Premium Brands Holdings Corp
TSX:PBH
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
76.06
96.82
|
| Price Target |
|
We'll email you a reminder when the closing price reaches CAD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Premium Brands Holdings Corp
You don't have any saved screeners yet
Good afternoon, ladies and gentlemen, and welcome to the Premium Brands Holdings Corporation Second Quarter 2022 Earnings Conference Call. [Operator Instructions] Our speakers today are George Paleologou, CEO and President of Premium Brands; and Will Kalutycz, CFO of Premium Brands.
I would now like to turn the conference over to Mr. Paleologou. Please go ahead, sir.
Thank you, Michelle. Welcome everyone to our 2022 second quarter conference call. With me today is our CFO, Will Kalutycz. Our presentation today will follow the deck that was posted on our website this morning. You can also access it by clicking on the link of our earnings press release issued this morning.
We're now on Slide 5, which outlines certain key highlights for the quarter, despite the various headwinds, we reported very good results for the quarter and year-to-date. Our CFO, Will Kalutycz will provide you with more color on our results later on in the presentation. Commodity cost inflation in a volatile and unpredictable environment continued to challenge our operations during the quarter. The silver lining is that for the first time in over 2 years, we're beginning to gradually see normality back into the market and in consumer and customer behaviors.
Our labor challenges are abating, supply chains are catching up and are becoming a little more reliable and inflation appears to be peaking. Consumers are now arguing about traveling, visiting friends, attending large gatherings and consuming food outside of their homes. Once again we're pivoting and adjusting to this new normal, which by the way is beginning to look very much like the old pre-pandemic normal. Our solid results for the quarter, despite the trend towards headwinds once again demonstrate the balance and resilience of our unique business model and its ability to continue to deliver above average and consistently growing returns to our shareholders.
Foodservice demand came back strongly during the quarter as customers added seating capacities, expanded menus and hours and hosted larger gatherings. Our protein platform faced the perfect storm during the quarter, including bad spring weather, reduced featuring, acute inflation, some price elasticity points and the reopening of foodservice which reduced the eating at home occasions. Despite these challenges to macro trends, we have been investing in over the past few years remain on track and our charcuterie protein and sandwich platforms continue to do well. Clearwater seafood had a record quarter and is performing ahead of plan and year-to-date.
Clearwater's results are benefiting from robust demand and strong pricing for most of its species. Despite weak margins in the snow crab business and substantially higher fuel costs, Clearwater species and sales channel diversification combined with proactive and disciplined cost management are helping to deliver excellent results. We're pleased to announce the closing of 2 more strategic transactions during the second quarter. King's Command is located in Ohio, U.S. and adds capacity and market reach to our cooked meats platform while the purchasing of the other 50% of Golden Valley that we did not previously own will enable us to more seamlessly expand our dry curing capacity in the future.
We're well positioned to continue to profitably grow our various platforms and we're pleased to see normality beginning to return in terms of consumer actions and buying behaviors. Our foodservice, airline and cruise line sales are nearing pre-pandemic levels, while our export business is gaining traction. Similarly, the explosion in consumer discretionary spending, which clogged up supply chains around the world is slowing down. This means more labor availability for the consumer staples and service industries. Overall, we're feeling very good about what lies ahead assuming a continued return to normality. We have come through some unusual volatile in unprecedented times and we have demonstrated our diversification, our resilience and our ability to pivot quickly. We're confident that our decentralized entrepreneurial business model combined with our great people and culture will continue to propel us to new opportunities and new growth.
We're now on Slide 5 to 11. I've included here some pictures of products manufactured and sold by our cooked protein businesses. Demand for cooked protein products continues to grow in both foodservice, club and retail, and the recent acquisitions of Beechgrove, Maid-Rite and King's Command provide us with more capacity and market reach in Canada and the US. Over the past 5 years, we have established ourselves as a leading provider of cooked protein solutions to customers in Canada and the US. Cooked protein offers retail and foodservice customer solutions to their labor shortage issues while providing consumers with convenient, excellent quality food experiences.
We're now on Slide 12. As you can see, our acquisition pipeline remains robust and we expect to complete many more transactions in the months and in years to come.
I will now pass the presentation to our CFO, Will Kalutycz, who will update you on our financial results for the quarter. Will?
Thanks, George. Before I begin, I'd 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 fiscal 2021 as well as other information on our website for a broader description of the risk factors that could affect our performance.
Now turning to Slide 14. Our sales for the quarter were $1.519 billion, an increase of $285 million or 23% from 2021. The key growth drivers of this increase were selling price inflation of $134.4 million. I should note that over the last 4 quarters, we have put through price increases totaling roughly $490 million. Acquisitions accounted for $114.1 million of our growth, a weaker Canadian dollar relative to the U.S. dollar, which resulted in the favorable translation of our U.S. operations contributed $20.1 million to our growth and organic volume growth contributed $16.6 million.
Turning to Slide 15. Our organic volume growth rate for the quarter was 1.3%. This is below our target and expectations for the quarter for 5 key reasons. Two of those, 2 key challenges in our specialty food groups included the sales challenges George mentioned earlier in our protein group namely poor weather across most of Canada, less featuring by our businesses, the shift in sales from the retail segment to the Foodservice segment and a small amount of demand destruction in certain limited categories.
Our specialty food sales were also impacted by issues in our sandwich group's Phoenix sandwich plant that resulted from the transitioning of their production lines from Gen 1 lines to their automated Gen 3 lines and corresponding with this transition resulted in some higher than normal customer order short shipments. Our Premium Food Distribution Group's organic volume growth rate was impacted also by 3 challenges. First was our lobster strategy as our key lobster businesses shifted -- built inventory over the quarter for future sales initiatives in their processed operations, which resulted in less trading of live lobsters in the quarter.
Also our Seafood Group experienced less featuring of their premium seafood products by both retailers and foodservices due to high -- record high price points. And finally our exports to China of live lobsters was down due to pandemic related issues within that country as well as a lack of air transportation. All 5 of these factors we see as temporary and we're already seeing solid improvement in the third quarter, particularly on the weather front.
Turning to Slide 16. This slide outlines the major growth initiatives across our 6 platforms, so you can see it's a very diverse range of initiatives. The ones highlighted in yellow contributed to our organic growth in the quarter. In our seafood and distribution, groups you can see a variety of initiatives were generating good momentum in the quarter. A lot of these driven by the recovery in the foodservice segment. Our Sandwich Group also generated good solid growth in the quarter driven by their frozen artisan sandwich initiatives, which continue to gain momentum, both in the QSR and retail channels. Our bakery group while being a smaller platform had tremendous success in the US with the launch of a variety of new artisan bread products. And finally our Culinary Group, the smallest of our platforms continue to see good progress in the retail channel with a number of new product solutions.
Turning to Slide 17. We increased our sales guidance for 2022 to $5.75 billion to $6 billion from a previous range of $5.6 billion to $5.85 billion, using the midpoint of our current guidance which is $5.875 billion. This would represent an increase of $943 million from 2021 or roughly 19.1%, which is in line with our 11 year sales CAGR of 22.4%.
Turning to Slide 18. This slide shows our sales on a weekly basis. The gold line represents 2022. You can see going into the third quarter, we continue to show solid momentum in our sales and as some of the headwinds that we experienced in the second quarter subside, we expect that trend to accelerate.
Turning to Slide 19. Our EBITDA for the quarter was $130.8 million, that's an increase of $18.6 million or 16.6% from 2021. The key drivers of it, were selling price inflation of $134.4 million, acquisitions, organic sales growth and reduced accruals of certain incentive-based compensation. These were offset by higher direct material, wages and freight costs. This totaled about $131 million. I should note the difference between our selling price inflation and our direct material wage and freight inflation was a positive $3.5 million, which shows a good trend relative to the first quarter when that same calculation was a negative $2 million, again showing the impact of the price increases we've been putting through. We did see also some increased plant head -- overhead as we invest infrastructure for future growth. Some increase outside storage costs relating to higher inventory levels, which we will discuss in a later slide. And finally, the continued investment in our SG&A infrastructure to support our growth.
Turning to Slide 20. Our EBITDA margin adjusted EBITDA margin for the quarter was 8.6%. This was 50 basis points off of our EBITDA margin for the second quarter of '21 or 140 basis points off of our long-term target of 10%. The key factors impacting our EBITDA margin in the quarter were in our Specialty Food Group, delays in retailer -- delays in our pricing increases resulting from retailer notice periods. If you normalize for selling price increases implemented over the course of the quarter that we're in reaction to commodity cost inflation in the first quarter assuming those had taken place at the beginning of the quarter, our EBITDA margin would have been 9.4%.
Other factors impacting our specialty foods margins included the sales challenges I mentioned earlier in our protein and sandwich groups as well as the increase in our outside storage costs. Our Premium Food Distribution Group's gross EBITDA margins were challenged by 2 structural issues, namely pricing to gross -- to recover gross profit dollar -- maintain gross profit dollars and not gross profit margins. This is being done to help customers deal with extreme cost inflation and then the number of cost plus contracts within that group. We also saw some lower margins in our lobster products as a result of extreme volatility in the pricing in that environment. And we'll talk a bit more about that on a later slide.
Turning to Slide 21. The next 5 slides outlines some of the key commodities used by our different businesses. The first slide is our pork index chart, which is -- highlight some of the key commodities purchased by our protein group. You'll note that the red line, which represents the index for 2022 was relatively stable in the quarter and sort of goes to the point of our margin challenge in the Protein Group in the quarter was largely as a result of the delay in the retail pricing and not a commodity challenge.
The next Slide 22 shows our beef index chart. This relates primarily to our distribution group. And again you can see that the commodity was relatively stable in the quarter.
Slide 23 is our chicken index chart. This was by far the most challenging commodity for our business, it's primarily relates to our protein group. You can see significant cost inflation has continued from the first quarter through most of the second quarter. The good news is we have seen a break in this commodity and that break seems to be continuing and could be positive upside in our outlook for 2022 if that trend continues.
Turning to Slide 24, lobsters index chart. You can see the extreme decline in pricing partway through the quarter. This was a result of a variety of demand factors including less retail featuring and menu featuring by restaurants as a result of record high prices, also the lower China -- exports to China resulting from the shutdown of parts of that economy. And then also on the supply side, we saw very strong lending. So all of that put together to result in the price decline you see in the chart. This pressured the margins within our lobster group as their procurement costs are delayed from when they actually make their sale of their processed products. The good news is this is stabilized, and so we do expect to see a stabilization in the back half of the year of our margins in this category.
Turning to Slide 25, last of the commodities. This is our salmon index chart relates all to our Seafood Group. Can you see a bit of a break there towards the end of the quarter, but continues at record high prices. Our pricing for these products tend to be very dynamic. So margins tend to be relatively stable on this product, regardless of where the pricing is at.
Turning to Slide 26. We are maintaining our EBITDA guidance for 2022 of $510 million to $530 million, using the midpoint of this guidance of $520 million, that would represent growth from 2021 of $89 million or roughly 20.7% which is in line with our 11-year EBITDA CAGR of 22%.
Turning to Slide 27. Our earnings for the quarter were $61.5 million. This represents an increase of $8 million or 15% from 2021. Our EPS for the quarter, adjusted EPS was $1.38 per share, representing an increase of $0.15 per share or 12.2% from 2021. The main drivers of our improved earnings performance was our EBITDA growth and then this is offset by a little bit of additional depreciation amortization mostly associated with acquisitions, some increased interest mostly associated with our higher senior debt levels and some increased income taxes associated with our increased profitability.
Turning to Slide 28, talking about our 5-year 2023 sales target. On this slide, what we've done, we've used the midpoint of our 2022 guidance of $5.875 billion. We've added some nominal growth for 2023 at a rate of 6%, which is far below what we've been running for the last couple of years and that gives us a pro forma number of $6.227 billion, which is well in excess of our $6 billion target. So we are very confident we will meet this target.
Turning to Slide 28. Looking at our 5-year 2023 EBITDA, adjusted EBITDA target similar to the previous slide, we use the midpoint of our 2022 guidance $520 million. We adjusted this for the retroactive impact of delayed pricing increases from the first and second quarters, which total about $28 million, giving us a normalized EBITDA of about $548 million adjusting for the organic growth at a conservative contribution margin of 20%. That gives us a pro forma EBITDA of $619 million. So, again, in excess of our $600 million target and close to our 10% EBITDA margin target. So again, we feel very confident about meeting this target.
Turning to Slide 30. Our inventory at the end of the second quarter was much higher than normally expected at $836 million. This was driven by 4 key factors. All we see as temporary, and a good portion of them reversing over the next 2 quarters. The first and most significant was inventory built in the first half of the year that will drive sales in the second half of the year. So in our Seafood Group, we're expecting about $30 million of inventory reversal primarily related to our lobster strategy and the buildup of inventory to support sales.
And then in our protein group, about a $29 million decrease partly due to a normal seasonal build up of inventory, but also due partly to the sales challenges from the second quarter. The second major factor resulting in the decrease in our inventory will be a reduction in our safety stocks. Over the last 2 years, we've built up significant safety stocks to help deal with supply chain disruption issues as well as commodity inflation. As these markets normalize, supply chains normalize and commodity markets normalize, we will be winding down those safety stocks and for the back half of the year, we're planning to wind down about $38 million.
The next factor is some very specific customer supply chain challenges that will normalize in the third quarter, that will contribute about $8 million of the decrease. And then the balance is just the normal seasonality of our business. So overall in the back half of the year, we expect to increase our inventory by at least $110 million, which will bring it down to about $726 million that will be roughly 55 days cost of sales in inventory, relative to our 3-year average of about 49 days that's still high as we are still carrying safety stocks. But as we see the continued normalization of supply chains and commodity markets, that could come down faster in 2022 or obviously it will come down in 2023.
Turning to Slide 31. We continue to make very strong liquidity with $490 million on our unused credit capacity. Our total debt to EBITDA ratio and our senior debt to EBITDA ratio did at the end of the quarter exceed our long-term targets. Our total debt to EBITDA ratio was 4.4:1 versus our long term targeted range of 3.5:1 to 4.0:1 and our senior debt-to-EBITDA ratio was 3.3:1 relative to our long-term targeted range of 2.5:1 to 3.0:1. Most of the higher ratios were driven almost entirely by our inventory positions and we do expect by year-end to be back within our targeted range in both these ratios.
Turning to Slide 32. And our free cash flow for the trailing 12 months at the end of the second quarter was $276.4 million. This represents an increase of $13.1 million or 5% from 2021. Our free cash flow per share on a trailing 12-month basis was $6.27 per share, an increase of $0.22 per share or 3.6% from 2021. Our payout ratio at the end of the trailing 12 months was 43% and at the end -- and we recently declared a third quarter dividend of $0.70 a share or on an annualized basis $2.80 per share.
Turning to Slide 33. During the first half of 2022, we spent $81.3 million on project capital expenditures, $60.3 million of these were on 14 major active projects, all of which are primarily growth related and span 5 of our 6 platforms. So lots going on across the different platforms, all oriented to future growth. And then we spent about $21 million in a variety of smaller project capital expenditure projects many of these associated with efficiency products, automation projects.
Turning to Slide 34. As George mentioned, we completed 2 acquisitions in the quarter, increasing our interest to 100% in Golden Valley Farms from 50% and acquired King's Command. Total invested in the quarter on these 2 transactions was $86.5 million. That -- I should note also because of the nature of these acquisitions, both of which were for capacity to support, as George mentioned earlier, our cooked protein and dry cured meats initiatives, neither of these are expected to contribute EBITDA in the second half of 2022. They're really longer term capacity solutions.
That concludes the financial presentation. So with that, I will now pass it back to Michelle for the Q&A segment of the call. Michelle?
[Operator Instructions] Your first question will come from Derek Lessard of TD Securities.
Congrats on navigating a tough market. It looks like one of the sites pointed to the sales trends are still doing -- are still pretty solid. Just wondering how quickly do you expect maybe the specialty foods organic volume growth to get back to your longer-term historical target?
Yes, let me start Derek by saying, I mean I think Will did a great job explaining kind of what's been going on. But again, you have to sort of look at the, what's top end from the point of view of the operational challenges that we were facing, which are well documented everywhere, right. So for example we shorted a lot of orders with regards to the Sandwich platform, because a lot of the issues. So, again, we're confident that the demand in many ways is there. We had there were some offsetting factors, of course, particularly with some of the weather issues, et cetera, which address themselves in July as the weather got better.
So it's not an issue of demand for us, it's just making sure that the stars align in some of these challenges. Again, that we've talked about go away and they have been going away and we're really happy about that. We're really pleased to see a return to normality, a lot of our plants that have been facing labor shortages or finding labor now and are getting populated again in terms of their shift, et cetera, et cetera. So lots of positive trends as we go towards normality. Right? So again no issue with regards to us feeling confident on the 4% to 6% organic growth.
So I'll pass it to Will if he's got anything to add.
Yes. To give you some specific numbers, Derek. We -- for the first half of the year, the organic volume growth rate in our Specialty Food segment was about 4%, little over 4%. We do expect to finish the year close to the top of that our targeted range that 5% to 6% range. So like George says, Q3 those issues did continue in, but, by the end of Q3, we saw some really good solid momentum and we're expecting that to continue through the -- sorry, by the end of July, we saw some good solid momentum and do expect that to continue through the year.
Okay. That's super helpful. And I guess maybe on the inflation side, it did look like it was starting to bite in some categories. I think you guys called out beef jerky. Just wondering if there is other categories out there that might be showing some signs of demand destruction. And if so, how do you view pricing going forward?
Actually, Derek, with the exception of some expensive imposed by items, particularly through sea store and that beef jerky for example, which will specifically address and mentioned. Overall volumes are holding with regards to other channels. And we've tested a lot of very high price points given the degree of the underlying inflation and volumes helped. You never know how volumes are going to do until the retail price goes to a certain level and we're very pleased with the way the volumes held overall as you've seen from our numbers. The good thing today is that is as Will mentioned, most of the underlying commodities that we're using have crested and they're going down. And again, so that will give us lots of ability to feature, promote, innovate et cetera, which is what we do very well. So again lots of positives with regards to the trends there.
Yes. And Derek. So just to make it really clear, if you take out the a little bit of demand destruction we saw jerky and you normalize for that, and the short order shipments in our Sandwich Group relating to the Phoenix facility. Our Specialty Foods group would have had 2% to 3% organic growth in volume terms. So like the categories are solid, there were just some specific issues there and then like George says the thing that's going to drive our growth is we get some good weather, we get the featuring going again, we should then see some solid organic volume coming back to the business.
And to add to that Derek in the sandwich group specifically given some of the challenges, particularly with labor across the system, we had lots of customers on our location for quite a while. Right? So again they want more. And we're going to get ourselves into a position to service them better and to take orders from them. So there is lots of demand in our view, it's just a matter of addressing some of these other issues that we've been facing over the last few quarters.
Your next question comes from Martin Landry of Stifel GMP.
My first question is on the pricing delays, on Slide 20, you highlight that some of the delays in implementing prices that retailers had an impact of 80 bps on your EBITDA, it's a pretty material impact this quarter. And I was wondering if you still expect other pricing delays in Q3 or if you're fully caught up from a timing standpoint?
Yes. So most of those -- these pricing increases were things that were actually implemented in the first quarter Martin. And some of these retailers require 90-day notice periods, so they weren't taking effect until mid this quarter, late this quarter, in some cases if they have been put through at the beginning of the quarter. So, in large part, they're mostly through now. So that should not be a big factor in the third quarter and what assuming commodity prices continue to stabilize or normalize.
Okay. That's helpful. And then just turning onto your financial leverage. On Slide 31, you showed at -- you're at the highest level that you've been in a while, probably the last 5 years and a little bit above your comfort range. You did talk about the fact that inventory reduction is going to help out and reduce the little bit your leverage. I'm wondering if you're looking at other options to reduce your leverage in near term and if you're concerned by your leverage ratios at this point.
No, we're very comfortable with the balance sheet, Martin. And at this point, we are not exploring any specific options. Again there's going to be a range of factors that bring the margins back in line. The reality is those target ranges we've set are long-term targets. The reality is our banking covenants, our general risk profile certainly adjust allow for much greater targets. And so, no, we're very comfortable with the balance sheet, very confident that the targets will be back in line by the end of the year.
Yes, Martin. Again if you sort of accept the fact that we've been through some difficult times, and we've had to make both kinds of decisions to hold inventory to maintain service levels to adjust for challenging supply chains and all of those things. If you normalize our inventory levels, and our EBITDA level, the numbers are very, very in range. They're not out of line. Right? So both our EBITDA has been impacted by the challenges and obviously we're holding a lot more inventory at the end of the quarter than normal. Right? If you adjust for that, if you normalize for that, then the numbers are very reasonable.
Yes. And Martin, we had expected to be at the top end of our range, because we are in a intense investment period right now. We've got some -- a number of, as you saw in that one slide a number of capital projects underway. The acquisitions we made in the second quarter, both are sort of long-term investments. So like George says, this really is the inventory issue that's caused most of the variance.
Okay. And my last question is on your announcement last week or last 2 weeks ago about putting in place an NCIB. It's something pretty rare for you guys, especially given your growth through acquisition strategy and your leverage. So, wondering if you can give us a bit of more color as to the reasons why you've established an NCIB, it seems to be your first since 2012.
It was really in response to at one point there, the markets were becoming incredibly irrational, incredibly volatile and it just gives us one more tool in the event that ways to create shareholder value if the opportunities arise. The reality is, as things come normalize and things proceed in a normal manner. It's probably unlikely will we end up using it, it's really to give us the tool if some sort of dramatic event happens.
Your next question comes from George Doumet of Scotiabank.
I just wanted to dig a little bit deeper on the shore shipments from the Phoenix plant. I guess how much of that is operational? I guess, versus just maybe general labor issues that are faced? Can you talk a little bit about maybe if you would expect to have similar dynamics and other plants maybe any color around kind of what's happening there, please.
Really, George, it's a combination of factors, one being obviously the shortage of labor issues we've been facing particularly in the US which by the way have gotten a lot better. As I mentioned in my prepared remarks the discretionary goods explosion in demand seems to be abating and there seems to be a lot more people looking for work.
And again, we've had all kinds of labor shortage type of challenges in regards to Phoenix as we transitioned over to the automated lines. We had some startup issues, normal startup issues and really lack of skilled labor for a while. We've addressed that again, our productivity numbers and our efficiency numbers are back up. And again, it was something that was part of the start-up of the new lines.
And George, in your letter to shareholders, you mentioned the North America is being underdeveloped in value-added and premium seafood products. It looks like a lot of potential targets in the pipeline in that area for your disclosure. So can you maybe talk a little bit about what areas you feel you want to get bigger in? And ultimately, I'm just wondering if margins in that area, can maybe get above those premium brands at a consolidated level, maybe down the road.
I think it's a couple of points there, George. One is that the number of companies that are up for sale these days in the value added seafood segment, we're looking at a few of them. And I just want to mention that Clearwater is looking at a few of them as well. And the challenge for a lot of those companies is access to supply and long-term access to supply. And thankfully with our investment in Clearwater, we're able to address that.
With regards to value added, again, we have a sort of a broad view of what value added means. For example, we love the soup category, seafood soups, our big category for one of our divisions. We're selling those not just in Canada, but also in Asia as well. We're launching a number of new products into the seafood space, leveraging our supply chain, our access to supply, our access to exceptional quality raw materials. And we think that, that business will grow immensely over the next few years.
Again, there's all types of value added we can do. We are looking at launching an amazing lobster macaroni type of product in both Canada and the U.S. We are -- done a lot of the R&D, we have done a lot of the development. And again we think that we want to make it easier for consumers to consume sea food. We think that's an area where we can upgrade the consumer experience again leveraging our access to exceptional quality supply. So that's basically a summary of what we're working on lots of projects on the go, lots of development, lots of trials and anyway, we're really excited to be presenting some new products in the near future to the market.
And George, from a margin perspective portion of your question, the beauty of these products is the margins are much more similar to those of our Specialty Foods segment versus what you see in our Premium Food Distribution. So you're talking 500, 600 basis points of improvement as you take those commodities and turn them into these wonderful branded value-added products.
That's very helpful. And last one for you, George. Just a quick clarification on the guidance. Is the $510 million, I guess, the lower end? Does that anticipate kind of spot prices? Or does that participate maybe I guess as per the charts maybe further and a deflationary environment for most of our commodities?
Yes. So, our assumption in Q1, George, when we maintained our guidance was we did expect some deflation in certain categories particularly pork. But there's some dynamics out there with what's happening in China right now and stuff. So we've just taken a little more conservative approach in our outlook for commodities and sort of assumed a more stable environment versus maybe some deflation. So if we do see deflation, then that will be upside in our numbers.
And we're starting to see deflation as we speak, George.
Your next question comes from Stephen MacLeod of BMO Capital Markets.
Just want to follow up on a couple of things. Great color so far. When you -- in the specialty food business, you talked a lot about the protein headwinds that you saw. Is there any way to quantify sort of what the magnitude of the volume headwind was to volume growth from those challenges?
Tough to do, right, Steve. The best I can do is when we answered Derek's question earlier about, you strip out those 2 basic factors and the challenges in the Phoenix plant and the -- I can't remember what the other one was. But you strip them out and you're sort of in that 3% organic volume growth rate. We had expected to be high single digits in the quarter. So how much of that difference relates to how much of the factors is -- it's just too tough to determine.
The type of environment we've been in, Stephen, for the last few quarters is, one, whereby it's been difficult to execute, right, given the challenges, right? So basically, you're dealing with shortage of labor, high absenteeism, supply chains that are not functioning as they're supposed to. And it's -- and you also had a reopening of food service as well, right?
So if, let's say, we assume that 50% of the food dollar is spent outside of the home, then obviously, there will be some impact there in terms of demand. So there's a number of factors impacting that number. But as I said earlier in my remarks, I know that we've showed a lot of customers during the quarter over the last few quarters because of the challenges with some of the inputs, labor and supply chain.
Okay. That's helpful, understandable. When you look at the back half of the year, I just wanted to sort of paraphrase, make sure I'm understanding all the moving parts correctly. It sounds like based on the chart you showed, well, you're sort of caught up on price or you were caught up on inflation with price this quarter. But do you expect to put through more pricing into Q3 and Q4?
Well, you'll have the continued year-over-year impact at the previous pricing pieces, right? So you're still going to see quite an inflationary fact, although we are starting to lap this quarter, Q3. Q3 last year was when the significant price increases started. But outside of that, not a lot, again, on the assumption that we'll see a normalization of commodities in the quarter, Steve.
I think the most likely scenario, Stephen, as I said earlier, and Will mentioned it as well, a lot of the commodities are coming off. The most likely scenario is that a lot of our input costs will go down and that we -- our companies will do a lot more featuring to promote their products, of course, and which should help volumes. A lot of our companies are already talking about that given with what's happened with some of the underlying commodities more recently, right? So that you're going to see a lot more featuring activity coming at.
Right. Okay. So considering -- or balancing out those 2 factors, do you expect sort of gross margins in the back half of the year to turn back to normalized levels? Or do you expect maybe a bit more pressure on them returning back to normalized levels in 2023?
Again, I think you've got our guidance, Steve. So I don't think I want to get into the specifics of margins outside of our guidance.
But overall, Stephen, I mean we're -- we assume things are normalizing and will continue to normalize for the remainder of the year. If you look at some of the investments we've made in key parts of our business, we are feeling really good about '23. And again, we're just hoping that things will continue to normalize, in terms of supply chain, in terms of the labor situation, in terms of demand through food service and retail, et cetera, et cetera. Lots of good things to look forward to.
Your next question comes from John Zamparo of CIBC.
I wanted to hit on a couple of topics and a couple of questions within each. So on the pricing pass-through, just wonder if I understand, were there also price increases taken in Q2 that we're going to see it kind of mid to late Q3? Or was the Q1 pricing you took is that the most recent round?
John, there's a little bit of that, but most of it was stuff that was implemented either last -- in Q1 or early in Q2. So we don't expect a lot of carryover into Q3. Again, on the assumption that we don't see further cost inflation.
Okay. Understood. Can you quantify the Easter shift versus last year going to Q2 this year versus Q1 last year on organic volume?
Yes. Again, there's so much noise around the numbers, John, and with what happened with weather and all those -- the feature -- it just -- the Easter is just such a small factor in that equation. So unfortunately not. I think the bump in the first quarter of -- sorry, the impact in the first quarter of the year because of the later Easter was it's under $10 million. It was a relatively small impact.
Okay. Understood. And I want to better understand the dynamics within featuring. And specifically, the language in the press release for Specialty Foods seems to suggest you're waiting for price increases to kick in before you feature items there, which is understandable. In Premium Food Distribution, the comment was that there was less featuring because of record high prices. So I just want to understand the PFD comments a bit better. And in particular, if those prices don't come down, should we interpret that as you won't see featuring within that segment?
Yes. It's a good question, John, because there are really 2 different dynamics. So in the Specialty Foods segment, featuring is something we drive, our businesses drive. So they'll work with the retailer to go and say, okay, we're prepared to give you this pricing for this feature at this time. And it's driven by the retailer. So that's the nature of featuring in the Specialty Foods group. When we talk about featuring in the Premium Food Distribution group, that's kind of we make our regular sales to the customer and then the customer decides to say, okay, I'm going to put salmon on the menu as a special this week or I'm going to feature this in the store this week.
And we don't drive that. We just provide them with the product at our normal margins, and they make that decision to feature or not to feature. So there's not a margin story in it for us. It's purely a volume on the Premium Food Distribution group side.
And the customers, John, are very smart, right? If the cut is very expensive, they're not going to feature it, right? It's just -- it won't meet that price point that will move the most volume, right? They generally feature something not that our feature is more attractive to the consumer. So that's part of what they do all the time.
And normally, it's -- if it was just a single commodity that goes up in the premium seafood world, usually is not an issue for us because they'll feature something else. We sell them as a different alternative premium product. But the fact is just everything was at record high prices. And so they started featuring lesser sort of more commodity like products like salmon or more simpler products and featuring those at lower price points versus the premium products because like I say, cost inflation, price inflation was across the entire broad group.
Okay. That's very helpful. I appreciate the color on that. And then I wanted to ask about leverage. I know you've talked about it a little bit. It's above where you'd like it. You do have some pretty ambitious plans when it comes to growth CapEx. And given all that, I wonder how you think about capital allocation for the next year or so. Historically, it's been M&A first and foremost. But what are your thoughts on prioritizing deleveraging at this point?
Yes. Again, those targets we set, we always -- those are always part of our decision-making with any capital allocation decision. Certainly, everything that's in the pipeline today was built around those targets ultimately, and we'll continue to manage that way. Like I say, we are comfortable in the short term, taking it over those targeted ranges because the reality is they're relatively conservative. Our senior debt-to-EBITDA ratio for us, our target range of 2.5 to 3. Just to put it in context, our banking covenant is 4x. Again, we've got good flexibility there. We're prepared in the short term as long as we see a clear sight to bringing it down to going over that target range. But ultimately, we'll always manage to that targeted range.
The other part, John, is that we have to remember that over the last couple of years, we've just about stress tested every aspect of our business. What happens if your whole channel shuts down, the food service channel? Well, we did okay. We managed through that. What happens if labor goes away? Well, we managed through that. What happens if you have the fastest inflationary times that we [ live through]. Well, we've gone through that as well, right? So we're -- as Will said, we're feeling pretty good that things are normalizing. If you normalize our balance sheet and our EBITDA, there's no issues there.
Fair enough. And one more clarification. Do you have any interest rate swaps in place on your $1.4 billion revolver? Or is that entirely variable?
It's entirely variable. We had a swap in place that recently expired. But today, most of our -- we do have a large component of fixed debt with our convertible debentures. But outside of that, our senior facilities are pretty well all floating.
Your next question comes from Vishal Shreedhar of National Bank.
On the acquisition opportunity charts that you showed and it's fluid from quarter-to-quarter, I understand, and I just want to make certain the advanced and active stage files, the sales numbers seem to be down quarter-over-quarter. Just wondering if there's anything that you'd like to call out or point out for that? Or is that just regular course variability? Is it relative to the way management is thinking about the opportunities or opportunities reducing as it relates to balance sheet, I don't suspect it is, but I just want to get your point of view.
Vishal, I'd say that the left 3 columns are the most relevant, right? These are deals that we're working on, our group is working on steadily. A lot of times, the timing is not really up to us. It's up to the other side, but we have a lot of conversations. We're working on a lot of transactions. And again, a lot of times, the larger transactions are tough to classify in the advanced stage because we're in a small universe and people kind of make assumptions as to who they are. So we're kind of careful as to how we disclose them, but I would say that our pipeline is never been more robust.
Okay. I just wanted to change topics on labor shortages. Encouraging to hear that they're improving. I'm wondering if in management's view, do they think that -- do you believe that the labor shortages experienced, are those a transient issue? Or are those structural just given lower immigration? And if they are -- have a structural component to it, is there a way that management aims to address that? I'm focusing more on the U.S. here. Is there a way that management aims to address it either focusing on states with more integration or things of that nature?
Yes. So Vishal, in terms of Canada, I would say through increased immigration, I think that the situation is improving immensely. Almost all of our businesses are in pretty good shape from that perspective, a lot more applications, a lot more people looking for work. And in general terms, we're in good shape. That's a positive to some of the challenges in the U.S. in that everybody is having these challenges and our Canadian-based plants are in a very good position to continue to increase their business in the U.S. So anyway, this is kind of a positive there.
With regards to the U.S., the things are improving as well. Over the last couple of years, as you know, there's been an explosion in demand for discretionary goods. And there's a lot of retailers today that are announcing that they're long on inventories of goods. And we know -- I don't want to mention particular states or towns, but there's been layoffs in the manufacturers of discretionary goods and we're getting more applications in, which is why we're feeling better about this. I know the jobs report came out in the U.S. today, and it created a lot of jobs. But in terms of what we're seeing today, we're getting a lot more applications in that we did over the last couple of years, and that's a positive.
And the other thing I'd mention is that, as we commented earlier, we continue to make a lot of investments in automation and the robotics and those types of things, and those will help as well.
Okay. And just on another topic here. I just wanted to get some clarification. Will, in your prepared remarks in the slide deck, you showed some indexes of particular commodities. And in general, they seem to be moderating and you mentioned that throughout this panel discussion as well. So just -- but in the past, I understood that your major commodities, particularly in the Specialty Food Group, they oftentimes deviated from those basic commodities due to higher labor requirements and other factors. So should we anticipate the parties that you're using, do they generally follow those trends? Or is there a lag of 2 to 3 quarters? How should we accommodate for the specific nature of the commodity cuts that you use?
Yes. So there's -- they generally do follow those trends, Vishal. But over the last couple of years, there's been some massive distortions. Again, labor has been an issue because we tend to buy more value-added and really base commodities. And the trend in other processes within the primary processing business. And they were so short of labor. There was a massive shortage of those. And as a result, that the prices were way distorted from what they would normally in the past.
As George has talked about, as labor normalizes, that issue was going away and they're going back to more sort of traditional trends following the base commodities. And then the second one has been the other market you have to sort of watch with us is we import a lot of product from Europe just because it's a much higher quality leaner product. And that market has its own unique dynamics. There are no sort of public indicators we can follow for it. But -- so that is something that unfortunately, I can't say, okay, it's going to stay stable or not because it does have a different sort of set of supply and demand factors on a global basis from just what's happening in the North American market.
Your next question comes from Sabahat Khan of RBC Capital.
Great. Just maybe starting with a housekeeping question, just maybe more for Will. I think the MD&A notes that the H1 organic growth rate for Specialty Foods is 4.3%. But just looking at where Q1 came in and where Q2 came in, I'm not sure if that's -- if I'm looking at it wrong or if that's -- that should be a little bit lower than that? I think it was 4.3% in Q1 and I think flat to negative 0.5% in Q2. Just kind of reconcile.
Yes. I'll have to do that offline with you Sabahat, because my notes are showing 4.3%.
Okay. No problem, we take that offline. And then maybe just, I guess, along the lines of the conversation on this call around commodity prices and margins. I guess these headwinds have been around for a couple of years. Now I'm just wondering, as you look forward to your '23 targets, and how confident are you and able to get to kind of that 10% range? Like I'm just thinking could some of these commodity and pricing dynamics be a bit more structural, just given how long kind of they've been in the market. Just want to get some perspective on just being able to get to that 10% range over, call it, the next 12 months or even just longer than that?
Again, the big driver there is definitely some normalization in our margins, right, Sabahat? And if you go to that chart on a 5-year EBITDA margin target, that's kind of that retroactive pricing impact. Those pricing increases are real. That's been done. But the big driver that gets us ultimately to our 10% target and beyond is sales growth is contribution margin, right? And particularly in our Specialty Foods segment. So as those sales come through, that will just naturally drive up the margin.
Okay. And then I guess maybe I'm getting a bit nitpicky, but as we think about maybe the deflation at some point over the coming quarters, would you have to give back some of that pricing potentially? Or do you find it tends to be stickier?
It depends a lot on the product category. As you move up the differentiation level in the product category, so when you go into products like some of our meat snacks and charcuterie products, we tend to set new consumer price points. Those are held. And what the business will do then is they'll use that high price point to do a lot more featuring. So you get the benefit of volume. So it's kind of a win-win situation.
As you get less differentiated in the products, maybe some of our grilling products, things like that, what happens is the prices are sticky. So as the commodity come down, you do have some expanded margins, but they do over time, sort of go back to normal levels. But you sort of -- the traditional inventory cycle or margin cycle for the industry or the less differentiated products, you lose some margin on the way up and then you gain it on the way down and you're kind of neutral over the cycle.
But again, we monitor the velocities very carefully, and we make decisions based on those velocities, right? So again, as Will said, if let's say, the underlying commodity goes down, then we tend to do a lot more featuring, which moves volume, which helps obviously the economics of the business, right? So that's generally what happens.
Okay. And just one last quick one. There's been a lot of focus on the call and just generally, I think, on your protein business and seafood. Just I guess, through the pandemic, some of the sandwich businesses might have slowed down due to structural stuff. But are you still kind of pursuing some of those initiatives with new retailers, new channels? Obviously, there's capacity constraints given the environment right now, but does that become a bigger focus as we look out 1, 2, 3 years from here?
You cut out at the beginning. Can you repeat the first part of the question, please?
I was just asking about your sandwiches business before kind of pandemic took hold, there's a lot of focus on pursuing new channels and obviously, capacity constraints right now, but how do you look at that as we kind of move to some sort of normalized manufacturing environment and you have capacity?
Well, our -- as I mentioned before, our sandwich business is in a situation where it provides labor-saving solutions to customers, retail, foodservice and club, right? If you make the assumption that labor is scarce and will remain scarce in terms of QSR, in terms of club, in terms of retail, then you can assume that our Sandwich division is going to be very busy. And this is what we're seeing. We've made tremendous progress in terms of developing new channels. I believe in the second quarter, we had record sales through the club channel and a lot more demand from various customers.
I read a statistic that the breakfast sandwich category in retail and club is like up 20% year-over-year. This is an overall statistic, right? So that bodes well for us because we're a low-cost producer. We're very well positioned to benefit from that growth in demand. But our Sandwich Group, we call it the Sandwich Group. They're not just sandwiches. They're basically one of the best assemblers in North America. Their charcuterie business is doing extremely well, taking advantage, of course, of the growth in charcuterie demand.
We are the assembler for most brands out there, and we're doing extremely well there as well. Some of the challenges that we face there are not demand-oriented, they are labor-oriented. And obviously, as we solve those issues, then the division will deliver better growth and better numbers. But they've been growing quite substantially over the last -- even in the last couple of years.
There are no more questions on the phone lines. At this time, I would like to turn the conference back to your hosts for closing remarks. Gentlemen, please go ahead.
I'd like to thank everybody for attending. Have a great rest of the summer. Thank you very much.
Ladies and gentlemen, this does conclude the conference call for this afternoon. We would like to thank you all for your participation and ask that you please disconnect your lines.