Premium Brands Q1 2024 Prepared Remarks Earnings Call Transcript

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Provided by Quartr
May 12, 2024

Key Takeaways

  • All 2024 U.S. capacity requirements are now in place with no delays, enabling full execution of the growth strategy without further build-out risk.
  • Q1 results beat expectations, driven by U.S. specialty foods growth and new capacity, with EBITDA growth set to accelerate year-over-year.
  • Canadian operations improved sequentially in Q1, aided by strong Atlantic salmon sales and shifting bakery capacity to the U.S.; PFD volumes should return to growth by Q3/Q4 as lobster stabilizes.
  • Short-term risks include lumpy customer onboarding, menu inflation dampening U.S. demand in some channels, and inventory seasonality causing leverage noise, though planned sale-leasebacks in Q3/Q4 should bolster the balance sheet.
  • A 10% mid-term EBITDA margin target is now expected by 2025—one year earlier than originally guided—reflecting conservative planning and strong execution.
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Earnings Conference Call
Premium Brands Q1 2024 Prepared Remarks
00:00 / 00:00

There are 2 speakers on the call.

Operator

Welcome everyone to our twenty twenty four First Quarter Conference Call. Thank you for joining us today. With me here today is our CFO, Will Kaludic. Our presentation will follow the deck that was posted posted on our website this morning. We're now on Slide four, which outlines certain key highlights for the quarter.

Operator

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 in 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.

Operator

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.

Operator

Menu price inflation is of 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.

Operator

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.

Operator

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 tray 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.

Operator

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.

Operator

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 five. Although we did not close any acquisitions during the quarter, we're pleased to report that our 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 Slides six to 10, where we have included some pictures of products sold in both the retail and foodservice channels in North America by our Belmond Food Group.

Operator

Belmond joined the Premium Brands family in 2016 with one forty seven thousand square foot facility located in Toronto, Canada and sales of about 115,000,000 The Belmont Food Group currently includes nine facilities totaling 519,000 square feet of production space, including three facilities in The U. S. And two forty 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 five fold since joining the Premium Brands family at the 2016 and will continue to grow well into the future.

Operator

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're 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. Thanks, George.

Operator

Before I begin, I would like to remind you that some of

Speaker 1

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 and A for the thirteen fifty two weeks ended 12/30/2023, 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 $1,460,000,000 as compared to $1,430,000,000 in the 2023. Our growth was driven entirely by our Specialty Foods Group, which generated organic volume growth of $53,000,000 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.

Speaker 1

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 a variety of initiatives taken to address a weakening consumer environment, including additional promotional activity.

Speaker 1

The growth in our Specialty Foods Group was partially offset by $25,500,000 sales volume contraction in our Premium Foods Distribution Group, which was entirely due to lobster supply shortages resulting from poor Maine and Nova Scotia fisheries in the back half of twenty twenty three that were caused by unusually poor weather that prevented vessels from harvesting. We expect this situation to improve in the coming quarters and with the new fishing season. And to this end, the first twenty twenty four 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 harvests on the East Coast Of Canada.

Speaker 1

Looking forward, we expect this tailwind to become a bit of a headwind as the strong first quarter harvests 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 businesses 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.

Speaker 1

S. Market focused growth initiatives is 12.2%. Turning to Slide 14, we are maintaining our sales guidance range for 2024 of $6,650,000,000 to $6,850,000,000 This slide shows the midpoint of this range or $6,750,000,000 which would represent an organic volume growth rate of 7.3%. This is well above our long term annual targeted range of four to 6% despite the temporary headwinds associated with recent supply issues of our lobster and a challenging consumer environment in Canada. Turning to Slide 15, Our adjusted EBITDA for the quarter was 121,000,000 representing an increase of $10,300,000 or 9.3% as compared to the 2023.

Speaker 1

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 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 1,600,000 increase in its adjusted EBITDA as compared to the 2023. Turning to Slide 16, we are maintaining our adjusted EBITDA guidance range for 2024 of $630,000,000 to $650,000,000 The slide shows for 2024 the midpoint of this range or $640,000,000 and a resulting adjusted EBITDA margin of 9.5% based on the midpoint of our sales guidance.

Speaker 1

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 $24,000,000 representing a $4,600,000 decrease as compared to the first quarter of twenty twenty three, 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 quarters sales growth.

Speaker 1

The year over year impact of this on our earnings is estimated to be $8,200,000 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 $98,000,000 on capital expenditures, consisting of $70,000,000 on major project CapEx, dollars 14,700,000.0 in smaller project CapEx and $13,300,000 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.

Speaker 1

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 $296,000,000 over the next six 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.

Speaker 1

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:one and our total debt to EBITDA ratio, which includes our subordinate debentures at 4.3:one. In terms of liquidity, we finished the quarter in a strong position with almost $600,000,000 in unused credit capacity. The next and final slide shows a variety of our free cash flow and dividend metrics over the last eighteen plus years. For 2024, we have increased our quarterly dividend rate by 10.4% to $0.85 per share per quarter.

Speaker 1

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 three years and the stabilization of interest rates. This concludes our presentation. Please join us on our Q and A conference call later today at 10:30AM Vancouver time, 01:30PM Toronto time. Thank you.

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