Premium Brands Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2024

There are 8 speakers on the call.

Operator

This call is being recorded on Thursday, August 8, 2024. Our speakers today are George Paliologou, CEO and President of Premium Brands and Will Kalutycz, CFO of Premium Brands. I would now like to turn the conference over to George.

Operator

Please go ahead.

Speaker 1

Thank you, Li Wei. Good morning and welcome everyone to our 2024 Q2 conference call. With me here today is our CFO, Will Kalutycz. Hopefully, you've had a chance to listen to our pre recorded call posted on our website this morning. Also, if you haven't done it already, please take the time to read through my most recent annual letter to shareholders on our website titled Transformational Growth.

Speaker 1

The title and narrative capture and describe the next stage of our journey as we begin to accelerate our growth in the U. S. And to a lesser extent in overseas markets. We will now take your questions. Li Wei?

Operator

Thank you so much. And ladies and gentlemen, we will now begin the question and answer session. Our first question comes from the line of Martin Landry of Stifel. Your line is now open.

Speaker 2

Hi, good morning guys.

Speaker 1

Good morning, Martin. Hey, Martin.

Speaker 2

My first question, highlight some startup issues and longer onboarding for new businesses than expected. So I was wondering if there's any way for you guys to quantify what's the revenue impact of these delays versus your original assumption at the beginning of the year? And is there any spillover into 'twenty five? I think there may be some as you've put in your press release. So can you quantify as well what could be the revenue impact headwind that you may feel in 'twenty five due to these delays?

Speaker 1

Yes, certainly the bigger of the two factors, Martin, is the onboarding of new business. It's large pieces of businesses we're pursuing. They tend to be fairly lumpy, and it can take a little bit longer than sort of your traditional smaller listings to get the program set up and launched. And so that's been the big factor. Like I say, startup issues in some of the plants has contributed to as well, but nowhere by any means as significant as that.

Speaker 1

In terms of the quantification of it, it's really going to be the timing of when these products actually launch. It could be late Q3, it could be Q4, it could be early 2025. We've taken the cautious approach and assume the launches are later in the schedule than we're hoping to achieve, and that's the rationale for guiding towards the bottom end of our guidance. But ultimately, it's going to be when the timing of those carries through.

Speaker 2

Okay. Just so I understand clearly, is this a delay from your customer and or is it a delay on your end to onboard that new customer or that new product?

Speaker 1

Well, in terms of the ones relating to plant capacity, obviously that's on us. In terms of working with our customers, it's generally going through the customer's processes. You know sometimes there's several layers of approvals and so it's just working through those processes, getting sign off on labels and packaging sizes and attributes. And so it's just a process of going through that. So on that side of things, it's more customer related.

Speaker 2

Okay. And then maybe just my last question would be on overseas markets. You talk about maybe lobster sales being a little slower. I don't know if it's shipments or demand, but I was wondering if you could talk a little bit more high level about the level of demand you see in overseas markets and what's the pace of your what's the percentage of your sales now that I realize outside of North America?

Speaker 1

Well, so premium brands proper excluding our Clearwater business. The large part when you look at our 2 segments, the premium foods distribution segment, all of their exports focus around live lobster to China are primarily live lobster to China, which is what we called out in the quarter. And that's really just the economic situation in China. As that turns and that improves, we should see that volume coming back. In terms of our specialty foods segment, we've got a number of initiatives in mainly in the Asian area, and those are going really well.

Speaker 1

And we're seeing really good glows. And then in fact, that's one of the issues that contribute to the delays is we've got a key customer in Asia that we've got a number of new product launches coming on with. We had expected them to happen in Q2. Most of them are now happening in Q3. So we're making really good progress there on the specialty food side.

Speaker 1

In terms I think that answers your question, Martin.

Speaker 2

Yes. I mean, I was just trying to see if you could quantify your internationally, but if it's too small.

Speaker 1

Oh right, in terms of sales internationally, I don't have that number off the top of my head, but in general terms, probably in the specialty foods group, George had, guess what, dollars 10,000,000 to $20,000,000 range? Yes, that's about right. And I'm just reminding you, Martin, that we're starting at 0, right? So we've got a lot on the go, as Will said. We've launched a few products recently and a few more in the pipeline across most of our platforms.

Operator

Our next question comes from the line of Derek Lessard of TD Cowen. Your line is now open.

Speaker 3

And I just so I understand that in the U. S, because you guys are winning

Speaker 4

new customers and contracts,

Speaker 3

it's hard for you to see the direct But But I was just you know I am curious if there is a weaker consumer there and if it's had any impact on you guys.

Speaker 1

Yes, you'll have noticed that when in our slide where we break down the organic volume growth rates by the 3 groups, protein, bakery and sandwich. Protein was a little lower than we expected in the quarter, part of that was product launches, But we have seen in some of our really high end products, we have seen a little bit of softening in terms of legacy markets. Now when they go into new markets, that's all new business and that's done well. But in the legacy markets, we have seen a little bit of softening. But it's interesting in the U.

Speaker 1

S. Derek is and we're not very big in the foodservice segment in the U. S. But we have seen to the extent we've got products going into that, that's been relatively stable and where we have seen a bit like I said, a little bit of softness has been in retail channel. I think in terms of channels, Derek, in particular, there's no question that both the Canadian consumer and the U.

Speaker 1

S. Consumer are looking for more value. They're trying to stretch their dollar. So they're generally shopping more in discount and club as opposed to traditional retail. And to a lesser extent, in foodservice, they're going to QSR rather than fast casual.

Speaker 1

So that's what we're seeing. It's not that overall demand is down, it's that the channel that the consumers choose to shop at is different.

Speaker 3

Yes, George. And maybe to your point, I know you guys are indexed in sort of that in the discount channel, but you are stepping up efforts I think in club. Are you are there any plans going forward to maybe even step up those or increase those efforts more to get into those channels?

Speaker 1

Absolutely. Absolutely. I think overall, Derek, we do very well in club and in retail. Where we're under indexed would be QSR, fast casual and C store chains. And we are really focusing on those three channels right now in the U.

Speaker 1

S. As Will said earlier, a lot of those customers are national. They have they don't have 1,000 stores. They have 10,000 stores. The launches are bigger.

Speaker 1

They take more planning. And again, we have a lot of businesses in the pipeline to launch.

Speaker 3

Okay. Thanks for that. And maybe switching gears more towards to M and A. I guess on your slide deck, you note that there are there's 3 acquisition opportunities in the advanced stages and probably another $1,000,000,000 of potential sales sort of in that advanced active discussions and that's changed or that's up materially from last quarter. So I was curious like how you guys are thinking about funding given where your leverage currently stands?

Speaker 1

Yes. So Derek, yes, a couple of things. I'll just make a couple of comments and then pass it on to Will. I would say that today, the valuation environment is very rational And that's why we are we've signed 3 LOIs recently, and we're in various stages of due diligence. We hope to sign a few more because we work on deals over a long period of time.

Speaker 1

And obviously, at some point, the valuation has to make sense. I think in the past, we've talked about the fact that no acquisition that we're going to make is going to stretch the balance sheet more than it is today. So that's still the case, and I'm going to let kind of Will explain the strategy there. Will? Yes.

Speaker 1

So Derek, we're committed to any acquisition we're doing being any debt issue associated with it being within our targeted debt, senior debt to EBITDA ratio, the 2.5 to 3 times target. And so what we've been doing in the 3 transactions that are in that advanced stage is there are combination of obviously some debt will raise a cash component of the transaction which will be within those parameters. And then we're using other structures like contingent consideration that's based on future cash flow growth, some equity. And whenever we use equity in the valuation of an acquisition, we price the equity in our modeling at its intrinsic value. We don't use the market value, which we see as a discount to the intrinsic value today.

Speaker 1

And so we're making sure there's no sort of dilution effect built into the acquisition modeling. And through that we were very confident that in fact acquisitions will strengthen our balance sheet from the perspective of our senior debt to EBITDA ratio.

Speaker 3

Okay. And does I guess you did have some you had talked about some sale leasebacks. Is there is that part of any potential funding and maybe just a comment on when you expect those the timing of those to be complete?

Speaker 1

Yes. So we've got a pipeline of sale and leasebacks of about $400,000,000 associated with 3 major initiatives properties, 2 in the U. S. And 1 in Canada. The sale leasebacks are being tied to the completion of the projects.

Speaker 1

And so right now, we're actively negotiating on one completed project, which we hope close this year and then we've got 2 more for next year. But yes, absolutely, that's a part of our general balance sheet strategies. We've talked in the past we're a food company not a real estate company and hence it doesn't make sense for us to sit on a lot of valuable real estate. Having said that, all three of these transactions we intend to use our REIT type structure where we continue to own 20 percent or 35% roughly of the equity in the property and benefit from the long term value growth of the real estate that way. So what you have to remember, Derek, as well is that we have a substantial base of business in the U.

Speaker 1

S. As we speak. And any of these acquisitions are going to be accretive. There will be synergies, etcetera. So they'll be very, very synergistic and very accretive to our numbers based on the fact that their valuations are very

Operator

And our next question comes from the line of Kyle McPhee of Cormark Securities. Your line is now open.

Speaker 5

Hi, George and Will. Just quickly on that $400,000,000 sale leaseback, is that your expected net proceeds from all three transactions?

Speaker 1

Yes.

Speaker 5

Okay. And then, so timing has shifted out for some of your U. S. Specialty foods growth programs. Should we still see the kind of pace of new volume wins ramp up like it kind of did from Q1 to Q2?

Speaker 5

Does that still happen into Q3 or the next kind of leg up is now delayed until later in the year?

Speaker 1

Yes. So Q3, again, as I mentioned earlier, it's really going to be the final timing of these initiatives, how much falls in Q3 versus Q4. From a conservative perspective, we would expect the U. S. Growth rate to maybe dip a little bit in Q3 from Q2 just because Q2 had some major channel fills from product launches that helped our sandwich group.

Speaker 1

You'll notice the sandwich group posted absolutely ramping up significantly well ahead of Q4 absolutely ramping up significantly well ahead of Q2 and Q3. So overall, we're looking at an annual rate probably close to or better than what we did in Q2. So again, just a key message there, as Will said earlier, Kyle, is that the growth is going to be lumpy, strictly because the customers are so big. So it's just a message you'll need to remember as we go forward, right? The nature of the U.

Speaker 1

S. Market is very different than in Canada, right? Customers don't have 1,000 stores, they have 10,000 stores. So the growth will come. We're certain it will come, but it will be lumpy depending on the timing of the launch.

Speaker 5

Okay, understood. And it sounds like none of the business you're expecting is lost. It's just a lumpy timing. Can you confirm that?

Speaker 1

Absolutely. That's correct.

Speaker 5

Okay. And so the mix of U. S. Specialty Foods organic growth programs that impacts your margins given the programs across protein, bakery and sandwich all have different contribution margin profiles. Which categories are kind of seeing the timing push that just so we can better understand how your margins really evolved because of this?

Speaker 1

It's definitely the protein and bakery groups, which we called out in the MD and A for the quarter. Okay.

Speaker 5

And then last one, just you've called out it's not the biggest issue, but startup issues at some of your plants. What exactly is the issue?

Speaker 1

It's just a normal ramp up, Kyle, and nothing unusual. We are as we've stated before, we're leveraging new technologies, automation, robotics, all of those things. Nothing unusual, just a normal ramp up. Okay. Yes, it's new equipment, new concepts, new technology, and it just takes people time to get the feel and the settings for all the equipment right.

Speaker 5

Okay. Thanks for the answers. That's it for me.

Speaker 1

Thanks, Kyle. Thanks, Kyle.

Operator

Thank you so much. Our next question comes from the line of Chris Lee of Desjardins. Your line is now open.

Speaker 6

Good morning, Josh and Hope you guys are doing well. Hi, Chris. Hi, there. Maybe just a follow-up to the first question for Martin. In terms of quantifying the revenue impact from the delay in the product launches, The way I think about it, and please let me know if that's not right.

Speaker 6

So the midpoint of your revenue guide is around RMB6.75 billion. Now you're guiding towards maybe the lower end about RMB650. So that's about RMB100 1,000,000 reduction. Is that roughly the amount of what's causing from the delay in part of launches in terms of the impact on revenue?

Speaker 1

Again, what you've just done some math, Chris, that I can't disagree with. But in terms of you were guiding to the bottom end on a cautious basis just because of that lumpy nature of the launches. We're not saying we're going to be at the bottom end. Again, if things go well, then we could easily be in the midpoint or even possibly higher. It really depends on how the timing of these play out.

Speaker 1

And there's 2 parties involved and we don't 100% control the process.

Speaker 6

Okay, understood. And then a related one is just again with respect to your full year guidance. Do you have sort of high visibility on that? And what I mean is the consumer pulls back even more than what you're expecting, especially in the U. S, do you have other levers that you can pull to still achieve your guidance?

Speaker 1

The interesting thing is a lot of our initiatives are with retail in the U. S. Are with retailers who are benefiting from those trends. And we're going into new markets. And so as I mentioned earlier, like we have seen in legacy markets a little bit of softness in some of our really premium products, but they're still being successfully launched into new markets.

Speaker 1

So we don't really see that as a big factor in terms of our growth outlook or expectations. The other part, Chris, that you have to remember again is that, as I mentioned earlier, we're not talking about $5,000,000 opportunities here, right? We're talking about $50,000,000 opportunities or more. So really for us, we have to plan out the capacity, right? Yes, we're working on a few of those.

Speaker 1

We have a few in the pipeline. We have very good visibility with respect to them. But ultimately, we have to budget the capacity for them, right? It's a really important part to understand. It's a very different market.

Speaker 1

That's why we called it transformational growth in my letter to shareholders.

Speaker 6

Yes, got it. No, I read the letter to you. No, that's good. And then maybe one on just on balance sheet, you guys were talking about sort of funding earlier. I just want to ask about what is your view on the more mature or lower growth part of your distribution business?

Speaker 6

Would you consider selling at the right price? Do you still get a lot of interest in that business these days?

Speaker 1

Well, we don't comment on our plans in general, Chris. But what I'll say is that ultimately, if we deem an asset or a business to be non core, we don't have an issue selling it, right? And that's sort of the key message.

Speaker 6

Got it. Okay. No, that's fair, George. And my last one is just in terms of capital expenditure. I think the first half of the year, you've spent about $200,000,000 in the first half.

Speaker 6

Well, sort of what is your outlook for second half? It's going to be similar. And then maybe a similar question, what is your CapEx outlook for 2025?

Speaker 1

Yes. So we outlined in the MD and A all of our active approved projects and that's the vast majority of our capital over the next several years. So right now we've got about $230,000,000 left to spend on those projects. And the timing is, again, whether it's in 'twenty four or 'twenty five, it's going to just depend on how things proceed. But in general terms, I would suspect about $120,000,000 to 130,000,000 dollars of that will be in the back half of this year and then the balance in next year on those major projects.

Speaker 1

And then we always have we generally have about $10,000,000 to $15,000,000 a quarter for smaller little sort of add ons to capacity on lines or little automation projects and stuff like that on top of that.

Speaker 6

Okay, great. Thanks guys.

Speaker 1

Okay. Thanks, Chris. Thanks, Chris.

Operator

Thank you so much. And our next question comes from the line of Stephen MacLeod of BMO Capital Markets.

Speaker 4

Hi. Lots of good color so far, so thank you for that. A couple of follow-up questions that I had. Just looking at the achieving your even the low end of the revenue guidance for 2024, still implies some pretty healthy growth in the back half of the year. You gave some color around the specialty foods business, but just wondering about the PFD.

Speaker 4

Are you still expecting that to sort of remain on organic sales drag as you get to the back half of the year?

Speaker 1

Yes, no. In fact, we're expecting a little bit of growth, Steve. And you see that going from Q1 to Q2, right? Like PFD in the first quarter had about 5%, 5.5 percent volume contraction. In the second quarter, it was around 2%.

Speaker 1

And then in the back half of the year, a couple of things happened. One is we start lapping some of the challenges we had back in 2023, the back half of twenty twenty three, as well as we have seen some stability and expect that to continue in some parts of their businesses their business. So yes, so Q3 probably flat, maybe a little bit of growth and then improving in Q4, some actual decent volume growth.

Speaker 4

Okay, that's great. And then just coming back to some of the delayed onboarding of the new initiatives. And George, I appreciate that it's lumpy. I guess, is it fair to say that absent the onboarding challenges,

Speaker 2

I mean,

Speaker 4

these are programs that are coming. It's just a matter of when. So we should see them. I mean if we don't see them in Q3 and maybe we don't see them in Q4 or maybe we see parts of them, These are projects that you have confidence that we're going to see in 2025. Is that right?

Speaker 1

Absolutely, Steve. And again, you have to remember, as I said earlier, we have a substantial business base in the U. S. Today as we speak. A lot of these are national rollouts with existing customers or new customers.

Speaker 1

And we have very high visibility with regards to

Speaker 6

the business.

Speaker 4

Okay. That's really helpful. Okay. Okay, that's great. And then just maybe one other question just on the margin profile.

Speaker 4

The midpoint of guidance still implies 9.5% margins, you've talked about 10% being the long term target. In the past, you've said that 10% target could potentially be achieved in 2025. Is that something that you still think is possible?

Speaker 1

Yes. No, absolutely, Steve.

Speaker 4

Yes. Okay. That's great. Thanks, guys. Appreciate it.

Speaker 1

Thanks, Steve.

Operator

Thank you so much. And your next question comes from the line of Mark Petrie of CITC. Your line is now open.

Speaker 7

Yes, thanks guys. Good afternoon or good morning. I actually just have two follow-up questions, to a few questions that Chris asked actually. First, could you just help with regards to sort of the portfolio and M and A or potential divestitures, could you just help me understand how you would define non core? And is that just simply a matter of lining up stated vision?

Speaker 7

Or are there other considerations that we should be aware of?

Speaker 1

Well, again, Mark, I mean, we're executing our strategies. Every year, we assess the performance of the various businesses, short term, long term. We see ourselves as allocators of capital. And we act rationally, right? If we see opportunities to unlock value from one area and employ the capital in another area that ultimately gives us a higher return, we'll do that.

Speaker 1

We've done that in the past. But we can't speak more specifically than that.

Speaker 7

Okay. Fair enough. That's still very helpful. And maybe another follow-up is just on the CapEx spend specifically. So I heard about the $1,200,000 to $130,000,000 of the $230,000,000 that will be in the second half plus $10,000,000 to $15,000,000 a quarter for smaller projects.

Speaker 7

And is there another component, like is there sort of a baseline maintenance number that we should factor to that or how should we think of those?

Speaker 1

Yes, no, no absolutely Mark. Our guidance on maintenance CapEx for this year is about $50,000,000 to $55,000,000 and we feel pretty good with that. So I think in the first half of the year we spent roughly $20,000,000 to $25,000,000 So we're on track with that range.

Speaker 7

Okay, perfect. And actually one other question, just to clarify, I know you called out weaker consumer spending as a headwind on revenue, but I'm not sure I saw it as an issue for profitability at all. And so is that to say that the consumer spend is an impact because it's affecting your volumes, but is there any change to sort of how you are pricing or promoting or what you're sort of seeing

Speaker 1

observation is correct. I think it's more in terms of trying to focus our sales efforts into the channels where the consumer is actually going and shopping, right? And as I mentioned earlier, they're tending to frequent more discount banners and club as we speak as opposed to traditional channels. That was kind of the comment, right?

Speaker 4

Yes, okay.

Speaker 1

And Mark, the biggest impact of consumer weakness really was in our premium food distribution group, which it's a lower margin group, it's more stable margins. And so from a margin percentage perspective, relatively little overhead, so contribution margins reflect gross margins. So you kind of don't see that margin impact like you would if it was an issue in our Specialty Foods group.

Operator

And our next question comes from the line of Derek Lessard.

Speaker 3

Yes, guys. I just have one follow-up, more of a housekeeping, Will, mostly on working cap. Just how should we be thinking about that working capital for, I guess, for 2024 and any plans to lower it or further reductions there?

Speaker 1

Yes, yes. With our inventory, it really seems to be 2 steps forward, 1 step back. Our inventory levels were higher than we'd like at the end of the second quarter, probably about 4 to 5 days purchases in inventory. But the fact is it was for very good reasons. One of the biggest challenges in the second half of last year was the shortage of lobsters, the boats just couldn't get out for poor weather.

Speaker 1

We had a really good strong Canadian spring fishery this year. We're really well positioned with lobster inventory, processed lobster inventory going into the back half of the year at favorable prices. So that was a big driver of the inventory level. We've been talking a lot about product launches and the lumpiness of them. We had some big builds, inventory builds associated with some product launches going out in Q2 and Q3 sorry Q3, Q4.

Speaker 1

So there were some good reasons for the higher inventories, but ideally they still are high and we are still looking to have lower sort of normalized run rates.

Remove Ads
Powered by Quartr
Earnings Conference Call
Premium Brands Q2 2024
00:00 / 00:00
Remove Ads