Earnings call: Premium Brands expects stable growth amid expansion

Premium Brands Holdings Corporation (PBH) reported on their First Quarter 2024 performance during an earnings call on May 13, 2024. CEO George Paleologou and CFO Will Kalutycz provided updates on the company’s operational progress, financial status, and strategic plans.

The executives discussed the company’s capacity investments in the US market, a positive outlook for the Canadian business, and upcoming product launches.

They also highlighted their confidence in meeting the midterm EBITDA target and managing long-term risks effectively. The company’s expansion plans, including the Tennessee facility, are set to significantly increase capacity, and a focus on M&A activities in the US market is aimed at further growth.

Key Takeaways

• Premium Brands Holdings Corporation is optimistic about its growth strategy and capacity investments in the US market.
• The company’s Canadian business has shown improvement in Q1 after a slowdown, with stable to positive organic growth expected for the year.
• Premium Brands anticipates three major product launches in Q2 and improvement in gross margins throughout the year.
• The Tennessee facility expansion is projected to add $8 billion to $8.5 billion of capacity, with a total of $300 million in project CapEx planned over the next six quarters.
• The company is also focused on M&A to increase capacity in the US market and improve capital efficiency in the seafood sector through its subsidiary Clearwater.

Company Outlook

• Premium Brands expects to meet its long-term guidance ranges by year-end, with potential short-term fluctuations due to sale and leaseback transactions.
• A midterm EBITDA target of 10% is set for 2025.
• The company is confident in its business model and the management of long-term risks.

Bearish Highlights

• The company acknowledged short-term noise in the balance sheet due to timing of transactions.
• Deflation in specialty foods, particularly in the sandwich business, was noted.

Bullish Highlights

• Premium Brands is seeing opportunities with QSR customers looking for lower-priced products as a response to menu inflation challenges.
• Stable commodity prices for pork and poultry are expected.
• The company’s conservative five-year plan is on track to be exceeded.

Misses

• No specific sales guidance was given for 2025.

Q&A Highlights

• Executives discussed consumer demand, product launches, margins, and costs.
• The company expressed confidence in their long-term risk management.

Capacity Expansion Plans

• The Tennessee facility’s final phase is not included in the current five-year plan but is expected to significantly boost the company’s capacity.
• Additional expansion projects are planned to reach a target of $9.5 billion in the next few years.

M&A and Capital Expenditure

• Premium Brands is actively pursuing M&A deals to address capacity issues in the US market.
• Approximately $200 million of the projected $300 million in project CapEx is to be spent this year, with the remainder slated for the first two quarters of the next year.
• Clearwater is considering several transactions to add value to their harvested species and improve capital efficiency.

Full transcript – None (PRBZF) Q1 2024:

Operator: Good morning, ladies and gentlemen. And welcome to the Premium Brands Holdings Corporation First Quarter 2024 Earnings Conference Call question-and-answer session. At this time, all lines are in a listen only mode [Operator Instructions]. This call is being recorded on Monday, May 13, 2024. Our speakers today are George Paleologou, CEO and President of Premium Brands and Will Kalutycz, CFO of Premium Brands. I would now like to turn the conference over to George. Please go ahead.

George Paleologou: Good morning. And welcome, everyone to our 2024 first quarter conference call. With me here today is our CFO, Will Kalutycz. Hopefully, you’ve had a chance to listen to the prerecorded call posted on our Web site this morning. We will now move to the Q&A portion of the call. Jenny?

Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session [Operator Instructions]. Your first question is from Martin Landry from Stifel.

Martin Landry: I’d like to try to understand a little bit where we go from here. Obviously, you are expecting EBITDA growth to accelerate on a year-over-year basis for the remainder of the year. So I’d like to understand if you can list maybe three factors that you’re watching that could prevent you from reaching your guidance this year? Is it delay in new capacity coming online, is it the weak consumer demand, is it labor? If you could tell us a little bit how you look at your risks for the remainder of the year would be helpful.

George Paleologou: Well, again, Martin, we’re very pleased to, of course, show progress in the first quarter. As we said in our prepared remarks and in the press release, over the last two or three years, we’ve invested a lot of capital in building capacity, focused mainly on the US market. And it’s great that we’re showing progress, of course, in terms of the US market. In terms of your comments in regards to the remainder of the year or the quarters ahead, of course, we’re always dealing with risks and we’re managing risks. It’s part of our business. But overall, we’re very pleased with where we’re at today. We — for the first time in a long time, we have very food safe, efficient capacity. We have great innovation in our pipeline and we’re very busy presenting solutions to customers, to retail and foodservice customers that are trying to deal with inflation. So we’re in a very good position. We’re very pleased with what we see. We’re happy to be bringing very efficient capacity on stream, and I think we’re in pretty good shape for the remainder of the year. That’s not to say that there are no risks in our business. But again, I think over the last 20 years, we’ve shown that the business model is very conducive to managing risks. We don’t manage quarter-by-quarter, we manage for the long term. And I think that the wisdom of our business model continues to prove itself.

Will Kalutycz: And Martin, I would just add from a capacity perspective, all of the facilities that are — we need to execute on our 2024 growth strategy, all those capacities are now in place. So that should not be an issue and really, it’s just like George says, executing at this point.

Martin Landry: And maybe just a follow-up on the capacity. Is it fair to say that there is limited to no delays versus your original budget at the beginning of the year in terms of time to come online?

George Paleologou: Can you say that again, Martin? That wasn’t clear, I didn’t understand your question.

Martin Landry: I’m just trying to understand if there’s delay in your capacity coming online versus your original plan when you set up your budget?

Will Kalutycz: No, that was my point earlier. All the capacity we need now to execute on our 2024 business plan is in place today.

George Paleologou: The only other comment [Multiple Speakers]…

Martin Landry: So no delays in your capacity coming online versus your original budget?

Will Kalutycz: No.

George Paleologou: Not on the capacity front, Martin. The only other comment I have is that in the US, in particular, we’re generally dealing with larger customers. I think that the onboarding of new customers sometimes takes longer than what we may have anticipated. There is big chunks of business there, but the process of onboarding may be lumpy at times. So again, we’re not in control of the exact timing. But we are very, very optimistic in terms of what we have in the pipeline and what we see.

Operator: Your next question is from George Doumet from Scotiabank.

George Doumet: I just want to understand a little bit what happened in Canada. There was a pretty material improvement quarter-over-quarter. Was it like a stronger exit in March? Just was the inter-quarter performance different, anything you want to maybe call out there? It’s pretty quick improvement there.

George Paleologou: Yes, again, as we’ve said on — in regards to the fourth quarter call, George, the slowdown in December surprised us, surprised many of our businesses. I think in general terms, recognizing this slowdown, a lot of our businesses did a lot of promotions and also pivoted some of their capacity to the US. So between the two, we’ve sort of reacted to what happened in December.

George Doumet: Can you give some examples of some of the pivoted capacity starts or maybe just follow-up on that point?

George Paleologou: Well, again, our bakery business, for example, has secured a lot of business in the US more recently. And again, it’s a good example of pivoting capacity instead of facing issues in the domestic market.

Will Kalutycz: And George, just a little more color there. What George talked about is certainly specialty foods and it was nice to see. I think we called it out that we actually saw growth in our Canadian business in the first quarter versus a contraction last quarter in specialty foods. Premium foods distribution, it’s a little more subtle understanding. There we continue to struggle with consumers trading down to discount banners where we just don’t sell our premium beef and seafood programs. But we were helped this quarter by a really strong Atlantic salmon fishery that position them well to do a lot of featuring with retailers. So that’s helped offset some of that weakness, but that’s something we don’t expect to continue into Q2.

George Doumet: And I guess when you guys set the guidance, it seemed that the Canadian business was under a little pressure. All things equal, it seems like it’s a little bit better. So if we continue — Canada delivers flat to positive organic growth this year, do you think that could be a source of upside to your guidance?

George Paleologou: Yes, the current state of the market is kind of unfolding as we expected. Again, we didn’t expect that large contraction in Q4 to be sustained, and so it’s really playing out how we expect it. And then again from last quarter what we talked about was sort of stable for the first half of the year, maybe a slight contraction on the premium foods distribution side of things. And then improvement showing in the back half of the year as we start lapping some of those more challenging numbers. And hopefully, we start seeing some relief on interest rates and the consumer being able to spend a little bit more on their food bill.

George Doumet: And my last one, in your prepared remarks you mentioned a midterm EBITDA target of 10%. Do you think that level is attainable in the second year for the entirety of the business assuming we can do double digit growth in organic at SF and assuming stable commodity markets?

George Paleologou: Yes, we’re cautiously optimistic we should hit that number in 2025.

George Doumet: As an annual number?

George Paleologou: As an annual number, yes.

Operator: Your next question is from Derek Lessard from TD Cowen.

Derek Lessard: Curious if you’ve seen any sort of cracks in the US consumer?

George Paleologou: I think that it depends on the channel, Derek. As I said in my prepared remarks, there’s evidence that menu inflation in both Canada and to a lesser extent in the US is an issue. And consumers obviously have to buy food. Consumers love to eat food outside of their home. But there’s no question that menu inflation is a big issue for a lot of the operators. And this bodes really well for us in the sense that we are able to give them solutions to that issue. It’s part of the reason why we’re very optimistic about where we’re at given that for the first time in a long time we have capacity to sell. But yes, in certain channels, absolutely, there is some evidence of slowing demand in the US as well.

Derek Lessard: And maybe just switching gears to the sandwich business, in particular. When should we expect you guys to start lapping the impact from the new product display strategy from your large client?

George Paleologou: One more quarter, Derek. That started in the third quarter of last year.

Derek Lessard: And I think you guys, a few quarters ago, also highlighted the real nice progress with sandwiches in particular going into the club channel. Just wondering if you can maybe update us on the progress there and on any incremental or new potential customers?

George Paleologou: All I could say that, Derek, is that there’s a lot of activity going on. As I mentioned earlier, every major C-store operator, every major QSR in the US today is looking for innovation and solutions with regards to their menu inflation issues. A lot of it caused by the increased cost of labor. So we’re able to offer them solutions with regards to innovation and cost savings as well. So every channel, I think that over the next few quarters and few years, we will be doing a lot more business in C-store and in QSR in the US.

Derek Lessard: And maybe one last one for me before I requeue, and I know you must be thinking one thing at a time. But how do you feel about where your leverage stands and maybe expectations for the remainder of the year?

Will Kalutycz: So our leverage was a little higher than we expected in the quarter, at the end of the quarter, primarily due to inventory related issues. We did have significant — most of it was planned, the increase in our inventory, seasonality and we have three major new product launches coming on stream in the second quarter. But there was an unplanned component in terms of, we had a major customer who saw some soft sales towards the end of the quarter and that ended up in a bit of a ramp up of our inventories. And also then, we had some timing issues around with some containers coming from offshore, but those should normalize over the course of the year. Our outlook for the balance sheet hasn’t changed. We still expect to be within our long term guidance ranges by the end of the year. But in the short term, there will be a bit of noise. It will be subject to the timing of the sale and leaseback transactions that we’ve been discussing. Those could happen in the third or the fourth quarter and they’ll certainly have a material impact on our balance sheet. But overall, you shouldn’t see anything, it should be stable to coming down over the course of the year.

Operator: Your next question is from Stephen MacLeod from BMO Capital Markets.

Stephen MacLeod: Just a couple of questions. You mentioned — I just wanted to dig in a little bit on some of the product launches. Just wondering if you can give some examples of things that hit the market in Q1? And then Will, you just alluded to kind of three major product launches coming on stream in Q2. So just curious if you can give a little bit color around those if you’re able to?

Will Kalutycz: So there was no new launches in Q1. There was continuation of launches we did in 2023 and continue to see the benefit, because we’re not lapping them yet. In terms of going forward, the three major launches, there’s one in retail, actually — two in retail, one in the sandwich group, one in the protein, they’re with a major national customer, North American customer. So we’re excited about those. One is in protein, one is in sandwiches. And then we also have another product launch coming with a major QSR chain in the US. So all exciting opportunities. And again, mainly US driven and will help to continue to drive that growth we’re seeing from our US sales initiatives, and largely the result of these capacity expansions we’ve been investing in over the last couple of years.

Stephen MacLeod: And then just thinking about the margins through to the balance of the year. I mean relative to our estimates kind of gross margin was better than expected, but SG&A was a little bit higher. So is that kind of how you expect things to unfold through the balance of the year?

Will Kalutycz: I think you’ll see less impact from the SG&A factor just because Q1 is a more seasonal quarter — slower quarter, and so SG&A can have a higher impact as a percentage. So it should have less. And then as the year unfolds and we see that sales leveraging from our growth, you should see some improvement in the gross margin. So it really should be gross margin driven, the increase or the improvement year-over-year in our EBITDA margin.

Stephen MacLeod: And I guess that’s also coming back to the strong contribution margins to those new products coming online?

Will Kalutycz: Repeat that again, Steve.

Stephen MacLeod: I was just saying that that also points to the strong contribution margins of those new products as they come into the market.

Will Kalutycz: Exactly, exactly. We’ve talked about that in the past. Our sandwich, protein and bakery goods have contributions anywhere from 25% to 45%.

Stephen MacLeod: And then just one final one for me. The ccosts were just running a touch higher in Q1 and I’m just curious what you expect for that for the full year 2024?

Will Kalutycz: Q1 should be a fairly — a good example of the run rate for the year. Most of that was variable compensation related. And again, assuming we hit our — last year was a tough year and correspondingly, our bonus accruals were much, much reduced. And this year, we are much more optimistic and you’re seeing that reflected in the accruals.

Operator: Your next question is from Vishal Shreedhar from National Bank.

Vishal Shreedhar: Just on the selling price deflation in Specialty Foods, it happened this quarter, it happened last quarter and you gave us some explanation for that. In the past, PBH talked about the ability for Specialty Foods to hold pricing followed periods of heightened inflation. I was just wondering if you could reflect on that comment and put it in context of the deflation that we’re seeing right now and put that in perspective how we should think about it going forward?

Will Kalutycz: Yes, the vast majority of that deflation, Vishal, related to our sandwich business and the cost plus contract. So again, we don’t take any margin risk there, because again, it’s cost plus. But correspondingly, as raw material prices increase and decrease, we pass those on to our customer whether they’re savings or cost increases.

George Paleologou: And this is not new, that’s always been the case with regards to that business.

Vishal Shreedhar: So ex that business, did that phenomenon about holding the price increases hold?

Will Kalutycz: Yes, absolutely. The only exceptions to that and we’ve talked about this, Vishal, is one, George mentioned earlier, we’re doing a lot more promotion. And so we reflect that promotion cost to the extent it’s off invoice price given to our customer is deflation. So there was a little bit of that in there. And then also the one area we have given a bit pricing back to our customers is in poultry. A year ago, poultry prices were at absolute record highs and they’ve come down significantly. And we talked a bit about this last year, we did see a little bit of demand destruction. And so, we have been passing on some of those savings to our customer to get those volumes back and we’re seeing that success of that strategy.

Vishal Shreedhar: Changing topics here, there is an seemingly increasing weakness in the QSR channel. You referenced it somewhat with that comment on inventories, and some QSRs have reported weaker than expected results in some cases meaningfully so. Wondering as you reflect on that, is that in consideration with your guidance? And considering that, does that still feel comfortable for you as you look to expand?

George Paleologou: Again, Vishal, I think that’s actually a positive for Premium Brands, because I think a lot of the QSR are talking about the menu inflation challenges. And the fact that they’re looking to innovate by introducing products into the market that are lower priced. So we are in a very good position to give them innovative solutions that address the menu inflation issue. So one of the reasons why we’re so busy today making all kinds of presentations to many, many QSRs, particularly in the US is because of that.

Will Kalutycz: And Vishal, what George is saying is definitely the case over sort of the mid to long term in the course of the year. We did internally pull back our expectations because of some weakness with one specific customer, but we’re still well within our guidance range for the year.

Vishal Shreedhar: And if lobster recovers as PBH anticipates, how quickly should the PFD segment return to growth? Is it reasonable to expect growth in Q2 or is it more Q3 or Q4?

George Paleologou: Our expectation is Q2 is hopefully, again, sort of similar to this quarter or better than this quarter, should hopefully be flat year-over-year in organic volume growth rate terms. And then as the lobster continues to help and we see some stability in the Canadian consumer in our beef and seafood programs, we should see a return to growth in Q3, Q4, that’s our general expectation.

Vishal Shreedhar: And you talked about it a bit last quarter, but the sale and leaseback, there was some expectation that you could get some of that early Q2. I think you referenced Q3 and Q4. Wondering if you can give us some thoughts on the magnitude and the associated rent expense and how we should think about modeling that?

George Paleologou: So we’re looking at several transactions. Nothing will happen in the second quarter. We are pushing for one transaction in the third quarter and possibly a second one in the fourth quarter. Again, we talked in the past, they’re probably around $250 million to $300 million in total real estate value. In terms of lease impacts, I can’t comment on that at this point.

Operator: Your next question is from John Zamparo from CIBC.

John Zamparo: A couple of follow ups and then to a broader question. I wanted to come back to the commodities environment. I appreciate the comments on poultry. I wonder what you’re seeing in your other major commodities, where are you seeing inflation versus deflation and where have you hedged your positions?

George Paleologou: Well, so probably the most critical commodities to our business today are pork and poultry, just because beef is largely used in our premium foods distribution group, which is much more dynamic pricing model. And so in terms of our most concern around inflation, it would be the beef category. But again, we have dynamic pricing there and the least amount of exposure to sort of short term fluctuations or increases in that commodity. So if we look at the specialty food segment, pork, in general terms, we expect relatively stable environment. Production is slightly up in the US. Globally production is better. Feed prices are coming down. So we’re expecting relatively stable prices there. Chicken is a little bit more uncertain. We do expect — there’s been a bit of spike most recently in chicken poultry prices in the US. It has stabilized. There is some expectations so maybe a bit of softening towards the end of the year. So again, overall we’re expecting a relatively stable environment. But again, John, I always go back to our pricing power, over 2022, 2023 and we put through over $0.75 of $1 billion of price increases and most of that was in our specialty foods group. They have tremendous ability to pricing and really it’s one of managing the short term pricing delays as we give our customers notice. But again, in general terms, we’re expecting commodities for Specialty Foods group to be relatively stable for the year.

John Zamparo: A quick one on the quick service business and your customers in that space. Whether sandwich or not, are those contracts typically structured as cost plus and is there potential for volatility from some of those in the coming quarters beyond what you’d announced in Q1?

George Paleologou: They’re generally cost plus, not always, but generally cost plus. That’s the way I would describe them. There are partnerships, there’s a lot of transparency with the customer. And again, we’re very happy to have them cost plus.

John Zamparo: And then I wanted to get to capacity. And I wonder if we take the scenario of, let’s fast forward to, say, the end of 2025 when all your primary project CapEx is complete. I wonder if you can try to quantify what percent of your capacity would be spoken for once those facilities are open within your three key US core sales growth initiatives?

Will Kalutycz: So by the end — when we finish the Tennessee facility, at that point, we should have about $8 billion to $8.5 billion of capacity in place. Again, there’s some other projects coming online over the next couple of years that will take us to that 9.5 billion target we’ve talked about in our five year plan. In terms of 2025 though, John, we haven’t given any guidance on that year at this point in terms of sales.

George Paleologou: And that comment, John, assumes no acquisitions of more capacity in the meantime.

John Zamparo: And just so I make sure I understand that the Tennessee facility, that’s the current phase that you’re referring to. So I think the [Multiple Speakers] phase isn’t set for ’28 or ’29?

George Paleologou: Yes, the final phase isn’t even in our current five year business plan in terms of the sales coming from that.

John Zamparo: And then just one last one coming back to the earlier question on EBITDA margin commentary that you’re optimistic you can get to the 10% next year that was previously expected in 27%. I wonder what was the biggest driver of change? I mean, everything’s kind of moving in the right direction in terms of commodities environment, your gross margins, growth from your core drivers, but that is a meaningful change to potentially hit that target two years early. I wonder what was the biggest driver that you saw that made you think that that’s achievable next year?

Will Kalutycz: Really it’s quite a simple answer John is we set a very conservative target when we set our five year plan, because our last five year plan, we exceeded our sales one year early, which we have done in the previous two, five year plans, but we didn’t hit our EBITDA target. And we just want to make sure we set a plan, set an expectation that the risk of not achieving was incredibly low. So we’ve been conservative in that five year plan. And the planning is worked out and the execution is going well and as a result we’re going to — we expect to exceed that.

Operator: And your next question is from Derek Lessard from TD Cowen.

Derek Lessard: Just a few follow ups for me. You noted that you expect, let’s call it, another $300 million in project CapEx over the next six quarters. Just based on, I guess, your current timeline, are you able to give us sort of a rough timing of that spend, is it — or do you expect it to be more front end or back end loaded?

Will Kalutycz: So if everything goes according to plan and — the timing of expenditures, it’s roughly 200 million this year, 100 million next year in the first two quarters of next year. But again, generally, we find that that’s just the timing our businesses have given us. We generally find it takes a little longer. So I suspect it’s probably closer to 60 this year, 40 next year percentage wise. But right now, today, like I say, if everything goes according to plan, it’s about two thirds this year, one third next year.

Derek Lessard: And one last one for me on M&A, it looks like you have another — you already have one deal on the protein side moving to the advanced stage. Just maybe add some — shed some some color to the M&A pipeline?

George Paleologou: It’s basically much, much needed capacity based in the US to service the US market in areas where we’re very under capacity. So it’s a capacity solution for us.

Operator: Thank you. There are no further questions — we have another one from George Doumet from Scotiabank.

George Doumet: Can we talk a little bit about seafood, so maybe just Clearwater, the outlook for the rest of the year and I did notice an M&A target in seafood. So can you maybe talk a little bit about what’s on the wish list for M&A there?

Will Kalutycz: In terms of Clearwater, they’re looking at several transactions at this point, George, but there’s nothing imminent. Again, we’ve talked in the past the core strategy for them is to continue to value add the wonderful species they harvest and that plan is proceeding, and a core part of that plan is through acquiring certain customers. But at this point, there’s nothing specific to comment on.

George Paleologou: I should also say, George, that we’re also working on a number of projects to improve the capital efficiency of that business. And hopefully, we’ll be able to talk about those in the next few quarters.

Operator: Thank you. There are no further questions at this time. I will now hand the call back to George for the closing remarks.

George Paleologou: Yes. I just like to thank everybody for attending today. Thanks a lot.

Operator: Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect.

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