Premium Brands Holdings Corporation

Good afternoon, ladies and gentlemen, and welcome to the Premium Brand Holding Corporation 4th Quarter 2022 Earnings Conference Call. At this time, online journalism 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 0 for the operator. This call is being recorded on Thursday, March 16, 2023. I would now like to turn the conference over to George Pagliologou, CEO and President of Premium Brands. Please go ahead.

Thank you, Ina. Welcome everyone to our 2022 fiscal year and fourth quarter conference call. With me here today is our CFO, Will Kaludich. Our presentation will follow the deck that was posted on our website this morning. Will is going to help us unpack the numbers for the fourth quarter and the year shortly, followed by a more in-depth discussion of our new five-year plan. We're now on slide four, which outlines certain key highlights for the quarter and the year. Some of the headlines of the quarter are as follows. Results for the quarter were unplanned, despite the various well-publicized headwinds, including inflation, supply chain disruptions, and labor shortages. On a more positive note, we continue to see evidence that life and the world are normalizing after three years of unusual volatility and economic and industry dislocations. We're delighted to share our new five-year plan and related targets, which call for us to reach $10 billion in sales and $1 billion of EBITDA by the end of 2027. We will have more discussion on this later on in the presentation. Clearwater had an excellent quarter and delivered record EBITDA for the year of about $130 million on sales of approximately $600 million. Both our platforms did well during the quarter, benefiting from improving business conditions, including better labor availability and easing supply chain issues. Our charcuterie, cooked protein, artisan sandwich, and specialty bakery businesses performed very well while our center-of-the-plate best-in-class protein offerings continue to drive the growth of our food service businesses. Of particular note this quarter is that 55% of our specialty foods platform sales were generated by our U.S.-based businesses. Although we did not close any acquisitions during the quarter, we're pleased to report the completion or near completion of several capital projects that will solve a number of capacity challenges facing our businesses. We're pleased to have purchased approximately 167,000 shares for cancellation or an NCIB at very compelling prices, thus benefiting all shareholders. For the ninth year in a row, we announced yet another double-digit increase in our quarterly and annual dividend. At PB, we love to share our growth and our value creation with our long-term shareholders through dividend increases as a way of cushioning the blow of unprecedented market and stock price We remain very confident that our decentralized entrepreneurial business model combined with our great people and culture will continue to drive above average returns for our long-term shareholders through increasing dividends and capital appreciation for many more years to come. Now we're on slide five. As you can see on slide five, we remain an acquisitor of choice and our pipeline continues to be very robust with many exciting small and larger projects and opportunities. Acquisitions remain a key part of our growth strategy over the next few years, and we expect to complete many more transactions in the future. I will now pass it on to Will.

Will? 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 discussed. Please refer to our MD&A for the 14 and 52 weeks ended December 31, 2022, as well as other information on our website for a broader description of the risk factors that could affect our performance. We are now on slide seven. Our sales for the quarter were $1.6 billion. That was an increase of roughly $289 million or 21.5% from 2021. There were five key drivers of our growth. First was there was an extra week in the quarter. due to our year end falling on December 31st, which resulted in 14 weeks versus the normal 13. This accounted for about $80 million of our growth. Selling price inflation was another $61.9 million of our growth. Organic volume was $60.8 million of our growth. And that was driven, as George mentioned earlier, by our sandwich initiatives, cooked protein, artisan baked goods, value-added processed lobster products and a reclassing of certain warehousing rental income. Acquisitions accounted for $43.8 million of our growth and a weaker Canadian dollar relative to the U.S. dollar, $42.9 million. Turning over to slide eight, our organic volume growth for the quarter was 4.5%. You can see from the chart over the last three quarters, we've improved our growth rates consecutively nicely, rising from 1.3% back in Q2 up to 4.5%. So we are now in our long-term targeted range of 4% to 6%, but there's still four main factors holding us back from reaching our potential of exceeding our long-term target. First was Q4 is generally a lower growth quarter just for seasonal factors. Next was our protein branded businesses were impacted particularly by a shift in spending by consumers from retail to food service. We continue to experience turkey supply challenges both in Canada and the US. This knocked about 60 basis points off of our organic volume growth rate. And finally, we have seen slower growth or relatively flat sales in certain categories, mainly beef jerky and certain cooked protein categories, which is a positive from previous quarters where we actually were seeing some demand destruction. That is now leveled and year over year roughly flat. And as we see some stability in commodities, we expect to see growth resume there in 2023. Turning to slide nine, for the year, our sales were 6 billion, 29.8 million. That was an increase from 2021 of $1.1 billion or 22.3%. For 2023, we've issued new guidance or our guidance of sales of 6.4 billion to 6.6 billion, using the midpoint of that at 6.5 billion. That would represent an increase from 2022 of $470 million, or roughly 8%. And I should note that does not include any potential new acquisitions. That's entirely based on the businesses that exist today. Turning to slide 10, this slide just shows our sales by week. The black line on the far left is the Start of 2023, the gold line was 2022 and the blue line 2021. You can see we started that we continue to show great growth across our platforms. And more importantly, as we've seen, you'll see on a later slide, inflation is pulling back, pricing is stabilizing. So more and more of that growth should be organic volume versus price inflation. Turning to slide 11. Our adjusted EBITDA for the quarter was $136.4 million. That was an increase of $22.9 million, or 20.2% from 2021. There were five key positive drivers. First was selling price increases net of certain cost inflation, and we're going to talk a bit more on that on the next slide. Organic sales growth was a major driver of the increase in our EBITDA. Plant efficiencies, as George mentioned, we're seeing much better labor conditions, supply chains normalizing, and that's translating to much improved operations. The 53rd week, extra week, did contribute a bit to our EBITDA. It was only about $2 million on $80 million of sales, as I mentioned earlier. So it was dilutive to our margins, but it was a small contributor to our EBITDA. And then finally, the weaker Canadian dollar relative to the US dollar. On the negative side, we continue to experience higher outside storage costs due to our inventory positions, which we will be talking about in a later slide. Discretionary promotion was up, which is a great sign. We are definitely seeing more normalcy in the market. retailers open to new products, new product listings, and correspondingly, our businesses are getting much more active on promotion and advertising, which is setting the stage for 2023. Continued investment in our SG&A infrastructure, a good portion of that was actually invested in salespeople as our businesses are ramping up for 2023. And then finally, some additional incentive-based compensations. Turning to slide 12, as I mentioned, you know, inflation was a positive impact on our EBITDA for the quarter. You know, this slide shows by quarter for 2022 our selling price increases and then the cost inflation of our raw materials, wages, and freight costs, which are the three key components we do isolate. And you can see Q1, This of 2022, you know, it was a negative $1.9 million. As we started catching up on our pricing, you saw improvement in Q2 to $3.5 million, Q3 to $12 million, and Q4 to $16 million. So a very positive trend and made so even more because Q4 is a seasonally slow quarter. So adjusting for that, you know, that trend would have been even stronger. You know, from a margin impact, You know, for the first two quarters of the year, you can see inflation was definitely eroding our overall margins. Q3, it was probably slightly positive because, again, this is before general cost inflation. So once you take into account that, it was probably slightly positive. And by Q4, we're making great progress in margin recovery, which sets the stage for a very positive 2023 forecast. Below that, we've isolated what we call the impact of retailer selling price increase notice periods, which generally run 60 to 90 days. You can see they were steadily decreasing through the year as we were catching up on our pricing and those notice periods met. There was a bump in Q4 as a number of our businesses started putting through price increases for just general cost inflation. We are seeing some stability on the commodities and labor fronts and a little bit of deflation in freight. So, you know, again, setting us up well for 2023. Turning to slide 13, our EBITDA margin for the quarter was 8.3%, relatively flat compared to Q4 last year at 8.4%. Our target is 10%. And there were five key factors that resulted in that variance from our target for the quarter. One of the key ones has just been unutilized production capacity. Due to some of the challenges George mentioned earlier in 2022, inflation in the back half of the year particularly, which resulted in a lot less featuring by retailers. are us featuring with retailers. And then in the first part and a little bit in the second part of the year, supply chain labor challenges and little interest by retailers in listing new products. All of that led to significant unutilized capacity in our network, which I'll talk about on the next slide. Another big factor in the quarter was just Q4 is a seasonally slow quarter. Usually, our margins for the quarter are about 40 to 60 basis points below the annual average margin, so that was certainly a contributor. The retailer selling price increases I mentioned earlier, the $8.6 million, that was about 60 basis points impact on the quarter. The extra week, again, the $2 million in contribution based on $80 million in sales, that eroded about 30 basis points in our margin. And then finally, bolt-on acquisition, turnaround acquisitions that we made in 2022. That impacted our overall margins by about 10 basis points, which was a very positive message because back in Q3, which is, again, a seasonally much stronger quarter, those same acquisitions had a negative impact of about 25 basis points. So we're making great progress on those initiatives and are very excited to see how they're coming along. Slide 14, this just gives you a bit of a sense of where the unused capacity is across our network relating to some of our more recent projects. There's also general capacity throughout the system as well. You can see from the slide roughly $320 million of unutilized capacity in 2022. And, you know, at the start of the year, our expectation was a good portion of that was going to be put to work, but for the challenges of 2022, it wasn't. Again, going into 2023, everything is lined up well, and we're excited that, you know, that capacity will be used. Slide 15. For 2022 annual, our EBITDA was $504.2 million. That was an increase of $73.5 million or 17.1% from 2021. We also issued our guidance for 2023 with our quarter four results and that is for a range of $590 million to $610 million in adjusted EBITDA. Using the midpoint of that, that's $600 million which would represent an increase from 2022 of $95.8 million or roughly 19%. Slide 16, our adjusted earnings for the quarter were $52.9 million. That was up about $700,000 or 1.3% from 2021. Major drivers were EBITDA growth and lower income taxes, and then that was offset by increased amortization of our right-of-use assets, and accretion of our lease obligations, as well as some additional depreciation. And then the biggest factor was additional interest expense, both through a combination of higher market rates and our larger debt balances. Our EPS for the quarter, adjusted EPS was $1.19, and that was roughly in line with 2021. Slide 17, just talking a little bit about our inventory, which we've talked in previous quarters, has been a bit of a challenge coming through the supply disruption issues over the last couple of years. We made some progress from Q3. Our inventory was down about $35 million from Q3. However, it was about $68 million short of the target we set last quarter. But the good news is 50 million of that variance is for very positive reasons. It's new initiatives that occurred in the back half of the quarter and should create value in 2023. First off, we invested about $26 million in opportunistic inventory buys. Just great, great opportunities for margin expansion in 2023, largely for products where the price is locked in. And so by doing these buys, we've locked in the margin. And then also about $24 million for new sales initiatives, inventory builds. And some of that is actually sales that were expected in 2022, but were just due to timing differences occurred in 2023. So very positive factors driving most of that variance from our target. Slide 18. We continue to mean very strong liquidity. Our unused credit facilities totaled about $514 million at the end of the quarter. That was up from $455 million last quarter. We showed some improvement in our senior debt and total debt TBDOT ratios. Our total debt TBDOT ratio fell from 4.5 last quarter to 4.3 this quarter. And our senior debt TBDOT ratio fell from 3.3 last quarter to 3.2 to one this quarter. We had expected a bit more of an improvement in the ratios this quarter. However, the inventory buys that I mentioned in the last slide as well as the 53rd week did impact our ratios. And the impact of the 53rd week was on our accounts payable. We saw a dramatic decrease in our days purchased in payables just because of that extra week and the timing of invoices. And if you normalize for the additional inventory by the roughly $50 million, and the AP, we would have been at a ratio of roughly 2.9 to 1 for our senior debt TBDOT ratio, so within our targeted range. Turning to slide 19, our free cash flow for the quarter, or sorry, for 2022 was $286 million. That was an increase of $22.6 million, or 8.6% from 2021. Our free cash flow per share was $6.41, an increase of roughly $0.36 from 2021 or 6%. Our payout ratio for the year came in at 43.8%. And as George mentioned earlier, with our fourth quarter results, we announced a 10% increase in our dividend rate to $0.77 a quarter or $3.08 per annum. And you can see from the slide that this will be the ninth year in a row where our dividend increase has been double digits. Slide 20. During the fourth quarter, we spent roughly $60 million on Project CapEx. You can see $44 million of that was spent on 16 major projects, all primarily capacity-related. We have since completed five of those projects, and the remaining ones are proceeding well within plan. For the year, we spent $185 million on capital projects, Project CapEx, with $141.2 million of that being on the major projects. Slide 21, our five-year plan. We're pleasant, as George mentioned earlier, to report that we did exceed our five-year target that we set in 2018 one year early with our sales coming in at $6 billion, $30 million versus the $6 billion target. And you can see from the slide, this is the third year in a row that we have exceeded our five-year target earlier than planned. And with In 2018, we also set an EBITDA target of $600 million, and while we did not achieve that a year earlier, we are certainly well on track to achieve it on plan in 2023. Correspondingly, we've set new targets, as George mentioned, of $10 billion in sales and $1 billion in adjusted EBITDA by 2027. These new targets we've set are a little bit unique because generally in the past, our targets have included a fairly significant acquisitions component to the expected growth. And as George mentioned earlier, we do expect acquisitions to continue to be a major growth driver. However, because of there being so many organic initiatives going on across our company and and a fair amount of investment associated with those, we isolated most of the growth to organic growth. So you can see roughly $9.5 billion of our targeted $10 billion will be driven by organic growth initiatives. Corresponding with that, we've given some guidance around our capital spend over the next five years, which we expect to be about $800 million to support growing to that target. Again, we fully expect these to be easily achievable targets based on the fact that very little acquisitions are included in them. The next slide gives you a summary of the major projects included in our five-year plan. There are 18 projects listed here. Eleven of them are in progress, as you would have seen on the earlier slide. and seven are in assessment or early planning stages. With that, I'll turn the presentation back over to George.