Astera Labs Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 5, 2024

There are 2 speakers on the call.

Operator

Welcome everyone to our 2024 Third 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 are now on Slide 4, which outlines certain key highlights for the quarter.

Operator

Results for the Q3 were generally in line with our expectations with the exception of a a material sales shortfall in our sandwich group due to an unanticipated decline in sales to a key customer. We believe that this decline is transitory and that sales to this customer will recover and will eventually return to their historical growth rates. Excluding sales to this customer, our Specialty Food Group's organic volume growth for its major U. S. Initiatives was 8.1%.

Operator

Our premium food distribution business improved sequentially during the quarter and has returned to modest growth in dollar terms as the consumer backdrop in Canada continues to show signs of improvement driven by lower interest rates and lower inflation. Demand for our products in the U. S. Remained strong for the quarter, with the exception of our Sandors Group, which reported a 5% decline for the reason I mentioned earlier. Despite this material but transitory decline, I'm very pleased to report that the new opportunities and sales initiatives pipeline in our Sandoz group has never been more robust and that we look forward to leveraging our new capacity coming on stream to return to our historical levels of growth in 2025 and beyond.

Operator

Our CFO, Will Kalutycz will give you more color on our U. S. Sales pipeline later on in the presentation. Our state of the art food safe and center of excellence centric plants and the new capacity coming on stream in our U. S.-based businesses currently gives us a unique point of difference considering the number of food related recalls that have been in the news over the past few months.

Operator

The recalls validate our plans to invest in new modern efficient and food safe capacity to service the U. S. Market as opposed to purchasing older legacy facilities. Our strategy is front end loaded and takes longer to execute and does not deliver immediate results, but we're certain that it is the right strategy in terms of delivering higher IRR in the long term, while taking on less risk as we strive to continue to create long term shareholder value. Our bakery and protein groups continued their growth momentum during the quarter as they leverage new U.

Operator

S.-based capacity achieving growth rates of 25.3% and 7.8% respectively. In regards to our Sandoz Group, we're confident that our key customer will return to sustainable growth, while we stand ready to support its new innovation initiatives, promotions and new growth strategies. Overall, we remain very confident that despite the temporary challenges in our sandwich group, we remain on course to achieve our 5 year plan and to achieve $10,000,000,000 in revenue and 10% to 12% EBITDA margins by the end of 2027. We're now on slide 5. Although we did not close any acquisitions during the quarter, we're pleased to report that we're making progress on several transactions and that we fully expect to close them prior to the end of the year.

Operator

We're now on slide 6 to 8 where we would like to give you a little more color on our North American sandwich business. Over the past several years, we have invested in new capacity and new food safe and efficient processing technologies and we're now clearly an industry leader in the assembly of frozen sandwiches and charcuterie trays. As we added capacity automation and expertise in this space, we have diversified the business to serve multiple sales channels and as shown on slide 8, are currently servicing 7 channels including coffee house, club, grocery retail, co manufacturing, airlines, hospitality and food service. In 2025, we're hoping to add overseas international sales to this mix. From 2010 to the end of 2023, the business has grown at a compounded rate of over 21% and we're confident that it will continue to grow in double digits for many years to come.

Speaker 1

We're now on slide 9 and 10 showing our recently expanded Columbus, Ohio facility and our Cleveland, Tennessee facility. When the Tennessee facility comes on board in mid-twenty 25, our Sandidge Group will operate nearly 1,500,000 square feet of production and Sandidge storage space with 10 facilities across North America, 9 located in the U. S. And 1 in Canada. I will now pass it to Will.

Speaker 1

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 13 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 12.

Speaker 1

Our sales for the quarter were a record $1,670,000,000 up $22,000,000 or 1.3 percent as compared to the Q3 of 2023. This increase was driven by 3 factors, namely $29,800,000 in selling price increases, which were primarily in response to higher lobster and to a lesser extent chicken, beef and egg costs, currency translation gains of $7,800,000 and business acquisitions net of shutdowns which contributed $5,500,000 These factors were partially offset by sales volume contractions in both our segments with specialty foods volumes dropping by 0.4% and premium food distributions volumes dropping by 2.9%. As George discussed earlier, the reduction in specialty foods volumes was due to a decline in sales to a major foodservice customer resulting from reduced consumer spending in the customer stores in general and on food in particular. Excluding the impact of this customer, specialty foods organic volume growth rate was 2.3%, which was driven by 1, its other core U. S.

Speaker 1

Growth initiatives in sandwiches, protein and baked goods which generated our organic volume growth rate of 8.1% and 2, the stabilization of its Canadian sales, which grew at an organic volume growth rate of 0.6% versus a contraction of 1.4% in the previous quarter. These factors were partially offset by reduced jerky sales due to a weaker consumer environment and a change by a customer in the seasonal rotation of a relatively high volume product, a temporary pullback in specialty foods growth in the U. S. Market due to several new major project launches being delayed because of longer than expected customer onboarding timelines and weaker consumer spending in the foodservice and convenience store channels. The reduction in premium food distributions volumes was due to lower lobster sales caused by an unusually high pricing environment and weaker consumer demand in the Chinese and European markets.

Speaker 1

Slide 13 shows the organic volume growth rates of our major protein, sandwich and bakery sales initiatives in the U. S. As George mentioned earlier, our protein and bakery initiatives generated organic volume growth rates of 7.8% and 25.3%, respectively. And our sandwich group after normalizing for the impact of the major foodservice customer mentioned earlier generated organic volume growth of 5.4%. While we are pleased with the growth rate generated by our bakery initiatives, The growth rates generated by our protein and sandwich initiatives are well below potential and we strongly expect them to accelerate in the coming quarters.

Speaker 1

Slide 14 gives some insight into why we are so confident that the growth rates of our U. S. Focused protein and sandwich initiatives will accelerate. As George referred to earlier, this slide shows a snapshot of the U. S.

Speaker 1

Market focused initiatives being actively worked on by our protein, sandwich and bakery groups. In total, we have almost $1,500,000,000 of opportunities being pursued with it being highly probable that $700,000,000 of these will launch in 2025 or sooner and another $300,000,000 will likely launch in 2025. Turning to Slide 15, our adjusted EBITDA for the quarter was $159,400,000 representing an increase of $600,000 or 0.3% as compared to the Q3 of 2023. Positive factors impacting our adjusted EBITDA included improved production efficiencies, mainly in our protein and sandwich operations and reduced discretionary compensation accruals. These were mostly offset by the impacts of raw material cost inflation, mainly for chicken and beef inputs and wage inflation.

Speaker 1

Turning to slide 16, our adjusted earnings and earnings per share for the quarter were $49,400,000 and $1.11 per share respectively, down from $56,300,000 $1.27 per share respectively in the Q3 of 2023. The declines were due to higher depreciation, lease costs and interest associated with the major capacity expansion projects we have completed over the last year. Looking forward, we expect to generate significant momentum in improving our adjusted EBITDA and correspondingly our adjusted earnings and EPS as we leverage our recent capital investments to execute on our $1,500,000,000 pipeline sales opportunity. Turning to Slide 17. For the quarter, we spent $82,100,000 on capital expenditures consisting of $60,400,000 on major project CapEx, $11,000,000 in smaller project CapEx and $10,700,000 on 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 of our major project CapEx expenditures in the quarter were on investments to increase the capacities and in many cases operating efficiencies of our protein, sandwich and bakery businesses to support their U. S. Focused growth initiatives.

Speaker 1

Looking forward, based on our approved major project CapEx pipeline, we expect to invest another $163,000,000 over the next five quarters on these projects. Subsequent to the quarter, we entered into 2 asset sale transactions. One involves the sale of a vacant piece of land for $26,000,000 which we expect to complete in early December. The other involves a non binding letter of intent to sell and lease back a recently expanded production facility located in the state of Washington for approximately $92,000,000 The transaction involves a REIT type structure in which we will have a 40% ownership stake. Correspondingly, the net proceeds of the transaction after accounting for transaction costs, taxes and our investment in the REIT are expected to be approximately $80,000,000 We plan to complete this transaction in mid December.

Speaker 1

Slide 18 shows some of the key metrics we use to assess our financial position. Our debt leverage levels were relatively stable as compared to last quarter with our senior debt to EBITDA ratio remaining at 3.4:one and our total debt to EBITDA ratio, which includes our subordinate convertible debentures increasing slightly to 4.4:one. Both these metrics are above the long term targeted 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 over $700,000,000 of unused credit capacity. The next and final slide shows a variety of our free cash flow and dividend metrics over the last 18 years.

Speaker 1

For 2024, in the Q1 of the year, we increased our quarterly dividend by 10.4 percent to $0.85 per share. That concludes our presentation. Please join us on our Q and A conference call later today at 10:30 am Vancouver time or 1:30 pm Toronto time.

Remove Ads
Powered by Quartr
Earnings Conference Call
Astera Labs Q3 2024
00:00 / 00:00
Remove Ads