth drivers of this increase were selling price inflation of $134.4 million. I should note that over the last four quarters, we have put through price increases totaling roughly $490 million. Acquisitions accounted for $114.1 million of our growth. A weaker Canadian dollar relative to the U.S. dollar, which resulted in the favorable translation of our U.S. operations, contributed $20.1 million to our growth, and organic volume growth contributed $16.6 million. Turning to slide 15, our organic volume growth rate for the quarter was 1.3%. This was below our target and expectations for the quarter for five key reasons. Two of those, two key challenges in our specialty food groups included the sales challenges George mentioned earlier in our protein group, namely poor weather across most of Canada, less featuring by our businesses, the shift in sales from the retail segment to the food service segment, and a small amount of demand destruction in certain limited categories. Our specialty food sales were also impacted by issues in our sandwich group's Phoenix sandwich plant that resulted from the transitioning of their production lines from Gen 1 lines to their automated Gen 3 lines and corresponding with this transition resulted in some higher than normal customer order short shipments. Our premium food distribution group's organic volume growth rate was impacted also by three challenges. First was our lobster strategy as our key lobster businesses shifted, built inventory over the quarter for future sales initiatives in their processed operations, which resulted in less trading of live lobsters in the quarter. also our seafood group experienced less featuring of their premium seafood products by both retailers and food services due to high record high price points and finally our exports to china of live lobsters was down due to pandemic related issues within that country as well as a lack of air transportation all five of these factors we see as temporary and we are already seeing solid improvement in the third quarter, particularly on the weather front. Turning to slide 16, this slide outlines the major growth initiatives across our six platforms. You can see it's a very diverse range of initiatives. The ones highlighted in yellow contributed to our organic growth in the quarter. In our seafood and distribution groups, you can see a variety of initiatives were generating good momentum in the quarter, a lot of these driven by the recovery in the food service segment. Our sandwich group also generated good solid growth in the quarter driven by their frozen artisan sandwich initiatives which continue to gain momentum both in the QSR and retail channels. Our bakery group, while being a smaller platform, had tremendous success in the U.S. with the launch of a variety of new artisan bread products. And finally, our culinary group, the smallest of our platforms, continued to see good progress in the retail channel with a number of new product solutions. Turning to slide 17, we increased our sales guidance for 2022 to $5.75 to $6 billion from a previous range of $5.6 billion to $5.85 billion. Using the midpoint of our current guidance, which is $5.875 billion, this would represent an increase of $943 million from 2021, or roughly 19.1%, which is in line with our 11-year sales CAGR of 22.4%. Turning to slide 18. This slide shows our sales on a weekly basis. The gold line represents 2022. You can see going into the third quarter, we continue to show solid momentum in our sales. And as some of the headwinds that we experienced in the second quarter subside, we expect that trend to accelerate. Turning to slide 19. Our EBITDA for the quarter was $130.8 million. This is an increase of $18.6 million, or 16.6% from 2021. The key drivers of it were selling price inflation of $134.4 million, acquisitions, organic sales growth, and reduced accruals of certain incentive-based compensation. These were offset by higher direct material wages and freight costs. This totaled about $131 million. I should note the difference between our selling price inflation and our direct material wage and freight inflation was a positive $3.5 million, which shows a good trend relative to the first quarter when that same calculation was a negative $2 million. Again, showing the the impact of the price increases we've been putting through. We did see also some increased plant overhead as we invest in infrastructure for future growth, some increased outside storage costs relating to higher inventory levels, which we will discuss on a later slide, and finally some continued investment in our SG&A infrastructure to support our growth. Turning to slide 20, Slide 20, our EBITDA margin, adjusted EBITDA margin for the quarter was 8.6%. This was 50 basis points off of our EBITDA margin for the second quarter of 2021 or 140 basis points off of our long-term target of 10%. The key factors impacting our EBITDA margin in the quarter were in our specialty food group, delays in our pricing increases resulting from retailer notice periods. If you normalize for selling price increases implemented over the course of the quarter that were in reaction to commodity cost inflation in the first quarter, assuming those had taken place at the beginning of the quarter, our EBITDA margin would have been 9.4%. Other factors impacting our sales, especially foods margins included the sales challenges I mentioned earlier in our protein and sandwich groups, as well as the increase in our outside storage costs. Our premium food distribution groups gross EBITDA margins were challenged by two structural issues, namely pricing to recover gross profit, maintain gross profit dollars and not gross profit margins. This was being done to help customers deal with extreme cost inflation and then the number of cost plus contracts within that group. We also saw some lower margins in our lobster products as a result of extreme volatility in the pricing in that environment, and we'll talk a bit more about that on a later slide. Turning to slide 21. The next five slides outline some of the key commodities used by our different businesses. The first slide is our pork index chart which highlights some of the key commodities purchased by our protein group. You'll note that the red line which represents the index for 2022 was relatively stable in the quarter and sort of goes to the point of our margin challenge in the protein group in the quarter was largely as a result of the delay in the retail pricing and not a commodity challenge. The next slide, 22, shows our beef index chart. This relates primarily to our distribution group. And again, you can see that the commodity was relatively stable in the quarter. Slide 23 is our chicken index chart. This was by far the most challenging commodity for our business. It's primarily relates to our protein group. You can see significant cost inflation has continued from the first quarter through most of the second quarter. The good news is we have seen a break in this commodity and that break seems to be continuing and could be positive upside in our outlook for 2022 if that trend continues. Turning to slide 24 in Lobster's index chart, you can see the extreme decline in pricing partway through the quarter. This was a result of a variety of demand factors including less retail featuring and menu featuring by restaurants as a result of record high prices. Also, the lower exports to China resulting from the shutdown of parts of that economy. And then also on the supply side, we saw very strong landings. So all of that fed together to result in the price decline you see in the chart. This pressured the margins within our lobster group as their procurement costs are delayed from when they actually make their sale of their processed products. The good news is this is stabilized, and so we do expect to see a stabilization in the back half of the year of our margins in this category. Turning to slide 25, last of the commodities. This is our salmon index chart, relates all to our seafood group. Again, you see a bit of a break there towards the end of the quarter, but continues at record high prices. Our pricing for these products tend to be very dynamic, so margins tend to be relatively stable on this product, regardless of where the pricing is at. Turning to slide 26. We are maintaining our EB-DOG guidance for 2022 of $510 million to $530 million. Using the midpoint of this guidance of $520 million, that would represent growth from 2021 of 89 million, or roughly 20.7%, which is in line with our 11-year EB-DOG CAGR of 22%. Turning to slide 27, Our earnings for the quarter were $61.5 million. This represents an increase of $8 million, or 15% from 2021. Our EPS for the quarter, adjusted EPS, was $1.38 per share, representing an increase of 15 cents per share, or 12.2% from 2021. The main drivers of our improved earnings performance was our EBITDA growth, and then this was offset by a little bit of additional depreciation amortization, mostly associated with acquisitions, some increased interest, mostly associated with our higher senior debt levels, and some increased income taxes associated with our increased profitability. Turning to slide 28, talking about our five-year 2023 sales target. On this slide, what we've done, we've used the midpoint of our 2022 guidance of $5.875 billion. We've added some nominal growth for 2023 at a rate of 6%, which is far below what we've been running for the last couple of years. And that gives us a pro forma number of $6.227 billion. which is well in excess of our $6 billion target. So we're very confident we will meet this target. Turning to slide 28, looking at our five-year 2023 EBITDA, adjusted EBITDA target. Similar to the previous slide, we used the midpoint of our 2022 guidance, $520 million. We adjusted this for the retroactive impact of delayed pricing increases from the first and second quarters, which total about $28 million, giving us a normalized EBITDA of about $548 million. Adjusting for the organic growth at a conservative contribution margin of 20%, that gives us a pro forma EBITDA of $619 million. So again, in excess of our $600 million target and close to our 10% EBITDA margin target. So again, we feel very confident about meeting this target. Turning to slide 30, our inventory at the end of the second quarter was much higher than normally expected at $836 million. This was driven by four key factors. All we see is temporary and a good portion of them reversing over the next two quarters. The first and most significant was inventory built in the first half of the year that will drive sales in the second half of the year. So in our seafood group, we expect about $30 million of inventory reversal, primarily related to our lobster strategy and the buildup of inventory to support sales. And then in our protein group, about a $29 million decrease, partly due to a normal seasonal buildup of inventory, but also due partly to the sales challenges from the second quarter. The second major factor resulting in the decrease in our inventory will be a reduction in our safety stocks. Over the last two years, we've built up significant safety stocks to help deal with supply chain disruption issues, as well as commodity inflation. As these markets normalize, supply chains normalize, and commodity markets normalize, we will be winding down those safety stocks, and for the back half of the year, we're planning to wind down about $38 million. The next factor are some very specific customer supply chain challenges that will normalize in the third quarter. That will contribute about $8 million of the decrease. And then the balance is just the normal seasonality of our business. So overall, in the back half of the year, we expect to increase our inventory by at least $110 million, which will bring it down to about $726 million. That'll be roughly 55 days cost of sales and inventory. Relative to our three-year average of about 49 days, that's still high as we are still carrying safety stocks. But as we see the continued normalization of supply chains and commodity markets, that could come down faster in 2022 or I'll say it'll come down in 2023. Turning to slide 31, we continue to maintain very strong liquidity with $490 million of unused credit capacity. Total debt to EBITDA ratio and our senior debt to EBITDA ratio did at the end of the quarter exceed our long-term targets. Our total debt to EBITDA ratio is 4.4 to 1 versus our long-term targeted range of 3.5 to 1 to 4.0 to 1. And our senior debt to EBITDA ratio was 3.3 to 1 relative to our long-term targeted range of 2.5 to 1 to 3.0 to 1. Most of the higher ratios were driven almost entirely by our inventory positions and we do expect by year end to be back within our targeted range in both these ratios. Turning to slide 32 and our free cash flow for the trailing 12 months at the end of the second quarter was $276.4 million. This represents an increase of $13.1 million or 5% from 2021. Our free cash flow per share on a trailing 12-month basis was $6.27 per share, an increase of $0.22 per share or 3.6% from 2021. Our payout ratio at the end of the trailing 12 months was 43%. And at the end, and we recently declared a third quarter dividend of 70 cents a share or on an annualized basis, $2.80 per share. Turning to slide 33, during the first half of 2022, we spent $81.3 million on project capital expenditures. 60.3 million of these were on 14 major active projects. all of which are primarily growth-related and span five of our six platforms. So lots going on across the different platforms, all oriented to future growth. And then we spent about $21 million in a variety of smaller project capital expenditure projects, many of these associated with efficiency products, automation projects. Turning to slide 34, As George mentioned, we completed two acquisitions in the quarter, increasing our interest to 100% on Golden Valley Farms from 50% and acquired King's Command. Total invested in the quarter on these two transactions was $86.5 million. I should note also, because of the nature of these acquisitions, These acquisitions, both of which were for capacity to support, as George mentioned earlier, our cooked protein and dry cured meats initiatives. Neither of these are expected to contribute EBITDA in the second half of 2022. They're really longer term capacity solutions. That concludes the financial presentation. So with that, I will now pass it back to Michelle for the Q&A segment of the call. Michelle?