Premium Brands Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 15, 2023

There are 8 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to the Premium Brands Holdings Corporation First Quarter 2023 Earnings Conference Call. Joining us on today's call, we have from Premium Brands, George Paleologou, CEO and President and Will Kalutycz, CFO. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Monday, May 15, 2023.

Operator

I would now like to turn the call over to George Caliologou, CEO and President of Premium Brands. Please go ahead.

Speaker 1

Thank you, Julie, and 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 key highlights for the quarter. Results for the quarter were on plan as industry headwinds subsided.

Speaker 1

Our overall volume growth for the quarter was within our targeted range of 4% to 6%. However, the majority of the growth came from the foodservice channel as out of home dining returned And food traffic in retail slowed down somewhat. Consumers have resumed their regular activities. They're spending more time at the office downtown. They're the company's business and pleasure, and they're consuming more food at QSR and in white tablecloth dining establishments.

Speaker 1

This, of course, means that they're eating and entertaining a little less at home. Return to normality for us means that once again, We're able to present our products and process innovations to new and existing customers, and we are pleased to report that responses have been excellent. Innovation is back in vogue and the premium brands ecosystem remains prolific in this area. Both our reporting platforms performed well during the quarter and are very well positioned to gain traction flowing forward. Demand for our cooked protein, artisan sandwich and specialty bakery products was very strong, while our center of the plate best in class protein offerings We're pleased to report that our new sandwich facility in Edmonton, Alberta is now ramping up And will be fully operational by the end of this month.

Speaker 1

The facility features automated state of the art sandwich assembly lines as well as industry leading charcuterie tray We continue to gain momentum in growing in our U. S. Businesses, and we expect this trend to accelerate in the months and years ahead. During the fiscal Q1, 57% of our Specialty Foods platform's sales were generated by our U. S.-based businesses.

Speaker 1

Considering the many new listings we have secured recently and the current pipeline of opportunities, we have visibility to this number growing us now to the Q1 2020 earnings conference call. We're now on Slide 5. You can see that our acquisition pipeline remains very full. Although we did not close any acquisitions during the quarter, we're pleased to report the completion or near completion of several capital projects us today, we'll be conducting a number of capacity challenges facing our various businesses, while improving efficiencies and enhancing productivity. Hopefully, you had a chance to watch the 3 videos we showed at our AGM on Friday.

Speaker 1

All three videos demonstrate the degree of automation and robotics we have been investing in me over the past 3 years. Before I pass it to Will, I would like to reiterate that as promised, We're emerging from the past 3 chaotic years bigger, stronger and even more diversified. Our decentralized entrepreneurial focused Our business model combined with our great people and culture continues to differentiate us, and we look forward to translating these competitive advantages As you can see on Slides 6 to 12, our prolific product innovation continues to disrupt and reinvent The various categories we compete in. Look for some of these products at a store near you. We're especially pleased to be bringing premium center cut our Super Lean Best in Class Bacon to Central and Eastern Canada under the Let Betters brand.

Speaker 1

It won't be the cheapest bacon you ever bought, you today, I will now pass it on to Will. 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 14 52 weeks ended December 31, 2022, As well as other information on our website for a broader description of the risk factors that could affect our performance.

Speaker 1

We're now on Slide 14. Our sales for the quarter were $1,430,000,000 This was an increase from 2022 of 179 point $3,000,000 or roughly 14.3%. There were 4 major drivers of our growth. 1st the largest was our organic volume growth, which was up $66,800,000 This was driven by the recovery in our food service and to a lesser sense cruise line bids sales to those channels as George mentioned earlier, our artisan frozen sandwich programs our cooked protein initiatives, which mainly are in the U. S.

Speaker 1

Us today, we will be conducting a few key initiatives, which are both in Canada and the U. S. Our organic volume growth Our organic growth rate for the quarter was 11.7%, which is well above our long term target of 6% to 8%. Turning to Slide 15. You can see on this slide from the chart, which shows our organic volume growth rate by quarter, the Steady progress we've made over the last four quarters from a trough of 1.3% in the Q2 of last year, which was greatly in fact impacted by the pandemic and inflation related factors and steady improvement over the 4 quarters reaching 5.3% for this quarter, Which is in fact the highest Q1 growth rate in our 5 year history other than the Q1 of 2020, Which was heavily impacted by a pandemic related demand surge.

Speaker 1

Compared to our expectations for the year, the Q1's growth rate of 5.3% is low, primarily due to Q1 being a seasonally slow quarter, as well as ongoing supply challenges with our Turkey, which good news there that we have seen some openings and some normalization in the commodities market, which is allowing us to reenter for that category this year. So we're excited about that. Turning to Slide 16. We reaffirmed our sales guidance for 2023 of $6,400,000,000 to $6,600,000,000 Using the midpoint of this guidance $6,500,000,000 that would represent growth from 2022 of roughly $470,000,000 or 8%. Turning to Slide 17.

Speaker 1

This slide shows our weekly sales and the black line is for 20 23 relative to the gold line, which is 2022. You can see we continue to generate solid momentum. The good news is FX translation And selling price increase impacts are lesser of a fact and as we go forward, organic volume growth will be more of a factor. Turning to Slide 18. Our EBITDA for the quarter was $110,700,000 This is an increase of $14,900,000 or 15.6 percent from 2022.

Speaker 1

There were 3 positive drivers and 4 major negative drivers of our results for the quarter. On the positive side, We continue to make great progress in recovery in margin recovery with our selling price increases outstripping our the call today, we will discuss the financial results. Thank you, Steve. Thank you, Steve. Thank you, Steve.

Speaker 1

Thank you, Steve. Thank you, Steve. Thank you, Steve. Thank you, Steve. Thank you, Steve.

Speaker 1

Thank you, Steve.

Speaker 2

Good morning, Steve.

Speaker 1

Good morning, Steve. Good morning, Steve. Good morning, Steve. Good morning, Steve. Good morning, Steve.

Speaker 2

Good morning, Steve. Good morning, Steve. Good morning, Steve. Good morning, Steve.

Speaker 1

Good morning, Steve. Good morning, And then organic volume growth was the next biggest driver. And finally, plant efficiencies, driven by recent investments we've made in Automation and New Technology. On the negative side, our plant overheads were much higher year over year. This was driven primarily by the ramp up in capacity that we've been investing in, which will drive our growth in the 2nd 3rd quarters of this year.

Speaker 1

Incentive based compensation was also up due in part to our higher expected earnings for the year and free cash flow. Discretionary promotion was up mainly due to the normalization of this expense post pandemic. And finally, outside storage costs continue Turning to slide 19, just gives you some progress we've made over the last 5 quarters on Recovering our margins from the impacts of cost inflation. You can see that the first row shows our selling price inflation by quarter. And the 3rd row, the net margin impact of our selling price increases after wage for raw materials and freight inflation.

Speaker 1

You can see from Q1 last year of a negative impact of $1,900,000 We made steady progress to roughly $18,000,000 positive impact in the Q1. Turning to Slide 20, Our EBITDA margin for the quarter was 7.7%, which was flat year over year. Q1 is generally a lower margin quarter due to the seasonality of our business and then other factors impacting our margin for the quarter was the significant unutilized capacity we built up to report our growth in the 2nd and third quarters. As I mentioned, that relates directly to the increase in the plant overheads. And then also our bolt on acquisitions that we completed in 2022, which are making great progress, but still have Much lower margins than their projected margins.

Speaker 1

That resulted in about a 30 basis point dilutive effect on our EBITDA margin. And finally, the notice of period associated with price increases we're putting through, if you've noticed on the previous slide, it was about $1,700,000 in the quarter, Much less significant from prior quarters as our pricing is catching up, but that was about 10 basis points of dilution in our EBITDA margin. So on a normalized basis, our EBITDA for the margin for the quarter was about 8.1%. Turning to Slide 21. We also reaffirmed our guidance for adjusted EBITDA for the year of $590,000,000 to $610,000,000 Using the midpoint of that guidance of $600,000,000 that would be an increase of roughly $96,000,000 or 19 percent for 2022.

Speaker 1

We also are projecting a nice increase in our EBITDA margin for the year. Again, using the midpoint, that would be about 80 basis points over 2020 you, too. Slide 22, our earnings for the quarter were down $10,800,000 to 28 point the balance sheet, we are now at $6,000,000 and our adjusted EPS was down $0.24 to $0.64 per share. There are 4 main drivers of the impact on our earnings. On the positive side was the growth in our EBITDA, which was about $14,900,000 And lower income taxes, which is about $6,300,000 The major negative impact on our Earnings and earnings per share came from the investments we've been making in growth.

Speaker 1

We estimate that impact from investing in capacity, which will set us up again for growth in 2nd and third quarter was about $19,600,000 before tax or roughly $14,500,000 after tax. And that consisted of interest on the capital we've invested and then additional lease and depreciation costs associated with those investments. Then the 4th factor impacting our earnings and earnings per share for the quarter was higher interest rates, which was an impact of about 12,300,000 you to see our earnings and adjusted earnings per share would both have been at record levels for the quarter. Slide 23, we finished this quarter with strong liquidity with $475,000,000 of unused credit capacity. Our debt ratios did, however, remain relatively flat from Q4 at 4.3:one for our total debt to EBITDA ratio on 3.2:one for our senior debt to EBITDA ratio.

Speaker 1

Both these ratios are high due to our high inventory levels, which I will be talking to you on a later slide, as well as our strong capital plan for 2023. We do expect solid improvement us in these covenants in the back half of the year as we grow our EBITDA and our inventory levels normalize. Turning to Slide 24. Our days cost of sales and inventory at the end of the quarter were 65 days, which was a slight improvement for the Q1 of last year, which was 65.8 days. However, we still have Lots of work to be done as we're still about 8 to 9 days over our historic levels.

Speaker 1

Our higher inventory levels for the Q1 were driven by 3 key factors. 1 was, and you can from the chart below, Q1 is just a normally strong inventory build period. You can see each of the last 5 years, Q1 has Sort of the peak point in our inventory cycle on a day's cost of sales basis. And with all of the sales initiatives we're preparing for in Q2 and Q3, that was elevated in Q1 this year. Then we also had new sales initiative builds.

Speaker 1

We've got some very Exciting sales initiatives launching in the 2nd quarter, which we had built about $35,000,000 of inventory for, which was unusual us today is a very high level. And then we had an unusual level high level of what we call opportunistic purchases where we were able to go into the market And buy raw materials at favorable prices and that was about $27,000,000 of additional inventory, which should contribute to better margins in the second quarter. Turning to Slide 25. For the quarter, we spent $62,100,000 you on project capital expenditures. These are expenditures that are expected to return or generate an internal rate of return of 15% or greater.

Speaker 1

$43,300,000 of those expenditures were on 11 major projects. 7 of those are Overall, the total expected investment for our projects underway is about $642,000,000 Of which we spent about $180,000,000 leaving $463,000,000 spent over the next couple of years. That concludes the financial presentation. With that, I'll hand it back to the moderator.

Operator

Thank you. Your first question comes from Martin Landry from Stifel GMP. Please go ahead.

Speaker 3

Hi, good morning, George and Will.

Speaker 1

Hey, Martin.

Speaker 3

My first question, in your opening remarks, you're talking about unused capacity utilization as having a bit of an impact on your EBITDA margins. I was wondering if you can put a number to that. What was your capacity utilization during the quarter? And then you're talking about Expecting it to improve in Q2 and Q3. So I was wondering what was your utilization this quarter and where do you

Speaker 1

Yes, we don't have a utilization number, Martin, just because We're a portfolio of businesses and they're all at different levels. So it's really hard to come up with 1 That summarizes everything. But they range from some of our sandwich facilities are sort of the 70%, 70% to 75% range, some of our meat snack facilities, 60%. We've got lots of capacity, me now? Particularly with what's coming on stream now and in sorry, that came on stream at the end of the Q1 and is coming on stream in the second quarter us to certainly exceed our sales expectations for this year.

Speaker 1

Yes. So Martin, we have 115 facilities us now to discuss the network and so there's quite a range of capacity utilization. As Will said, in general terms, the 2nd and the 3rd quarter are by far the busiest, for many reasons having to do with the weather, in particular, People eating outdoors, barbecuing, all of those things. And when you run a plant at 60% capacity, You're still running it with the same type of overhead, right? So as you ramp up to 100%, that improves your Efficiencies and new productivity immensely, right?

Speaker 1

So generally, the Q1 is impacted margins are impacted because of the low utilization of the facilities.

Speaker 3

And just

Speaker 1

to give you a sense of the impact on the quarter, Martin, Our EBITDA, the impact on EBITDA plant overhead increase was close to $6,000,000 There's a little bit of cost inflation of that, But a lot of that is just building that infrastructure now to support our sales for the balance of the year.

Speaker 3

Okay. That's helpful. And it's a good segue into my next question. Again, in your opening remarks, you've talked about an inventory built up. I think you mentioned $35,000,000 that was related to new sales initiatives.

Speaker 3

So Could you share some of those new sales initiatives that you have lined up that are going to unveil in the next quarter?

Speaker 1

Me now. Yes. So just to correct the comment, Martin, Will was referring to One specific sales initiative with expected Sales being in that range. There's, of course, many sales initiative in the pipeline of premium brands going to the 2nd Right. And as we've talked before and as you know, we don't talk specifically about customers, but With increased capacities in the areas of sandwiches, in particular, meat me from the line of Alex.

Speaker 1

There's a lot going on with regards to opening new channels and Finding new markets for our products. Yes, but to just to George's point, Martin, it is primarily developed Driven by a number of sandwich initiatives that are new and we don't include in that factor the normal sort of Seasonal buildup for ongoing sales initiatives.

Speaker 3

Okay. I see. And then last question for me. With regards to the overall environment and the customer confidence I'm being a bit shaky right now. Are you seeing your private label products or your growth in private label sales Being faster than your growth in branded products and could that have a bit of an impact on your margins or not at all?

Speaker 1

I wouldn't say that's an issue for us, Martin. As we've mentioned in the prepared comments, What's happening right now is that we're basically back to normal. And I think consumers, as you know, are out and about and traveling and Getting on airplanes and I think you're seeing that in all the data that's coming out. So there is Less entertaining and eating at home. Obviously, that translates into reduced traffic through certain channels.

Speaker 1

We've always emphasized the importance of selling through diversified channels as a business overall, and we're Really happy with our diversification. And again, as you've seen during the quarter, we pickup sales in the foodservice channel and maybe lost a little bit of traction in the retail channel as Consumers are eating out more frequently.

Speaker 3

Okay. That's helpful. Thank you.

Speaker 4

Us now. Thank you, Mark. Thanks, Mark.

Operator

Your next question comes from Stephen MacLeod from BMO Capital markets, please go ahead.

Speaker 5

Thank you. Good morning, guys. Good afternoon for us. Good morning for you.

Speaker 1

Hi, Steve.

Speaker 5

Hi. Just wanted to circle around on the margin. You gave some good examples or some of the reasons why margins came in a little bit below expectations in Q1, some of the headwinds that you're seeing. As you work towards that Full year margin in the 9% plus range. Do you expect to get most of those gains kind of in Q2, Q3 you to take your questions.

Speaker 5

As you realize the benefits of these new sales initiatives?

Speaker 1

Yes. So going forward, the 2 big drivers of our margins will be growth in our Specialty Foods segment, which will be leveraging the capacity most of the capacity we've invested in over the last year is in our Specialty Foods segment. And it's a much higher margin business, much higher contribution margin. So that certainly is the biggest driver. And then the investments we've made in plant efficiencies.

Speaker 1

In the quarter, our plant efficiencies number was up about us to $5,000,000 through primarily automation and other kind of investments in new technology. So those are going to be the 2 big drivers. And so as you fold that out over the quarter, the automation is something that That's going to be sort of equal in Q2 to Q3. But in terms of the sales, the ramp up is certainly we're going to see some benefits in Q2, but Q3 will be the full quarter of those benefits. So that we're expecting that certainly to be our highest margin quarter of the year.

Speaker 5

Okay. That's helpful. And then just along those lines, I mean, you talked about capacity challenges. Is that all sort of wrapped in together with what you expect to see in Q2 and Q3 as you some of these investments Come on, or you reap the benefits from these investments. And is that where you expect to see the capacity solutions coming kicking in?

Speaker 1

Yes, absolutely. Those are we've talked in the past about particularly around sandwiches and some of our protein categories, cooked protein in particular, and even artisan bakery goods, being real bottlenecks and those are the bottlenecks we're addressing.

Operator

Your next question comes from John Zamparo from CIBC. Please go ahead.

Speaker 4

Thanks. Good morning, George and Will.

Speaker 1

Hey, John. Hey, John.

Speaker 4

I wanted to get back to capacity and particularly within the sandwich platform. And we spoke last quarter about how You weren't able to service all the sandwich customers you wanted to because of the combination of lack of capacity and just how fast your largest customer was growing. So I think you've said in the previous question or one of the previous questions, you're now at 70% to 75% capacity in sandwich. So I wonder how quickly can you fill this capacity? Is there kind of a waiting list of customers that you could quickly onboard?

Speaker 4

And I think the next expansion within sandwiches is Columbus early 2024. So can you just confirm that for me, please?

Speaker 1

Yes. So starting with your last part of your question, you're absolutely right. That's when Columbus is scheduled to come on Q1 2024. Again, you'll see we're sort of pushing up against the capacity of our sandwich group throughout the next 2 years. And that's why we've already started on the Tennessee plant, which is scheduled to come online Q1 2025.

Speaker 1

We'll be Based on the outlooks and the discussions we've had with the customers and potential customers, we're going to be pushing that capacity Pretty quickly and scrambling right through until 2025. But that's a good problem to have, John. And again, It's Will. Just to answer your earlier question, we're not just on boarding 1 or 2 customers, we're on boarding a lot of customers. What we have, what we offer to the industry is in very high demand.

Speaker 1

We're really happy to be commissioning the Edmonton facility. We've had lots of innovation sessions and lots of visitors with regards to customers wanting that capacity as we speak. So there's a lot going on in that In addition to that, because we have such a lead in that area, we seem to be taking market share as well. This is something that we've never done because this has really been white space for us, but we're even seeing opportunities to take market share as well. So there's lots going on in that pipeline, a lot of exciting growth initiatives in that platform.

Speaker 4

Okay, understood. And sticking with some of your different projects, you have multiple large ones underway. And I wonder if we're trying to figure out what's going to have the greatest impact on EBITDA. Is it as simple as looking at what you're spending on these? Or are there 1 or 2 projects Better going to over contribute when it comes to EBITDA improvements among your project CapEx?

Speaker 1

There's one outlier Our San Leandro Bakery initiative, John, these products are absolutely amazing. They are, to George's White space products that are just we can't keep up with the demand of our customers that are wanting us to take them into new markets. And they're good solid contribution margin products. So that's certainly and you can see from the CapEx spend, it's a pretty material project. So that's probably the outlier.

Speaker 1

After that, the size of the product Project is a good indication of the impact on our margin. And the biggest impact, again, John, overall in our margins is going to be getting back Normal, right? You have to understand that in the last three years, we had amazing challenges accessing labor, we had supply chain issues And of course, inflation. So you have to look at our margins today in that context. If you assume normalization, which We're seeing that will have a big impact in terms of our margins.

Speaker 4

Understood. Okay. Question on Clearwater. And the loss this quarter was larger than what we typically see. And you listed some of the reasons in the press release.

Speaker 4

And I know Q1 seasonally, but the softest quarter in that business. But can you elaborate on how Clearwater is performing? And can you give any color on their access to liquidity to Your expected interest and fees?

Speaker 1

Yes. So, yes, there's no doubt, there was sort of a variety of challenges in the quarter for Clearwater. Most of them just that, just sort of temporary challenges, some weather related issues, just the timing of inventory sales, some of that big or a good portion of that Clearwater is expecting to make up in the back half of the year. So we are expecting them to be on plan for the year. The reality is, John, and it's one of the reasons we the transaction as we did is there's expected to be volatility in their business because of things like catch rates and weather.

Speaker 1

And Q1 is exactly that. But for the year, no, we're still very positive on the year for the business and Expect a decent cash flow coming in to pay the what essentially is the stripping the free cash flow of the business by our interest payment. And I would just add that we've worked with Keyur's management team for the last couple of years to Reconfigure the business plan, the overall long term business plan towards more value added and branded products and we're making very good progress in regards to that. A few possible acquisition downstream type of acquisitions in the pipeline. So again, the plan is on track and on plan.

Speaker 4

Okay. That's helpful. And then just one more on margins, and then I'll pass it on. The elevated inventory levels that you've held So far, I understood why you make them. There's opportunistic raw materials prices you're getting.

Speaker 4

But can you say to what extent, If any, this has benefited margins to this point or is that a future margin benefit?

Speaker 1

It's largely a To the extent we made some opportunistic buys in last quarter or Q4 Before that, we did carry into Q1 and used in Q1, but the reality is that was part of that margin normalized. It's captured in that 18,000,000 dollars margin normalization. So there is a little bit of that, but in terms of the $27,000,000 of unusual buys, That is all for Q2, Q3 this year.

Speaker 4

Got it. Okay. I'll pass it on. Thank you very much.

Speaker 1

Thanks, John.

Operator

Your next question comes from Derek Lessard from Citi Cowen. Please go ahead.

Speaker 2

Yes. Good afternoon, gentlemen. I appreciate the update.

Speaker 1

Hey, John.

Speaker 2

I just wanted to maybe I I had one just maybe give us an update on sort of your seafood initiatives and in the broader sense and When do you

Speaker 1

expect to really start seeing the benefits of those investments? Well, there's a lot going on in our AGM on Friday are quite advanced in Announcing a Clearwater West type of transaction Involving certain Indigenous First Nations, Coastal First Nations in BC. We've made a number of investments in value added, both in our our soup business, we've launched a number of chowder type of soups in Canada and the U. S. Us today, we are launching more.

Speaker 1

We're also launching them into with customers in Asia as well. And then with one of our companies here, we launched a number of value added seafood and branded initiatives into Retail mainly. As I mentioned earlier, with Clearwater, we're working on a number of acquisitions that We'll move them into the value added space. So there's a lot going on. There's some pictures in the deck that show you some the seafood products we're launching or we've launched, including a wonderful lobster macaroni and cheese product.

Speaker 1

And Anyway, there's a lot going on in the pipeline with regards to value added seafood initiatives.

Operator

Your next question comes from Chris Lee from Desjardins. Please go ahead.

Speaker 6

Hi, Josh and Will. Nice to talk to

Speaker 1

you. Hi, Chris. Hi, Chris.

Speaker 6

And maybe I'll start with a specific question just on the Specialty Foods organic volume growth in the quarter. Was the year ago comparison particularly a bit more challenging because there were 5 or 6 weeks of Omicron shutdown where everyone was eating at home and therefore You benefited from the excess demand in the retail channel from a year ago?

Speaker 1

Yes, A little bit, although that was more of an issue in 2020, Chris. By 2021, 2022, it sort of had steadied. And again, this year, we're It was a bit of a headwind, but there were different headwinds Q2 last year. So I think overall, the 5.3% shows a good sort of Real trend happening in the group.

Speaker 6

Okay. And can you maybe talk about specifically on the Specialty Foods segment, the organic volume growth, how is that trending so far Q2 to date?

Speaker 1

Yes. Well, it's early, Chris, And things are just ramping up now. The May long weekend is kind of the big starting point for specialty foods with the turn in the weather. So, but so far, it's on plan. It's looking good.

Speaker 1

And as we showed in that weekly sales chart, we continue to generate Good year over year weekly sales growth. And I should comment too that Q1 is likely the last Quarter that you see that big growth coming from foodservice, whereas by Q2 last You're already seeing that normalization. So the growth being driven now is in the Specialty Foods segment. Yes. And I'd like to add, Chris, that some of the products that we are featuring in the deck, they've been Recently launched into the national channels in the U.

Speaker 1

S. And in Canada as well, right? So there's a lot of positives. Again, we've got national listings and these are multimillion dollar opportunities.

Speaker 6

Okay, great. And I guess my last question is to the extent that you are increasing the featuring rebates for your retail customers, are you seeing a corresponding pickup in volume or is there a bit of a lag? And maybe secondly, How important is more volume from more featuring a key part of your capacity utilization

Speaker 1

Yes. So Chris, the general answer to that is absolutely. As you know, some input costs were very high in the last year or so. And to the extent That the underlying commodities come off, we've passed on some of the savings to customers through different Programs and to the extent that they pass that on to the consumers, the volume generally picks up. And again, this is a big part of While we're feeling pretty good about the next couple of quarters, there's a lot going on.

Speaker 1

The prices seem to be deflationary in certain areas, and we expect that to be passed on to the consumer and for volume to pick up because of that.

Speaker 6

Okay, great. Thanks and all the best.

Speaker 1

Thank you, Chris. Thanks, Chris.

Operator

Your next question comes from Vishal Shreedhar from National Bank. Please go ahead.

Speaker 7

Hi. Thanks for taking my question. Just wondering how we should think about balance sheet improvement.

Speaker 6

Wondering if

Speaker 7

we should see that manifest in a bigger way in Q2. The offsets you had a decent EBITDA growth, but the offsets relate to And inventory and interest seem to be kind of constraining some of that improvement that would have been otherwise expected.

Speaker 1

Yes. Chris sorry, Vishal, we might see a little improvement in Q2, but I think it's more a back half of the year story. The 2 major drivers are going to be of improvement are going to be the growth in our EBITDA. So that will accelerate from Q2 through Q3, so that's going to be a big factor. And then the normalization of our inventories, which we expect some progress in Q2, but that will be sort of Carried over into Q3.

Speaker 1

So those are the 2 big positive factors. And then the negative factor is going to be our CapEx program. Obviously, that is fairly substantive this year. So that's a bit of a headwind. But we as I mentioned in the prepared comments, we do expect to see a Good solid improvement in the back half of the year.

Speaker 7

Okay. And related to the inventory, like how much looking kind of from 2 years ago, It's on a year over year basis, it's not quite double, but it's getting there. So like how much cash can we unlock from normalizing inventory? Just some broad numbers, I know it varies by quarter.

Speaker 1

A conservative estimate, as we've talked in previous quarters, Just that the two factors that we pointed out, the opportunistic buys and the inventory builds, that was roughly I think $62,000,000 $55,000,000 A number we're targeting internally is $100,000,000 Vishal.

Speaker 7

Okay. And in terms of the CapEx, is that kind of number that you had in Q1 a good run rate? And should I think of that over that kind of number for the next several years given

Speaker 1

I think, yes, it's probably not a bad run rate for 2022 or sorry, 2023, But we do expect it to drop off a bit in 2024. But it can be quite a choppy number just on the timing of things, right?

Speaker 7

Okay. And with respect to the optimism that you have for Q2 in particular, And I guess this question was alluded at by another, but the drivers that you see currently in place, like you're seeing your initiatives pan out as the Q1 of 2019, I know it's early, but what kind of what gives you confidence that the organic growth will pick up as you anticipate through the quarter?

Speaker 1

Well, a lot of these initiatives, particularly the ones where we've been building inventory, they're done. They're baked in. They're good to go. And just again, Going back to, I think it was Chris' comment, a lot of the retail featuring and those sort of programs, those have all been set now. So there's good visibility on what the drivers are going to be.

Speaker 1

Now there's ultimately always the risk of what the consumer Our reaction is going to be, but at this point, we feel very bullish on that. And sorry, George, just before and just to be clear, so In terms of how we see these ramping up, Q2 is a transition quarter, right, Vishal? Q3 is when everything is running at full speed. So That's where most of our optimism is. We're still a little conservative on Q2.

Speaker 1

So Vishal, if you assume normality, We have excellent visibility for the rest of the year. So that's really the assumption, right? If we make the assumption that there is no normality and we cannot access labor and supply chains slow down, etcetera, it's a different issue, Right. But if you assume normality, we have excellent visibility going forward because we're very close to our customers. We understand the demand patterns for

Speaker 5

Okay.

Speaker 7

Thank you for your confidence.

Speaker 1

Thank you, Vishal.

Operator

Comes from Sabahat Khan from RBC Capital Markets. Please go ahead.

Speaker 2

Great. Thanks very much. Just I guess on the lobster business, There's some headlines in the papers late last week about potential for some of this Canada, China disputes to kind of spill over into the lobster space. So

Speaker 1

Yes. So Sabra had Canada ships a lot of live lobster to China and other markets around the world. The global Highly sought after commodity, as you know. China is a big market for Lived Lobster. Our strategy overall as a business is always to move the commodity to value added.

Speaker 1

We've built a lot of capacity to produce and sell lobster meat. It constitutes the Majority of our initiatives, we're trying to democratize lobster. We've created new customers in cruise lines and Foodservice and Restaurants, etcetera. And that's our major, major focus right now. With regards to trade disputes, We can impact those, but again, our focus is really to continue to move the business towards More value added and more branded, and we've had a lot of success doing that.

Speaker 1

And Chris, I'd just add that Typical for premium sorry, Saba, I'd just add that typical to premium brands in our diversification. The reality is premium brands proper, The big driver of our lobster business is Ready Seafood, which is actually a U. S. Company. So to the extent there is a dispute in Canada and it impacts Clearwater will probably benefit from that in Ready in our U.

Speaker 1

S. Business.

Speaker 2

Okay, great. And then I guess you You talked a little bit about your kind of Clearwater investment earlier. And I remember when the acquisition was undertaken, there was a bit of a pause in the actual kind of cash full payments on this kind of $15,000,000 a quarter that you recognize. I guess if they do run into a bit of a tougher time, can they pause on those cash payments again? Or are they obliged to kind Pay those every quarter regardless of what's happening sort of in their base business.

Speaker 1

Yes. No, no, it's definitely the latter, Saba. We structured it such that debt structure is their cushion to when their business has downturns, Which again, that industry, they're going to happen. They have that ability to weather. And then when they have the upturns and they generate excess cash flows, they'll pay a higher amount.

Speaker 1

But yes, it definitely will fluctuate with the performance of their business.

Speaker 2

Okay, great. And then just last one, I guess, on the me on kind of the margin side here. You talked about being a bit more of a ramp in H2. Is that more you probably had a bit of color earlier, but is that a bit more of a specialty foods ramp with some of these initiatives ramping up? Or are you expecting a significant Okay.

Speaker 2

Foods ramp with some of these initiatives ramping up? Or are you expecting a significant improvement across both businesses, I guess, given Q1 I guess, it's going to be a bit more of a meaningful ramp, but is there a way toward one segment more than the other based on your current outlook?

Speaker 1

Me now. Yes, absolutely. It's heavily weighted to Specialty Foods. Again, the big driver of our margin Growth overall for premium brands over the next couple of years will be our specialty food segment. There's still some room for Are there still some opportunity for improvement in the premium food distribution group, but it is much smaller than specialty foods.

Speaker 1

And again, Saba, it's not that big of a reach if you look at The challenges we faced in the past 2 to 3 years, right? We faced a lot of challenges, again, with regard to labor and supply chain and If you assume normality, it's not that much of a reach. Even if again, we've invested a lot of capital in Automation and robotics, as we've shown some videos that demonstrate the extent to which we've automated a lot of our businesses. And Again, if you assume normality, we will expand margins for sure.

Speaker 2

Great. Thanks very much.

Speaker 1

Thanks, Saba.

Operator

Your next question comes from Chris Lee from Desjardins. Please go ahead.

Speaker 6

Thank you. Just maybe a few quick ones for me. In the specialty food business, I noticed you didn't call out specifically price inflation As having an impact on certain product categories as you did in previous quarters. So I'm just wondering, was that an issue during the quarter? Or is that largely behind you now?

Speaker 1

Yes. So, Chris, it's largely behind us now. The big factors or the big categories that were impacted were some of our cooked protein products in the chicken category, which if you look at any chart of chicken breast prices in 2022, they're just absolutely off the roof. They have come down significantly now and pricing is where it needs to be and we're seeing really good volume pickup. As George mentioned, when the The other category was jerky, which isn't a Big category for us, but beef prices on the specific cuts used for that product have come off.

Speaker 1

So we are seeing At least the stabilization in volumes. The only area we're seeing a little bit of challenge right now is in our premium bacon products, And that's just because we use very high end raw materials that come from Europe and there's a bit of a disconnect between Europe Stream Products, but even that it was only a small amount, not even enough to sort of mention in terms of our MD and A. The only thing I would add, Chris is that in the case of Turkey, I mean Turkey prices We're very, very high and we actually walked away from some listings because of that. Thankfully, Turkey pricing has corrected and now we're reentering categories and Basically reclaiming our listings and again that's a positive going forward.

Speaker 6

Great. My next question was, yes, on the Turkey side, I think you mentioned last quarter that was maybe a drag of around 60 basis points in Q4, I was wondering like what was the drag in Q1?

Speaker 1

Yes, it's an interesting question, Chris, in terms of just year over year, there was about a 30 basis point impact in terms of Lost sales because of like George says, listings we walked away from that we didn't have this quarter. But the reality is a big part of our Turkey business That we walked away from, we're already lapping. So there's categories that we're not in that we weren't in, in the Q1 So those now are coming back as well. So the impact, if you normalize for the loss growth opportunities, Much greater than the 30 basis points, but that is what it was sort of on just a year over year impact on sales.

Speaker 6

Okay. That's helpful. And then maybe another one, just I wanted to ask, if you take a step back and where you're sitting today, Can you give us a sense of what you're seeing in some of the key commodities, the outlook for the rest of the year in beef, in chicken, Pork, etcetera, do you foresee any sort of major headwinds? Or is it like what George alluded to, a sense of normality that should come back For the rest of the year, just any comments on what you're seeing on the commodity side will be helpful.

Speaker 1

Again, Chris, We follow commodities. The commodities that you've mentioned are global commodities, as you know. We follow them me very, very closely. And again, I go back to my comment around normality. And in the last 3 years, we had we did not have any semblance of normality whatsoever with regards to any of our inputs, Right.

Speaker 1

So basically, if we assume normality, then in general terms, as Will mentioned earlier, In poultry, Turkey is coming down to normal from extraordinarily high levels. Pork, probably flat to down in general for the remainder of the year. There seems to be plenty of pork around. China produces a lot of pork now. They've basically repopulated They're industry and invested in massive hog production and They're not as significant an importer as they used to be from the global market.

Speaker 1

And then beef, in general terms, probably flat to up, Mainly because the herd has contracted a little bit, particularly In the U. S, although Australia and New Zealand have rebuilt their herds and they're kind of on the upcycle. So those would be our general observations with regards to each one of the commodities. But the key here is really to assume Normal supply chains, normal demand through the different channels, etcetera. Yes.

Speaker 1

And Chris, the good news in terms as George says, probably the most in terms of the Specialty Foods segment in the premium food, beef being the most sort of inflationary Commodity we're looking at. The good news is that's primarily in our premium food distribution group and it's primarily priced on a very dynamic basis. So it's probably our least exposure in terms of the impact on our profitability. And to add to the comment, Chris, again In general is that, again, in the last 3 years, we've had circumstances where we didn't even know whether we could access The protein, right? Those are circumstances that we had to deal with.

Speaker 1

We were willing to buy it. We had Business for it, but we weren't able to access it, right? That just gives you an impression of What we've managed through in the last 3 years.

Speaker 6

Very helpful. Maybe my last housekeeping question, maybe this one is for Will. I apologize if you mentioned this already, but there was a rising corporate cost. Can you just talk about what drove it and is the Q1 a good run rate

Speaker 1

Yes, the biggest factor in there Chris was incentive accruals. Again, we're very bullish on the year and appropriately we've been accruing to our incentive programs for that. And then Lester was just there is some additional wage inflation, a little bit of headcount increase. So, but it's probably not an unreasonable number as a run rate.

Speaker 6

Thanks again.

Operator

Presenters, there are no further questions at this time. Please proceed with your closing remarks.

Speaker 1

Yes. I'd like to thank everybody for attending today. Thank you.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for joining and you may now disconnect your lines.

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Earnings Conference Call
Premium Brands Q1 2023
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