Premium Brands Holdings Corp
TSX:PBH
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Premium Brands Holdings Corp
Earnings Call Analysis
Q2-2024 Analysis
Premium Brands Holdings Corp
In the latest earnings report, the company revealed impressive results for the quarter, achieving record sales of $1.7 billion, reflecting a $72 million increase compared to $1.63 billion in the second quarter of 2023. This growth was underpinned by a combination of factors: organic volume growth of $62 million in the Specialty Foods group, $9.3 million in currency translation gains, $5.9 million from business acquisitions, and $6.1 million from selling price inflation. However, these gains were somewhat offset by a $12 million contraction in the Premium Food Distribution group's organic volume, which faced challenges in the Canadian market due to production issues.
The company cited specific performance metrics across various sectors, noting 7.2% and 20.4% organic volume growth in protein and bakery sales, respectively, driven by U.S. market initiatives. Nevertheless, both figures fell short of expectations due to delays in major product launches, anticipated to now occur in late 2024 and early 2025. The delayed launches stemmed from capacity startup issues and extended onboarding timelines for new business. Notably, the sandwich segment outperformed, generating a robust 16.7% organic volume growth, reflecting successful new product launches.
Looking ahead, the company maintains its guidance for 2024 sales between $6.65 billion and $6.85 billion but is increasingly leaning towards the lower end of this range due to the aforementioned product launch delays. The midpoint of this guidance, $6.75 billion, would indicate an organic volume growth rate of approximately 7.3%.
In terms of profitability, the adjusted EBITDA for the quarter rose by 8%, reaching $164.6 million, with an adjusted EBITDA margin of 9.7%, marking a significant 40 basis points improvement. This success is largely attributed to improved sales leverage and efficiencies within the Specialty Foods Group. Despite facing increased plant overhead and wage inflation, the company expects its adjusted EBITDA guidance for 2024 to hover between $630 million and $650 million. The midpoint of this range signals a projected adjusted EBITDA margin of 9.5%, which would represent a historic high.
The company continued to focus on capital investments, spending $104.4 million in the quarter alone, primarily on major projects aimed at enhancing capacities and efficiencies in both protein and bakery businesses. Over the next five quarters, an additional $230 million is projected for similar initiatives. The company has identified these projects as critical for supporting growth and achieving their strategic five-year plan, aiming for $10 billion in revenue and 10% to 12% EBITDA margins by 2027.
It's crucial to note the company's current leverage metrics, where the senior debt-to-EBITDA ratio stands at 3.4:1 and the total debt-to-EBITDA ratio at 4.4:1, both slightly above long-term targets but still manageable. On the liquidity front, the company closed the quarter with robust unused credit capacity totaling nearly $550 million, which has since been boosted by an additional $150 million increase, securing these facilities until July 2028.
In terms of shareholder returns, the company has shown commitment by increasing its quarterly dividend by 10.4% to $0.85 per share in the first quarter of 2024. This aligns with the leadership's confidence in improving free cash flow, driven by the results of recent capital investments and declining interest rates.
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Welcome, everyone, to our 2024 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.
We're now on Slide 4, which outlines certain highlights for the quarter. Overall, results for the second quarter set new records as our Premium Food Distribution business began to stabilize, while our Specialty Food Group's business delivered excellent top line and margin growth by leveraging new key capacities and capabilities, mainly focused on the U.S. market.
The consumer backdrop remains challenged in Canada and, to a lesser extent, in the U.S. but I'm pleased to report that despite this, customers remain open to new innovation, concepts and ideas. And as such, our business development teams have never been busier, with many exciting initiatives in the pipeline.
Our diverse portfolio of innovative and high-quality products is attracting attention and gaining traction with new customers and channels as we rapidly expand into new regions and geographies. With state-of-the-art plants and new capacity coming on stream in our U.S.-based businesses as we speak, our U.S. growth strategy is building momentum as evidenced by the 12.9% volume growth generated by our major U.S. sales initiatives.
We're particularly pleased with progress made by our sandwich and protein groups as we leverage newly added capacity. These two platforms provide our customers with inflation, fighting labor and cost-saving solutions while improving quality and reducing waste, combined with the added benefit of enabling consistency of execution across customer store networks.
For more color on our various growth drivers, I would refer you to this year's CEO letter to shareholders, which we recently posted on our website. The letter is titled, Transformational Growth and explains our various capital allocation decisions and growth strategies.
As you know, over the past 5 years, we have doubled down on capital investments in order to support our U.S. growth and we're starting to see these investments contribute to our overall results. This positions us well as we continue to execute our 5-year plan, and progress towards our 2027 targets of $10 billion in revenue and 10% to 12% EBITDA margins. We are in the early innings of the game, and we expect further improvements in operational excellence, as our new capacity ramps up and efficiency and productivity begin to optimize across our plant network.
We're now on Slide 5. Although we did not close any acquisitions during the quarter, we're pleased to report that we're in the advanced stages of due diligence on a number of deals, and we hope to close a few in the near future.
We're now on Slide 6 to 9, where we have included some pictures of products made and sold in both the retail and food service channels across North America by our Expresco Foods business. Expresco was our initial investment in the cooked protein space and specialize the production of cooked ready-to-eat skewers. It is a key asset in our cooked protein portfolio, an area that we had identified as having many white space growth opportunities due to favorable consumer lifestyle and demographic trends.
Expresco operates a state-of-the-art 75,000 square foot facility in Montreal and has grown in sales and geographic reach substantially since our original investment in 2015, with nearly 70% of its sales now coming from the U.S. market. We believe that Expresco progress in the U.S., combined with the momentum of our other cooked protein businesses, will help drive our overall sales of ready-to-eat meat proteins to $1 billion by the end of our current 5-year plan, up from $600 million today.
I will now pass it to 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 MD&A for the 13 and 52 weeks ended December 30, 2023, and as well as other information on our website for a broader description of the risk factors that could affect our performance.
Turning to Slide 11. Our sales for the quarter were a record $1.7 billion, up $72 million as compared to $1.63 billion in the second quarter of 2023. This increase was driven by 4 factors. Namely, organic volume growth of $62 million in our Specialty Foods group, currency translation gains of $9.3 million, business acquisitions net of shutdowns, which contributed $5.9 million, and $6.1 million in selling price inflation. These factors were partially offset by a $12 million contraction in our Premium Food Distribution group's organic volume.
Our Specialty Food Group's growth was driven primarily by the U.S. market focused growth initiatives in our protein, sandwich and bakery businesses that George discussed earlier. This was partially offset by a $6.5 million decrease in the group sales in Canada, which was largely due to production-related issues associated with capacity expansion projects.
Specialty Foods growth was also hampered by general consumer spending decreases in the beef jerky category, resulting from a challenging consumer environment and historically high beef commodity prices.
The 2.2% decrease in the volumes of our Premium Food Distribution group, which was an improvement from the 5.3% decrease we saw last quarter, was primarily due to challenging consumer environments that resulted in a general decline in sales in the Canadian food service channel, less featuring of premium seafood and beef products in the Canadian retail channel, and lower lobster exports to China.
Turning to Slide 12. You can see the organic volume growth rates of our major protein, sandwich and bakery sales initiatives in the U.S. Our protein and bakery initiatives generated organic volume growth rates of 7.2% and 20.4%, respectively, both of which were below our expectations due to several major product launches being delayed to later in 2024 and early 2025, as well as a weaker-than-expected trends in consumer spending in the food service channel.
The delayed product launches were the result of new capacity startup-related issues and longer-than-expected new business onboarding time lines. Our U.S.-focused sandwich initiatives generated an organic volume growth rate of 16.7%, which was ahead of plan, primarily due to the success of several recent new product launches.
Turning to Slide 13. While we are maintaining our sales guidance range for 2024, of $6.65 billion to $6.85 billion. We are, however, increasing the probability of being at the lower end of this range based on the delayed product launches I referred to earlier. The slide shows for 2024, the midpoint of our guidance range or $6.75 billion, which would represent an organic volume growth rate of 7.3%.
Turning to Slide 14. Our adjusted EBITDA for the quarter was $164.6 million, representing an increase of $12.2 million or 8% as compared to the second quarter of 2022. Our adjusted EBITDA margin increased by 40 basis points to a 6-year second quarter high of 9.7% and marks our fifth consecutive quarter of year-over-year increases in our margin.
The increases in our adjusted EBITDA and adjusted EBITDA margin were driven by sales leveraging and improved plant efficiencies in our Specialty Foods Group, and stronger margins on processed lobster products in our Premium Foods Distribution group. These factors were partially offset by additional plant overhead associated with new production capacity being brought online by our Specialty Foods Group and general wage inflation across most of our businesses.
Turning to Slide 15. We are maintaining our adjusted EBITDA guidance range for 2024 of $630 million to $650 million. But like with our sales guidance, are increasing the probability of being at the lower end of this range based on the delayed product launches. 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, would be a historic high watermark for us. Furthermore, we would be only 50 basis points away from achieving our midterm target of an annual adjusted EBITDA margin of 10%.
Turning to Slide 16. Our adjusted earnings and earnings per share for the quarter were $56.9 million and $1.28 per share, respectively, up slightly from $56.3 million and $1.27 per share, respectively, in the second quarter of 2023. This represents the first year-over-year increase in these metrics since the latter part of 2022, when our earnings started to be impacted by rapidly increasing interest rates combined with higher lease costs, depreciation and debt levels associated with our capital investment plan.
Looking forward, we expect to generate significant momentum in improving our adjusted earnings and EPS as interest rates moderate, and we continue to leverage our recent capital investments to grow our business.
Turning to Slide 17. For the quarter, we spent $104.4 million in capital expenditures, consisting of $83.2 million on major project CapEx, $11.5 million in smaller project CapEx and $9.7 million in 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 our major capital expenditures in the quarter were on projects to increase the capacities in many cases, operating efficiencies of our protein, sandwich and bakery businesses to support their U.S.-focused growth initiatives.
Looking forward, based on our approved project CapEx pipeline, we expect to invest another $230 million over the next 5 quarters in these projects. We also expect to partially offset these expenditures with proceeds from the sale and leaseback of real estate associated with some of these projects.
Slide 18 shows some of the key metrics we use to assess our financial position. Our debt leverage levels increased slightly as compared to last quarter, with our senior debt-to-EBITDA ratio at 3.4:1 and our total debt-to-EBITDA ratio, which includes our subordinate convertible debentures at 4.4:1. Both metrics are above the long-term target ranges we have set for them, but well within our shorter-term operating parameters.
In terms of liquidity, we finished the quarter in a strong position with almost $550 million in unused credit capacity. Furthermore, subsequent to the quarter, we increased our unused credit capacity by USD 150 million in conjunction with extending the maturity date of these facilities to July 2028.
The next and final slide shows a variety of our free cash flow and dividend metrics over the last 18-plus years. For 2024, in the first quarter of the year, we increased our quarterly dividend rate by 10.4% to $0.85 per share. 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 moderation of interest rates.
That concludes our presentation. Please join us on our Q&A conference call later today at 10:30 a.m. Vancouver time or 1:30 p.m. Toronto time. Thank you.