Premium Brands Q2 2024 Earnings Call Transcript

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August 7, 2024

Key Takeaways

  • Positive Sentiment: We set record Q2 results as Premium Food Distribution stabilized and the Specialty Food Group delivered strong top-line and margin growth.
  • Positive Sentiment: U.S. initiatives drove 12.9% volume growth, led by sandwich and protein platforms leveraging new capacity to cut costs and improve quality.
  • Negative Sentiment: Growth in Canada was hampered by a $6.5 million sales decrease due to capacity expansion issues and a slump in beef jerky, and management now sees a higher probability of hitting the lower end of 2024 guidance.
  • Positive Sentiment: Adjusted EBITDA rose 8% to $164.6 million with a 9.7% margin (a six-year Q2 high), and adjusted EPS increased to $1.28 despite headwinds.
  • Neutral Sentiment: The company invested $104.4 million in capex this quarter, plans another $230 million over five quarters, and holds $550 million in unused credit capacity while advancing several acquisition due diligence processes.
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Earnings Conference Call
Premium Brands Q2 2024
00:00 / 00:00

There are 2 speakers on the call.

Operator

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

Operator

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 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.

Operator

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.

Operator

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 consistency of execution across customer store networks.

Operator

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 five 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.

Operator

This positions us well as we continue to execute our five year plan and progress towards our 2027 targets of $10,000,000,000 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 five. 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 Slides six to nine, where we have included some pictures of products made and sold in both the retail and foodservice channels across North America by our Xpresco Foods business.

Operator

Xpresco was our initial investment in the cooked protein space and specializes 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. Xpresco 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.

Operator

We believe that Xpresco's progress in The U. S, combined with the momentum over other cooked protein businesses, will help drive our overall sales of ready to eat meat proteins to $1,000,000,000 by the end of our current five year plan, up

Speaker 1

from $600,000,000 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 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.

Speaker 1

Turning to Slide 11. Our sales for the quarter were a record $1,700,000,000 up $72,000,000 as compared to 1,630,000,000 in the 2023. This increase was driven by four factors, namely organic volume growth of $62,000,000 in our specialties foods group, currency translation gains of $9,300,000 business acquisitions net of shutdowns, which contributed $5,900,000 and $6,100,000 in selling price inflation. These factors were partially offset by a $12,000,000 contraction in our Premium Food Distribution Group's organic volume. Our Specialty Food Group's growth was driven primarily by The U.

Speaker 1

S. Market focused growth initiatives in our protein sandwich and bakery businesses that George discussed earlier. This was partially offset by a $6,500,000 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 foodservice channel, less featuring of premium seafood and beef products in the Canadian retail channel and lower lobster exports to China.

Speaker 1

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 7.220.4%, respectively, both of which were below our expectations due to several major product launches being delayed to later in 2024 and early twenty twenty five as well as a weaker than expected trends in consumer spending in the foodservice 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.

Speaker 1

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 6,650,000,000 to $6,850,000,000 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 6,750,000,000 which would represent an organic volume growth rate of 7.3%. Turning to Slide 14.

Speaker 1

Our adjusted EBITDA for the quarter was $164,600,000 representing an increase of $12,200,000 or 8% as compared the 2022. Our adjusted EBITDA margin increased by 40 basis points to a six 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 on line by our Specialty Foods Group and general wage inflation across most of our businesses. Turning to Slide 15.

Speaker 1

We are maintaining our adjusted EBITDA guidance range for 2024 of $630,000,000 to $650,000,000 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 $640,000,000 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.

Speaker 1

Our adjusted earnings and earnings per share for the quarter were $56,900,000 and $1.28 per share respectively, up slightly from $56,300,000 and $1.27 per share respectively in the 2023. This represents the first year over year increase in these metrics since the latter part of twenty twenty two 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 $104,400,000 in capital expenditures, consisting of $83,200,000 on major project CapEx, dollars 11,500,000.0 in smaller project CapEx and $9,700,000 in maintenance CapEx.

Speaker 1

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 and 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 $230,000,000 over the next five quarters in these projects.

Speaker 1

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 to one and our total debt to EBITDA ratio, which includes our subordinate convertible debentures at 4.4 to one. 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 $550,000,000 in unused credit capacity.

Speaker 1

Furthermore, subsequent to the quarter, we increased our unused credit capacity by US150 million dollars 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 eighteen 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 three years and the moderation of interest rates. That concludes our presentation.

Speaker 1

Please join us on our Q and A conference call later today at 10:30 a. M. Vancouver time or 01:30 p. M. Toronto time.

Speaker 1

Thank you.

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