Premium Brands Holdings Corporation

Good morning, ladies and gentlemen, and welcome to the Premium Brands Holdings Corporation First Quarter 2023 Earnings Conference Call. Joining us on today's call, we have from Premium Brands, George Palaiologos, CEO and President, and Will Kalutich, CFO. At this time, all lines are in a lesson only mode. Following the presentation, we'll 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 on Monday, May 15th, 2023. I would now like to turn the call over to George Palaiologos, CEO and President of Premium Brands. Please go ahead.

George Palaiologos Thank you, Julie, and thank you for joining us today. With me here today is our CFO, Will Kaludich. Our presentation 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 quarter. Results for the quarter were unplanned as industry headwinds subsided. Our overall volume growth for the quarter was within our targeted range of 4% to 6%. However, the majority of the growth came from the food service channel, as out-of-home dining returned and food traffic in retail slowed down somewhat. Consumers have resumed their regular activities. They're spending more time at the office downtown. They're traveling more for business and pleasure, and they're consuming more food at QSR and white tablecloth dining establishments. This, of course, means that they're eating and entertaining a little less at home. Return to normality for us means that once again, we're able to present our products and process innovations to new and existing customers, and we're pleased to report that responses have been excellent. Innovation is back in vogue, and the premium brands ecosystem remains prolific in this area. Both our reporting platforms performed well during the quarter and are very well positioned to gain traction going forward. Demand for a cooked protein artisan sandwich and specialty bakery products was very strong, while our center of the plate best-in-class protein offerings continue to drive the growth of our food service business. We're pleased to report that our new sandwich facility in Edmonton, Alberta is now ramping up and will be fully operational by the end of this month. The facility features automated state-of-the-art sandwich assembly lines as well as industry-leading charcuterie tray assembly capabilities. We continue to gain momentum in growing in our U.S. businesses, and we expect this trend to accelerate in the months and years ahead. During the fiscal first quarter, 57% of our specialty food platforms sales were generated by our U.S.-based businesses. Considering the many new listings we have secured recently and the current pipeline of opportunities, we have visibility to this number growing substantially in the future. We're now on slide five. You can see that our acquisition pipeline remains very full. 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 various businesses while improving efficiencies and enhancing productivity. Hopefully, you had a chance to watch the three videos we showed at our AGM on Friday. All three videos demonstrate the degree of automation and robotics we have been investing in over the past three years. Before I pass it to Will, I would like to reiterate that, as promised, we're emerging from the past three chaotic years bigger, stronger, and even more diversified. Our decentralized, entrepreneurial-focused business model, combined with our great people and culture, continues to differentiate us and we look forward to translating these competitive advantages into sustainable top and bottom line growth, and above average long-term returns for our shareholders. As you can see on slides 6 to 12, our prolific product innovation continues to disrupt and reinvent the various categories we compete in. Look for some of these products at a store near you. We're especially pleased to be bringing premium, center cut, super lean, best-in-class bacon to Central and Eastern Canada under the Leadbetters brand. It won't be the cheapest bacon you ever bought, but it'll be the best you've ever had. 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 discuss. Please refer to our MP&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're now on slide 14. Our sales for the quarter were $1.43 billion. This was an increase from 2022 of $179.3 million, or roughly 14.3%. There were four major drivers of our growth. First and the largest was our organic volume growth, which was up $66.8 million. This was driven by the recovery in our food service and to a lesser cruise line bid sales to those channels, as George mentioned earlier. Our artisan frozen sandwich programs, our cooked protein initiatives, which mainly are in the U.S., and our artisan baked goods initiatives, which are both in Canada and the U.S., Our organic growth rate for the quarter was 11.7%, which is well above our long-term target of 6% to 8%. Turning to slide 15, you can see on this slide from the chart, which shows our organic volume growth rate by quarter, the steady progress we've made over the last four quarters. from a trough of 1.3% in the second quarter of last year, which was greatly impacted by the pandemic and inflation-related factors, and steady improvement over the four quarters, reaching 5.3% for this quarter, which is in fact the highest first quarter growth rate in our five-year history, other than the first quarter of 2020, which was heavily impacted by a pandemic-related demand surge. Compared to our expectations for the year, the first quarter's growth rate of 5.3% is low, primarily due to Q1 being a seasonally slow quarter, as well as ongoing supply challenges with our turkey, which good news there that we have seen some openings and some normalization in the commodities market, which is allowing us to reenter that category this year. So we're excited about that. Turning to slide 16, We reaffirmed our sales guidance for 2023 of $6.4 billion to $6.6 billion. Using the midpoint of this guidance of $6.5 billion, that would represent growth from 2022 of roughly $470 million or 8%. Turning to slide 17, this slide shows our weekly sales. And the black line is for 2023 relative to the gold line, which is 2022. You can see we continue to generate solid momentum. The good news is FX translation and selling price increase impacts are lesser of a fact. And as we go forward, organic volume growth will be more of a factor. Turning to slide 18. Our EBITDA for the quarter was $110.7 million. This is an increase of $14.9 million or 15.6% from 2022. There were three positive drivers and four major negative drivers of our results for the quarter. On the positive side, We continue to make great progress in recovery in margin recovery with our selling price increases outstripping our raw material freight and wage cost inflation by about $18 million in the quarter. We'll talk a bit more about that on the next slide. And then organic volume growth was the next biggest driver. And finally plant efficiencies driven by recent investments we've made in automation and new technology. On the negative side, our plant overheads were much higher year over year. This was driven primarily by the ramp up in capacity that we've been investing in, which will drive our growth in the second and third quarters of this year. Incentive based compensation was also up due in part to our higher expected earnings for the year and free cash flow. Discretionary promotion was up mainly due to the normalization of this expense post pandemic. And finally, outside storage costs continue to increase year over year due to our inventory levels, which I will be talking to in a later slide. Turning to slide 19, just gives you some progress we've made over the last five quarters on recovering our margins from the impacts of cost inflation. You can see that the first row shows our selling price inflation by quarter. And the third row, the net margin impact of our selling price increases after wage for raw materials and freight inflation. You can see from Q1 last year of a negative impact of $1.9 million, we've made steady progress to roughly an $18 million positive impact in the first quarter. Turning to slide 20. Our EB down margin for the quarter was 7.7%, which was flat year over year. Q1 is generally a lower margin quarter due to the seasonality of our business. And then other factors impacting our margin for the quarter was the significant unutilized capacity we built up to support our growth in the second and third quarters. As I mentioned, that relates directly to the increase in the plant overheads. And then also our bolt-on acquisitions that we completed in 2022, which are making great progress, but still have much lower margins than their projected margins. That resulted in about a 30 basis point dilutive effect on our EBITDA margin. And finally, the notice of period associated with price increases we're putting through. You've noticed on the previous slide it was about $1.7 million in the quarter. much less significant from prior quarters as our pricing is catching up, but that was about 10 basis points of dilution, our EBITDA margin. So on a normalized basis, our EBITDA for the margin for the quarter was about 8.1%. Turning to slide 21, we also reaffirmed our guidance for adjusted EBITDA for the year of $590 million to $610 million, using the midpoint of that guidance of $600 million That would be an increase of roughly $96 million or 19% for 2022. We also are projecting a nice increase in our EBITDA margin for the year. Again, using the midpoint, that would be about 80 basis points over 2020-2022. Slide 22. Our earnings for the quarter were down $10.8 million to $28.6 million. and our adjusted EPS was down 24 cents to 64 cents per share. There are four main drivers of the impact on our earnings. On the positive side was the growth in our EBITDA, which was about $14.9 million, and lower income taxes, which is about $6.3 million. The major negative impact on our earnings and earnings per share came from the investments we've been making in growth. We estimate that impact from investing in capacity, which will set us up again for growth in the second and third quarter, was about $19.6 million before tax or roughly $14.5 million after tax. And that consisted of interest on the capital we've invested and then additional lease and depreciation costs associated with those investments. Then the fourth factor impacting our earnings and earnings per share for the quarter was higher interest rates, which was at impact of about $12.3 million before tax or about $9.1 million after tax. Normalizing for the growth investments, you can see our earnings and adjusted earnings per share would both have been at record levels for the quarter. Slide 23. We finished this quarter with strong liquidity with $475 million of unused credit capacity. Our debt ratios did, however, remain relatively flat from Q4 at 4.3 to 1 for our total debt EBITDA ratio and 3.2 to 1 for our senior debt EBITDA ratio. Both these ratios are high due to our high inventory levels, which I will be talking to on a later slide. as well as our strong capital plan for 2023. We do expect solid improvement in these covenants in the back half of the year as we grow our EBITDA and our inventory levels normalize. Turning to slide 24. Our days cost of sales and inventory at the end of the quarter were 65 days, which was a slight improvement for the first quarter of last year, which was 65.8 days. However, we still have lots of work to be done as we're still about eight to nine days over our historic levels. Our higher inventory levels for the first quarter were driven by three key factors. One was, and you can see it from the chart below, Q1 is just a normally strong inventory bill period. You can see each of the last five years, Q1 has been sort of the peak point in our inventory cycle on a day's cost of sales basis. And with all of the sales initiatives we're preparing for in Q2 and Q3, that was elevated in Q1 this year. Then we also had new sales initiative builds. We've got some very exciting sales initiatives launching in the second quarter. which we had built about $35 million of inventory for, which was unusually high level. And then we had an unusual level, high level of what we call opportunistic purchases, where we were able to go into the market and buy raw materials at favorable prices. And that was about $27 million of additional inventory, which should contribute to better margins in the second quarter. Turning to slide 25. For the quarter, we spent $62.1 million on project capital expenditures. These are expenditures that are expected to return or generate an internal rate of return of 15% or greater. $43.3 million of those expenditures were on 11 major projects. Seven of those are either complete or nearing completion, with two more scheduled for early next year and two into 2025. Overall, the total expected investment for our projects underway is about 642 million, of which we spent about 180 million, leaving 463 million spent over the next couple of years. That concludes the financial presentation. With that, I'll hand it back to the moderator.

Thank you. Ladies and gentlemen, should you have a question, please press the star followed by the one on your touch-tone phone. If you'd like to retry a question, please press the star followed by the two. If you're using a speakerphone, please lift your handset before pressing any keys. One moment, please. Your first question comes from Martin Landry from Stifel GMP. Please go ahead.

Hi. Good morning, George and Will. Hey, Martin. My first question, in your opening remarks, you're talking about unused capacity utilization as having a bit of an impact on your EBITDA margins. I was wondering if you can put a number to that. What was your capacity utilization during the quarter? And then you're talking about expecting it to improve in Q2 and Q3. So I was wondering, what was your utilization this quarter, and where do you see it going in Q2 and Q3?

Yeah, we don't have a utilization number, Martin, just because we're a portfolio of businesses and they're all at different levels. So it's really hard to come up with one percentage that summarizes everything. But, you know, they range from some of our sandwich facilities are, you know, sort of the 70%. 70% to 75% range, some of our meat snack facilities, 60%. We've got lots of capacity, particularly with what's coming on stream now and in – sorry, that came on stream at the end of the first quarter and is coming on stream in the second quarter to certainly exceed our sales expectations for this year.

Yeah, so, Martin, we have 115 facilities – across the network, and so there's quite a range of capacity utilization. As Will said, in general terms, the second and the third quarter are by far the busiest for many reasons having to do with the weather, in particular people eating outdoors, barbecuing, all of those things. And, you know, when you run a plant at 60 percent capacity, you're still running it with the same type of overhead, right? So as you ramp up to 100%, that improves your efficiencies and your productivity immensely, right? So generally, the first quarter is impacted, and margins are impacted because of the low utilization of the facilities.

And just to give you a sense of the impact on the quarter margins, our EBITDA, the impact on the EBITDA plant overhead increase was close to $6 million. There's a little bit of cost inflation of that, but a lot of that is just building that infrastructure now to support our sales for the balance of the year.

Okay. That's helpful, and it's a good segue into my next question. Again, in your opening remarks, you've talked about an inventory built up. I think you mentioned $35 million that was related to new sales initiatives. So, you know, could you share some of those new sales initiatives that you have lined up that are going to unveil in the next quarter?

Yeah, so just to correct the comment, Martin, Will was referring to one specific sales initiative, you know, with the expected sales being in that range. There's, of course, many sales initiatives in the pipeline of premium brands going to the second quarter. As we've talked before, and as you know, we don't talk specifically about customers, but with increased capacities in the areas of sandwiches in particular, meat snacks, There's a lot going on with regards to opening new channels and finding new markets for products.

To George's point, Martin, it is primarily driven by a number of sandwich initiatives that are new. We don't include in that factor the normal sort of seasonal buildup for ongoing sales initiatives. Okay, I see.

And then last question for me. With regards to the overall environment and the customer confidence being a bit shaky right now, are you seeing your private label products or your growth in private label sales being faster than your growth in branded products and could that have a bit of an impact on your margins or not at all?

I wouldn't say that's an issue for us, Martin. As we've mentioned in the prepared comments, what's happening right now is that we're basically back to normal and, you know, I think consumers, as you know, are arguing about and traveling and getting on airplanes and I think you're seeing that in all the data that's coming out. So there is less entertaining and eating at home. Obviously that translates into reduced traffic through certain channels. We've always emphasized the importance of selling through diversified channels as a business overall. And we're really happy with our diversification. And again, You know, as you've seen during the quarter, we've picked up sales in the food service channel and maybe lost a little bit of traction in the retail channel as consumers are eating out more frequently.

Okay. That's helpful. Thank you.

Thank you, Martin. Thanks, Martin.

Your next question comes from Stephen McLeod from BMO Capital Markets. Please go ahead.

Thank you. Good morning, guys. Good afternoon for us. Good morning for you. Hi, Steve.

Hi.

I just wanted to circle around on the margin. You gave some good examples or some of the reasons why margins came in a little bit below expectations in Q1. Some of the headwinds that you're seeing. You know, as you work towards that full year margin in the 9% plus range, do you expect to get most of those gains kind of in Q2, Q3 as you realize the benefits of these new sales initiatives?

Yeah. So, you know, going forward, the two big drivers of our margins will be growth in our specialty food segment, which will be leveraging most of the capacity we've invested in over the last year is in our specialty food segment. And it's a much higher margin business, much higher contribution margin. So that certainly is the biggest driver. And then the investments we've made in plant efficiencies. In the quarter, our plant efficiencies number was up about $5 million through primarily automation and other kind of investments in new technology. So those are going to be the two big drivers. And so as you fold that out over the quarter, the automation is something that's going to be sort of equal in Q2 to Q3. But in terms of the sales, the ramp-up is certainly we're going to see some benefits in Q2, but Q3 will be the full quarter of those benefits. So we're expecting that certainly to be our highest margin quarter of the year.

Okay, that's helpful. And then just along those lines, I mean, you talked about capacity challenges. Is that all sort of wrapped in together with what you expect to see in Q2 and Q3 as some of these investments come on or you reap the benefits from these investments? And is that where you expect to see the capacity solutions kicking in?

Yeah, absolutely. Absolutely. Those are, you know, we've talked in the past about particularly around sandwiches and some of our protein categories, cooked protein in particular, and even artisan bakery goods being real bottlenecks, and those are the bottlenecks we're addressing.

Yeah.

Great. Okay.

Thanks, guys. Appreciate it. Thanks, Steve. Thank you, Steve.

Your next question comes from John Zantaro from CIBC. Please go ahead.

Thanks. Good morning, George and Will. Hey, John. Hey, John. I want to get back to capacity and particularly within the Sandwich platform. And we spoke last quarter about how you weren't able to service all the Sandwich customers you wanted to because of the combination of lack of capacity and just how fast your largest customer was growing. So I think you'd said in the previous question, or one of the previous questions, you're now at 70% to 75% capacity in Sandwich. So I wonder how quickly can you fill this capacity? Is there kind of a waiting list of customers that you could quickly onboard? And I think the next expansion within Sandwich is Columbus early 24. So can you just confirm that for me, please?

Yeah, so starting with your last part of your question, you're absolutely right. That's when Columbus is scheduled to come on, Q1 2024. Again, you'll see we're sort of pushing up against the capacity of our sandwich group throughout the next two years, you know, and that's why we've already started on the Tennessee plant, which is scheduled to come online Q1 2025. You know, we'll be, you know, Based on the outlooks and the discussions we've had with the customers and potential customers, we're going to be pushing that capacity pretty quickly and scrambling right through until 2025.

But that's a good problem to have, John. And again, just to answer your earlier question, you know, we're not just onboarding one or two customers. We're onboarding a lot of customers. what we have, what we offer to the industry is in very high demand. We're really happy to be commissioning the Edmonton facility. We've had lots of innovation sessions and lots of visitors with regards to customers wanting that capacity as we speak. So there's a lot going on in that platform. In addition to that, because we have such a lead in that area, we seem to be taking market share as well. This is something that we've never done because this has really been white space for us, but we're even seeing opportunities to take market share as well. So there's lots going on in that pipeline, a lot of exciting growth initiatives in that platform.

Okay, understood. And sticking with some of your different projects, You have multiple large ones underway, and I wonder if we're trying to figure out what's going to have the greatest impact on EBITDA. Is it as simple as looking at what you're spending on these, or are there one or two projects that are going to over-contribute when it comes to EBITDA improvements among your project ethics?

There's one outlier, our San Leandro Bakery Initiative. John, these products are absolutely amazing. They are, to George's point, white space products that are just, we can't keep up with the demand of our customers that are wanting us to take them into new markets. And they're good, solid contribution margin products. So that's certainly, and you can see from the capex span, it's a pretty material project. So, you know, that's probably the outlier. After that, the size of the project's a good indication of the impact on our margin.

And, you know, the biggest impact, again, John, overall on our margins is going to be getting back to normal, right? You have to understand that in the last three years, we had amazing challenges accessing labor, we had supply chain issues, and, of course, inflation. So, You know, you have to look at our margins today in that context. If you assume normalization, which we're seeing, that will have a big impact in terms of our margins.

Understood. Okay. A question on clear water. And the loss this quarter was larger than what we typically see. And you listed some of the reasons in the press release, and I know Q1 seasonally, but the softest quarter in that business. But can you elaborate on how Clearwater is performing and can you give any color on their access to liquidity to pay your expected interest and fees?

Yeah, so, yeah, there's no doubt, you know, there was sort of a variety of challenges in the quarter for Clearwater. Most of them just that, just sort of temporary challenges, you know, some weather-related issues, just the timing of some inventory sales. You know, some of that, they are a good portion of that Clearwater is expecting to make up in the back half of the year. So we are expecting them to be on, you know, plan for the year. You know, the reality is, John, and it's one of the reasons we structured the transaction as we did is, you know, there's expected to be volatility in their business because of things like catch rates and weather. And, you know, Q1 is exactly that. But, you know, for the year, no, we're still very positive on the year for the business and, you know, expect, you know, a decent cash flow coming in to pay the – what essentially is the stripping, the free cash flow of the business, but our interest payment.

And I would just add that we've worked with POR's management team for the last couple of years to – reconfigure the business plan, the overall long-term business plan towards more value-added and branded products. And we're making very good progress in regards to that. There's a few possible downstream type of acquisitions in the pipeline. So, again, the plan is on track and on plan.

Okay, that's helpful. And then just one more on margins, and then I'll pass it on. The elevated inventory levels that you've held so far and understood why you make them, there's opportunistic raw materials prices you're getting, but can you say to what extent, if any, this has benefited margins to this point, or is that a future margin benefit?

It's largely a futures margin. To the extent, you know, we made some opportunistic buys in the last quarter or Q4 that we did carry into Q1 and used in Q1. But the reality is that was part of that margin normalization. It's captured in that $18 million margin normalization. So there is a little bit of that. But in terms of the $27 million of unusual buys, You know, that is all for Q2, Q3 this year.

Got it. Okay. I'll pass it on. Thank you very much. Thanks, John.

Your next question comes from Derek Lessard from CD Cohen. Please go ahead.

Yeah, good afternoon, gentlemen. Appreciate the update. Hey, Derek. I just wanted to maybe – I had one just maybe give us an update on sort of your seafood initiatives in the broader sense and when you expect to really start seeing the benefits of those investments.

Well, there's a lot going on in seafood, Derek, and I did speak to it a little bit at the – at our AGM on Friday, we are quite advanced in announcing a clear water west type of transaction involving certain indigenous First Nations, coastal First Nations in BC. We've made a number of investments in value added, both in our soup business. We've launched a number of chowder type of soups in Canada and the U.S., and we're launching more. We're also launching them with customers in Asia as well. And then with one of our companies here, we've launched a number of value-added seafood and branded initiatives into As I mentioned earlier, with Clearwater, we're working on a number of acquisitions that will move them into the value-added space. So there's a lot going on. There's some pictures in the deck that show you some of the seafood products we're launching or we've launched, including a wonderful lots of macaroni and cheese product. And anyway, there's a lot going on in the pipeline with regards to value-added seafood initiatives.

And your next question. Your next question comes from Chris Lee from Desjardins. Please go ahead.

Oh, hi, George and Will. Nice to talk to you.

Hi, Chris. Hi, Chris.

Maybe I'll start with a specific question just on the specialty foods organic volume growth in the quarter. Was the year-ago comparison particularly a bit more challenging because there were five or six weeks of Omicron shutdown where everyone was eating at home, and therefore we benefited from the excess demand in the retail channel from a year ago?

Yeah, a little bit, although, you know, that was more of an issue in 2020, Chris. You know, by 2021, 2022, it sort of had steadied. And, you know, again, this year, it was a bit of a headwind, but, you know, there were different headwinds Q2 last year. So, you know, I think overall, the 5.3% shows a good sort of real trend happening in the group.

Okay. And Can you maybe talk about specifically the specialty food segment, the organic volume growth? How is that trending so far, Q2, Q8?

Yeah, well, it's early, Chris, and things are just ramping up now. The May long weekend is kind of the big starting point for specialty foods with the turn in the weather. So, but, you know, so far it's on plan. It's looking good. And, you know, as we showed in that weekly sales chart, we continue to generate good year-over-year weekly sales growth. And I should comment, too, that Q1 is likely the last quarter that you see that big growth coming from food service, whereas by Q2 last year, you're already seeing that normalization. So the growth being driven now is in the specialty food segment.

Yeah, and I'd like to add to that, Chris, that Some of the products that we're featuring in the deck, they've been recently launched into the national channels in the US and in Canada as well, right? So there's a lot of positives. Again, we've got national listings and these are multi-million dollar opportunities.

Okay, great. And I guess my last question, Dan, To the extent that you are increasing the featuring rebates for your retail customers, are you seeing a corresponding pickup in volume, or is there a bit of a lag? And maybe secondly, how important is more volume for more featuring a key part of your capacity utilization in the back half of the year? Thank you.

is absolutely. As you know, some input costs were very high in the last year or so. And to the extent that the underlying commodities come off, we passed on some of the savings to customers through different programs. And to the extent that they pass that on to the consumers, the volume generally picks up. And again, this is a big part of while we're feeling pretty good about the next couple of quarters. There's a lot going on. The prices seem to be deflationary in certain areas, and we expect that to be passed on to the consumer and for volume to pick up because of that.

Okay, great. Thanks, and all the best. Thank you, Chris. Thanks, Chris.

Your next question comes from Vishal Sridhar from National Bank. Please go ahead.

Hi, thanks for taking my question. Just wondering how we should think about balance sheet improvement. Wondering if we should see that manifest in a bigger way in Q2. You know, the offsets, you had a decent EBITDA growth, but the offsets related to CapEx and inventory and interest seem to be, you know, kind of constraining some of that improvement that would have been otherwise expected.

Yeah, Chris, or sorry, Michelle, we might see a little improvement in Q2, but I think it's more a back half of the year story. You know, the two major drivers are going to be – of improvement are going to be the growth in our EBDOT. So, you know, that will accelerate from Q2 through Q3. So, you know, that's going to be a big factor. And then the normalization of our inventories, which we expect some progress in Q2, but that will be sort of carried over into Q3. So those are the two big positive factors. And then the negative factor is going to be our CapEx program. Obviously, it's fairly substantive this year, so that's a bit of a headwind. But as I mentioned in the prepared comments, we do expect to see a good, solid improvement in the back half of the year.

Okay. And related to the inventory, how much, looking kind of from two years ago, it's on a year-over-year basis, it's not quite double, but it's getting there. So, look, how much cash can we unlock from normalizing inventory? Just, you know, to broaden that, I know it varies by quarter.

You know, a conservative estimate, you know, as we talked in previous courses, you know, just that, the two factors that we pointed out, the opportunistic buys and the inventory builds, you know, that was roughly, I think, $62, $65 million. You know, a number we're targeting internally is $100 million a shell.

Okay. And in terms of the CapEx, is that kind of number that you had in Q1 a good run rate? And should I think of that kind of number for the next several years, given all the opportunities that you see?

Yeah, it's probably not a bad run rate for 2022, or sorry, 2023. But, you know, we do expect it to drop off a bit in 2024. But, you know, it can be quite a choppy number just on the timing of things, right?

Okay. And with respect to the optimism that you have for Q2 in particular, and I guess this question was alluded at by another, but the drivers that you see currently in place, you're seeing your initiatives pan out as anticipated quarter to date. I know it's early, but what gives you confidence that the organic growth will pick up as you anticipate through the quarter?

Well, a lot of these initiatives, particularly the ones where we've been building inventory, they're done. They're baked in. They're good to go. And, you know, just again, you know, going back to I think it was Chris's comment, you know, a lot of the retail featuring and those sort of programs, those have all been set now. So, you know, there's good visibility on what the drivers are going to be now. There's ultimately always the risk of what the consumer reaction is going to be. But at this point, we feel very bullish on that. And sorry, George, just before. And just to be clear, so in terms of how we see these ramping up, Q2 is a transition quarter, right, Vishal? Q3 is when everything's running at full speed. So that's where most of our optimism is, where we're still a little conservative on Q2.

So, Vishal, if you assume normality, we have excellent visibility here. for the rest of the year. So that's really the assumption, right? If we make the assumption that there's no normality and we cannot access labor and supply chains slow down, et cetera, it's a different issue, right? But if you assume normality, we have excellent visibility going forward because we're very close to our customers. We understand the demand patterns for our products.

Okay. Thank you for your comments.

Thank you, Vishal.

Ladies and gentlemen, as a reminder, should you have a question, please press the star followed by the moon. Your next question comes from Sabahat Khan from RBC Capital Markets. Please go ahead.

Great. Thanks very much. Just I guess on the lobster business, there's some headlines in the papers late last week about potential for some of this Canada-China disputes to kind of spill over into the lobster space. So I want to get an idea of what your outlook for the business is for the back half of the year, both kind of, you know, yours and Clearwater. And, you know, what could be the range of outcomes given that ongoing issue if pricing really does take a hit?

Yeah, so Sabra has, you know, Canada ships a lot of live lobster to China and other markets around the world. the global highly sought after commodity as you know. China is a big market for live lobster. Our strategy overall as a business is always to move the commodity to value added. We've built a lot of capacity to produce and sell lobster meat. It constitutes the majority of our initiatives. We're trying to democratize lobster We've created new customers in cruise lines and food service and restaurants, et cetera. And that's our major, major focus, right? Now, you know, with regards to trade disputes, we can impact those. But, again, our focus is really to continue to move the business towards more value-added and more branded. And we've had a lot of success doing that.

Chris, I'd just add that typical to premium rents in our diversification, the reality is premium rent is proper. The big driver of our lobster business is Ready Seafood, which is actually a U.S. company. So to the extent there is a dispute in Canada and it impacts clear water, we'll probably benefit from that in Ready in our U.S. business.

Okay, great. And then I guess you talked a little bit about your kind of clear water investment earlier. And I remember when the acquisition was undertaken, there was a bit of a pause in the actual kind of cash flow payments on this kind of 15 million a quarter that you recognize. I guess if they do run into a bit of a tougher time, can they pause on those cash payments again? Or are they obliged to kind of pay those every quarter, regardless of what's happening sort of in their base business?

Yeah, no, no, it's definitely the latter, Saba. You know, we structured it such that, you know, that debt structure is their cushion to when their business, you know, has downturns, which, you know, again, that industry, they're going to happen. They have that ability to weather and then when they have the upturns and they generate excess cash flows, they'll pay a higher amount. But yeah, it definitely will fluctuate with the performance of their business.

Okay, great. And then this last one, I guess, on the on kind of the margin side here, I talked about being a bit more of a ramp in h2. Is that more practical earlier, but is that a bit more of a specialty foods ramp with some of these initiatives ramping up? Are you expecting a significant improvement across both businesses, I guess, given, you know, q1, it's gonna, I guess, can be a bit more of a meaningful ramp. But is there a way toward one segment more than the other based on your current outlook?

Yeah, absolutely. It's heavily weighted to specialty foods. You know, again, the big driver of our margin growth overall for premium brands over the next couple of years will be our specialty food segment. You know, there's still some room for opportunity or there's still some opportunity for improvement in the premium food distribution group, but it is much smaller than specialty foods.

And again, it's not that big of a reach if you look at the challenges we've faced in the last two to three years. We faced a lot of challenges, again, with regard to labor and supply chain and inflation, et cetera. If you assume normality, it's not that much of a reach. Again, we've invested a lot of capital in automation and robotics. We've shown some videos that demonstrate the extent to which we've automated a lot of our businesses. And again, if we assume normality, we will expand margins for sure.

Great. Thanks very much. Thanks, Sabah.

Your next question comes from Chris Lee from Desjardins. Please go ahead.

Oh, thank you. Just maybe a few quick ones from me. In the specialty for business, I noticed you didn't call out specifically price inflation as having an impact on certain product categories as you did in previous quarters. So I'm just wondering, was that an issue during the quarter or is that largely behind you now?

Yeah, Chris, it's largely behind us now. You know, the big factors or the big categories that were impacted were some of our cooked protein products in the chicken category, which if you look at any chart of chicken breast prices in 2022, they're just absolutely off the roof. They have come down significantly now, and pricing's where it needs to be, and we're seeing really good volume pickup. As George mentioned, when the customer passes that on, we see almost an instant response in the volumes. The other category was jerky, which isn't a big category for us, but beef prices on the specific cuts used for that product have come off, so we are seeing at least a stabilization in volumes. The only area we're seeing a little bit of challenge right now is in our premium bacon products, and that's just because we use very high-end raw materials that come from Europe, and there's a bit of a disconnect between Europe and Europe. and North America right now that's causing us, you know, our products to sell at an incredible premium over the mainstream products. But even that, it was only a small amount, not even enough to sort of mention in terms of our MD&A.

The only thing I would add, Chris, is that in the case of Turkey, I mean, Turkey prices were very, very high. And we actually... walked away from some listings because of that. Thankfully, Turkey pricing has corrected, and now we're reentering categories and basically reclaiming our listings. And, you know, again, that's a positive going forward.

Great. My next question was on the Turkey side. I think you mentioned last quarter there was maybe a drag around 60 basis point in Q4. I was wondering, like, what was the drag in Q1?

Yeah, it's an interesting question, Chris. In terms of just year over year, there was about a 30 basis point impact in terms of lost sales because of, like George says, listings we walked away from that we didn't have this quarter. But the reality is that a big part of our turkey business that we walked away from, we're already laughing. So, you know, there's categories that we're not in that we weren't in in the first quarter of last year. So those now are coming back as well. So, you know, the impact, you know, if you normalize for the lost growth opportunities, much greater than the 30 basis points. But that is what it was sort of just a year-over-year impact on sales.

Okay, that's helpful. And then maybe another one, just I wanted to ask if, you know, if you take a step back and, you know, where you're sitting today, can you give us a sense of what you're seeing in some of the key commodities, the outlook for the rest of the year in beef, in, you know, chicken, pork, et cetera? Do you foresee any sort of major headwinds or is it like what George alluded to, you know, a sense of normality that should come back? for the rest of the year. Just any comments on what you've seen on the commodity side would be helpful.

You know, again, Chris, we follow commodities. The commodities that you've mentioned are global commodities, as you know. We follow them very, very closely. And, you know, again, I go back to my comment around normality. And in the last three years, we did not have any semblance of normality whatsoever with regards to any of our inputs, right? So, basically, if we assume normality, then, you know, in general terms, as Will mentioned earlier, you know, poultry, turkey is coming down to normal from extraordinarily high levels. Pork probably flat to down in general for the remainder of the year. There seems to be plenty of pork around. China produces a lot of pork now. They've basically repopulated their industry and invested in massive hog production. They're not as significant an importer as they used to be from the global market. And then beef, in general terms, probably flat to up. mainly because the herd has contracted a little bit, particularly in the U.S., although Australia and New Zealand have rebuilt their herds and they're kind of on the up cycle. So those would be our general observations with regards to each one of the commodities. But the key here is really to assume normal supply chains, normal demand, you know, through the different channels, et cetera.

Yeah, and Chris, the good news in terms, you know, as George says, probably the most in terms of the specialty food segment and the premium food, you know, beef being the most sort of inflationary commodity we're looking at. You know, the good news is that's primarily in our premium food distribution group, and it's primarily priced on a very dynamic basis. So it's probably our least exposure in terms of the impact on our profitability.

And to add to the comment, Chris, again, in general, is that, again, in the last three years, we've had circumstances where we didn't even know whether we could access the protein, right? Those are circumstances that we had to deal with. We were willing to buy it. We had business for it. for it, but we weren't able to access it, right? That just gives you an impression of, you know, what we've managed through in the last three years.

Very helpful. Maybe my last housekeeping question, maybe this one is for Will. I apologize if you mentioned this already, but there was a rise in corporate costs. Can you just talk about what drove it and is the Q1 a good run rate to model for the rest of the year? Thank you.

Yeah, the biggest factor in there, Chris, was incentive accruals. Again, we're very bullish on the year and appropriately we've been accruing to our incentive programs for that. And then lesser was just there is some additional wage inflation, a little bit of headcount increase. But it's probably not an unreasonable number as a run rate.

Thanks again.

Presenters, there are no further questions at this time. Please proceed with your closing remarks.

Yeah, I'd like to thank everybody for attending today.

Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for joining, and you may now disconnect your lines.