Premium Brands Holdings Corp

TSX:PBH

Earnings Call Transcript 2024-Q1

[George Paleologou, executive]

Welcome, everyone, to our 2024 First Quarter Conference Call. Thank you for joining us today. With me here today is our CFO, Will Kalutycz. Our presentation will follow the deck that was posted on our website this morning.

We're now on Slide 4, which outlines certain key highlights for the quarter. Results for the quarter were generally on plan with some demand headwinds in Canada offset by growth in the U.S. and to a lesser extent, in overseas markets. As the first quarter is for seasonal reasons our slowest, our main focus was on executing our various operational and go-to-market strategies, which bodes well for our growth prospects as we head into the busier quarters.

We made solid progress during the quarter in stabilizing our overall business in Canada, while we aggressively leveraged our new capacity and our new product innovation to accelerate our growth in the U.S. market. In general terms, some consumers in Canada and, to a lesser extent, in the U.S. are showing signs of economic fatigue, resulting in slowing demand in food service and some trading down in retail. Menu price inflation is a particular concern and is forcing consumers to change their eating habits, resulting in less food traffic at out-of-home dining establishments and reduced overall out-of-home eating occasions.

As a leading vertically integrated and highly efficient sandwich wrap and meal assembler with multiple scaled efficient and state-of-the-art plants in North America, we're able to offer labor and cost saving solutions to current and new customers seeking to counter menu price and cost-related inflation. In addition, our various ready-to-eat and ready-to-cook protein offerings reduce labor intensiveness at the store level and provide cost savings to customers without sacrificing quality or consumer experience. Over the past several years, we have invested heavily in developing food safe, efficient and highly automated food production facilities that can provide labor and cost-saving solutions to our retail and food service customers, and are now starting to see these investments generate returns.

Similarly, we have also made significant investments in ready-to-eat fully cooked protein production capacity that is now starting to benefit from the growth in demand in this exciting category. Overall, we're very well positioned to capitalize on these opportunities and we have never been busier in introducing our products and process innovations to new customers and channels. Our year-over-year sales growth in the U.S. of almost 10% for the quarter is indicative of the momentum we're seeing as we continue to invest and expand our manufacturing and commercial footprint in this important market.

We're pleased to report that several capital projects focused on supporting our U.S. growth including new plants and new capacity in key product categories are either fully operational or ramping up and will be fully operational in the coming months. Just last week, I visited our Reno Nevada facility, which now features fully automated state-of-the-art sandwich assembly lines as well as industry-leading charcuterie trade assembly capabilities. I have no doubt that this capacity will be filled in no time, leveraging both external and internal sales and distribution opportunities. Overall, we continue to gain momentum in growing our U.S. businesses and we expect this trend to accelerate in the months and years ahead. During the first fiscal quarter, 62.9% of our specialty food platform sales were generated by our U.S.-based businesses, up from 57% in last year's first quarter.

Given the size of the U.S. market and our recent capital investments in plants, and capacity to serve this market, we expect this number to grow substantially. We're now on Slide 5. Although we did not close any acquisitions during the quarter, we're pleased to report the acquisition pipeline is very robust and that we're working on a number of exciting opportunities at a time when valuation expectations are moderating with interest by food entrepreneurs to join our unique ecosystem the best it has ever been. We're now on Slide 6 to 10, where we have included some pictures of products sold in both the retail and food service channels, in North America by our Belmont Food Group.

Belmont joined the Premium Brands family in 2016, with 1 47,000 square foot facility located in Toronto, Canada and sales of about $115 million. The Belmont Food Group currently includes 9 facilities totaling 519,000 square feet of production space, including 3 facilities in the U.S. and 240 square feet of production space there. This group is a market leader in fresh and frozen premium burgers, fully cooked burgers and meatballs, dry cured pizza, and other protein toppings and organic fresh frozen and value-added chicken. Belmont's business has grown more than fivefold since joining the Premium Brands family at the end of 2016 and will continue to grow well into the future.

Before I pass it to our CFO, I would like to do a shout out to the amazing people of PB for their commitment, dedication and hard work. They are our most important competitive advantage and the main reason for our continued success I couldn't be more proud for their resilience, dedication and drive to succeed during these volatile times. I will now pass it on to Will.

[Will Kalutycz, executive]

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 MD&A for the 13 and 52 weeks ended December 30, 2023, as well as other information on our website for a broader description of the risk factors that could affect our performance.

Turning to Slide 12. Our sales for the quarter were a record $1.46 billion as compared to $1.43 billion in the first quarter of 2023. Our growth was driven entirely by our Specialty Foods group, which generated organic volume growth of $53 million. This represented a growth rate of 5.6% which was within our long-term targeted range of 4% to 6%, despite, as George mentioned earlier, the first quarter generally being our slowest due to seasonal factors. Specialty Foods growth was driven primarily by its U.S. market focused growth initiatives in protein, sandwiches, and artisan baked goods, which grew at an organic volume growth rate of 9.7%.

The group's Canadian business also contributed to its growth with organic volume growth of 1.1%, a substantial improvement from the 4.3% contraction we saw last quarter. This improvement was driven by variety of initiatives taken to address a weakening consumer environment, including additional promotional activity.

The growth in our Specialty Foods Group was partially offset by $25.5 million sales volume contraction in our premium foods distribution group, which was entirely due to lobster supply shortages resulting from Port Maine and Nova Scotia fisheries in the back half of 2023, that were caused by unusually poor weather that prevented vessels from harvesting.

We expect the situation to improve in the coming quarters and with the new fishing season. And to this end, the first 2024 Canadian fishery, which opened last month has started off well. The group sales of premium beef and seafood products continued to be impacted by a weak consumer environment in Canada. However, this challenge was mostly offset by several successful retail salmon features made possible by above normal harvest on the East Coast of Canada.

Looking forward, we expect this tailwind to become a bit of a headwind as the strong first quarter harvest will likely result in supply constraints in the future. Turning to Slide 13. You can see the organic volume growth and growth rates of our protein sandwich and artisan bakery initiatives in the U.S. Our protein businesses generated a rate of 9.9%, while our sandwich businesses generated 7.4%, and our artisan bakery business is 45.1%.

Furthermore, if you adjust for a temporarily lower growth rate in our sandwich businesses due to a major customer implementing a new product display strategy to reduce food waste, the fourth quarter adjusted organic volume growth rate for our U.S. market focused growth initiatives is 12.2%. Turning to Slide 14. We are maintaining our sales guidance range for 2024 of $6.65 billion to $6.85 billion. This slide shows the midpoint of this range or $6.75 billion, which would represent an organic volume growth rate of 7.3%.

This is well above our long-term annual targeted range of 4% to 6% despite the temporary headwinds associated with recent supply issues for lobster and a challenging consumer environment in Canada.

Turning to Slide 15. Our adjusted EBITDA for the quarter was $121 million, representing an increase of $10.3 million or 9.3% as compared to the first quarter of 2023. Our adjusted EBITDA margin, which is generally lower in the first quarter due to seasonally lower sales volumes, also showed improvement, increasing by 60 basis points to 8.3%. The increases in our adjusted EBITDA and EBITDA margin were driven mostly by our Specialty Food Group, whose margin rose to 9.5% as compared to 8.6% in the first quarter of 2023, driven by sales leveraging, stronger pricing and improved plant efficiencies.

Our premium food distribution group also showed some margin improvement, driven by stronger pricing primarily on lobster based products. This was, however, partially offset by lower sales volumes which resulted in the group generating only a $1.6 million increase in its adjusted EBITDA as compared to the first quarter of 2023.

Turning to Slide 16. We are maintaining our adjusted EBITDA guidance range for 2024 of $630 million to $650 million. The slide shows for 2024, the midpoint of this range or $640 million and a resulting adjusted EBITDA margin of 9.5% based on the midpoint of our sales guidance. The 9.5% margin, which is a 60 basis points improvement as compared to 2023 will be a historic high watermark for us.

Furthermore, we would only be 50 basis points away from achieving our midterm target of 10%. Turning to Slide 17. Our earnings for the quarter were $24 million, representing a $4.6 million decrease as compared to the first quarter of 2023, while our earnings per share was $0.54 down $0.10 from 2023. The main reason for these decreases was increased interest, depreciation and lease costs, associated with recent investments made to drive both the current as well as future quarter sales growth.

The year-over-year impact of this on our earnings is estimated to be $8.2 million or $0.18 per share. Increased interest rates and a higher effective income tax rate also impacted our earnings and earnings per share but to a much lesser extent. Turning to Slide 18. For the quarter, we spent $98 million on capital expenditures consisting of $70 million on major project CapEx, $14.7 million in smaller project CapEx, and $13.3 million on maintenance CapEx.

We define project CapEx as investments that are expected to generate an unlevered after-tax internal rate of return of 15% or greater. All other capital expenditures are classified as maintenance CapEx. Primarily all of our major CapEx expenditures in the quarter were on projects to increase the capacities and in many cases, operating efficiencies of our protein sandwich and artisan bakery businesses in order to support their U.S.-focused growth initiatives.

Looking forward, based on our approved major project CapEx pipeline, we expect to invest another $296 million over the next 6 quarters on these projects. We also expect to partially offset these expenditures with proceeds from the sale and leaseback of real estate associated with some of the projects. Slide 19 shows some of the key metrics we use to assess our financial position. Our debt leverage levels increased slightly as compared to the previous quarter, with our senior debt-to-EBITDA ratio at 3.3:1 and our total debt-to-EBITDA ratio, which includes our subordinate debentures at 4.3:1.

In terms of liquidity, we finished the quarter in a strong position with almost $600 million in unused credit capacity. The next and final slide shows a variety of our free cash flow and dividend metrics over the last 18-plus years. For 2024, we have increased our quarterly dividend rate by 10.4% to $0.85 per share per quarter.

Looking forward, we expect to significantly improve our free cash flow and free cash flow per share in 2024 driven by leveraging the significant capital investments we have made over the last 3 years and the stabilization of interest rates. This concludes our presentation. Please join us on our Q&A conference call later today at 10:30 a.m. Vancouver time, 1:30 p.m. Toronto time. Thank you.