Premium Brands Holdings Corporation

Good afternoon, ladies and gentlemen, and welcome to the Premium Brand Holdings Corporation Third Quarter 2022 Earnings Conference Call. At this time, all lines 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 need assistance, please press star zero for the operator. This call is being recorded on Thursday, November 3, 2022. Our speakers will be George Pagliologo, CEO and President of Premium Brands, and Will Kaludich, CFO of Premium Brands. I would now like to turn the conference over to George Pagliologo. Please go ahead.

Thank you, Joanna. Welcome, everyone, to our 2022 third quarter conference call. With me today is our CFO, Will Kaludich. Our presentation today will follow the deck that was posted on our website this morning. We're now on slide four, which outlines certain key highlights for the quarters. We're very pleased to report very good results for the quarter and year to date in an environment where the challenges of inflation, supply chain issues, and labor shortages have been moderate. This was very evident in our monthly sequential results with September coming in well ahead of schedule. Our CFO, Will Kaludich, will provide you with some color on our results later on in the presentation. Normality for premium brands and its ecosystem of great food companies means a return to the relentless pursuit of product and process innovation, capacity expansions to satisfy increasing demand, and of course, strategic and opportunistic acquisitions that complement our portfolio of exceptional businesses. Clearwater Seafood had a very good quarter and continues to perform well ahead of plan. Pricing for most of its species continues strong, with the exception of snow crab, the pricing of which deteriorated materially earlier in the year due to certain imbalances in supply and demand. Clearwater chose to hold on to its snow crab inventory instead of selling it at a loss, and this action appears to have been an astute decision as snow crab prices are recovering. Despite the challenging margins in its snow crab business and substantially higher fuel costs, Clearwater's discipline cost management and very good commercial execution helped to deliver solid results. We did not complete any acquisitions during the quarter, prioritizing capital allocations like capacity expansion and process automation initiatives instead. We will also be acting on our NCIB this quarter as we were not able to activate it during the second quarter due to our trading related blackout rules. Overall, we're very pleased with our results as we continue on our path back to normality. We're very well positioned to accelerate our growth through amazing product innovation, capacity expansion, and process automation and optimization initiatives, combined with exceptional operational and commercial execution. We remain very confident that our decentralized entrepreneurial business model, combined with our great people and culture, will continue to distinguish us from the rest. We are now on slide five. We have recently posted our 2022 ESG progress report on our website. We're making great progress in all aspects of ESG and look forward to achieving all of our ESG goals as outlined in the report. We are now on slide six to 13. I've included here some pictures of new innovative products manufactured and sold by Artisan Bakery, Cook Coating, charcuterie, culinary, snack food, and sandwich groups. Demand for these type of products remains very strong, and we're pleased to have recently had opportunities to introduce our innovations to new and existing customers in person. We're confident that some of the products you see here will eventually become multi-million dollar SKUs in both retail and food service. In regards to slide 14 in your deck, I'm very happy to report that Clearwater Seafood working closely with our various distribution groups like Centennial Food Service in Western Canada to bring new seafood based solutions to new markets. They're also prioritizing value-added seafood as a key area of focus and are reviewing both organic and acquisition opportunities in this segment. We're confident that Clearwater is well on its way to becoming a best-in-class vertically integrated seafood company on a global scale. We're now on slide As you can see, our acquisition pipeline remains robust, and we expect to complete many more strategic, opportunistic, and transformational transactions in the months and 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.

Will? Thanks, George, and welcome, 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. Turning to slide 17, Our sales for the quarter were $1.624 billion, up $285 million, or 23% from 2021. The major drivers of our growth were acquisitions, which accounted for $153 million of our growth, selling price increases, which were $90 million, organic volume growth of $39 million, and the translation of our U.S. businesses into Canadian dollars contributed $18 million due to a weaker Canadian dollar. These factors were partially offset by an accrual for a claim made by a customer for products sold in the second quarter of this year that did not meet the customer specifications. Total amount of the claim is approximately $18.5 million. Our organic growth for the quarter was roughly 10%, just below 10%, and well above our 6% to 8% nominal growth objective. Turning to slide 18, our organic volume growth rate for the quarter was 2.9%. This was below our 4% to 6% long-term target primarily caused by seven temporary factors. The first and most significant was lower retail channel sales, resulting from consumer spending shifting to food service and less featuring activity in general. The cancellation of the new sandwich program, which related to the claim I mentioned earlier, also was a major headwind to our growth in the quarter. Continued development of our lobster strategies, which resulted in building of inventory that will drive future sales, but impacted our sales in the quarter because we had less trading of live lobsters. Turkey supply issues also impacted our sales as we saw significant shortages of raw materials in Canada and incredibly high prices in the U.S., A three-week shutdown of a very successful cooked protein program in the U.S. also impacted our sales due to production issues on a new line. And the final factor impacting our sales growth was a little bit of demand destruction, primarily in the C-Store channel relating to our meat snack initiatives. Turning to slide 19. This outlines all of the major growth initiatives across our different platforms. The ones we've highlighted in yellow were the ones that contributed to our growth in the third quarter. Turning to slide 20, the gold line represents our sales by week in 2022 relative to the blue line, which were our sales by week for 2021. You can see going into the fourth quarter, We continue to show good solid momentum in our sales growth. And it's interesting, the impacts of inflation have been slowing. We peaked in the second quarter of this year where our selling price inflation was about $134 million in the quarter. That fell to about $90 million, as I mentioned earlier, in this quarter. And we expect that will come down more in the fourth quarter, so our growth being more driven by volume versus price growth. Turning to slide 21, our EBITDA for the quarter was $141.2 million, which was a record level. This was up $18.6 million, or 15% for 2021. The major positive drivers were selling price inflation, as I mentioned earlier, of $90 million, acquisitions, organic sales growth, lower incentive-based compensation accruals, improved plant efficiencies, and the weaker Canadian dollar relative to the US dollar contributed about $800,000 of the increase in our EBITDA. Offsetting these factors were several challenges, the most significant of which was cost inflation across our raw materials, wages, and freight. This totaled about $78 million for the quarter. Interesting, if you look at the difference between our selling price inflation and our cost inflation in those three categories for the third quarter, that was a positive margin expansion of about $12 million. That compares to about $3.5 million in the second quarter and a contraction of $2 million in the first quarter. So we're making excellent progress in getting our pricing and our margins back to the levels they need to be. Also impacting the positive factors was some increased overhead in our plants, mainly associated with increased infrastructure to support both our current and future growth. Higher outside storage costs associated with our inventory positions, which we'll talk to on a later slide. Also, there was some increased promotional activities in our specialty food businesses, which was great to see as As the pricing returns to normal levels, we'll see them pick that spending up, and that should drive our organic growth volume growth rates higher in coming quarters. And then finally, we invested a little bit extra in SG&A infrastructure in order to support the continued growth of our company. Our EBITDA margin for the quarter was 8.7%. This was a 40 basis points decrease from 2021. And I'll talk about this decrease on the next slide. So turning to slide 22. Our targeted EBITDA margin is 10%. For the third quarter, we would normally have expected it to be above the 10% because of seasonal factors. As I mentioned earlier, we came in at 8.7%, which was 130 basis points off our target. The variance was due to primarily seven temporary factors. One was underutilized capacity, particularly in our specialty food segments, which generates much higher margins, and the growth in that segment will be a key driver of the growth in our EBITDA margin over time. Next was freight cost inflation, higher outside storage costs, as I mentioned earlier. There's also a continuing impact of the delay in getting our pricing through, especially in our specialty food segment. It takes anywhere from 60 to 90 days to get our price increases take effect from when we put them through with the major retailers. So that delay in the quarter was about $4.6 million of an impact on our EBITDA. And then finally, recent acquisitions of King's Command, Golden Valley, and Beach Grove had a fairly significant impact on our margins because all of these acquisitions are bolt-on turnaround acquisitions by our various businesses, and they're in the very early days of their business plan, and as a result, they are weighing on our EBITDA margins. Also contributing to our EBITDA margins, mainly in our premium food distribution group and much less impact on the overall margins, was a certain amount of strategy focused on the continued pricing based on recovering gross profit dollars versus gross margin levels because of the incredibly high price points of a lot of products, and then also the impact of cost plus contracts. I should mention that if you normalize for the second, third, fourth, and fifth factors I mentioned earlier, namely freight cost inflation, outside storage cost inflation, increases, retailer selling price delays, and acquisitions. Those four factors alone would normalize our EBITDA margin to about 10%. Turning to slide 23, this slide shows a chart that tracks a basket of commodity pork raw materials used mainly by our specialty foods segment. You can see the green line represents 2021, the red line 2022, Overall, pricing on a year-over-year basis was relatively stable but still at record highs. Turning to slide 24, this slide shows a chart that tracks a basket of commodity beef raw materials used primarily in our premium food distribution group. The trends in the commodities are not as reflective of the impact on our EBITDA margin as the the impacts of pork on our specialty food segment, mainly because of the dynamic pricing models in this segment. But you can see overall beef was slightly deflationary in the quarter, but continued to be at record high levels, or near record high levels. Turning to slide 25, this shows a chart that tracks a basket of commodity chicken raw materials used mainly by our specialty food segment. This was an incredibly deflationary commodity. You can see coming down from all-time record highs in the second quarter down to close to 2021 levels, or actually by the end of the quarter below 2021 levels, but still, again, on a historic basis, very high levels. You know, this deflation did help our specialty food segment margins, helped counter some of the headwinds I mentioned earlier. but the impact was limited because of inventory positions going into the quarter, as well as just the normal time it takes to process the product and sell it. Turning to slide 26, this slide shows a chart of lobster input prices and relates primarily to our premium food distribution group. Our lobster prices tend to be also fairly dynamic in their pricing, our businesses with their lobster products. However, we move more and more into processed lobsters. It's becoming a little more stickier than the pricing around this product, as a lot of that product is going into the retail channel. As a result of that stickiness, you can see the significant deflation from the second quarter going into third quarter, shown in the red line. And so this really did help the margins of our premium food distribution group in the quarter. Our last commodity slide on slide 27 shows a chart of salmon input prices. And again, this relates primarily to our premium food distribution group. You can see on a year-over-year basis relatively stable pricing and continue to be at very high levels. Turning to slide 28, our earnings for the quarter was $61.3 million. This was an increase of $3.5 million, or roughly 6% from 2021. The increase was driven by our EBITDA growth, as well as a small decrease in our income tax expense. And these factors were partially offset by increased amortization and depreciation, mainly relating to acquisitions and increased interest costs. Overall, our interest costs were up $10.9 million. Majority of the increase related to our higher debt balances, which has been driven by the capital investments we've been making in recent times as well as some of the acquisitions, recent acquisitions. So we've yet to leverage the full benefit of those investments yet. That accounted for about $7.4 million of the increase. FX translation was roughly half a million dollars. and the balance related to rate increases, and that was about $3 million. Turning to slide 29 and our five-year targets, which focus on 2023 for sales. This slide, the starting point we did in this analysis was the midpoint of our 2022 guidance, which is from $5.75 billion to $6 billion for our sales for 2022. We expect to be at the top end of that guidance, so we're starting at a relatively conservative point. If you adjust that then for the impact of delayed pricing over the course of the year, which was about $33.5 million for the first three quarters of the year, add in some nominal organic growth at a rate of 6%, which we feel very confident based on our historic performance. And you can see our pro forma 2023 sales would be roughly $6.3 billion, well ahead of our $6 billion five-year target. Turning to slide 30, our five-year 2023 adjusted EBITDA target. Again, going through a similar calculation. We started at the low point of our 2022 guidance range of $510 to $530 million. This is what we're currently guiding to. I adjusted that for the retroactive impact of delayed pricing increases and that gave us a normalized adjusted EBITDA of $543 million or an EBITDA margin of roughly 9.2%. Added to that the contribution margin associated with the 6% nominal growth and that gives us a pro forma 2023 adjusted EBITDA of $614 million. Again, ahead of our target of $600 million for 2023. Turning to slide 31, our inventory levels continue to be at record highs. They've been driven by hedging strategies by our different businesses in this incredibly inflationary environment, as well as some hedging against supply chain disruptions. So our inventory at the end of the quarter was $821 million. This was down from the second quarter of $836 million, which was about a $15 million increase. The actual progress made by our legacy business was about a $24 million increase, or sorry, decrease in their inventories from the second quarter. And then that was offset by the impacts of FX translation because of the weaker Canadian dollar and acquisitions. If you look forward to the end of 2022, we're projecting inventory of roughly $718 million. That's in line or a bit favorable relative to our plan that were presented in Q2. So we are still very focused on bringing down our inventories and expect to make a lot of progress in the fourth quarter. If we do achieve our $718 million, that'll bring our days cost of sales and inventory down to 53 to 54 days. which is still above our targeted level of about 49 days, but certainly good progress from where we are today. Turning to slide 32, we continue to maintain very strong liquidity. Our unused credit facilities at the end of the quarter were $455 million, giving us great flexibility for our executing of our various growth plans. Our senior and total debt to EBITDA ratios, however, continue to stay at the elevated levels from Q2. Our total debt to EBITDA ratio was 4.5 to 1, which was a bit ahead of our long-term target range of 3.5 to 4 to 1. And our total debt to EBITDA ratio at the end of the quarter was 3.3 to 1. Again, a little ahead of our long-term targeted range of 2.5 to 3 to 1. We actually did make some solid progress on bringing down our ratio over the quarter, these ratios over the quarter. However, if you turn to slide 33, the impact of this progress was offset by kind of an anomaly in the translation of our U.S. currency balances. What this chart shows is the gold line on the left was the end of the second quarter and then we're showing the blue line is our exchange rates and the gold line on the right is the end of the third quarter. So you can see for most of the quarter the exchange ratio was within a fairly reasonable band and then at the end of the quarter it spiked dramatically. So what this did was we translated our EBITDA at a average rate that was much lower than the rate at the end of the quarter. So when we translated our U.S. debt balances, the net effect of these two factors was our covenant ratios got impacted negatively. If you normalize for this effect, our debt EBITDA ratio would have been 3.0 to 1. senior debt to EBITDA ratio, so back within our targeted range. So we look forward for the end of the year, we do expect to be within our targeted range by the end of the year. Turning to slide 34 and our free cash flow for the quarter was $286 million and increase, or sorry, our free cash flow for the trailing 12 months was $286 million. This was a $22.6 million increase or 8.6% from 2021. Our free cash flow per share for the trailing 12 months ending the third quarter was $6.45. This is an increase of 40 cents per share or 6.6%. Our payout ratio for the trailing 12 months was 42.8%. And subsequent to the quarter, we declared a dividend for the fourth quarter of $0.70 per share or $2.80 per share on an annualized basis. Turning to slide 35, this slide outlines our project capital expenditures. We differentiate project capital expenditures from maintenance capital expenditures. by the fact that these are all projects that are expected to generate a 15% internal rate of return after tax unlevered. Maintenance capital expenditures are those that don't meet that test. So during the quarter, we spent $44.1 million on project capital expenditures. And year to date in 2022, we spent $125 million. You can see from the chart, virtually all of these are relating to capacity expansions across our many platforms. So lots of growth opportunities ahead, and we continue to invest significantly in the future. That ends the financial presentation, and with that, I will turn the call back over to Joanna. Joanna?