Q3 2019 Earnings Call
I mean brands Holdings Corporation third quarter 2019 earnings Conference call. As a reminder, this conference is being recorded at this time all participants are in listen only mode.
The presentation, we will conduct a question answer session.
Participants are asked to press Star One to register first question first just didn't starting to call. Please press star zero on your Touchtone phone. It's now my pleasure to introduce your host George Kelly logo. Please go ahead.
Thanks, Corey and good morning, everyone.
I would like to welcome you toward 2019 third quarter conference call.
I would also like to recognize the significance of these days and thank all the brave men and women, who have fought for our country and too when we all our rights in freedom.
On an overall basis I'm pleased with the progress we made in the execution of our many growth initiatives during the past quarter and in particular with the success, we're seeing in the U.S. across our seafood sandwiches protein platforms.
Unfortunately factors outside of our control, namely issues, resulting from the severe outbreak of the especially in Asia and in particular, China combined with global trade disputes have temporarily distorted the economics of some of our legacy businesses.
It is now projected that they assess outbreak in China will result in the loss of 50% to 55% of their hog production, creating an unprecedented supply demand imbalance in global protein markets.
To put the size of its fishing perspective, China produced this almost half of the world pork supply, which means that over one quarter of the global supply a poor has been temporarily taken off the market.
This is truly a first time event in modern history.
I will be expanding on this issue as well as some some of our successes later, but before I do I will be trying to presentation over to watch T.. So we'll conclude pitch for an overview of our financial results for the quarter well.
Thanks, George and good morning, everyone before discussing our results for the quarter I would like to caution you that to the extent, we make forward looking statements during our presentation.
Our forecasts and assumptions are subject to change and actual results may vary. Please see our 2018, Mdna, which is filed on SEDAR website www dot Cedar Dot com for details on some of the factors that could cause our actual results to differ from our current expectations [laughter].
Turning to our results.
Our revenue for the quarter grew by $132.8 million or 15.9% to a record 968.3 million.
Acquisitions accounted for 69.1 million of the increase organic volume growth for 51.7 million.
Net selling price inflation for 6.5 million and currency translation for 5.5 million.
Our organic volume growth rate, which excludes the impact of selling price and exchange related inflation was 6.2% for the quarter or on a nominal dollar basis, 7.6%.
Our strong growth was driven by a broad range of initiatives with most of our success being in the seafood sandwich meat snack and she could read product categories.
This was partially offset by three topline challenges.
East consisted of one tough year over year Comparatives for a quick back based distribution operation due to an unusually large amount of feature activity by a particular retailer 2018 to lower than normal promotional activity for certain important based products as a result of cost and supply uncertainties associated.
With the outbreak of African swine fever in China.
And three continued weakness in the western Canadian full service foodservice market.
[noise], while our growth for the quarter exceeded our long term targeted range of 4% to 6%. It was below our expectations, mainly due to slower than planned ramp up in a variety of new meat snack and sandwich product launches and they asked half related challenge mentioned earlier.
Our adjusted EBITDA for the quarter increased by 12.8 million or 18% to 84.1 million.
This was driven primarily by our sales growth adoption of the IRS 16, accounting standard and efficiency improvements in a number of our production facilities.
These positive drivers were partially offset by four main factors, namely one additional cost associated with investments, we're making in infrastructure to support our current and future growth, including additional overhead associated with our new Gtlds facility expanded Montreal operation and new lobster procurement initiative.
To a run up in the cost the main landed lobsters due to unexpectedly low landings, which resulted in lower than normal margins on freight fixed price lobster promo promotions with several major U.S. retail chains, three labor cost inflation, particularly in our U.S. based businesses where the.
Labor market, it's extremely tight and for additional outside storage costs, mainly associated with long inventory positions being taken to hedge against rising global pork and beef commodity costs and to prepare for new product launches.
The impact of pork and beef commodity cost inflation had a negative impact on our margin percentage for the quarter, but on a dollar basis was relatively neutral due to price increases implemented earlier in the quarter earn their previous quarter offsetting cost inflation.
While our adjusted EBIDA set a new third quarter record it was below our expectations due to the lump sum lobster margin and sales challenges I mentioned earlier.
And also because the March improvement, we had expected to result from recent selling price increases put through by many of our protein businesses.
Yeah staff related costs challenges did not happen.
This is because of further commodity cost inflation and in particular significant increases in the cost to specialize raw material source from Europe , which in turn was the result of a major increasing Europe's pork exports to China.
Looking forward, we're reducing our sales and adjusted EBITDA guidance for 2019 based primarily on the four consett based primarily on for considerations, namely the greater than expected challenges that occurred in the third quarter the.
The continuation of some of these challenges into the fourth quarter and in particularly those associated with the outbreak of AOCF in China.
The Canadian dollar being stronger in the back half a 2019, then we had previously forecasted.
And delays in close the closing of several planned business acquisitions note that this last factor impacted only the top end of our guidance.
These factors are expected to be partially offset by the recent completion of two acquisitions, namely the index and main coast, albeit the impacted these is mitigated by the seasonality of their businesses.
Well, we're expecting to complete additional acquisitions in the fourth quarter 2019. These have not been factored into our revised guidance.
Our adjusted earnings per share for the quarter decreased by 15 cents per share to 80 to 88 cents per share primarily due to three causes namely won the dilutive effects of our recent private placement as a significant portion of the new capital raises yet to be invested.
To the adoption of the IRS 16, accounting stacks standard, which represents let represented approximately one third of the decrease in our S and three D.A.S. half challenges I outlined earlier.
In terms of our financial position. We continue you continue to maintain a very conservative balance sheet and strong liquidity, our senior debt to adjusted EBITDA ratio was 2.0 to one which was well below our long term target range at 2.5 to one to 3.0 to one.
While our total debt to adjusted EBITDA was 3.3 to one which was also below our long term targeted range from 4.0 to one to 4.5 to one.
In terms of liquidity, we had $409 million unutilized credit capacity at the ended the quarter.
During the quarter, we invested $68.7 million in businesses and growth related capital projects.
This these consisted of 49.6 million for and the investments in Vienna Index, and North Delta seafood and $19.1 million for project capital expenditures.
Turning to dividends during the quarter, we declared a dividend of $19.6 million or 52.5 cents per share, which on an annualized basis works out to $2.10 per share.
Our free cash flow for the trailing four quarters was a record $174.7 million as compared to dividends of $73.1 million, resulting in a payout ratio of 41.8%.
I'll now turn the presentation back to George Thanks will [noise].
Well I lay assassin global trade disputes are presenting us with certain short term challenges. We showed very good up on our third quarter and year to date performance.
The progress, we're making towards becoming north America's leading specialty food company.
We're particularly pleased with the headway being made by our seafood sandridge and protein platforms into U.S.
Our third quarter growth in this market of almost 50% underscores the merits of our long term strategies and gives us the conviction that will be we will exceed our plan of achieving sales to 6 billion and an EBITDA margin of 10% by 2023.
At a time when most large food companies are struggling just to maintain their sales were hitting singles and doubles on a regular basis driven by our passion for producing authentic great tasting and great quality products.
Our U.S. coaching platforms meat snack initiatives are generating great momentum in all retail channels, including Sop grocery and convenience store.
This is most evident indices store channel, where we can now claim it title to having the fastest growing meat snack brand in the U.S. driven by new product launches an excellent commercial execution.
During the quarter, our U.S.T. for platform Commission, and New 40000 square square foot lost or processing plant in Sacco main.
The ramp up of this facility is going very well and were now without a doubt the best position company in the U.S. to capitalize on the growing demand for by both retail and foodservice customers for new and innovative value added lobster products.
It is early days, but the response, so far from our customers to the new and innovative product solutions, we're bringing to them has been excellent and sales traction.
It's accelerating my much faster than plan.
Are you a sandwich platform, which is our most developed initiative in the U.S. had another solid quarter generating double digit organic growth driven in part by their new sales initiatives into club retail and C store channels and by their focus on the assembly of trickery Platters and trace.
Well, Santa just continue to be they're focused the success, there, having and leveraging their assembly abilities to expand into the charcuterie and tray pack product categories has quickly filled their capacity and this fast growing segment of the market.
Correspondingly there in the process of planning an expansion of their capacity as they established themselves has the best in class manufacture in this category.
Partially offsetting the success, we're seeing in so many areas so our business or the challenges caused by a staff related issues and global trade dispute, which are resulting in unprecedented volatility in both domestic and international global protein market.
This volatility is making it increasingly difficult to conduct our business on an as usual basis. However, there's been some recent positive developments with China lifting its ban on Canadian pork and beef and reducing some of its tariffs on the meat imports from the U.S.
While these developments dong resolve the immediate supply demand imbalances. They will help global protein markets that would turn to some normally see and predictability.
It's a final word on this situation I would like to reemphasize. The transitory nature of these challenges that our long term perspective has lot has not changed we continue to manage our business in growth prudently and deliberately focusing on innovation operational excellence and diversification all the while keeping our eyes.
On the long game.
Turning to our acquisitions I'm very pleased to welcome to the Ondecks main coast shellfish and North Delta seafood teams to premium brands Yandex is a leading distributor proteins in Quebec city and will expand the capabilities to work it back based CNC platform.
Main coast shellfish, it's a leading distributor of locally harvest at sea food in the U.S. northeast and will provide downstream distribution capabilities to ready seafood as they ramp up production at their sacco facility.
North Delta seafood is a leading to processor and distributor otherwise variety of wild Pacific Cod seafood and will further enhance in diversifier sourcing capabilities, but these highly sought after products no doubt that will also expand our seat was platforms access to key markets in Asia and more specifically China.
We're very happy to welcome. These three very talented management teams to the P.B. family.
In closing I would like to once again state that we remain on track to deliver another year of record top and bottom line growth. Despite some of the unprecedented headwinds currently facing US 2019 will be the 16th year in a row that we deliver record year over year results, while continuing to grow.
Diversify our revenue and cash flow streams.
In terms of acquisitions activity I'm pleased to report and we continue to enjoy and especially robust pipeline of opportunities some of which are sizable and fully expect to add to our portfolio of freight specialty food companies and the relatively near future.
I will now turn the presentation over to points, where the two any part of our presentation Cory.
Thank you if you would like to ask your question. Please chicken by pressing star one on your telephone keypad.
Ken Please press star one to ask your question, we'll pause momentarily to allow everyone an opportunity to signal for questions.
We will take our first question from George do met with Scotiabank.
Yeah I enough thanks, taking my questions.
Hey, George.
Well I think you guys I'm called out about 6 million of impact for yourself on EBITDA last quarter.
Would you have the number handy for this quarter and do you guys have any approximation maybe for the sale startup challenges that were also.
Hop in the quarter as well.
Yeah. So so it's actually very similar quarter over quarter Georges closer to 6 million was just a little under 6 million.
And again, a similar sort of mix between commodity in and sales impact in terms of the the rounds to the sales impact it was a much smaller impact on our EBITDA, probably less than $2 million.
And so they did not ballpark and then just because of generally promo cost associated with those new ramp ups.
And then finally, you know and the one I want to make clear because maybe it's it's a little more difficult to explain in the written Mdna is the the challenge and are ready seafood business with the Maine lobster situation for last little while we've been talking about how there's been a glut of lobsters in the U.S. and that's been impacting.
Reddys margins.
And this this this quarter actually up a lot of the initiatives. They put in place to address that have have sort of kicked in and out was that's been addressed but we had sort of averse situation happened then in that the lobster landings in Maine. This year, we're way below expectations, which.
Actually resulted in a a ramp up a lobster prices in the U.S. and ready got caught because they had a bunch of fixed promotions, which are negotiated well in advance of of the season with some major U.S. retailers. So that that was another couple of million dollars, Oh I've hit to our EBITDA.
Yeah, Thanks for calling for those.
So those would be sort of the three major factors in in the normalization of earnings.
Great. Thanks for that I think George in your prepared remarks, you'd mentioned that progress in the sandwich capacity <unk> platform in general.
There seems to be seem to be doing quite a bit of stuff on the capacity side I'm. Just wondering is it and possibly in the cars to maybe odd another sandwich platter over the next 12 months or is there going to be just mainly reconfiguration or existing ones.
No we will not be adding another plant George again [noise].
We purchase that we made two acquisitions or.
Bodies and Ray Burns are both acquisitions came with a lot of capacity.
A lot of Unutilized capacity, plus we built a phoenix as well. So again, we have plenty of a production space as I mentioned in my prepared remarks, we're getting very good traction in San who just in all channels, we are growing very nicely.
In all channels, but also the charcuterie trade business is growing faster than than sandwiches right now, we feel dark capacity, which which we have at a Reno and Columbus and now we're looking to to expand that capacity within a the plant network that we yeah, we already.
Yep.
It's just a.
Follow up on that George is we will be investing in more lines in the existing facilities. So there will be some capex to support our our sandwich growth, but nothing in the scale of a new facility.
Okay, and maybe just last one I'm maybe more of a general question for you guys. I know you guys, probably yourselves on being an entrepreneurial and kind of decentralized model, but can you hold onto and maybe keep keep that culture, but also workout Atlanta, I guess reduce your footprint in the manufacturing and distribution capacity.
Maybe to ultimately improve margins, that's something you guys we consider.
Well again, George we're not a consolidator, we don't make decisions that are driven by costs, where make decisions driven by value.
So so I you know, we you know being interpreted oriel, it's part of our strength is part of our point of difference.
No at times, we can sit back and say, yes, we can save some cost here by rationalizing and consolidating some large companies have done it in the past.
But you know not the with good results out part of a selling premium artisan type of products means that we have to maintain our in entrepreneurialism nature. Yes. There is some costs associated with that but but there's also opportunities to a charge more.
For a selling these type of product. So so I think the value equation outweighs the cost savings equation.
Okay. Thanks for answering.
Thanks George.
Thank you. Our next question comes from Derrick Lessard with TD Securities.
Yeah. Good afternoon, everybody George you talked about double digit growth and sandwiches and secondary trades, even faster than you were strong at sea food and you've got momentum in C. <unk> C stores, just wondering how that only translated into you know like 6% organic growth.
And and how that how does that tie into the slower ramp up and new products that you guys talked about.
Yes, there's a big factor there is the challenges around a lot of D.
The process meets the pork based products in S.S. impact on them. So that was sort of a negative on our growth profile. While sandwiches was the big positive and then you had categories that did well, but overall the other categories weighing them down in the protein group yeah. So so Derek I think just.
Based on on a well prepared remarks earlier <unk>.
It's not a surprise to anyone for us to say that we weren't focusing our promotions with respect to pork related type of products.
So in Canada in particular.
And to some extend into U.S., we have some exposure to park and because of the uncertainty Oh, the input costs and the prices et cetera. We just didn't focus very much on promoting those type of products or those type of launches having said that we are focusing more on seafood.
Chicken based or fully cooked protein and.
And Ah you know of course, a sand to just centric charcuterie trade. So so we're focusing more on products that are not impacted by.
Yes, Jeff for obvious reasons.
So that [noise].
That means the sold a slower ramp was once because of the focus on everything but park.
Exactly exactly I mean, we're trying to run the business prudently and Ah.
No I think that a middle of the year, everybody was saying its staff, what's gonna be at 20% impact in terms of China's production and a it's gotten worse than worst it now up to 50% to 55%.
I sat in in the Oh My prepared remarks, we did have.
The bad on Canadian pork, which meant that a Chinese sourced a lot of pork from Europe .
Prices skyrocket it in Europe , a impacting all of our partners in our suppliers there and again for obvious reasons, we we focused on promoting other products other than those that are part based we felt that it was the right thing to do and prudent thing to do.
And happened to say that we had a lot of traction a lot of success with respect to all those nonproduct related products. So again, it's good to be diversified in this type of situation.
Thanks for the color for and I guess, maybe a follow up to that is how much of the how much of the business is tied to two European specialty me just trying to get a sense sensitive your sensitivity to to European prices [noise].
And so so Derek we procure up $60 million of year, a product from Europe , and you know roughly half of that is is 40% that spell east 40% that she could or in 20% is is red products, they're all very specialized products and and as a result, we can easily.
Shift procurement to another market and and that's kind of why we're we're tied in with what's happening with Europe , just Wanna mention Derrick that disconnect between Europe , and North America was strictly the result of Oh, Oh, the band that China imposed on mainly Canadian pork.
Obviously, there were some trade issues with the U.S. pork as well well with respect to.
Canadian situation, that's gone away right. The market opened up again last week or so we expect the disconnect between European pork and North American port to.
Go away or diminish so it was a short term issue. It was really a distortion knows the economics that were used to.
We're faced with situations, where half do you know raised prices in our domestic market because we input product from Europe at the same time. The domestic situation is a relatively benign. So we don't have a lot of pricing a ability in those situations of course, we don't lose market share it was kind of.
A you know very unusual event, but again with Canada opening up now we expect that discrepancy to go away.
One final one for me and it's just on a turn into your cash flow statement well there was some big.
And capital was a big source of funds. This quarter. Just wondering if you can tell us what the driver that Watson was there anything one Austin in terms of business operations.
Yeah I know he was just timing if if you recall and in Q2, we had and I'm very big negative in our cash flow statement on the working capital on so it was just a timing of items. Okay. Thank you.
Thank you. Our next question comes from David Neumann reduce Jordan.
Good morning, John .
Hey, David It David just quickly on just think tenant for the fun on the only comment on the C. S situation.
So you prices are our high end, a north American prices are flat or rolling over but Canada is opening up so if you get the situation where you see some normalization around the world are you I guess your and your in a pretty decent position that you can raise prices again three or four.
The prices in North America Riser costs rise in North America.
[laughter] definitely David and that we've always done that again the the issue was the large disconnect between north American prices in European prices right so that that.
Did not give us the the ability to to raise prices because again the.
Competitive price is in North America work benign or flat.
But but with Canada opening up again, now you'll have sort of more normal supply global supply and demand conditions, which we've we've operated for a long time and obviously, we understand and again, we feel comfortable that that in this situation, we will be able to raise prices if we have to it.
And what do you think the typical I know I know your pricing lag is but how long do you think this could linger as an issue knows you an election next year in the U.S.
Obviously, you want to get to solve but how long do you think this might linger into 2020.
Well, we we are again, they as I said in my prepared remarks, there appears to be some sanity coming back into the global trade situation. The fact is that.
China has a massive protein deficit given they assess it has and massive pork deficit as well they will need to import pork from Canada and the U.S. out I believe that that's why they opened up a these market mark.
It's more recently so so again, we think it's probably in 2019 issue.
ER and a and we're already seeing that we're already seeing openness and more liberalization, a trade and treat time in back to two to normal but a in the last six months I would say, we had nothing nothing west or when it was very unusual know for sure I need you leave your programs in terms of your key.
Current programs that you've won and some of the ones that you guys are still a looking at you had some delays I guess a launching some your your current programs, which I think if I recall was like 100 of 135 million or under 35 million total was the 35 cascading into 2020, maybe just some thoughts from on the delays.
I think is basically your Walmart breakfast Sandwich program.
And how's that going.
[laughter] again is as our organic growth overall, David and also our numbers show, we're getting really good traction in terms of our product launches into the U.S. as I mentioned dark meat snack platform is doing extremely well growing very quickly.
You know we now on the number one a gross Brandon in.
C store in the U.S. getting really good traction in club and grocery as well.
Again, we talked about our sandridge initiatives and Archer Korea initiatives, where we're getting incredible traction, particularly in the U.S. markets. So we're getting really really good traction in terms of what we're trying to do in the way we're executing in the U.S. you know we generally follow the markets we've tried to make a.
<unk> in a student decisions as to what we promote than what we don't promote we even have to make some changes in our strategies given.
The they at least 10% to 25% tariffs on on European some European pork products.
Yes.
You know a you know some products are.
Included in getting a a that Terry if some or not so well you know what all is trying to adjust and reposition ourselves and what we focus on to make sure. Obviously, we manage their businesses prudently as we can't.
But overall, we're very pleased with the growth that we're seeing and the opportunities we're seeing and there's no question about that.
Are you still seeing some b C stores as potentially as part of the mix or is it he still more the small chains or what is kind of the constitution of them or the mix of business that you guys are are currently bidding on.
Again, David I Welcome you had to take a trip into the U.S. and checkout, both or some of the large.
C store chains in some of the the smaller chains that we're getting very good traction in both in both Sandy just n. and meat snacks again, not not an issue there and that's driving a lot of our growth.
Okay, guys. Hopefully this thing gets sorted out real sooner and 2020 turned to be a much for a year or when compared to this kinda debacle that we face this year. So we'll we'll talk soon.
Thank you David.
Thank you. Our next question comes from John Snapper with RBC.
Hey, Thanks. Good afternoon first question, it's more a follow up on I'm always asked earlier, so apologies if I Miss I, just want to better understand your yourself.
So the press release noted they Ah yes. It did impact margins would also said the impact from commodity costs was largely offset by price increases. So I'm just help me understand what what exactly was the impact from from assets I think you'd split it earlier and assuming it was mostly on new product sales I'm, assuming that's referring to the.
A new contract wins and C store in club channels I'm. So can you remind us of 130 or so million is that how does it split between those two channels.
Yes, so in terms of the the margins versus dollars impact so.
It was it's a nominal versus percentage concept. John you. We didn't we were able to cover the actual cost increases off over on an overall basis, but we didn't make the margin. So so effectively our margins were drawn down while the net dollars change stayed flat.
That makes sense.
Yeah understood.
Okay, and then in terms and sorry, what was the second part on the sales.
So you said that you're going after net new sales initiatives and that's a assets impacting some of the new the new product launches that you've targeted so assuming this is referring to the 130 or so million of new contract wins can you remind me the split of that hundred 30 between sandwich in meat snacks.
Yeah, so well the split was roughly 45% sandwiches, 55% protein, which included meat snacks. Your crude agree and some are cook protein plans. So that all of those initiatives that were outlined in that hundred $30 million are progressing and progressing well.
But like George talked about some of them meat snack and she could re items a we've taken a less aggressive pro <unk> in terms of our featuring and promo.
Based on what's been happening in Europe , and so those are ramping up slower than the original expectation.
But there's still progressing.
Got you. Okay. That's helpful. Thanks, what ask about labor cost inflation, it impacted specialty foods gross margin in the quarter. It seemed it had been maybe an issue in the rear view mirror, but it sounds like it is still something you're you're dealing with so can you talk about how this is impacting the business and in other incremental steps you can take to address instead, we viewed already type.
Got some last year.
Yeah, and enjoying that that was a year over year impact that wasn't a surprise from our looking forward perspective, we had built that into our expectations.
It's just purely that that is the year over year impact of though of primarily labor inflation.
Okay. Thanks.
That number was not a surprise to us and also again, we were in a unique position to leverage our Canadian production to service. The U.S. markets are in fact a.
This past quarter, we had a record production out of Canada or shipped to the U.S. So so we we have an advantage over.
Labor and in this situation a and it's one of our competitive advantage is I think in terms of our projects and a growth initiatives in the U.S.
Okay understood, maybe moving to the lobster markets I'm, so that at a significant impact on margins and I know you're excited about the future this business and that you're building. It for the long term, but is there anything you can do to execute to reduce the impact on on results over the next few quarters.
Well there there's two stories right in the lobster impact on the quarter. One was the one I mentioned earlier on the the question from George do May in terms of the impact on some fixed price contracts with retail.
That was an actual negative hit to us.
In terms of the other impact I'm, one of the exciting things happening within our ready seafood businesses. They are.
Using the disruption in the market to implement a whole number of new procurement initiatives and and those are going very well, what they're doing is setting up supply for their new soco facility in some of their other growth initiatives and in that industry procurement is critical its a scarce resource and your.
First step in any growth strategy has to be to procure the product so they've gone out procured it in the interim while they're now developing their soco facility and other growth initiatives. There are actively selling that supply it at a nominal margin. So it's not a negative. It's it's just again, it's impacting the percentage on margins.
But now as they execute on their growth strategy, they will expand their marching they'll pick up that additional margin.
And our overall strategy as is usual again in.
In lobster as it is in a in pork and beef.
Chicken is really to move more towards value add it didn't brand it and that's why we're so excited with the completion soco and ER and the a commission that facility.
Right and is there do you have a timeline in mind for when that that business would be selling it sustainable margins are the margins you like like its use it to closer to a year or is this kind of a three to five your project.
Oh, it's it's close it's sort of a one oneplus type project, one plus years project.
It's relatively but we're pretty excited about the opportunities and how quickly we expect them to ramp up.
Okay understood and if I could just sneak in one more more broadly I'm just trying to get a sense into visibility into your portfolio companies acute you called reaffirmed guidance, but the quarter didn't come in where you'd like so is it that operations turn really sharply in the last six to seven weeks for the quarter or is it that you had limited visibility into some of that.
Businesses and if it's the latter or their leavers you can pull to try to increase visibility.
I I can't I I think the major issue for us, it's really a staff and the I don't know if you follow a SF and and some of the reports that are coming out of both China is that we've you know we modeled about 20% loss of ER.
Hawk about pork production in China, and it's coming out at 50% to 55%, which is really disrupting the a international pork markets too much.
Larger extent then what we modeled you know this has not happened before.
And we didn't model the [noise] the disconnect between the a European markets and the the North American markets again, we've never had this type of a disconnect before so we generally a assaf isn't that big issue for us but.
I've mentioned earlier, we're adjusting our strategies, our launches sorry, innovation et cetera to make sure that that we minimize the impact at the same time would obviously managing the business for the long term, but but the the situation in terms of assessing China has been the real issue for us.
And the European disconnect result into consequent a disconnect yeah.
Right. Okay. That's helpful. Thank you very much.
Thank you.
Thank you. Our next question comes from <unk> Khan with RBC capital markets.
Oh, Thanks, and good afternoon, I'm, just wanting to understand the the logistics of I guess, how some of these promotions go into the market. I think you had similar commentary a Q2 that because of some of these commodity concerns.
Pulled back on promotions or didn't execute them I guess, how can you just walk us through maybe the logistics of that isn't as you see the commodity price rising up when you realize cost as high are you just pulling back on those promotions as it is a margin are right for you or the customer. So just trying to understand how that's working on the ground level.
Well you know I can't typically a you know a certain retailer will have.
Six promotions, let's say in a given year in and you know we bid on those promotions and when it comes to pork type of products, we have not been very aggressive at all a this year in both the second into third quarter because of the uncertainty of Oh of Ah Ah pork pricing and.
Taking a given the uncertainty around the yourself. So so that that you know again.
Somebody else may have gotten that business, there well come to get the business that the loss. That's fine you know they can do that but we have not been aggressive at all with respect to any product, which involved part we've been aggressive on promotions with regards to other proteins, but but.
But generally speaking in historically you know pork is a big part of our business, but we have not been aggressive at all in terms of these type of promotions on the retail by we took a basis in Canada and the U.S.
And then similarly with launch launch of the she coterie programs in the U.S. again, just because of the margin profile being challenge.
The team doesn't want to go out there with premium pricing to start off with so they've just done a soft launch and then is proceeding on a much more sort of conservative basis.
Okay, and then just follow up on.
Hi, good Yeah go ahead.
Yeah, just just in general terms I would say that every company in North America today that that a value add pork is probably very cautious with regards to Ah two promotions. A you know there's this saturday assess its impacting a ever specialties. So it shouldn't surprise.
As anyone that companies are not promoting aggressively with respect to port.
Okay, and then I'm just a follow up on that I guess, what kind of visibility or use thing to commodity prices are and put cost for the next few quarters do you have some of their pricing locked in for late this year early next year, both from a north American and European.
Sourcing point of view.
Well, we're comfortable with respect to supply again, I I, you know prices fluctuate generally.
Pricing has been volatile with respect to to pork in particular.
We're modeling it to be you know quite inflationary for 2020 and.
Again, our companies are planning accordingly.
But as I mentioned earlier, we're generally happy with the fact that China has opened up to.
<unk> for four pork in particular, and we think you know that what we're looking for is where the markets to return to normal global supply and demand or conditions or you know that that that's that's what what has been missing in the last six months.
Okay, Great and then I guess just on the M&A front, it looks like kind of between last quarter and this quarter you indicated that some of the acquisitions might have been a little bit delayed I guess is it because it acquisitions. It just didn't feel where the right but is it pricing I guess, maybe what are some of the causes the some of these acquisition maybe not getting done.
Her on time, and how do you see the the pipeline for transactions over the next while.
Well, we have up probably the most robust pipeline we've had in our history. Our M&A group here is being extremely.
Busy over the last Linda while you know it shouldn't surprise anybody that we're not aggressively trying to close or acquisitions right now that involve a port related company [laughter], we're concerned with respect to anything that Ah that involves.
Pork I'm, having said that you know all of our platforms right now have major acquisitions in the works and you know the you know a lot of times. The timing stretches you know if by few months or a lot of the timing is driven by the other side.
But but again, we're very confident with or.
Pipeline and our ability to close many more acquisitions over the next few months.
Okay, Great and then I'm just on the capacity side I guess in terms of adding the lines that you're talking about in the phone which plans.
Is it primarily in the new Phoenix facility, because I understand I think you moved with some production from some of the as opposed to Phoenix I guess, how should we think about how ramped up the Phoenix plant is right now and.
How much room as they're tied lines in some of the other plans.
Yes, so so Phoenix is running I'm extremely well, we're very pleased with.
With.
How well it's been running in the last a year or so.
Phoenix is mainly focusing on sandwiches.
And as we've taken.
Sandwich type of production out of a we know and Columbus and move them into Phoenix that gave us space to convert to a trick coterie Ah. So we do trickery in Reno and Columbus, and we're looking as.
We'll set to add more lines to two this very fast growing category.
Great and then we have all we have a lot of space in our one of our lake Phil facilities, which we acquired from.
From a as part of the buddies transaction so.
Ultimately depending on how rapidly we see growth coming that that gives us a lot of flexibility and adding lines as well.
Okay. That's helpful. Thank you.
Thank you. Our next question comes from Stephen macro <unk> with BMO capital markets.
I think you're good afternoon guys.
Hey, Steven Steven.
I just wanted to just circle back around them on the sales wise I I know the question has been asked a couple different ones, but I just wanted to try to.
Figure out kind of you know you were saying previously that 100 million of those hundred 35 million of new probably cousins would flow through in the back half of your can you talk about you know like how much you how much you still expect to come through in the back half of the year and how much sort of gets bumped into early 2020.
We have an isolated dot 130, specifically Stephen but it is factored into our our projections for the year you know in general terms, though I would say that you know our run rate of that 130 for 220 19 was about 90 million.
And so we had expected 40 million at that run rate that to happen in 2020, So I I guess, probably would be about 10 to 15, and that's maybe been pushed out.
Oh all park related.
So these are certainly not law.
Just delayed no.
Really not absolutely and and and in fact in terms of though the pipe <unk>, we haven't updated or we don't sort of.
Continually update that hundred 30 million dollar number but the reality is based on further contracts that had been one you know the run rate of that number into 2020 as much larger today than the 130.
Oh, I see okay, and would it be safe to assume that the incremental.
The incremental dollars above me on that 130 would be you know in those categories sandwiches, Turkey rotary meat snacks.
Yeah, Andrew Pro D., and Cook protein don't forget Cook protein and I'd say high growth category for us.
Right Okay.
Okay. That's great and then just you know I know visibility right now I was quite low.
Just given where you know all the moving parts that obviously impacted the quarter, but I just wanted to get your senses to you know what does your visibility as you roll into 2020, whether it's you know the topline I guess I mean top on gross margin would be the most of the two biggest.
Variables that I'm just curious how do you think about how do you think about those numbers and what kind of confidence you have in where you could potentially end up with your role to 2020 understanding it's a ways away and there are some factors I just wanted to get a sense of what visibility might look like.
[laughter] against it Steve and I think you know that that you know over the years Weve diversified.
I quite a bit away from from pork when we first launched a premium brands I think.
Pork was probably 50% of our inputs.
Today to much lesser number I would say that we have very good visibility with respect to the rest of the platform as it relates to other proteins of course.
Chicken beef and seafood. These are massive parts of our business again, there is some uncertainty with respect to the pork situation.
Situation in Canada, far exceeded or anyone or a expectations with respect to two or how bad is to ask would get a so we're a little bit cautious with respect to pork of course, having said that as I mentioned earlier, all we want is we want.
ER normal.
Global supply and demand conditions.
To be in place and we're seeing evidence of that which makes us very happy.
We did not have normal supply and demand conditions when it with regards to pork.
Over the last six months. So so we like the fact that Canada now has been opened up in regards to exports to China. We like the fact that there appears to be again more liberalize trade between us and China with regards to protein and that will make the markets get back to two north.
Again that that.
The pork situation is what causes us a little bit of.
Certain but we're seeing evidence that the markets are going to write the right way.
Okay. So that's helpful.
And then just finally on the lobster situation.
With respect to the pricing is that it's not a.
When do you see that issue sort of.
Resolving itself in terms of the pricing with respect to the fixed price contracts.
No that was completely a one off situation this past summer Steve.
Okay.
Okay. That's that's great. That's it for me thank you.
Thank you said thanks, Dan.
Thank you. Our next question comes from Dimitri Kaminski with very tough.
[noise] high end. Thanks for taking my question how much revenue did you a January the from the new product initiatives year to date.
[noise] well.
Was the majority of that growth in our organic specialty foods, 6.2% would've come from the new initiatives.
Like I say you know in fact, when you look at the new initiatives. It's it's <unk> larger than that because you saw flatten or in some cases, a little bit a contraction in some of the other port categories with what's happening around the featuring issues.
I see okay, so and.
How much revenue was lost in relation to you our regional guidance Julie and stuff.
I I, it's probably in the $5 million to $10 million range.
For the quarter or no further for the quarter.
The quarter, Yeah. It was about 5 million in the second quarter and sort of five to 10, depending on you know how we look at our promo activity in the U.S. So some of the new programs.
I see okay, and Oh broadly what kind of thought multiples I did you pay for 2009 acquisitions.
Hi, there Rick.
We we never talk multiples, but in terms of the two recent acquisitions I'm you know there they're roughly.
By 5% achieved beat up businesses at this point before synergies.
Sorry, but then again supposed so if you do the math around the sales and the margins you can you know so to extrapolate some estimates around EBITDA, but again, we always talk about in our minds and the way. We look at these things are through a an IR model or 15% IR concept.
Right.
But on the Oh in terms of revenue is around one times revenue that was made just trying to figure out the book, though the 2019 acquisitions one on revenue.
I don't have that metric.
<unk>, Yeah, Dimitri <unk> again, we look out from IR perspective, not a multiple of revenue.
I called out and those numbers.
Yeah, and there was also a brutal ups an exercise them to wash or for a $17 million, just wonder a which business does not relate to it.
Oh no. There's this this past quarter there was no put options exercised.
Like on the cash flow statement.
Oh are you now are you looking on the year to date because last quarter, we did.
We bought out the minority shareholders in our handlers business in the U.S., we moved them up to the premium brands level.
But that that was in second quarter non in the third.
So for 13 weeks ended September 22019 investment being in advance of still are so since not of distribution source 16.3 million Oh, Oh, Oh, okay. Yeah. So that's our investment in North Delta seafood, Dimitri and Uh Huh.
That was a 50% interest so it's being accounted for as an equity investment.
Okay excellent glow, okay. Thank you very much.
Okay Dimitri thank you.
Thank you. Our next question comes from Wap Wells with TD wells.
Good morning towards you will.
Good morning era.
Firstly, thank you for your efforts in the building and growing the company look forward to.
<unk> longer term returns and a three work today Ive two questions.
The first one is back in November last year, you know normal course issuer bid.
How much of that plan share buyback did you complete prior to the private placement indeed this year.
We actually Didnt, we put in place the.
The buyback program, Rob way back in in in last year. When there was a significant amount of weakness in our share price we were down in sort of low sixtys and so we put in place because of the silly in our opinion the silly evaluation of the company, but by the time.
We got the program in place 'cause there's various regular step regulatory steps we have to go through by that time the share price had normalized and as a result, we never ended up using it.
Okay.
Thank you in the second question now that the good news on that so.
Hey, Rob the good news in that we did happen.
The reason it normalizes, we had some good long term shareholders, who stepped into the stock and took advantage of the weakness.
Are you see it outside of the private placement.
Yeah outside of the private placement.
Okay.
And thinks in Georgia in August on the call you mentioned.
The possibility of a European acquisitions acute recall was another year end or within a six month period can you hear any update on that a digital Burgess.
Yeah, you know again, we've got a where we're in a number of discussions with companies in North America, and Europe , we fully expect to.
Probably close a at transaction involving one or two European companies.
In 2020.
Okay. Thanks very much.
Thank you Rob.
Thank you our final question comes from Derek Lessard with TD Securities.
Just a few follow ups for major home and I'm, just wondering if you're modeling any pressure in any other commodity markets like beef.
[laughter], we all lose model inflation or deflation of course, given a they you know that if volatility in into markets generally we're modeling or inflation.
With respect to to two beef in particular.
Again, there is a protein.
Shortage in the world today based on what's happening in China with respect to a two way assaf.
I'm very often days to substitution effect when.
And as certain market is short of a have a protein.
So generally we're modeling inflation.
We've done that in the past one phone top model is obviously the that type of trade issues or and [noise] a aberrations in supply in global supply and demand that we saw in the last six months, we're comfortable with inflation or deflation.
Many of us by a lot of our pricing <unk> tends to be cost plus.
But again and we're very comfortable with regards to passing on price increases to our customers to under normal conditions.
So inflation is not an issue for us. It's just that we had this a unusual situation with respect to the disconnect have a European and ER and Canadian prices.
Okay. Thanks, George and I was wondering you guys talked about taking advantage of some of the lobster disruption can you remind me again, what that disruption is [noise].
Well I always say, China tariff issue, where China placed at 25% chair tariff on on U.S. lobsters and as a result, you number suppliers a number of players had really based their business plans on China. So that created a tremendous amount of disruption in local market.
Okay and then one final one for me again, it's on on M&A, but the ones that you guys completed this quarter I'm just wondering how we should be modeling I think there was some disclosure on on on sales for for one of them, but maybe total sales and sort of the margin expectations [noise].
Yes, so there will be more coming up we expect this this this quarter Derek but in terms of the ones. We completed the index and main coast you're looking into about.
Hundred and 20 million sales range with the roughly five an EBITDA margin.
5% you said.
Yes, they're both distribution businesses.
And now we've got that that's before that's before any synergies that's their historic levels right. Thank you.
[noise]. Thank you. This concludes today's question and answer session I would now like to turn the call over to today's speakers for closing remark.
Yes, I'd like to thank everybody for attending today. Thank you so much bye bye.
Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect.
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