Premium Brands Q2 2024 Prepared Remarks Earnings Report

Premium Brands EPS Results

• Actual EPS: C$1.28
• Consensus EPS: C$1.32
• Beat/Miss: Missed by -C$0.04
• One Year Ago EPS: N/A

Premium Brands Revenue Results

• Actual Revenue: $1.70 billion
• Expected Revenue: $1.70 billion
• Beat/Miss: Beat by +$1.97 million
• YoY Revenue Growth: N/A

Premium Brands Announcement Details

• Quarter: Q2 2024 Prepared Remarks
• Date: 8/8/2024
• Time: N/A
• Conference Call Date: Wednesday, August 7, 2024
• Conference Call Time: 8:00PM ET

Premium Brands (TSE:PBH) Holdings Corp is engaged in specialty food manufacturing, premium food distribution, and wholesale businesses with operations in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, Nevada, and Washington State. The company's business segments include Specialty Foods, Premium Food Distribution, and Corporate. The Specialty Foods segment consists of its specialty food manufacturing businesses, which contributes about two-thirds of the group revenue; the Premium Food Distribution segment consists of the company's distribution and wholesale businesses; the Corporate segment includes the company's head office activities along with its finance and information systems. Its geographical segments are the United States and Canada.

Premium Brands Q2 2024 Prepared Remarks Earnings Call Transcript

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.

Presentation

[George Paleologou, CEO at Premium Brands Holdings Corporation]

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 four, 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 Foods Group 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, and as such, our business development teams have never been busier, with many exciting initiatives in the pipeline.

[George Paleologou, CEO at Premium Brands Holdings Corporation]

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.

[George Paleologou, CEO at Premium Brands Holdings Corporation]

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 US growth, and we're starting to see these investments contribute to our overall results. This positions us well as we continue to execute our five-year plan and progress towards our 2027 targets of CAD 10 billion in revenue and 10%-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.

[George Paleologou, CEO at Premium Brands Holdings Corporation]

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 six to nine, 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 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.

[George Paleologou, CEO at Premium Brands Holdings Corporation]

Expresco operates a state-of-the-art 75,000 sq ft 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'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 CAD 1 billion by the end of our current five-year plan, up from CAD 600 million today. I will now pass it to Will.

[Will Kalutycz, CFO at Premium Brands Holdings Corporation]

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, 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 CAD 1.7 billion, up CAD 72 million, as compared to CAD 1.63 billion in the second quarter of 2023.

[Will Kalutycz, CFO at Premium Brands Holdings Corporation]

This increase was driven by four factors, namely, organic volume growth of CAD 62 million in our Specialty Foods Group, currency translation gains of CAD 9.3 million, business acquisitions net of shutdowns, which contributed CAD 5.9 million, and CAD 6.1 million in selling price inflation. These factors were partially offset by a CAD 12 million contraction in our Premium Food Distribution Group organic volume. Our specialty food group's growth was driven primarily by the U.S. market focus growth initiatives in our protein, sandwich, and bakery businesses that George discussed earlier. This was partially offset by a CAD 6.5 million decrease in the group's sales in Canada, which was largely due to production-related issues associated with capacity expansion projects.

[Will Kalutycz, CFO at Premium Brands Holdings Corporation]

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.

[Will Kalutycz, CFO at Premium Brands Holdings Corporation]

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 timelines. 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.

[Will Kalutycz, CFO at Premium Brands Holdings Corporation]

Turning to Slide 13, while we are maintaining our sales guidance range for 2024 of CAD 6.65 billion-CAD 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 CAD 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 CAD 164.6 million, representing an increase of CAD 12.2 million or 8% as compared to the second quarter of 2022.

[Will Kalutycz, CFO at Premium Brands Holdings Corporation]

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 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 CAD 630 million-CAD 650 million.

[Will Kalutycz, CFO at Premium Brands Holdings Corporation]

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 CAD 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 water mark for us. Furthermore, we would be only 50 basis points away from achieving our midterm target of an annual Adjusted EBITDA margin of 10%.

[Will Kalutycz, CFO at Premium Brands Holdings Corporation]

Turning to Slide 16, our adjusted earnings and earnings per share for the quarter were CAD 56.9 million and CAD 1.28 per share, respectively, up slightly from CAD 56.3 million and CAD 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.

[Will Kalutycz, CFO at Premium Brands Holdings Corporation]

Turning to Slide 17, for the quarter, we spent CAD 104.4 million in capital expenditures, consisting of CAD 83.2 million on major project CapEx, CAD 11.5 million in smaller project CapEx, and CAD 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 CAD 230 million over the next five quarters in these projects.

[Will Kalutycz, CFO at Premium Brands Holdings Corporation]

We also expect to partially offset these expenditures with proceeds from the sale and lease back 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 1, and our total debt to EBITDA ratio, which includes our subordinate convertible debentures, at 4.4 to 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 CAD 550 million in unused credit capacity.

[Will Kalutycz, CFO at Premium Brands Holdings Corporation]

Furthermore, subsequent to the quarter, we increased our unused credit capacity by $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+ years. For 2024, in the first quarter of the year, we increased our quarterly dividend rate by 10.4% to CAD 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. 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.

[Will Kalutycz, CFO at Premium Brands Holdings Corporation]

Thank you.

Participants

Executives

• George Paleologou, CEO
• Will Kalutycz, CFO