Premium Brands Holdings Corp

TSX:PBH

Earnings Call Transcript 2023-Q2

[George Paleologou, executive]

Welcome, everyone, to our 2023 Second 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. Later this morning, we will hold a separate live Q&A session at 10:30 a.m. Vancouver time. Details on the call can be found in our Q2 results press release posted on our website.We are now on Slide 4, which outlines certain key highlights for the quarter. Our overall results for the quarter were on plan with our Specialty Foods segment outperforming plan and our Distribution group coming in slightly below plan. We're pleased with the progress we made on all fronts during the quarter, including the organic volume growth in our Specialty Food Group and our overall EBITDA growth and margin improvement. Will Kalutycz will provide you with more color on our numbers shortly.Our second quarter results give you a small glimpse of our future cash-generating capacity as we execute our new 5-year plan announced earlier in the year that takes us to $10 billion in revenue and to $1 billion in EBITDA by 2027. Over the past 5 years, we have invested approximately $2 billion on acquisitions, capacity expansions, new plants and in process automation initiatives. And with the world returning back to normal, we're beginning to see the tangible benefits of this investment cycle in our financial results.Our Specialty Foods Group performed very well during the quarter and is very well-positioned to continue to gain further traction in the future. Demand for our cooked protein, raw skewers, artisan sandwiches and charcuterie and meat snacks was very strong during the quarter driven by promotions, more featuring activity and distribution gains. In addition to recently commissioning our new sandwich facility in Edmonton, Alberta, we're looking forward to the start-up of our new laminated bakery plant in San Leandro, California shortly, and our new meat snack and premium bacon facility in Ferndale, Washington, this October. We're also pleased to announce the new capacity expansion and plant rationalization project in Ontario, where 3 smaller legacy facilities will be merged into a much larger state-of-the-art facility in Brampton, Ontario. This new facility will mainly support the growth of our Merck Angelo brand in Canada and in the U.S.We are now on Slide 5. You can see here that our acquisition pipeline continues to remain very robust. With the various pandemic-related risks and disruptions behind us, we are beginning to once again make significant progress on our various acquisition-related discussions. I'm pleased to report that our M&A group is currently fully engaged on several larger transactions that are progressing as planned.Before I pass it to Will, I would like to refer you to my recently published 2022/'23 CEO Shareholder Letter posted on our website. Once again, I have done my best to articulate our unique strategies as we go forward. At Premium Brands, we're passionate about what we do and we are firm believers that our decentralized entrepreneurial focused business model, combined with our great people and culture, create a massive moat around their business. This moat manifests itself into a higher and more predictable margins and high-quality cash flow streams resulting in consistent and higher returns for our long-term shareholders.On Slide 6, we feature some recently launched products from our Kettle business operating under the names of Global Gourmet and Gourmet Chef. Global Gourmet and its management team joined the PB family back in 2020 and historically, focused on producing high-quality soups and sauces for the food service channel. Since joining the PB family, Global Gourmet has invested in new capacity and new technology, including new packaging formats that provided with access to new channels and to new markets.Furthermore, Global Gourmet has been able to leverage its proprietary access to clams from Clearwater Seafoods and lobster from Ready Seafood to create best-in-class chowder and Bisque soups. These soups are now being sold globally to customers in Canada, the U.S. and Asia, including in China and Japan. Global Gourmet was a good company when it joined Premium brands, and it's now well on its way to becoming a great company under our umbrella. Please look for these amazing best-in-class soups and sauces as well as the new products on Slide 6 at a store near you.I will now pass it over 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've discussed. Please refer to our MD&A for the 14 and 52 weeks ended December 31, 2022, as well as other information on our website for a broader description of the risk factors that could affect our performance.Turning to Slide 9. Our sales for the quarter were $1.63 billion, representing an increase of $111 million or 7.3% from 2022. The major drivers of this increase were organic volume growth of $61.2 million, a favorable translation of our U.S.-based businesses sales of $29.0 million due to a weaker Canadian dollar, acquisitions growth of $16.9 million and net selling price inflation of $3.9 million.On Slide 10, we show our organic volume growth rate for the last 18 quarters. Our organic volume growth rate for the quarter was 4% or 5.2% after normalizing for a new sandwich program that was launched in the second quarter of 2022, then recalled and canceled in the third quarter of 2022 due to third-party supply quality issues.There are 2 key narratives behind understanding our growth rate for the quarter. The first is the strong performance of our Specialty Foods Group, which generated an organic volume growth rate of 8.1% or 10.2% after normalizing for the canceled sandwich program. The major drivers of Specialty Foods growth were our cooked protein, fresh skewers, artisan sandwiches, meat snacks and charcuterie initiatives in the U.S. The second narrative behind our growth rate for the quarter is a small contraction in the sales of our Premium Foods Distribution group that resulted in a lower consolidated growth rate. This contraction was due to several challenges, all of which we view as transitory and do not impact our long-term organic volume growth rate outlook for this group of 4% to 6%.Slide 11 shows the historic organic volume growth rates for our Specialty Food Group over the last 18 quarters. You can see the steady progress being made by the group in recent quarters as we return to more normal operating environments post the pandemic. We are particularly pleased with this progress given that over the last 5 years, we have invested almost $1.5 billion in positioning this group to create significant value for our shareholders.Slide 12 shows our historic annual sales for the last 13 years, which have grown at a compound annual growth rate of 22.4% as well as our projected 2023 sales using the midpoint of our annual guidance of $6.4 billion to $6.6 billion, which is unchanged from last quarter. Based on this midpoint, we expect to generate $470 million in sales growth this year, representing an increase of 7.8% or 9.2% normalizing for an extra week of sales in 2022.Slide 13 shows our weekly sales trend for the last 4 years as well as year-to-date 2023. You can see that other than a 1-week anomaly, we are continuing to generate sales growth in the most recent quarter, albeit at a slower rate than in the past. This lower rate is primarily due to 4 factors; the transitory challenges that are continuing to impact our Premium Foods Distribution group, price deflation, particularly for lobster and chicken-based products, no acquisitions impact given our last acquisition was in the second quarter of 2022 and the general timing of promotions and features.Turning to Slide 14, our adjusted EBITDA for the quarter was $152.4 million, representing an increase of $21.6 million or 16.5% from 2022. The major drivers of this increase were the recovery of our margins as our past selling price increases catch up with cost inflation, our organic volume growth and improved plant efficiencies. These factors were partially offset by a variety of cost increases, including higher bonus accruals, promotion expenses and plant overheads.Slide 15 shows the progress we have made in dealing with the severe cost inflation we have experienced over the last 2 years. You can see we generated $24.9 million in margin recovery in the quarter, up from $17.9 million in the first quarter of this year and a loss of $1.9 million if you go back to the first quarter of last year.Slide 16 shows our adjusted EBITDA margin for the last 18 quarters. We are now back to pre-pandemic levels with our margin for the quarter coming in at 9.3%. Furthermore, if you normalize for the 3 of the unusual items noted on the right-hand side of the slide, our adjusted EBITDA margin is approximately 9.7%, which is closing in on our midterm targeted annual margin of 10%.Slide 17 shows our Specialty Foods group's adjusted EBITDA margin for the last 18 months. Similar to the situation with our sales growth, Specialty Foods is a key driver in the improvement of our consolidated adjusted EBITDA margin for the quarter with its margin increasing by 80 basis points to 10.1%. Here, however, we still have some work to do as its pre-pandemic margins were in the 11% to 13% range. Normalizing for the unusual items shown on the right-hand side of the slide, Specialty Foods adjusted margin for the quarter was 10.7%.Slide 18 shows our historic annual adjusted EBITDA for the last 13 years, which has grown at a compound annual growth rate of 22.2% on a pre-IFRS 16 basis as well as our projected 2023 adjusted EBITDA using the midpoint of our annual guidance of $590 million to $610 million, which is unchanged from last quarter. Based on the midpoint, we expect to generate $96 million in adjusted EBITDA growth this year, representing an increase of 19% and expand our adjusted EBITDA margin by 80 basis points to 9.2%.Turning to Slide 19. Our earnings for the quarter were $56.3 million, representing a decrease of $5.2 million or 8.5% from 2022. The main reasons for this decrease were higher interest rates, which impacted our interest cost by approximately $14.7 million and increased interest, depreciation and amortization associated with recent investments made to drive both the current quarter's growth as well as future growth.Slide 20 shows our inventory levels and days purchases in inventory for the last 18 quarters. You can see the significant process we made in the quarter in bringing our inventory down post the normalization of supply chains and raw material inflation rates. As compared to the first quarter of this year, our inventory is down almost $69 million and compared to the second quarter of 2022, our inventory is down over $75 million. Similarly, we made solid progress in bringing down our days purchasing inventory, which fell to 53 days from over 61 days in the second quarter of 2022. Here too, there is work still to be done as we are targeting to reduce our days purchase and inventory by another 5-plus days.Turning to Slide 21. For the quarter, we had $109 million in capital expenditures, consisting of $87.5 million in project capital expenditures and $13.4 million in maintenance capital expenditures. Looking forward, based on our approved capital project pipeline, we expect to spend another $367 million on project CapEx over the next 8 quarters. I should note that we expect to generate a minimum unlevered after-tax return of 15% on all our project capital expenditures.Slide 22 shows some of the key metrics we use to assess our financial position. You can see that we finished the quarter with very strong liquidity, having $650 million in unused credit capacity. In terms of our senior debt and total debt to EBITDA ratios, both of these ticked up slightly in the quarter, which was expected based on it being a working capital-intensive quarter and our current capital plan. We do, however, expect to see solid improvement in both these ratios in the back half of the year and to be within our long-term targeted zones by the end of the year.That concludes our presentation. As George mentioned earlier, 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.